Dougherty v. Continental Oil Co.

• Decision Date: 11 September 1978
• Docket Number: No. 77-2373,77-2373
• Citation: 579 F.2d 954
• Parties: 1978-2 Trade Cases 62,224 James E. DOUGHERTY et al., Plaintiffs-Appellees, v. CONTINENTAL OIL COMPANY, Defendant-Appellant, Truman Arnold Distributing Co., Inc., Genico Distributors, Inc., and Reed Distributing Co., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 954

579 F.2d 954

1978-2 Trade Cases 62,224

James E. DOUGHERTY et al., Plaintiffs-Appellees, v. CONTINENTAL OIL COMPANY, Defendant-Appellant Truman Arnold Distributing Co., Inc., Genico Distributors Inc., and Reed Distributing Co., Defendants-Appellants.

No. 77-2373.

United States Court of Appeals Fifth Circuit.

Sept. 11, 1978.

John Feather, Dallas, Tex., for Genico Distributors, Inc.

Eugene L. Lefler, Beaumont, Tex., for Reed Distributing Co.

Edward Miller, Texarkana, Tex., for Truman Arnold Distributing Co.

B. J. Bradshaw, William R. Pakalka, Jerry E. Smith, Louis S. Zimmerman, Edward R. Adwon, Robert M. Craft, Houston, Tex., W. F. Palmer, Marshall, Tex., for Continental Oil.

Jim Ammerman, Don Stokes, Marshall, Tex., Jack Price, Austin, Tex., Stephen D. Susman, Tex Lezar, Mandell & Wright, Houston, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Eastern District of Texas.

Before GEWIN, GODBOLD and MORGAN, Circuit Judges.

GODBOLD, Circuit Judge:

This is an antitrust case brought by commission agents of Continental Oil Company (Conoco) against Conoco and some of Conoco's jobbers. In answers to special interrogatories the jury found that Conoco and its jobbers had violated § 1 of the Sherman Act and assessed damages against the defendants at approximately $8.4 million after trebling. We reverse.

The case arose out of Conoco's decision to reshape its methods of gasoline marketing in Texas. Prior to 1975 Conoco marketed branded gasoline in three ways. First, Conoco sold gasoline and gasoline products directly to the public from service stations owned and operated by Conoco. Second, Conoco sold gasoline to independent jobbers who stored it in their own distribution facilities, set prices, and resold the gas to consumers and other distributors. Third, Conoco consigned gasoline to commission agents who operated bulk plant facilities owned by Conoco and sold the gas to service stations, municipalities and quantity consumers such as farms. Conoco set both the sale prices and the commissions received by the commission agents.

In 1972 Conoco decided to abandon this vertical integration system in the Texas-Arkansas market by withdrawing the "Conoco" brand and converting to low cost self-service operations under the FasGas and E-Qual brands. To avoid terminating its commission agents selling "Conoco," Conoco gave them the options of going out of business, finding another supplier or purchasing the Conoco-owned bulk plants they operated and becoming jobbers in E-Qual gas. Many commission agents, some of whom are plaintiffs here, planned to purchase the facilities they were operating and become jobbers. The 1973 Arab oil embargo caused Conoco to suspend its market realignment before any E-Qual jobber contracts were consummated.

During this hiatus two Conoco jobbers, Wright and Arnold, proposed to Conoco that they purchase all Conoco's marketing facilities (service stations and bulk plants) in Texas and Arkansas. Conoco was willing to discuss such a plan provided that all the available assets were purchased. Conoco set a price of $22 million on the asset package. Wright and Arnold were unable to meet that price but suggested that they solicit bids from other interested parties to buy large parcels of assets. Conoco agreed, insisting that the negotiations be kept secret.

Wright and Arnold selected other Conoco jobbers they felt might have the interest and financial ability to participate in the plan. This group divided up the assets by geographic location, each person selecting an area encompassing his present area of operation. Each person submitted a bid for his area and negotiated separately with Conoco to purchase it. Most of the negotiations concluded successfully, resulting in the sale of about a dozen asset parcels. Other negotiations, such as Wright's, failed.

The plaintiff commission agents were informed in May 1975 that the bulk plants they were operating were being sold to the jobber defendants and that, rather than becoming jobbers themselves, they had only the option of continuing as commission agents for the purchasing jobbers or going out of business. The plaintiff agents sued Conoco and the purchasing jobbers, claiming that Conoco and the jobbers conspired in violation of the Sherman Act to exclude plaintiffs from becoming E-Qual jobbers as Conoco had promised in 1972. Plaintiffs contended that but for illegal territorial divisions and other restraints of trade Conoco would have sold the marketing assets to them instead of the jobber defendants. Alternatively, plaintiffs claimed that the restructured marketing scheme created restraints on trade that would not have occurred had Conoco acted on its original plan to permit the plaintiffs to become jobbers. The plaintiffs claimed as damages the difference between their incomes as commission agents and their projected incomes as jobbers.

The case was tried during 1977, when vertical territorial restraints were per se illegal under U.S. v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967). The district court submitted to the jury two Rule 49(a) interrogatories, one based on per se illegality and one based on the rule of reason for general restraints of trade. The jury found for plaintiffs and against Conoco and the jobber defendants on both interrogatories.

The judgment must be reversed because of prejudicial errors committed by the district judge. During the pendency of this appeal, the Supreme Court in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), discarded the Schwinn rule of per se illegality for vertical territorial restraints. Therefore, interrogatory 1, predicating liability on per se illegality, falls with Schwinn.

Interrogatory 2, basing liability on unreasonable restraints of trade, cannot support the verdict because it was infected by the now-erroneous Schwinn instruction. Also, as we discuss later in this opinion, the district judge did not ask the jury to make a finding of what constituted the relevant market but, as best we can tell, intended to make his own finding defining the relevant market, as he could do under Rule 49(a). Two errors occurred in the implementation of this approach. The district judge did not clearly apprise the jury of what he had found the relevant market to be. Second, whatever his finding, there was not sufficient evidence to support any definition of the geographic market. Finally, while the district judge correctly found the product market, there was insufficient evidence to support the jury's finding that the challenged restraints actually restrained trade in that product market.

Interrogatory 1.

Interrogatory 1 clearly asked the jury to evaluate vertical territorial restrictions imposed by Conoco on the jobber defendants.

Do you find from a preponderance of the evidence that Continental Oil Company conspired with Defendants Gabbert, Arnold and Reed to divide territories between them, and restrict the geographic territory within which the Defendant Continental Oil Company would sell petroleum products to the Defendants, and within which the Defendants would resell to customers located within such territories?

(Burden of proof on Plaintiffs.)

Answer yes or no. Yes.

If this were inarguably a case of vertical restraints tried under the now discredited Schwinn per se rule, we would remand for proceedings consistent with Continental T.V. ¹ See Florida Harvestore, Inc. v. A. O. Smith Harvestore Products, Inc., 561 F.2d 631 (C.A.5, 1977); Eastern Scientific Co. v. Wild Heerbrugg Instruments, Inc., 572 F.2d 883 (C.A.1, 1978); Adolph Coors Co. v. A & S Wholesalers, Inc., 561 F.2d 807 (C.A.10, 1977). The appellees argue, however, that the case was not tried on a Schwinn theory at all but on a theory of horizontal market division. Schwinn, of course, did not alter the rule that horizontal market divisions are per se illegal. See U.S. v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972); U.S. v. Sealy, Inc., 388 U.S. 350, 87 S.Ct. 1847, 18 L.Ed.2d 1238 (1967). Thus, in appellees' view, Continental T.V. does not require reversal.

The relationship among the defendants has both vertical and horizontal elements. Vertically, Conoco, as a manufacturer and seller of petroleum products, agreed with entities at a lower level of the marketing chain, its jobbers, to sell them assets previously owned by Conoco. Horizontally, Conoco, as an owner and operator of both bulk plants and retail service stations, agreed with entities at the same market level, its jobbers, to sell them assets previously owned by Conoco. Thus, under settled antitrust doctrines, the Conoco-jobber dealings are capable of several characterizations.

Vertically, the transaction might be described, depending on anticompetitive purpose, as a unilateral refusal to deal with the commission agents, U.S. v. Colgate, 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992 (1919), or as a vertical refusal to deal with the agents to further the anticompetitive motives of competitors of the agents. See U.S. v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966) (per se treatment). Or the sale to the jobbers could be evaluated under the rule of reason by characterizing the sale as Conoco's right to establish and terminate exclusive dealerships or franchises. See, e. g., Universal Brands, Inc. v. Phillip Morris, Inc., 546 F.2d 30 (C.A.5, 1977); Burdett Sound, Inc. v. Altec Corp., 515 F.2d 1245 (C.A.5, 1975). Given the agreement between Conoco and the jobbers, one might designate the transaction as a vertical group boycott to exclude competitors of the jobbers, thus invoking per se treatment. See Klors, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959). Looking to the fairly routine nature of a sale of assets, the transaction could be seen as having a legitimate business...