The opinion of the court was delivered by: Anthony W. Chief United States District Judge
MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT OR SUMMARY ADJUDICATION ON ISSUES OF CONSPIRACY Doc. # 535
This is an action for damages and declaratory relief by plaintiff E. & J. Gallo Winery ("Gallo") against defendants EnCana Corp. ("EnCana"), a Canadian producer of natural gas, and WD Energy Services, Inc. ("WD") (formerly EnCana Energy Services, formerly Pan Canadian Energy Services, Inc.), a wholly-owned marketing subsidiary of EnCana Corp. (collectively, "Defendants"). On January 24, 2005, Gallo filed its first amended complaint for damages, disgorgement/restitution , constructive trust, and injunctive relief (the "FAC"). The FAC alleges both state and federal antitrust claims. Defendants have filed two motions for summary judgment and Gallo has filed one motion for partial summary judgment. In this, the last of these dispositive motions, Defendants move for summary judgment or, in the alternative, summary adjudication on the issues of whether Gallo can show the existence of an anticompetitive conspiracy over a defined span of time and whether Gallo can show the damage they claim was caused by the conspiracy. Federal question jurisdiction exists pursuant to 28 U.S.C., section 1331. Venue is proper in this court.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Gallo is a wine producer and purchases large quantities of natural gas for use in its glass and bottle making facility in Stanislaus County. Natural gas produced outside of California enters the state at one of four pricing points. During the time period at issue in this case, Gallo purchased Canadian-produced natural gas from defendant WD, EnCana's wholly-owned subsidiary for marketing natural gas in the United States, at the pricing point called PG&E Citygate, which is located at the California-Oregon border. "During this period, the purchase and sale contract between Gallo and EnCana did not specify how the parties would calculate the price of the natural gas. However, both parties concede that, as a matter of practice, the purchase price was pegged to indices published in two trade publications, Natural Gas Intelligence ("NGI") and Gas Daily." E. & J. Gallo Winery v. EnCana Corp., 503 F.3d 1027, 1031 (9th Cir. 2007) ("Gallo").
As the court has previously observed, the NGI and Gas Daily indices represent a compilation of submitted and verified information gathered from voluntary reports of trading activity and are intended to reflect trading activity at each pricing point. "The process by which the prices in natural gas transaction were reported to the publishers of the indices was left largely to the traders themselves." Id. As the Ninth Circuit Court of Appeals observed, "[n]ot only were the indices ripe for manipulation, but also FERC's investigation confirmed that such abuse actually occurred. Market participants had provided false reports of natural gas prices and trade volumes, and had engaged in other misconduct." Id. at 1032 (citing FINAL REPORT ON PRICE MANIPULATION IN WESTERN MARKETS, FEDERALENERGY REGULATORYCOMMISSION(2003) (hereinafter "FERC Final Report") at ES-1 - ES-6).
The allegations set forth in the currently-operative FAC have been summarized many times in prior orders of this court. In its order of July 6, 2005, denying Defendants' motion to dismiss the FAC, the court summarized the claims alleged in the FAC as follows:
Commencing in the Summer of 2000 and continuing until late 2001, by their marketplace behavior and agreement as to pricing, defendants, and the unnamed co-conspirators, avoided competing with each other in the pricing and sale of "bundled" natural gas in California, in the pricing and sale of interstate gas transportation contracts into California in the secondary (or replacement) market, and in the pricing and sale of the derivatives supposedly derived from California natural gas market prices. This agreement is evidenced by, among other things, the daily exchange of price information by and among defendants and the unnamed co-conspirators and the use of computer software programs and websites by defendants and the unnamed co-conspirators to collusively establish Defendants' and the unnamed co-conspirators' price of "basis" and thus the price of bundled natural gas pricing (and vice-versa) at artificially high levels during the relevant time. [¶ . . . ¶]
Defendants and the unnamed co-conspirators also agreed to do "wash" transactions under which they simultaneously bought and sold from each other the same natural gas and natural gas "basis" swaps and other commodities at the same price on the same day. The "wash trades" created the false appearance of demand for and shortage of supply of natural gas and natural gas transportation into California. The " wash trades" also served as a method of communicating collusive price information and collusively manipulating the supposedly independent third party published indexes of prices used to determine the settlement amount of natural gas contracts and natural gas derivatives, including "basis" swaps.
FAC at ¶¶ 19, 21. As discussed in the court's order of July 6, 2005, as well as in other court orders, the "basis" price generally reflects the portion of the cost that goes to the pipeline company for transportation. The basis is computed as the difference between the price paid a particular delivery or pricing point and the commodity price as set by the relevant commodity exchange market, here the New York Mercantile Exchange ("NYMEX"). The essence of Gallo's claim against Defendants is that natural gas traders working for WD manipulated the basis prices reflected in the indices by conducting simultaneous sales and purchases with counterparty traders from other companies so that pricing information was exchanged and basis prices were bid up, but no actual molecules of natural gas changed hands. These trades are referred to by the parties variously as "sham trades," "wash trades," or "basis swaps." See In re: Natural Gas Commodity Litigation, 377 F.Supp.2d 498, 504 (S.D.N.Y. 2004) ("The FERC Final Report defines wash trades a[s] 'a prearranged pair of trades of the same good between the same parties, involving no economic risk and no net change in beneficial ownership").
In the instant motion Defendants challenge the ability of Gallo to show a causal connection between any "basis swaps" it may have conducted and any damage Gallo may have incurred. Defendants challenge Gallo's ability to provide evidence to prove both that the basis swaps actually caused the spike in natural gas prices Gallo paid, and to prove that other market factors not related to basis swaps were not the cause of price increases. Defendants also challenge Gallo's ability to produce evidence sufficient to show the conspiracy existed during the full time-period alleged in the FAC.
Defendants' instant motion for summary judgment on the issues of causation and conspiracy was filed on July 26, 2005, concurrently with Defendants' motion for summary judgment on the issue of applicability of the Filed Rate Doctrine and concurrently with Gallo's motions for summary judgment on principal/agent liability and on Gallo's motion for summary judgment on Defendants' affirmative defenses.
On October 17, 2005, the court granted Defendants' motion for certificate of applealability as to the court's order of September 30, 2005, denying Defendants' motion for summary judgment on the grounds of filed rate doctrine and federal preemption (hereinafter the "September 30 Order"). The court's order of October 17 stayed further proceedings in this case pending judgment by the Ninth Circuit Court of Appeals on Defendants' interlocutory appeal of the court's September 30 Order. The judgment of the Ninth Circuit Court of Appeals affirming this court's order of September 30 Order, was received by this court on December 6, 2007. The stay that had been imposed pending interlocutory appeal was lifted on November 21, 2007.
Following the lifting of the stay, the court requested statements by the parties as to the need for further briefing as to any of the dispositive motions that were still pending at the time. Based on the parties responses, the court determined further briefing was not necessary as to Gallo's motions for summary judgment on the issues of principle/agent liability and on Defendants' affirmative defenses. The parties differed with respect to whether additional briefing would be appropriate with respect to Defendants' instant motion on causation and conspiracy. Gallo opined that further briefing is not necessary and Defendants averred that further briefing would be appropriate.
UNDISPUTED MATERIAL FACTS
Basically, Defendants' proffered statement of undisputed material facts consists of a series of assertions that Gallo lacks sufficient evidence to prove necessary elements of its claims. In particular, Defendants allege Gallo lacks evidence to prove when the conspiracy started, or that the conspiracy involved any wrongful activities with named non-party co-conspirators or among the alleged co-conspirators. Defendants also allege Gallo lacks evidence to show "any conspiracy involving any trading, reporting, transactions or other conduct impacting Henry Hub natural gas prices." Defendants Undisputed Material Fact ("UMF") # 6. Defendants also allege Gallo's evidence shows only a limited number of wash trades, not enough to establish a conspiracy, and alleges further that none of the wash trades cited by Gallo were reported to any index, nor did the transactions involve natural gas pricing at any pricing point in California. Defendants' UMF # 9.
Defendants next allege a number of undisputed material facts intended to show that Gallo lacks evidence that shows that the trading activities alleged by Gallo were the cause of increased natural gas pricing during the times at issue in this case. Specifically, Defendants allege Gallo has no witness testimony that establishes the link between trader activity and increased prices, but rather has stated it will rely on expert testimony to establish the causal connection. Gallo vigorously disputes essentially every allegation of insufficient evidence proffered by Defendants.
GALLO'S ADDITIONAL MATERIAL FACTS
Gallo alleges a total of 155 additional material facts that are intended to controvert Defendants' allegations of insufficiency of evidence as to each claim. Of significance to the instant motion, Gallo alleges Defendants overreported the volumes of their transaction over a period of a year and that WD traders knew they were overreporting the volumes traded. The overreporting included reports of the volumes traded at PG&E Citygate. Gallo also alleges that volume statement for trades reported to the trade publications over a two year period by certain WD employees were inflated over the volumes actually traded in almost every instance. The over reporting of trading volumes caused a significant spike in reported volumes traded during beginning in the first quarter of 2001 and continuing to the first quarter of 2002. Gallo alleges that the United States Commodities Futures Trading Commission made factual findings of false reporting by WD traders and other co-conspirators and asks the court to take judicial notice of the commissions findings. The court will address Gallo's requests for judicial notice infra. Gallo also alleges false reporting was common among co-conspiring energy companies during the period of 2001-2002, and points out that such false reporting has been acknowledged in other proceedings.
Gallo also alleges and proffers evidence of wash trades and "churning." The former consists of simultaneous buy/sell transactions where equal volumes are traded and sold simultaneously at the same prices. The latter, so far as the court can discern, are sequential sales by a party to a counterparty with immediate resales of identical volumes back to the original seller creating a buy/sell loop in which the basis price is bid up incrementally with each transaction. As will be discussed in more detail infra, Gallo proffers evidence, primarily in the form of commission proceedings, that explain how false volume reporting, "wash trades," and "churning" all had the effect of distorting the natural gas marketplace at the time in question.
Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Poller v. Columbia Broadcast System, 368 U.S. 464, 467 (1962); Jung v. FMC Corp., 755 F.2d 708, 710 (9th Cir. 1985); Loehr v. Ventura County Community College Dist., 743 F.2d 1310, 1313 (9th Cir. 1984).
Under summary judgment practice, the moving party always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Although the party moving for summary judgment always has the initial responsibility of informing the court of the basis for its motion, the nature of the responsibility varies "depending on whether the legal issues are ones on which the movant or the non-movant would bear the burden of proof at trial." Cecala v. Newman, 532 F.Supp.2d 1118, 1132-1133 (D. Ariz. 2007). A party that does not have the ultimate burden of persuasion at trial -- usually but not always the defendant -- "has both the initial burden of production and the ultimate burden of persuasion on the motion for summary judgment." Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099, 1102 (9th Cir. 2000). "In order to carry its burden of production, the moving party must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial." Id.
If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968); Ruffin v. County of Los Angeles, 607 F.2d 1276, 1280 (9th Cir. 1979). In attempting to establish the existence of this factual dispute, the opposing party may not rely upon the mere allegations or denials of its pleadings, but is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Rule 56(e); Matsushita, 475 U.S. at 586 n.11; First Nat'l Bank, 391 U.S. at 289; Strong v. France, 474 F.2d 747, 749 (9th Cir. 1973). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987), and that the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party, Anderson, 477 U.S. 248-49; Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1436 (9th Cir. 1987).
In the endeavor to establish the existence of a factual dispute, the opposing party need not establish a material issue of fact conclusively in its favor. It is sufficient that "the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." First Nat'l Bank, 391 U.S. at 290; T.W. Elec. Serv., 809 F.2d at 631. Thus, the "purpose of summary judgment is to 'pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.'" Matsushita, 475 U.S. at 587 (quoting Fed. R. Civ. P. ...