Antitrust Law Daily Water conservation district unable to poke leaks in claims it monopolized water market
Tuesday, August 18, 2020

Water conservation district unable to poke leaks in claims it monopolized water market

By Nicole D. Prysby, J.D.

The plaintiff utility companies alleged the district conspired to maintain an absolute hold on the wholesale raw water in the county and sufficiently alleged a relevant market.

Utility companies sufficiently alleged that a water conservation district conspired to inflate water prices, held the federal district court in Houston. The plaintiffs alleged that they suffered injury through paying inflated water prices under the contracts with the conservation district. The allegations created a plausible inference of concerted action and the complaint sufficiently alleged a relevant market—the raw water market in the county. The plaintiffs demonstrated that they plausibly alleged claims for declaratory and injunctive relief. Although the contracts were signed more than four years before the plaintiffs brought their claims, the monthly fee assessments were new overt acts that qualified as a continuing antitrust violation. The conservation district was not entitled to state action immunity because there was nothing in its enabling legislation that authorized it to displace or regulate competition in the wholesale raw water market. Thus, the motion to dismiss the claims was denied (Quadvest, L.P. v. San Jacinto River Authority, August 14, 2020, Gilmore, V.).

Plaintiffs Quadvest, L.P. and Woodland Oaks Utility, L.P. are private, investor-owned utility companies that provide groundwater to residential and commercial consumers in Montgomery County. Defendant San Jacinto River Authority (SJRA) is a conservation district created by the Texas Legislature in 1937 to manage water in the district. In 2001, the Texas Legislature created Lone Star Groundwater Conservation District in Montgomery County. Since Lone Star’s inception, the plaintiffs alleged that SJRA worked with Lone Star to monopolize all of the raw water supply in Montgomery County. In 2010, SJRA established Groundwater Reduction Plan Contracts (GRP Contracts). Each plaintiff signed its own version of the GRP Contract, which required payment of SJRA pumpage fees.

The plaintiffs alleged that, under the GRP Contracts, SJRA would use the pumpage fees to finance SJRA’s water treatment plant project and SJRA had the contractual right to dictate how much water participants can use and at what cost. They contended that SJRA struck a deal with the other providers of surface water to maintain an absolute hold on the wholesale raw water in Montgomery County. The complaint included claims under section 1 of the Sherman Act and also sought declaratory and injunctive relief.

Statute of limitations and laches. The court held that the claims were not barred by the statute of limitations or by laches. The plaintiffs signed the GRP Contracts in 2010, more than four years before filing the lawsuit. However, the monthly fee assessments were new overt acts that qualified as a continuing antitrust violation because at the time the contracts were signed, damages caused by the alleged conspiracy were not provable with certainty. In September 2019, SJRA adopted a new schedule for pumpage fees, which indicated an overt act. The laches doctrine did not bar the claims; the claim was filed within the statute of limitations period and therefore the plaintiffs did not delay in asserting their claim.

State action immunity. SJRA was not entitled to immunity under the state action doctrine. The enabling legislation authorized SJRA to operate water transportation facilities and enter into any and all necessary and proper contracts to do so, but these provisions—and the enabling statute generally—omitted any affirmative contemplation that SJRA was authorized to displace or regulate competition in the wholesale raw water market. SJRA argued that the enabling statute’s language was a broad authorization to enter into all contracts related to the construction of water treatment and transportation facilities. However, such broad authorizations are typically used in ways that do not raise federal antitrust concerns. There was no indication that the displacement of competition was an inherent, logical, or ordinary result of the exercise of SJRA’s general powers delegated from the enabling statute.

Restraint of trade and related claims. The plaintiffs alleged that the GRP Contracts were horizontal agreements, but did not allege that SJRA and the plaintiffs compete in the same market with the same customer base. Therefore, the factual allegations did not amount to a horizontal restraint that would be per se unlawful, according to the court.

The allegations did, however, state a claim under the rule of reason. The complaint alleged that the GRP Contracts formed with SJRA were intended to raise the wholesale price of groundwater to equal the effective wholesale price of surface water, that every utility pays the same rate to procure raw water and this inflated cost is then passed down to the Montgomery County consumers of treated water, and that they each have suffered economic injury by paying the monthly pumpage fees to SJRA. These allegations created a plausible inference of concerted action. The plaintiffs also sufficiently alleged a relevant market—the raw water market in Montgomery County—through allegations that they are restricted to purchasing raw water in Montgomery County due to licensing and regulatory requirements.

Because the complaint stated a section 1 claim, it was reasonable that the plaintiffs could attain declaratory relief. The court also found that the plaintiffs were entitled to injunctive relief. They paid more than $21 million to SJRA for pumping their own groundwater and were unable to recoup payments from SJRA as it is a governmental subdivision. Though an injunction might cause SJRA to default on bond obligations, the injunction—and subsequent default—would be due to SJRA’s own unlawful antitrust violation. And the public interest would be served by a permanent injunction.

This case is No. 4:19-cv-04508.

Attorneys: J David Rowe (Dubois Bryant & Campbell, LLP) for Quadvest, L.P and Woodland Oaks Utility, L.P. James E. Zucker (Yetter Coleman LLP) for San Jacinto River Authority.

Companies: Quadvest, LP; Woodland Oaks Utility, LP

MainStory: TopStory Antitrust GCNNews TexasNews

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