Rare FTC-DOJ Joint ‘Gun Jumping’ Action Results in Record Penalty

Key Takeaways

• On January 7, the Federal Trade Commission (FTC) and Department of Justice (DOJ) jointly filed suit against XCL Resources Holdings, LLC (XCL), Verdun Oil Company II, LLC (Verdun), and EP Energy LLC (EP) for alleged "gun-jumping" in violation of the Hart-Scott-Rodino (HSR) Act.
• This is the first time the FTC has participated in a gun-jumping enforcement proceeding since 1999. The most recent gun-jumping suit was brought by the DOJ in August 2024.
• According to the complaint filed in the United States District Court for the District of Columbia, XCL and Verdun violated the HSR Act by entering into an operation agreement and assuming control of EP's day-to-day operations before the expiration or termination of the mandated waiting period under the HSR Act.
• The defendants agreed to pay nearly $5.7 million to remedy the alleged violation - a record penalty in a gun-jumping case.

On January 7, 2025, the FTC and DOJ jointly filed a complaint against XCL, Verdun, and EP concerning an alleged gun-jumping violation. The parties simultaneously filed a proposed final judgment, under which the defendants agreed to pay nearly $5.7 million in penalties for allegedly violating the HSR Act's mandated waiting period.

The HSR Act requires parties to certain transactions to file a premerger notification with the FTC and DOJ, and observe a 30-day waiting period before closing the transaction. During that waiting period, the FTC or DOJ reviews the proposed transaction for potential competition issues and may decide to extend the waiting period by issuing a "Second Request." Violating the HSR waiting period by prematurely exercising beneficial ownership of the target subjects the transacting parties to fines, currently a maximum of $51,744 per day of the violation.[1]

In July 2021, XCL and Verdun signed a purchase agreement under which they would acquire EP for approximately $1.4 billion - an acquisition large enough to trigger an HSR filing obligation. Both buyers and EP were engaged in the development of crude oil extraction, with overlapping operations in Utah. When they signed the purchase agreement, XCL and Verdun also entered into an operating agreement with EP under which EP's operational rights were restricted. For example, EP was prohibited from continuing its crude oil development activities unless it received approval from XCL and/or Verdun.[2] Because these contractual restrictions imparted control over ordinary course of business activities, beneficial ownership of EP transferred to XCL and Verdun before the expiration or termination of the HSR waiting period.

The purchase agreement was amended to allow EP to resume its ordinary course of business activities pre-closing in October 2021 - after the transaction's HSR filing had become subject to a Second Request - and after 94 days of alleged continuous violation. XCL, Verdun, and EP agreed to pay nearly $5.7 million to settle the gun-jumping lawsuit with the FTC and DOJ.

Caution for Transacting Parties

Gun-jumping enforcement lawsuits are somewhat rare but remain a priority for the antitrust agencies. The last gun-jumping case was brought in August of 2024, by the DOJ only. The last time the FTC participated in a lawsuit for a gun-jumping violation was in 1999.

However, despite the relative infrequency of enforcement proceedings, gun jumping is a risk for all transacting parties, regardless of whether they are competitors, but especially so when they are. During the HSR waiting period, parties to a transaction should ensure that the buyer does not hold itself out as controlling the target, and a buyer should not take control of ordinary course of business activities of the target. Where the parties are competitors, they must additionally avoid sharing competitively sensitive information pre-closing, except with appropriate safeguards in place - like a clean team agreement and a restricted data room.

[1] The maximum daily fine is expected to adjust upward in early 2025.

[2] The complaint also details XCL/Verdun control of other EP ordinary course of business functions. It also alleges the parties shared competitively sensitive information after the signing of the purchase agreement.