Chevron U.S.A., Inc. v. Cayetano

• Decision Date: 01 April 2002
• Docket Number: CIVIL NO. 97-00933 SOM.
• Citation: 198 F.Supp.2d 1182
• Parties: CHEVRON U.S.A., INC., a Pennsylvania corporation, Plaintiff, v. Benjamin J. CAYETANO, Governor of the State of Hawaii; Earl I. Anzai, Attorney General of the State of Hawaii, Defendants.
• Court: U.S. District Court — District of Hawaii

198 F.Supp.2d 1182

CHEVRON U.S.A., INC., a Pennsylvania corporation, Plaintiff, v. Benjamin J. CAYETANO, Governor of the State of Hawaii; Earl I. Anzai, Attorney General of the State of Hawaii, Defendants.

CIVIL NO. 97-00933 SOM.

United States District Court, D. Hawai`i.

April 1, 2002.

Robert A. Mittelstaedt, Pillsbury Winthrop LLP, San Francisco, CA, John R Myrdal, Stanton Clay Chapman Crumpton & Iwamura, Honolulu, HI, for plaintiff.

Charles A. Price, James Koshiba, Koshiba Agena & Kubota, Honolulu, HI, for defendants.

AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

MOLLWAY, District Judge.

I. INTRODUCTION.

This case is a challenge to a state law that caps the rent an oil company may charge someone who leases a service station owned by the oil company. Plaintiff Chevron U.S.A., Inc. ("Chevron"), argues that Act 257, passed by the Hawaii legislature in 1997, unconstitutionally effects a regulatory taking because it fails to substantially further a legitimate state interest. The rent cap was instituted as part of the State of Hawaii's response to high gasoline prices. High prices caused the State of Hawaii to file a separate lawsuit, alleging that oil companies had conspired to keep the prices high. While the parties to the antitrust lawsuit reached a settlement, the present rent cap dispute went to trial. The court held a one-day bench trial on February 26, 2002, then ordered evidence reopened and received limited additional testimony on March 25, 2002. Having examined the evidence provided by economists, who were the only witnesses at trial, this court agrees with Chevron that the rent cap in Act 257 is unconstitutional.

This case has had a long history. Filed in 1997, this case was initially assigned to a different district judge, who granted summary judgment for Chevron on the grounds that Act 257 failed to substantially advance a legitimate state interest and therefore effected an unconstitutional taking. See Chevron U.S.A., Inc. v. Cayetano, 57 F.Supp.2d 1003 (D.Haw.1998). Defendants (collectively "the State") appealed that decision to the Ninth Circuit in Chevron U.S.A., Inc. v. Cayetano, 224 F.3d 1030 (9th Cir.2000)("Chevron Appeal"). The Ninth Circuit reversed, holding that there were genuine issues of material fact as to whether Act 257 effected an unconstitutional taking by failing to substantially advance its purpose of lowering gasoline prices for consumers. See id. at 1038-1041. The Ninth Circuit remanded the case for resolution of questions of fact, including: (1) whether oil companies would offset the benefits of Act 257 by raising the wholesale price of gasoline, and (2) whether incumbent lessee-dealers would sell their leaseholds at a premium representing the increased value resulting from the rent cap, so that new dealers who had to pay that premium would receive no net benefit from the rent cap to pass on to consumers. Id. at 1042.

Based on the evidence presented at the trial held on February 26, 2002, this court¹ finds that Act 257 will not decrease retail gasoline prices. In fact, it will cause retail gasoline prices to increase. Act 257 will also discourage oil companies from investing in lessee-dealer stations. It will create no incentive for lessee-dealers to continue operating their stations through lower operating costs. Instead, Act 257 will create a premium that lessee-dealers can recognize upon selling their leases. Act 257 will not advance the goal of lowering gasoline prices.

II. FINDINGS OF FACT.

Whenever, in the following discussion, this court has mistakenly designated as conclusions of law what are really findings of fact, and vice versa, the court's statements shall have the effect they would have had if properly designated.

This bench trial was conducted in accordance with this court's trial procedures for civil nonjury trials, which are reproduced, in substantially the same form followed here, in Appendix A to this court's decision in Kuntz v. Sea Eagle Diving Adventures Corp., 199 F.R.D. 665 (D.Haw.2001). The court heard testimony from two expert witnesses: John Umbeck, Ph.D. ("Prof.Umbeck"), who testified on behalf of Chevron, and Keith Leffler, Ph.D. ("Prof.Leffler"), who testified on behalf of the State. Direct examinations of both witnesses were submitted to this court in the form of written declarations. Both witnesses appeared live for cross-examination and redirect examination. The court admitted into evidence three exhibits: Defendant's Ex. 1 (Prof. Leffler's direct testimony by declaration), Plaintiff's Ex. 14 (Prof. Umbeck's direct testimony by declaration), and Plaintiff's Ex. 15 (pages A2-A5 of Exhibit A attached to the Stipulation Re: Adoption of Stipulation of Facts for Trial, filed Feb. 22, 2002).

For ease of reference by the parties and the court, the following findings are presented in numbered paragraphs.

Background.

1. On June 21, 1997, the State of Hawaii enacted Act 257. Stip. of Facts ¶ 1. Act 257 regulates the maximum rent an oil company may charge a dealer that leases a service station from the oil company. The rent is capped at 15 percent of the dealer's gross margin on actual gasoline sales. Haw.Rev.Stat. § 486H-10.4(c)(2) (1998). Act 257 does not apply to any dealer lease in effect on August 1, 1997. Stip. of Facts ¶ 40.

2. In passing Act 257, the legislature was concerned about the level of concentration at the wholesale level in the gasoline industry. Trial Testimony by Keith Leffler, Tr. at 89:7-14, 96:18-24. The legislature passed Act 257 to reduce gasoline prices for Hawaii's consumers. See Chevron Appeal, 224 F.3d at 1033 n. 3.

3. Hawaii's gasoline market is an oligopoly at the wholesale level but very competitive at the retail level. An oligopoly is a market with few sellers. Decl. of Keith Leffler (Ex. 1) ¶ 9. A competitive market, by contrast, is one with many sellers. Decl. of Keith Leffler (Ex. 1) ¶ 9.

4. In a competitive market, no one seller is individually significant enough to have a measurable impact on the industry supply. Sellers therefore act independently of each other. A market with only a few sellers is a "highly concentrated" market. In such a market, each seller recognizes that its decisions will significantly affect the market and its competitors. Each seller therefore takes into account how its competitors will react to its decisions about marketing, supply, and price. The sellers are interdependent, rather than independent, competitors. Reduced competition is likely when the market is highly concentrated. In an oligopoly, an individual firm pursuing its own individual interests will not "rock the boat" and will try to avoid price wars and battles for market share. High concentration may have the anticompetitive effect of causing what few firms there are to cooperate tacitly, resulting in high prices to consumers. Decl. of Keith Leffler (Ex. 1) ¶ 10.

5. The level of concentration in an industry may be measured by the Herfindahl Hirschman Index, or HHI. The HHI is calculated by adding the squared values of the market shares of each company in the industry. Trial Testimony by Keith Leffler, Tr. at 90:22-91:1. If the HHI in a market exceeds 1,800, that market is considered highly concentrated. Trial Testimony by Keith Leffler, Tr. at 91:6-9. The HHI is used by the Department of Justice and the Federal Trade Commission among others, to measure concentration levels. Trial Testimony by Keith Leffler, Tr. at 89:18-21.

6. In 1997, Hawaii had two refineries that supplied gasoline to essentially six wholesalers. Decl. of Keith Leffler (Ex. 1) ¶ 9. With an HHI greater than 1,800, the wholesale gasoline market in Hawaii is highly concentrated. Trial Testimony by Keith Leffler, Tr. at 91:10-12.

7. Hawaii's retail gasoline stations come in three types: company-operated stations, which are owned and operated by oil companies marketing their own products; lessee-dealer stations, which are leased by retail dealers from oil companies; and independent stations, sometimes called "two-party dealers" or "open dealers," which are stations that are neither owned by nor leased from oil companies and that make their own decisions about whose gasoline they will buy. Decl. of John Umbeck (Ex. 14) ¶ 6. Company-operated stations tend to enjoy more efficiencies than lessee-dealer stations. On average, when the gasoline price charged to the dealers (the "Dealer Tank Wagon price" or "DTW") is held constant, company-operated stations charge less for gasoline than other stations. Trial Testimony by Keith Leffler, Tr. at 111:5-16.

8. With an HHI of around 150, the retail gasoline market in Hawaii is very unconcentrated, or highly competitive. Trial Testimony by Keith Leffler, Tr. at 96:7-17. To calculate the HHI at the retail level, Prof. Leffler, testifying for the State, grouped together all stations operated by a single oil company, counting them as a single entity deciding on retail prices as a unit. Stations operated by lessee-dealers and open dealers were counted individually, on the theory that such stations decided on retail prices independently. Trial Testimony by Keith Leffler, Tr. at 95:6-9.

9. Under Chevron's lessee-dealer arrangement, Chevron purchases land or leases it from a third party, makes the entire investment to build the service station and to build the related facilities on each location, and leases the land and facilities to the dealer on a turn-key basis. Stip. of Facts ¶ 7. Chevron incurs ongoing expenses attributable to the lessee-dealer rental property, such as ground lease rents, real property taxes, ordinary maintenance (subject to the terms and conditions of the dealer lease), and the accounting expense entry of "depreciation." Stip. of Facts ¶ 8.

10. Chevron's lessee-dealer arrangements have two parts. There is a lease under which Chevron charges the lessee-dealer a monthly lease rent. There is a separate supply contract under which Chevron sells motor fuels to the lessee-dealer at a...