The opinion of the court was delivered by: ROSENBERG
The United States of America, plaintiff, brings this action for injunctive relief against Pennzoil Company and Kendall Refining Company, defendants, as based upon the provisions contained in § 7 of the Clayton Act (Act of Congress of October 15, 1914, c. 323, § 7, 38 Stat. 731, December 29, 1950, c. 1184, 64 Stat. 1125, 15 U.S.C. § 18).
The action was filed on August 4, 1965 to enjoin the consummation of an acquisition agreement of Kendall by Pennzoil on the basis that it violated § 7 of the Clayton Act. As originally filed, the complaint requested a temporary restraining order, but after a short hearing, the parties entered into a stipulation whereby the defendants agreed not to consummate the agreement until after a ruling on the plaintiff's motion for preliminary injunction.
In its complaint, the Government averred that the defendants, Pennzoil and Kendall, producers of Penn Grade crude oil and refiners of that product, entered into an agreement dated June 11, 1965, whereby Pennzoil was to succeed to all the rights, properties and assets of Kendall by exchanging Kendall common stock for newly issued Pennzoil cumulative convertible preferred stock. The complaint charged that actual and potential competition between these two corporations in the purchase of Penn Grade would be eliminated; that Kendall would be eliminated as a substantial competitive factor in the purchase of Penn Grade; and, that concentration in the production and purchasing of Penn Grade will be substantially increased.
A hearing on the motion for preliminary injunction was commenced on September 14th and concluded on September 21st. Considerable testimony was taken and a large number of exhibits were presented by the parties. The question is whether or not the plaintiff has met its burden of proving that a preliminary injunction should issue on a violation of § 7 of the Clayton Act.
The plaintiff contends that the consummation of the proposed merger of Pennzoil and Kendall would be an acquisition in a line of commerce (Pennsylvania Grade crude oil) in a section of the country delineated by boundaries of the Pennsylvania Grade crude oil producing area, the effect of which may be to substantially lessen competition or tend to create a monopoly, and that such acquisition is forbidden by § 7 of the Clayton Act.
The defendants, on the other hand, contend that
(1) the plaintiff cannot prevail at a trial on the merits because the evidence established that Pennsylvania Grade crude is not a line of commerce within the meaning of the Clayton Act;
(2) the merger will not substantially lessen competition even if it is assumed, arguendo, that Penn Grade crude oil is a line of commerce within the meaning of the Act;
(3) the merger will not violate § 7 of the Act because it will promote, not lessen competition;
(4) the issuance of a preliminary injunction would inflict irreparable injury on the defendants and amount to a final judgment for the plaintiff; and
(5) even if the plaintiff should ultimately prevail in a trial on the merits, divestiture would be a completely adequate remedy.
Penn Grade crude is extracted by more than 2,000 independent producers operating approximately 100,000 wells with an average daily output of less than one-third barrel per day. The producers include the two defendants, Pennzoil and Kendall, who are also refiners, as well as the third producer-refiner, Quaker State Refining Company. In the past seven or eight years the total annual production of Penn Grade crude has ranged from eleven to twelve million barrels. The largest producer is the defendant Pennzoil with a rated production in 1964 of 25% of the total. In the same year defendant Kendall had a rated production of approximately 3%, as did Quaker State Refining Company. The remaining 68.5% or about 8,200,000 barrels was produced by the independents who are neither refiners nor processors of the crude oil.
The production of Penn Grade crude is, on the whole, by extraction induced by mechanically forced pumping. The reserves or deposits have been subjected to a series of secondary recovery techniques, and currently efforts to increase recoverable reserves are being made with the use of hydraulic fracturing and steam injection.
Penn Grade crude is distinctive because paraffin comparatively free from impurities forms its major base component, while other crudes have either an asphaltic base or a mixed asphaltic-paraffin base. Because of its paraffin base and its relative freedom from asphalt, carbon and sulphur, Penn Grade crude is easier to refine than are other crude oils. The peculiar chemical composition of Penn Grade crude permits its refiners to omit certain steps which are necessary in the refining of other types of crude oil. Penn Grade crude has been distinctly, easily and exclusively processable into the highest grade of lubricants available. Its composition and lubricant yield of 25% is so distinct as to make it usable for lubrication of certain kinds of large machinery without any processing whatsoever. This, however, is not considered to be its end use. Its primary distinction lies in the fact that it is easily convertible into the highest quality of lubricants obtainable.
Penn Grade crude has in the past been processed in a large number of refineries. These have dwindled to ten refineries, four of which are presently owned by the defendants, Pennzoil and Kendall. Pennzoil operates three and Kendall operates one. Quaker State Refining Company also operates three refineries. All ten refineries are relatively small, with through-put capacity ranging from 1,000 to 10,000 barrels per day. They are principally lubricant plants specially built to utilize this particular grade of crude oil. This is so because Penn Grade crude refiners produce lubricants primarily, with gasoline and other incidentals as side products, as opposed to other crude refiners which produce gasoline primarily, with lubricants and other incidentals as side products.
All ten refineries for this Penn Grade crude product are located in the Penn Grade crude producing area. So it is that Penn Grade crude is transported only within this geographic section of the country and it is processed exclusively in these refineries.
In order to supplement their own production of Penn Grade crude in 1964, the defendants Pennzoil and Kendall and Quaker State purchased substantial quantities from the independent producers. Of the approximately eight million barrels produced by the independents in 1964, Pennzoil, Kendall and Quaker State purchased 93%. Quaker State was the largest purchaser with 3,517,000 barrels comprising 43% of the total so produced by the independents. Pennzoil was the second largest purchaser with 3,106,515 barrels comprising 38% of the total produced by the independents. Kendall was the third largest purchaser with 995,380 barrels comprising 12% of the independents' production.
In 1964, approximately 11,580,360 barrels of Penn Grade crude were run through the ten refineries of Penn Grade crude. Pennzoil accounted for approximately 44%, Quaker State for approximately 29% and Kendall for 13%. Thus, the top three refiners accounted for approximately 86% of the refining runs of Penn Grade crude. The three small refiners ran through only 14%. Pennzoil and Kendall together accounted for 57% of the total refining runs.
The Penn Grade crude refiners have a total refining capacity of 40,320 barrels per day. Of this total, Pennzoil accounts for 40%, Quaker State for 23% and Kendall for 14%. Thus, the top three Penn Grade refiners account for approximately 77% of the total. Pennzoil and Kendall account for 54% of the total refining capacity.
The marketing of oil between the producers and refiner-purchasers is governed by short-term contracts as a general rule, and "transfer orders" which provide for delivery are generally revocable by either party upon notice. Penn Grade crude is sold by the producers at a price which is determined and posted by the refiners. This grade of crude oil commands a premium price in the market place and is currently being sold at an average price of $1.00 more per barrel than other crudes. In 1963 for example, five of the other better quality crudes in the nation ranged from $2.65 per barrel for West Texas crude to $3.15 per barrel for Texas Gulf crude. At the same time Penn Grade in the Bradford Field was priced at $4.63.
Prices vary slightly in the Penn Grade field because the crude is priced so as to arrive at Oil City at one price. The slight variations in the posted price reflect, therefore, the cost of gathering and transporting the crude oil. Delivery of the crude oil to the refiners is made at the producers' wells and it is transported to the refineries by pipelines. Where pipelines are not accessible, supplemental transportation is by tank truck pick-up.
Eureka Pipe Line Company is the only transporter of Penn Grade crude by pipeline in West Virginia. Penn Grade crude, shipped from eastern Ohio by Buckeye Pipe Line Company, is put into the pipelines of Eureka at the Ohio-West Virginia border. Eastern Ohio Penn Grade crude and West Virginia Penn Grade crude, gathered and transported by Eureka, is delivered to the two refineries which process Penn Grade crude in West Virginia (one owned by Pennzoil, the other by Quaker State); and to the extent it is not utilized there, it is transported by Eureka to the West Virginia-Pennsylvania border and there it is put into the pipeline system of National Transit Company. Pennzoil owns 52% of the common stock of Eureka.
The lubricants produced by the Penn Grade refiners are distributed primarily through independent dealers and not in refiner-owned service stations. They are marketed under specific trade or brand names with insigne or labeling which identifies them as produced from "Pure Pennsylvania oil". Penn Grade crude can be found in, and recovered from, only the Penn Grade crude area comprising southwestern New York, western Pennsylvania, eastern Ohio and all of West Virginia. It is purchaseable only in this area. It is transportable only within this area. And, it is refined only in this area.
The petroleum industry regards Penn Grade crude as a separate economic entity. Both the American Petroleum Institute and the Bureau of Mines of the Department of Interior keep separate statistics on its production and the National Petroleum Refiners Association publishes a monthly statistical bulletin on Pennsylvania oils. Producers and refiners of Penn Grade crude oil are united in a trade association, the Pennsylvania Grade Crude Oil Association. The license regulations of the Penn Grade association provide that only motor oils manufactured from "100% pure Pennsylvania Grade crude oil" may be marketed in containers bearing the association's insigne. The term "100% Pure Pennsylvania oil", used in advertising Penn Grade lubricants, refers to oil produced within the geographic area commonly recognized as the Pennsylvania oil region.
Penn Grade crude has been the object of emulation and refiners throughout the country during the past thirty years have striven to obtain equality with the specifications of Penn Grade crude lubricants. In this connection, scientific knowledge and improved technology has added much to the improvement of the specifications of "lube" products obtained from other crudes. Today there is a claim by the major oil companies that they have finally succeeded in equalling the specifications of the Penn Grade lubricants. Penn Grade crude products have achieved a reputation which is not only nationwide but worldwide; and it is noteworthy that in spite of the claim of the major oil companies that they have equalled the specifications of Penn Grade crude products, that Penn Grade crude, nevertheless, continues to demand the highest price among crude oils; continues to be more easily refined than other grade crudes; persists in having the reputation of the highest quality; and continues to be demandable by consumers because of the fact that it is derived from Pennsylvania Grade crude.
The defendants argue that there can be no line of commerce without regard to the end use of the raw material; that the courts have consistently tested the effects of mergers in terms of the products made from, or the end use of the raw material; and, that there is no legal precedent by which Penn Grade crude as such can be considered a line of commerce within the meaning of § 7 of the Clayton Act.
The last part of this argument may here be used, not as a positive but rather as a negative crutch. The mere absence of precedents does not of itself defeat a right of action. In order for a precedent to exist, there must be an antecedent case. The absence of precedents, then, is no authority against a right of action, and that circumstance does not of itself defeat a right of action. Heine v. New York Life Insurance Co., 50 F.2d 382, C.A. 9, 1931. "It is well established that the mere absence of precedent does not prove that an action cannot be maintained." Daily v. Parker, 152 F.2d 174, C.A. 7, 1945; Morrow v. Yannantuono, 152 Misc. 134, 273 N.Y.S. 912; Hill v. Sibley Memorial Hospital, 108 F. Supp. 739, 740 (D.C.D.C., 1952). To the same effect is Bonbrest v. Kotz, 65 F. Supp. 138 (D.C.D.C., 1946). Neither does the absence of precedents raise any presumption, ipso facto, that a plaintiff lacks a remedy.
Because the plaintiff bases its action here on a statute, the authority by which a judicial determination may be made must appear by the command or direction of the statute, itself. We look fundamentally for our authority to the words of the statute and if necessary to the Congressional reports of the proposed statute as it was being considered by the Congress. We also look for direction from the Supreme Court as it viewed and discussed the statute in the light of the Congressional reports and as reflected in background history, necessity and purpose. From all of this we are instructed that § 7 provides a remedy where there may be a substantial lessening of competition or where there may be a tendency to create a monopoly "in any line of commerce, in any section of the country". United States v. Continental Can Co., 378 U.S. 441, 12 L. Ed. 2d 953, 84 S. Ct. 1738 (1964); United States v. Aluminum Company of America, 377 U.S. 271, 12 L. Ed. 2d 314, 84 S. Ct. 1283 (1964); United States v. El Paso Natural Gas Company, 376 U.S. 651, 12 L. Ed. 2d 12, 84 S. Ct. 1044 (1964); United States v. Philadelphia National Bank, 374 U.S. 321, 10 L. Ed. 2d 915, 83 S. Ct. 1715 (1963); Brown Shoe Company v. United States, 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962); Maryland and Virginia Milk Producers Association v. United States, 362 U.S. 458, 4 L. Ed. 2d 880, 80 S. Ct. 847 (1960); United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 1 L. Ed. 2d 1057, 77 S. Ct. 872 (1956); Standard Oil Company of California v. United States, 337 U.S. 293, 93 L. Ed. 1371, 69 S. Ct. 1051 (1948); Van Camp & Sons, Co. v. American Can Co., 278 U.S. 245, 73 L. Ed. 311, 49 S. Ct. 112 (1929). We have substantial guidance in all of these decisions.
Since § 7 forbids acquisition, in whole or in part, of the assets of one or more corporations where in any line of commerce in any section of the country the effect of such acquisition may be to substantially lessen competition or tend to create a monopoly, it is incumbent upon the plaintiff in this action to show that Pennzoil, as a defendant, seeks to acquire the assets of Kendall in a line of commerce in a section of the country, and that the effects of such acquisition may substantially lessen competition or tend to create a monopoly. This "line of commerce" in the stated "section of the country" must then constitute the market which is relevant to the determination under the proscription of § 7.
Two elements comprise a relevant market: (1) the product or subject of economic activity, and (2) the geographic area in which the economic activity exists. Brown Shoe Co. v. United States, supra. Determination of a relevant market, both as respect the product and the geographical area, is a necessary step precedent to determining whether a corporate acquisition violates this section. Crown Zellerbach Corp. v. F.T.C., 296 F.2d 800, C.A. 9, 1961; United States v. E. I. duPont de Nemours & Co. et al., supra; Brown Shoe Co. v. United States, supra. The relevant market is the "area of effective competition" within which the defendants operate. Standard Oil Co. of California, supra. "[The] problem of defining a market turns on discovering patterns of trade which are followed in practice." United States v. United Shoe Machinery Corp., (D.C. Mass. 1953) 110 F. Supp. 295, 303, affirmed per curiam, 347 U.S. 521, 74 S. Ct. 699, 98 L. Ed. 910.
The three basic issues in a § 7 proceeding are (1) line of commerce, (2) section of the country, and (3) the probable competitive impact of the merger.
"[If] the forbidden effect or tendency is produced in one out of all the various lines of commerce the words 'in any line of commerce' literally are satisfied."
It is only necessary in a preliminary injunction proceeding for the plaintiff to raise substantial questions which go to the merits of the case. Thus, it is the plaintiff's burden here merely to show that a product line involved may ultimately be found to be a line of commerce.
While the selection of an entire industry as the principal line of commerce in which to assess the competitive impact of an acquisition in § 7 cases was adopted by the courts in United States v. Bethlehem Steel Corp., 168 F. Supp. 576 (S.D.N.Y. 1958), and United States v. Philadelphia National Bank, supra, the Supreme Court in Brown Shoe Co. v. United States, supra,
recognized that within a broad market, " well defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes."
"The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. . . ."
In a petition filed with the Public Utilities Commission of West Virginia, on July 22nd, 1963, J. Hugh Liedtke, President of Pennzoil stated:
" . . . The technical characteristics which differentiate Pennsylvania Grade crude oil from other grades of crude oil are beyond the relevant scope of this Petition, but it is deemed relevant that in general Pennsylvania Grade crude oil commands a premium price in the market place because motor oils which are refined from such crude oil have superior lubricating characteristics and are generally accepted as premium products. In general, Pennsylvania Grade crude oil is a paraffinic base crude oil while others are either mixed or asphaltic base crude oils. In addition, a barrel of Pennsylvania Grade crude oil yields approximately 23 percent lubricating oil, compared to a national average for crude oils generally of less than three percent."
As Mr. Liedtke said, Penn Grade crude is a paraffin base crude, as differentiated from other crudes, with a seven to eight times higher yield of lubricating oil than other crude oils. It has distinct prices, in that it generally sells at more than a dollar a barrel over the price of other crudes. It is produced, moves and is processed separately within its own area and as its own industry. The Government and industry recognize Penn Grade crude as a separate economic entity. And it has distinct customers in that the only purchasers are Penn Grade crude refiners. It is by such indicia that we may determine that a well-defined sub-market exists even if crude oil should naturally happen to be an entire industry.
There may be other lines of commerce comprised of lubricating oils, gasoline, asphalt, and other products of crude oil; and crude oil in general in an appropriate case may constitute a line of commerce, but well-defined trade realities exist here which support Penn Grade crude as a line of commerce. Any line of commerce definition which ignores the sellers (producers) and focuses on what the buyers (refiners) do or can do is meaningless. Here the producers produce and sell Penn Grade crude. Similarly the refiners purchase and refine only Penn Grade crude. It is only within this framework, this line of commerce, that these particular competitive forces move.
The evidence supports the conclusion that Penn Grade crude (1) has distinct prices; (2) has distinct customers; and (3) is recognized by the industry as a separate entity from other types of crude oil.
The defendants contend that Penn Grade crude cannot be a line of commerce because the end use to which it is put is similar to the end use of other crude oils and that the end product is interchangeable or substitutable. The fact that the other crudes have improved their end-use product and have achieved in a large measure the specifications of the end-use products of Penn Grade crude, and that the other crude products are more easily accessible because the large oil companies distribute them in their vast networks of gasoline stations throughout the country, may indicate that there is a possible interchangeability between the end-use products of Penn Grade crude and other crudes. This contention is no more acceptable here than it was in the Brown Shoe Co. v. United States, supra,
where it was said at page 325:
"The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined sub-markets may exist which, in themselves, constitute product markets for antitrust purposes."
In Crown Zellerbach Co. v. Federal Trade Commission, supra,
at page 811, this was said:
"All that the Commission was required to do was to ascertain and find a product line which was sufficiently inclusive to be meaningful in terms of trade realities . . . In the statutory phrase 'in any line of commerce ', the word entitled to emphasis is 'any'. Any line of commerce does not mean the same as the entire line of ...