Rio Grande Royalty Company Inc v. Energy Transfer Partners, L.P., et al


PUBLISHED OPINION FILED. [09-20607 Affirmed ] Judge: EHJ , Judge: PEH , Judge: JWE Mandate pull date is 10/06/2010 [09-20607]

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Rio Grande Royalty Company Inc v. Energy Transfer Partners, L.P., et al Doc. 0 Case: 09-20607 Document: 00511233901 Page: 1 Date Filed: 09/15/2010 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED September 15, 2010 N o . 09-20607 Lyle W. Cayce Clerk R I O GRANDE ROYALTY COMPANY, INC., on behalf of itself and all others s im ila r ly situated, Plaintiff - Appellant v. E N E R G Y TRANSFER PARTNERS, L.P.; ENERGY TRANSFER CO.; ETC MARKETING, LTD.; HOUSTON PIPELINE COMPANY, Defendants - Appellees A p p e a l from the United States District Court fo r the Southern District of Texas B e fo r e JONES, Chief Judge, and HIGGINBOTHAM and ELROD, Circuit Ju dges. E D I T H H. JONES, Chief Judge: R io Grande Royalty Company, Inc., contends that defendants Energy T r a n s fe r Partners, L.P., Energy Transfer Company, ETC Marketing, Ltd., and H ou ston Pipeline Company committed common law fraud by truthfully reporting n a t u r a l gas transactions that, because of the defendants' alleged monopolization o f the Houston spot market, served to lower prices artificially on long-term c o n t r a c t s . As a result of the alleged misrepresentations, the defendants and Case: 09-20607 Document: 00511233901 Page: 2 Date Filed: 09/15/2010 No. 09-20607 o t h e r gas buyers were able to purchase natural gas at below-market prices, to t h e detriment of Rio Grande and other sellers. Rio Grande also argues that the d e fe n d a n t s ' failure to disclose this manipulation to sellers constituted a material o m is s io n and thus fraud. The district court dismissed the claims. Because the d e fe n d a n t s ' alleged conduct does not amount to common law fraud, we affirm. I. BACKGROUND T h e district court found that the plaintiff's complaint failed to state a c l a i m under FED. R. CIV. P. 12(b)(6), and we therefore assume the truth of all fa c t s properly pled within it. T h e parties are participants in the natural gas market, buying and selling c o n t r a c t s for the delivery of gas. These contracts are typically of two kinds: t h o s e in which the price is fixed in the contract and those in which the price is d e t e r m i n e d by reference to a published price index. The price index at issue h e r e , for deliveries to the Houston Ship Channel (HSC), is published monthly by t r a d e publications such as Platts Inside FERC's Gas Market Report and is based o n fixed-price transactions made during a "bidweek," usually the last five b u s in e s s days of the preceding month. Buyers and sellers voluntarily report v o lu m e and price data to Platts, which then calculates the index price. T h e plaintiffs allege that the defendants--energy traders and operators o f interstate pipelines and other infrastructure--monopolized trading in the m a r k e t through HSC, a principal U.S. natural gas gateway, from December 2003 t h r o u g h December 2005. During this period, the defendants exploited their m a r k e t position by making bidweek sales at artificially low prices--in other w o r d s , dumping. This, in turn, suppressed the HSC index, to the benefit of the 2 Case: 09-20607 Document: 00511233901 Page: 3 Date Filed: 09/15/2010 No. 09-20607 d e fe n d a n t s , which were net buyers of natural gas, and to the detriment of the p la in t iff and other sellers bound by index-linked contracts.1 R io Grande filed suit in 2008, seeking to certify a class of all natural gas s e lle r s , other than the defendants, who sold gas at prices determined by r e fe r e n c e to the manipulated HSC index.2 Its original complaint asserted claims u n d e r the Sherman Act for predatory pricing, unlawful monopolization, and r e s t r a in t of trade. The district court dismissed these antitrust claims under R u l e 12(b)(6). It found that the plaintiff had failed to allege any predatory b e h a v io r , merely low prices; failed to allege facts showing the extent of the d e fe n d a n t s ' market power; and failed to do more than simply assert collusive b e h a v io r . See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 1 9 6 4 6 5 (2007) ("[A] plaintiff's obligation to provide the grounds of his e n tit le m e n t to relief requires more than labels and conclusions.") (internal q u o t a t io n marks removed). At the same time, the court granted the plaintiff t h ir t y days to file an amended complaint. T h e plaintiff's amended complaint sought to remedy its Sherman Act m o n o p o liz a t io n claim and asserted an additional claim of common law fraud. The defendants, it alleged, "knowingly, intentionally and recklessly m is r e p r e s e n t e d and omitted material facts by, inter alia, reporting trade d a t a . . . to Platts that: (i) intentionally misstated the true market price of n a t u r a l gas sold at HSC; and (ii) failed to disclose that the prices of HSC fixedp r ic e baseload natural gas they reported to Platts did not represent, and were In March 2008, the Commodity Futures Trading Commission announced a consent order under which defendants would pay $10 million in a civil monetary penalty to settle charges of manipulating both the price of natural gas at HSC and the HSC index. In September 2009, the defendants settled related claims brought by the Federal Energy Regulatory Commission. As pled, this class would include any seller bound by a contract referencing the HSC index, not just those who completed transactions with the defendants or who are net sellers. 2 1 3 Case: 09-20607 Document: 00511233901 Page: 4 Date Filed: 09/15/2010 No. 09-20607 n o t intended to represent, the true market forces of supply and demand." The p la in t iff did not allege that the defendants misreported their sales, but that the t r u t h fu l sales data they supplied to Platts were misleading because of market m a n ip u la t io n . T h e district court denied the plaintiff's motion to amend its complaint for fu t i l it y , finding that the amended complaint still failed to state a claim under R u le 12(b)(6). Truthful reporting of sales data, it held, did not constitute a m is r e p r e s e n t a t io n , and the plaintiffs had failed to plead facts showing the d e fe n d a n t s ' intent to induce reliance by failing to disclose any market m a n ip u la t io n . The plaintiff timely appealed, challenging only the dismissal of its common la w fraud claim. I I . STANDARD OF REVIEW A district court's denial of a motion for leave to amend a pleading is subject t o review for abuse of discretion. Word of Faith World Outreach Ctr. Church, I n c . v. Sawyer, 90 F.3d 118, 124 (5th Cir. 1996). The trial court acts within its d is c r e t io n in denying leave to amend where the proposed amendment would be fu t ile because it could not survive a motion to dismiss. Briggs v. Mississippi, 3 3 1 F.3d 499, 508 (5th Cir. 2003). I I I . DISCUSSION O n appeal, Rio Grande reasserts that its allegations state a claim for fraud b y misrepresentation or omission. Specifically, it argues that the truthful r e p o r t in g of transactions tainted by market manipulation may amount to fr a u d u le n t misrepresentation and that failure to disclose this misrepresentation m a y amount to a fraudulent omission of material fact. To state a claim of fraud by misrepresentation under Texas law, a plaintiff m u s t sufficiently allege (1) a misrepresentation that (2) the speaker knew to be fa ls e or made recklessly (3) with the intention to induce the plaintiff's reliance, 4 Case: 09-20607 Document: 00511233901 Page: 5 Date Filed: 09/15/2010 No. 09-20607 fo llo w e d by (4) actual and justifiable reliance (5) causing injury. Ernst & Young, L .L .P . v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001). Alternatively, a plaintiff may, in limited circumstances, claim fraud by o m is s io n : "[S]ilence may be equivalent to a false representation only when the p a r tic u la r circumstances impose a duty on the party to speak and he deliberately r e m a in s silent." Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001). "Generally, n o duty of disclosure arises without evidence of a confidential or fiduciary r e la t io n s h ip ," Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998), but t h e plaintiff here alleges no such relationship. Outside of such a relationship, a duty to disclose may arise, among other circumstances, "when one makes a p a r tia l disclosure and conveys a false impression." Brown & Brown of Tex., Inc. v . Omni Metals, Inc., ___ S.W.3d ___, 2010 WL 1240580, at *16 (Tex. A p p . H o u s t o n Mar. 25, 2010). Therefore, to prevail under either theory--affirmative misrepresentation o r omission--the plaintiff must allege some defect in the defendants' voluntary r e p o r t s to Platts. To that end, it claims that these sales reports were m is s t a te m e n t s because the sales did not represent "the true market price of n a t u r a l gas sold at HSC." This, in turn, gave rise to a false impression, which t h e defendants were obliged to correct. Both theories depend on the conjecture that a sample of market t r a n s a c t io n s , compiled into an index, necessarily reflects a "true market price." The plaintiff, however, disclaims that proposition in its amended complaint, a lle g in g (quite accurately) that the Platts HSC index is merely "representative o f transactions." A price index may, of course, be evidence of fair market value, T r a n s o il (Jersey) Ltd. v. Belcher Oil Co., 950 F.2d 1115, 1122 (5th Cir. 1992) (c it in g Platt's Oilgram price reports as evidence of market price), but it embodies n o deeper truth than that. Indeed, it is a mundane fact that actual prices often d iv e r g e from those reported in indices, "reflect[ing] the interaction of many 5 Case: 09-20607 Document: 00511233901 Page: 6 Date Filed: 09/15/2010 No. 09-20607 v a r ia b l e s " relevant to pricing. N. Cent. Airlines, Inc. v. Cont'l Oil Co., 5 7 4 F.2d 582, 588 (D.C. Cir. 1978) (referencing Platt's Oilgram). By corollary, a n index may diverge from the "true market price," for any number of reasons, d u e to the vagaries of the transactions that underlie it.3 The "true" market price is that at which buyers are willing to buy and sellers sell, and an index does no m o r e than provide a window into their commerce. E. & J. Gallo Winery v. E n C a n a Corp., 503 F.3d 1027, 1031 (9th Cir. 2007). W e do not discount the possibility that price reports may be tainted by fr a u d . A report could plainly misstate the terms of a transaction. It could fa b r ic a t e a transaction out of whole cloth or be the result of "wash t r a d e s " -- o ffs e t t in g transactions calculated to manipulate prices--that are, in s u b s t a n c e , equally fictitious. But the plaintiff alleges none of these. Rather, as t h e amended complaint recounts, the defendants engaged in real transactions o f real economic substance and reported the details of those transactions a c c u r a t e ly . That these transactions may have been carried out at artificially low p r ic e s does not render the reporting of those prices a misstatement. F o r the same reason, the defendants were not obliged to disclose that their p r ic e reports did not represent "the true market forces of supply and demand." If the Platts index is "representative of transactions," and if the defendants' t r a n s a c t io n s were properly reported, then there could be no false impression--at n o point did the index cease being "representative of transactions"--and hence n o duty to disclose. The plaintiff has failed to allege either a material misstatement or a c t io n a b le omission on the part of the defendants and so has failed to state a Underscoring these vagaries, the Platts editors exercise discretion to remove transaction reports that they believe to be anomalous or unreliable--in other words, "outliers." See United States v. Valencia, Crim No. H-04-514-SS, 2006 WL 3716657, at *6 n.7 (S.D. Tex. Dec. 14, 2006) (Atlas, J.). 3 6 Case: 09-20607 Document: 00511233901 Page: 7 Date Filed: 09/15/2010 No. 09-20607 c la im for fraud. For reason of futility, the district court did not abuse its d is c r e t io n in denying the plaintiff leave to amend its complaint. I V . CONCLUSION T h e district court's dismissal of the appellant's claims is AFFIRMED. 7

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