Alberta Gas Chemicals Ltd. v. E.I. Du Pont De Nemours and Co.

• Decision Date: 10 September 1987
• Docket Number: No. 86-5662,86-5662
• Citation: 826 F.2d 1235
• Parties: , 1987-2 Trade Cases 67,671 ALBERTA GAS CHEMICALS LIMITED and Alberta Gas Chemicals, Incorporated, Appellants, v. E.I. DU PONT DE NEMOURS AND COMPANY, Du Pont Holdings, Inc., and Conoco Inc.
• Court: U.S. Court of Appeals — Third Circuit

Page 1235

826 F.2d 1235

56 USLW 2145, 1987-2 Trade Cases 67,671

ALBERTA GAS CHEMICALS LIMITED and Alberta Gas Chemicals, Incorporated, Appellants, v. E.I. DU PONT DE NEMOURS AND COMPANY, Du Pont Holdings, Inc., and Conoco Inc.

No. 86-5662.

United States Court of Appeals, Third Circuit.

Argued Feb. 25, 1987.

Decided Aug. 17, 1987.

Rehearing and Rehearing In Banc

Denied Sept. 10, 1987.

James M. Brachman (argued), Richard E. Grimm, Freeman, Wasserman & Schneider, New York City, for appellants.

Henry P. Sailer (argued), Carolyn F. Corwin, Covington & Burling, Washington, D.C., for appellees.

Before WEIS, BECKER and HUNTER, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

In this antitrust suit a methanol producer challenges a competitor's acquisition of another corporation. The merger led to cancellation of the acquired company's plans to produce methanol by a new process, preceded by large scale purchases to stimulate the market before beginning production. We conclude that the plaintiffs' alleged loss of anticipated sales resulting from that expected increase of market activity does not constitute antitrust injury. We determine further that the plaintiffs' collateral loss of sales to the acquired company in the circumstances amounts to only a de minimis foreclosure, and does not constitute antitrust injury. Consequently, we will affirm the district court's entry of summary judgment in favor of defendant.

In 1981, E.I. Du Pont de Nemours and Company acquired Conoco Inc., in a transaction of approximately 7.8 billion dollars. Plaintiffs contend that the merger violated Sec. 7 of the Clayton Act, 15 U.S.C. Sec. 18, because it "may substantially lessen competition" in the United States market for methanol. Plaintiffs seek an order for divestiture as well as money damages of 98.5 million Canadian dollars for lost profits and interest and 153 million Canadian dollars for reduced value of the plaintiffs' business.

Although Du Pont and Conoco produce a variety of products, this litigation focuses on the methanol-producing and methanol-consuming aspects of their operations. Methanol is a chemical used in the manufacture of such products as formaldehyde, plywood, particle board, various plastics, and many others. Methanol can also be used as a fuel both in its pure form and as an additive to gasoline. It is viewed as a successor to gasoline in motor vehicles, to natural gas and petroleum in utility generators, and to petroleum in various chemical uses.

Plaintiffs are Alberta Gas Chemicals, Ltd., a Canadian natural gas producer, and its New Jersey subsidiary, Alberta Gas Chemicals, Inc. (collectively "Alberta"). Alberta produces methanol from its natural gas holdings in Canada and boasts the largest source of the product in that country. In the highly concentrated United States "merchant market," that is, the market for methanol not used by the producing company for internal manufacturing, Alberta's sales accounted for about 7% in 1981.

Defendant Du Pont was the largest producer of methanol in the United States in 1981, recording sales of about 30% of the merchant market. In that year, Du Pont devoted about half of its production to internal operations. Du Pont and the second largest producer together controlled about 50% of the market, and the four largest companies accounted for more than 70%.

At the time of the acquisition, Conoco was an international energy company owning the largest coal reserves in the United States. It did not produce methanol, but in 1980 purchased roughly nine million gallons for use in its chemical and plastic manufacturing plants in New Jersey and Louisiana. Its purchases represented approximately 1.8% of total merchant market sales in the United States.

Although methanol is generally manufactured from natural gas, studies have demonstrated the potential for using coal as a source through a gasification and liquefaction process. During the 1970s and early 1980s when crude oil prices rose rapidly, projects that experimented with coal to produce synthetic fuels grew commercially attractive. With governmental encouragement, many corporations explored coal gasification and, by mid-1981, at least sixteen coal-to-methanol projects were active.

Before the merger, Conoco had been studying plans to construct a large coal gasification facility in the United States. Among other uses, the company considered blending methanol with gasoline to produce gasohol, a fuel for motor vehicles that Conoco would market through its existing service stations, particularly on the west coast.

After the merger, Conoco cancelled the coal gasification project. The company also sold its chemical plant in Louisiana and dismantled the one in New Jersey. By 1984, Conoco's methanol purchases were comparatively minimal.

Because of the lead time necessary for construction, Conoco's first methanol plant was not likely to have begun operations until the late 1980s. In order to have a market in place when manufacture began, Alberta asserts that Conoco planned to purchase large quantities of methanol from a number of producers in the interim. Conoco would then sell this methanol on the merchant market to stimulate additional demand.

Alberta estimates that Conoco would have purchased at least one hundred million gallons of methanol per year in the interim before its own production facilities became operational. Alberta would have supplied some of this quantity, it says, and to that extent would benefit directly. It would profit indirectly through the increased price for methanol brought about by the large demand created by Conoco's purchases. These elements make up Alberta's first or "demand creation" claim.

Alberta's second claim is based on the premise that it would have sold methanol to Conoco for its chemical and plastic plants in New Jersey and Louisiana. After the merger, Conoco filled some of its needs through Du Pont and other companies, but none through Alberta. Alberta claims damages for a loss of sales to Conoco which, it is alleged, resulted from the merger.

After the acquisition, Du Pont temporarily closed one of its two methanol-producing plants and, although it no longer predominates in the "merchant market," still possesses substantial market power. The price of methanol has declined substantially since the early 1980s, and there is now an oversupply in the world market. Du Pont insists that Conoco did not proceed with coal gasification plans because of the falling price of oil and observes that other companies also abandoned their projects for the same reason.

Conoco's consumption of methanol fell after the merger to about 400,000 gallons in 1985, none of which Du Pont supplied. Conoco had purchased some methanol from Alberta in the late 1970s, but was not a customer of plaintiffs at the time of Du Pont's acquisition.

Alberta filed suit on September 25, 1981, in the United States District Court for the District of New Jersey. The complaint asked for equitable relief, but Alberta did not seek a preliminary injunction. The merger became effective on September 30, 1981. After the parties had conducted extensive discovery, the district court granted summary judgment in favor of Du Pont on Alberta's horizontal or "demand creation" claim and, at a later date, on the "vertical" count as well.

The court assumed for purposes of summary judgment that Du Pont's acquisition of Conoco violated Sec. 7 of the Clayton Act ¹ and that Alberta had suffered the losses it claimed. In addition, the court also accepted Alberta's theory that potential competition between Du Pont and Conoco had been or would be eliminated because of cancellation of the coal gasification project. Rejecting Alberta's arguments, the district court stated that the absence of a projected increase in industry demand was not identical to a lessening of competition. There being no antitrust injury in the view of the court, it denied Alberta's demand creation claim.

The district court distinguished Alberta's second or "vertical" claim--that for losses of sales to Conoco's chemical plants. Relying on Brown Shoe Co. v. United States, 370 U.S. 294, 328, 82 S.Ct. 1502, 1525, 8 L.Ed.2d 510 (1962), the court reasoned that foreclosing competitors from a segment of the market would make defendant liable for losses traceable to that action. Because Conoco had ceased its chemical manufacturing operations by 1984, however, the court ruled that Alberta could not establish any losses after that point.

In addition, the court observed that Alberta had not submitted any breakdown of the losses suffered between the acquisition in 1981 and Conoco's withdrawal from the plastic and chemical manufacturing fields in 1984. Based on this gap in proof, the court concluded that Alberta had failed to meet its burden on damages. Moreover, the court stated that its decision was compelled because "even before the merger Conoco had no plans to purchase methanol from Alberta."

Finally, the court denied Alberta's claim for an injunction. The court noted that because the antitrust injury requirement applies to claims for equitable relief, Alberta's failure to demonstrate antitrust injury in its damage claims was fatal to its prayer for divestiture.

On appeal, Alberta contends that it would prove its vertical claim at trial by showing prospects of sales to Conoco and argues that summary judgment was inappropriate to resolve this issue of material fact. Alberta asserts, in addition, that the district court erred in evaluating the vertical claim by relying on Du Pont's post-acquisition activity. That conduct, Alberta says, is self-serving and is merely temporary forbearance limited to the duration of the current litigation.

As to the demand creation claim, Alberta argues that in failing to find antitrust injury, the district court erred because it did not recognize that the damages flow directly from "either ... the [antitrust] violation or ... anticompetitive [a...