United States v. Atlantic Richfield Company

• Decision Date: 17 February 1969
• Docket Number: 69 Civ. 162.
• Citation: 297 F. Supp. 1061
• Parties: UNITED STATES of America, Plaintiff, v. ATLANTIC RICHFIELD COMPANY and Sinclair Oil Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

297 F. Supp. 1061

UNITED STATES of America, Plaintiff, v. ATLANTIC RICHFIELD COMPANY and Sinclair Oil Corporation, Defendants.

69 Civ. 162.

United States District Court S. D. New York.

February 17, 1969.

COPYRIGHT MATERIAL OMITTED

David R. Melincoff, Donald H. Mullins, Attys., Dept. of Justice, for the United States.

Hughes Hubbard & Reed, New York City, Jerome G. Shapiro, Otis Pratt Pearsall, John A. Donovan, New York City, of counsel, Henry B. Weaver, Jr., Gen. Counsel, J. Quinn O'Connell, Washington, D. C., Sp. Counsel, for Atlantic Richfield Co.

G. B. Mallum, V. A. Gorman, New York City, Vinson, Elkins, Weems & Searls, Houston, Tex., David T. Searles, Harry M. Reasoner, Houston, Tex., of counsel, for Sinclair Oil Corp.

OPINION

FREDERICK VAN PELT BRYAN, District Judge:

The Government brings this action under Section 15 of the Clayton Act, 15 U.S.C. § 25, to enjoin the proposed merger of defendant Sinclair Oil Company (Sinclair) and defendant Atlantic Richfield Company (Atlantic) on the ground that the merger would violate Section 7 of the Clayton Act,¹ 15 U.S.C. § 18.

The Government has now moved by order to show cause² for a temporary injunction against consummation of the merger pending determination of the merits of the action. On the motion the parties rely mainly on affidavits and statistical data. Additional facts were developed at an evidentiary hearing before the court.

Both Altantic and Sinclair are large integrated oil companies and are among the nineteen major integrated oil companies in the United States.

Atlantic has total assets of $1,885,991,000 and ranks eleventh in assets among such companies. Its total revenues in 1967 were some $1,559,000,000 and it ranked tenth in total revenues.³ Atlantic has large crude oil reserves of 970,849,000 barrels in the United States. It operates three refineries in this country with a combined capacity of 404,000 barrels per day. It accounts for 3.63% of total domestic refining and ranks tenth among domestic refiners. It also has a 50% interest in a recent crude oil discovery on the Northern Alaskan Slope with reserves estimated at between 5 and 10 billion barrels and estimated production of 600,000 to 900,000 barrels per day.

Atlantic's gasoline marketing operations are presently confined to the Northeastern, Southeastern and Far Western sections of the country.

Sinclair has total assets of some $1,810,183,000, placing it thirteenth in total assets. Its 1967 total revenues were some $1,500,100,000 and it ranked fifteenth in net earnings with net earnings in 1967 of $95,400,000. It has large crude oil reserves in the United States of 644,017,000 barrels, one-half of which are in Texas. Sinclair operates four refineries in the United States with combined capacity of 450,000 barrels per day. It accounts for 4.04% of domestic refinery capacity and, in 1967, ranked eighth among domestic refiners. It markets gasoline in all of the United States except the Far Western States.

On October 31, 1968, after Gulf and Western Industries had made a tender offer to Sinclair stockholders, Atlantic and Sinclair entered into a merger agreement. The agreement provided that Sinclair would be merged into Atlantic by the exchange of Sinclair stock for Atlantic common and newly issued Atlantic convertible preferred. The merger agreement was approved by the stockholders of both companies on December 31, 1968.

On December 18, 1968, after the merger agreement had been entered into but before it had received stockholder approval, Atlantic entered into an agreement with B P Exploration U.S.A. Inc. (B P) whereby B P agreed to purchase all of the marketing properties of Sinclair in the Northeastern United States and its pipelines, storage and distribution terminals, inventories, accounts receivable and patents for the sum of $300,000,000. Also included were the Sinclair refinery in Pennsylvania and the Atlantic refinery in Texas. The sale to B P was to be consummated on the first day of the month following the completion of the merger. The sale was avowedly made by Atlantic for the purpose of avoiding attack on the merger under the antitrust laws because of anti-competitive consequences in the Northeast.

B P is a wholly owned subsidiary of British Petroleum Corporation, Ltd. (B P Ltd.), a United Kingdom corporation which is among the seven largest integrated oil companies in the Western World. It has a net worth of 3.8 billion dollars and gross annual sales of 4 billion dollars. Slightly under 50% of its stock is owned by the British Government. While B P Ltd. has refining and marketing facilities in many parts of the world, it has been unable thus far to enter and compete in the United States market, though it has long desired to do so.

If the purchase agreement is carried out, B P Ltd. will, for the first time, become a competitor in the United States market through its subsidiary B P which has a substantial interest in one of the recent North Alaskan Slope crude oil discoveries. B P anticipates that production from this discovery will eventually fill a large part of its United States crude oil requirements.

Atlantic and Sinclair submitted information and data concerning the proposed merger and the proposed sale to B P of Sinclair assets in the Northeast to the Department of Justice during November and December 1968. Without objection from the Department, Atlantic made a tender offer to shareholders of Sinclair. Pursuant thereto Atlantic acquired 2,538,369 shares of Sinclair common at a price of $145 per share or a total price of $366,615,505. The merger was scheduled to be consummated on January 20, 1969.

In the meantime, following published rumors that the Department of Justice was planning to challenge the merger, the market price of both Sinclair and Atlantic dropped precipitously from the highs reached when the merger was announced. The total decline in market value of the common stock of both defendants in late December and early January is estimated at $1,100,000,000.

On January 15, 1969, five days prior to the contemplated closing date of the merger, the Department of Justice filed the complaint in this action. The complaint, in substance, charged that, in violation of Section 7 of the Clayton Act, the effect of the proposed merger may be to substantially lessen competition or tend to create a monopoly in the marketing of gasoline in four geographic markets: (1) the Northeastern States,⁴ (2) the Rocky Mountain States,⁵ (3) the Central States,⁶ and the Southeastern States.⁷ It alleged that actual and potential competition between defendants in the sale of gasoline will be eliminated, Sinclair will be eliminated as a substantial competitive factor in the sale of gasoline, and competition in the sale of gasoline generally may be substantially lessened.

The complaint seeks judgment declaring that the proposed merger would violate Section 7, and both a preliminary and permanent injunction against carrying out the merger or any similar agreement.

On the filing of the complaint the Government immediately moved for a preliminary injunction and secured a temporary restraining order against the imminent consummation of the merger. The preliminary injunction motion is before me for decision.

I

In a series of cases beginning with Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), and following with such cases as United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963), United States v. Continental Can Co., 378 U.S. 441, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964), United States v. Von's Grocery Co., 384 U.S. 270, 86 S.Ct. 1478, 16 L.Ed.2d 555 (1966), and United States v. Pabst Brewing Co., 384 U.S. 546, 86 S.Ct. 1665, 16 L.Ed.2d 765 (1966), the Supreme Court has laid down the basic principles and standards to be used by the courts in applying § 7 of the Clayton Act.

Section 7 proscribes mergers where, as a result, competition in any line of commerce in any section of the country may be substantially lessened. As is clear from Brown Shoe, the section does not prohibit all mergers. While Congress intended to arrest restraints of trade and monopolistic tendencies "in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding,"⁸ there is no per se proscription against corporate mergers. The statute is concerned only with those mergers which may have demonstrable and substantial anti-competitive effects.

Moreover, Section 7 was directed neither at the possibility that anti-competitive effects might occur nor at the certainty of such effects. "Proof of a mere possibility of a prohibited restraint or tendency to monopoly will not establish the statutory requirement * * *."⁹ Section 7 concerns itself with the reasonable probability of the lessening of competition or tendency toward monopoly as a result of the particular merger being scrutinized —a showing that such effects are reasonably likely to occur. This is what the words "may be" as used in Section 7 mean. The lessening of competition must also be shown to be "substantial."

Thus, mergers are proscribed where substantial anti-competitive effects or tendency to monopoly are reasonably probable in any line of commerce in any section of the country. In order to determine whether there are substantial anti-competitive effects or tendency to monopoly, it is necessary in each case to define the relevant product market in which it is claimed that such effects will occur, and the section or sections of the country affected. The probability of anti-competitive effects and their substantiality cannot be evaluated in a vacuuum. They can only be judged in terms of the particular markets affected, that is, "within the area of effective competition."¹⁰

In the case at bar, at least at this stage of the proceedings, there appears to be no dispute of any substance between the parties as to either the relevant...