Petroleum Marketing Attorneys’ Meeting April 14-15, 2016 Loews Madison Hotel – Washington, DC

Antitrust: What Do Petroleum Marketing Attorneys Need to Know?

Layne E. Kruse and Eliot Turner 49654645

Antitrust Questions: Gasoline Marketing

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1. Can Wholesale Customers Be Charged Different Prices If They Do Not Compete At Retail? Western Convenience Stores v. Suncor Energy, 2014 Bloomberg Law 235562 (D. Colo. Aug. 22, 2014); see also 970 F. Supp. 2d 1162 (D. Colo. 2013) •

After bench trial, court found that refiner did not violate Robinson-Patman Act by charging different wholesale prices to convenience store chain and to food store chain.

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There was no effect on competition since food store chain did not use its lower wholesale costs to lower its retail prices. Food store was only a price follower.

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However, Court found sales were in interstate commerce, even though refiner located in same state as convenience store and food store chains.

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2. Can Functional Discounts Justify Charging Two Different Prices? Texaco v. Hasbrouck (Sup. Ct. 1990) •

Texaco sold gas to independent Texaco retailers at higher prices than it sold to two distributor buyers, who also sold their gasoline at retail.

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Plaintiffs alleged price discrimination violated Robinson-Patman Act.

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Affirmed judgment for plaintiffs since record supported finding that functional discounts were not legitimate.

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Distributors may be granted functional discounts for distribution function, but the discounts must bear resemblance to the functions recipients performed.

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3. Can Refiner Charge Higher Prices To A Distributor As Compared To Company-Owned Stations? Two Brothers Distributing v. Valero Marketing and Supply, 2015 Bloomberg Law 389917 (D. Ariz. Nov. 25, 2015) • • • •

Distributor (with ten associated gasoline retailers) sued refiner for charging higher prices as compared to its company-owned stations. Court dismissed Robinson-Patman claim. Robinson-Patman Act does not apply to intra-corporate transfers. Leave to amen granted to alleged, that price breaks were given to station formerly owned by refiner.

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4. Does Parallel Pricing Prove a Conspiracy to Fix Gasoline Prices?

King & King Enters. v. Champlin Petroleum Co. (10th Cir. 1981) •

Unbranded independent gas station priced two cents below the branded independents and claimed Defendant conspired with competitors to lower prices uniformly to coerce station to raise prices.

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Defendant and other companies guaranteed their dealers profit margins, regardless of the retail price of gas.

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Defendant would coordinate with other companies and tell them when to raise prices.

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Affirmed verdict against defendant.

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4. Does Parallel Pricing Prove a Conspiracy to Fix Gasoline Prices? (cont’d) White v. R.M. Packer Co. Inc. (1st Cir. 2011). •

Plaintiffs claimed gas stations conspired to fix gasoline prices on Cape Cod.

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Need to show evidence tending to exclude independent decisions. Conduct that is as consistent with permissible competition as with illegal conspiracy did not support inference.

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Did not exclude independent decisions: Parallel steady or raised prices; abnormal profits; motive to conspire; high barriers to entry; attempting to maintain those barriers.

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5. Can a Conspiracy Be Based on Following Posted Prices? In re Petroleum Products Antitrust Litigation (9th Cir. 1990) •

Gasoline retailers claimed that defendants were coordinating dealer discounts from tankwagon prices to fix the retail price of gasoline.

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Defendants would publicly announce pricing decisions, sometimes in advance of effective date, and would also publicly post prices for inspection.

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Ninth Circuit reversed summary judgment for defendants. Jury could conclude that companies agreed, either implicitly or explicitly, as a means to facilitate tacit or express price coordination. 8

6. Could a Joint Venture be an Illegal Conspiracy to Fix Gasoline Prices? Texaco v. Dagher (Sup. Ct. 2006) •

Texaco and Shell Oil created joint venture, to refine and sell gasoline in western United States under the original brand names of Shell and Texaco.

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Gas station owners sued alleging that the two companies, selling as one in a joint venture, amounted to price fixing under Sherman § 1.

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Supreme Court found no illegal restraint. The Court found they were merely setting prices in a legitimate joint venture.

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DOJ & FTC, Antitrust Guidelines for Collaborations Among Competitors (2000).

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7. When Are Gasoline Prices Too Low? Bathke v. Casey’s Gen. Stores, Inc. (8th Cir. 1995). • • •

Independent gasoline retailers claimed defendant targeted rival gasoline sellers by pricing below cost for a period until it destroyed rivals and losses could be recouped. To establish predatory pricing, must show below cost pricing and ability to recoup. Brooke Group v. Brown & Williamson Tobacco (Sup. Ct. 1993). Plaintiffs did not provide sufficient evidence to reach a jury on (i) below cost pricing; (ii) recoupment; or (iii) relevant geographic market.

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8. When Are Gasoline Prices Too Low? (cont’d) Rebel Oil Co. v. Atlantic Richfield Co. (9th Cir. 1995). •

Plaintiffs claimed ARCO predatorily lowered prices to take over Las Vegas retail gasoline market, and began to raise prices to recoup prior losses.

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Plaintiffs could not show defendant had market power to allow scheme to succeed. ARCO lacked power to charge prices above competitive levels to recoup predatory losses. Existing stations could always supply more gasoline to customers.

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9. Are Maximum or Minimum Prices for Gasoline Per Se Violations? State Oil v. Kahn (Sup. Ct. 1997) Gas station leaseholder alleged price fixing because of agreement with State Oil to sell gasoline at a specified retail price and receive a specified margin on those sales, which, created a maximum price. –

Supreme Court overturns precedent that had held vertical maximum price-fixing per se illegal. Vertical maximum price fixing should be evaluated under “rule of reason.”

Leegin Creative Leather Prods. v. PSKS, Inc. (Sup. Ct. 2007) The Court overturned 100-year precedent that vertical minimum price setting was per se illegal. Maximum and minimum prices must be evaluated on a case-by-case basis under a “rule of reason.” 12

10. Can Dealers Be Forced to Carry Products and Services That They Do Not Want? Gasoline and Trademarks: Power Test Petroleum Dist., Inc. v. Calcu Gas, Inc. (2d Cir. 1985) •

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Non-refiner distributed gasoline to franchised stations under trademark “Power Test.” Stations required to purchase all gas from Power Test. After Power Test determined station was selling non-Power Test gas, it brought trademark infringement claim. Station asserted that agreement for purchase of gas required use of trademark and disallowed sales of another brand of gasoline was tying agreement. Court found gasoline and trademark are not separate products and therefore no tying arrangement, regardless of whether trademark was source or quality mark.

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10. Can Dealers Be Forced to Carry Products and Services That They Do Not Want? (cont’d) Gasoline and Trademarks: Hamro v. Shell Oil Co. (9th Cir. 1982) •

Independent gas reseller who sold gasoline at wholesale from Shell to service stations, alleged that Shell’s contract with plaintiff was a tying arrangement.

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Shell was manufacturer of the gasoline and the Shell trademark identified the source of the gasoline.

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Court found that the trademark and the gasoline were one and the same for antitrust purposes.

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10. Can Dealers Be Forced to Carry Products and Services That They Do Not Want? (cont’d) Gasoline and Pumps: FTC v. Sinclair (Sup. Ct. 1923) •

Refiners and wholesalers leased underground tanks and pumps to service stations on condition that equipment would only be used with gasoline supplied by one refiner.

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No violation. Service stations are free to contract with whomever they want, are free to use as many pumps as they like (except they may not use the lessor’s equipment for another’s brand), or can invest in pumps on their own and use whatever gas they prefer.

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10. Can Dealers Be Forced to Carry Products and Services That They Do Not Want? (cont’d) Tires, Batteries, and Accessories: FTC v. Texaco Inc. (Sup. Ct. 1968) (“TBA” cases) •

FTC claimed that attempt to induce service stations to purchase Goodrich products, because Texaco was receiving a commission from Goodrich, was an unfair method of competition and violated § 5 FTC Act.

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This conduct was violation because, even though there was no mandate to carry Goodrich products, the economic power Texaco had over its service stations, one year lease practices, and repeated importance placed on buying and selling Goodrich combined to have an adverse effect on competition.

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Antitrust Questions: Latest Merger Issues •

Mergers between upstream oil & gas companies have historically not encountered significant resistance; E&P has generally occurred in large geographic areas with robust competition – $70B merger between Royal Dutch Shell PLC and BG Group PLC – cleared December 2015 – Acquisition of reserves or rights in oil, natural gas, shale or oil sands, together with associated exploration or production assets, exempt from Hart-Scott-Rodino (HSR) reporting if fair market value of assets held as result of acquisition does not exceed $500 million. – In determining whether the $500M threshold has been exceeded, no need to count value of any nonproducing reserves.

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Antitrust Questions: Latest Merger Issues (cont’d) • Most antitrust M&A scrutiny occurs downstream, where fewer competitors • Halliburton Co. $34.6 billion purchase of Baker Hughes Inc. – DOJ filed suit April 2016 to stop merger, despite over $7.5B in proposed divestitures. • Schlumberger $14.8B bid for Cameron given US approval November 2015 – companies offer complementary product lines, meaning less regulatory scrutiny

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Antitrust Questions: Increase Criminal Enforcement

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Increased Individual Antitrust Criminal Prosecution

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Increased Focus on Individual Liability • DOJ recently announced increased focus on individual accountability to combat corporate misconduct (2015) (Yates Memo). • Seeks to ensure “individual accountability is at the heart of our corporate enforcement structure.” • Antitrust Division has a stated policy of pursuing individuals; DOJ’s policy will encourage the Antitrust Division to increase its efforts to hold individuals accountable. • To maintain cooperation as a viable option, prompt internal investigation must be considered. 21

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