Lehrman v. Gulf Oil Corporation

Decision Date26 June 1972
Docket NumberNo. 29908.,29908.
Citation464 F.2d 26
PartiesKenneth LEHRMAN, Plaintiff-Appellee, v. GULF OIL CORPORATION, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

COPYRIGHT MATERIAL OMITTED

John B. McNamara, Jr., Waco, Tex., W. B. Edwards, Regional Atty., Gulf Oil Corp., Houston, Tex., for defendant-appellant.

Jack N. Price, Longview, Tex., Charles M. McDonald, Waco, Tex., for plaintiff-appellee.

Before WISDOM and COLEMAN, Circuit Judges, and BOYLE,* District Judge.

As Modified on Denial of Rehearing and Rehearing En Banc June 26, 1972.

WISDOM, Circuit Judge:

This appeal from a treble damage judgment under the Sherman Act raises questions of jurisdiction, liability, and the proper measure of the plaintiff Lehrman's damages. We affirm the judgment of the district court as to jurisdiction and liability, but reverse and remand for additional proceedings on the question of damages.

Gulf Oil Corporation took this appeal from a jury verdict and judgment of the United States District Court for the Western District of Texas awarding $63,000 plus costs and interest to Kenneth Lehrman, the operator of a now-defunct Gulf service station in Mart, Texas. Lehrman sued Gulf for treble damages under Section 1 of the Sherman Act, 15 U.S.C. § 1, alleging that Gulf's complicated system of setting wholesale prices for its gasoline was used by Gulf as a mechanism for fixing the retail prices at which dealers resold Gulf gasoline. Gulf asserts that Lehrman voluntarily retired because he was not making enough money to continue in business. Lehrman complains that Gulf's pricing policies drove him out of business by making it impossible for him to engage in price competition with a neighboring self-service station run by Cape Oil Company, and with stations in Waco, Texas, near Mart. At the time of the trial he was a mail carrier. Both parties to the appeal complain of the district court's handling of the damages to be assessed against Gulf.

I. THE FACTS

Lehrman opened his service station, leased from Gulf, in November 1959. It was the only service station handling Gulf gasoline in Mart, Texas, a small town in central Texas. For almost nine years he sold on the average between 8000 and 9000 gallons a month. See footnote 14.

From December 12, 1961, until August 16, 1964, Gulf openly fixed the resale prices for its gasoline, relying upon "consignment" agreements with its retail outlets as a means of avoiding the Sherman Act's per se ban on vertical agreements not to resell except at a fixed price. The "consignment" charade came to an abrupt end in the wake of the Supreme Court's ruling in Simpson v. Union Oil Co. of California, 1964, 377 U.S. 13, 84 S. Ct. 1051, 12 L.Ed.2d 98. Gulf then put into effect a "price support" system of wholesale distribution of its gasoline. That system was in effect at the time Lehrman's station went out of business in 1967, and the uncontroverted evidence at trial indicates that the price support system continues to characterize a substantial portion of Gulf's operations. This litigation requires us to analyze the compatibility of Gulf's price support system with the competitive dictates of our antitrust laws.

Gulf sells gasoline to its dealers at a "dealers tank wagon" ("DTW") price. That price is set from 4.5 to 5 cents lower than the prevailing retail price on the gasoline in question; the difference of 4.5 to 5 cents provides the dealer with his gross margin of profit on the sale of each gallon of gasoline. For example, if the retail posting on Gulftane were 29.9 cents, the "dealer margin" would be 5 cents per gallon and the DTW price would be 24.9 cents per gallon.

When other major oil companies in competition with a Gulf station lower their prices, a dealer requests Gulf to provide "price support" in the form of a "temporary competitive allowance" ("TCA"), or reduction in the DTW price. After ascertaining informally that the competitor station's prices are as described by the Gulf dealer, Gulf grants the necessary TCA. For example, suppose that Texaco were selling its competitive gasoline for 25.9 cents per gallon in a location adjoining a Gulf station which had posted Gulftane at 29.9 cents. A 3.5 cent TCA would be granted. If the dealer followed Gulf's "suggested" retail price, he would post Gulftane at 25.9 and absorb half a cent of the retail price cut, reducing his gross margin to 4.5 cents and the DTW price to 21.4 cents per gallon.

To understand Lehrman's necessary reliance on this system, we must add a further complication to the Gulf price support system—namely, Gulf's insistence upon differentiating the prices it will support in the face of "private brand" and "self-serve" competition from the prices it will support to meet the competition of other major oil companies.1 Gulf will support a price only to within a penny of a "private brander" and—directly relevant to this case—only to within two cents of a self-serve station. In other words, if Lehrman wished to price his gas at the precise level charged by the self-serve Cape Oil station in Mart, he might have done so, but would have been forced to absorb the two cent difference out of his own gross margin of profit—assuming, that is, that Gulf would not withdraw all price support from Lehrman if he dipped beneath Gulf's suggested retail price.

This outline of the TCA mechanism provides the background for the events which Lehrman alleges led to the failure of his service station business. Mart, where Lehrman's station was located, is only twenty miles from Waco, a relatively large city with a number of major company service stations. Since many residents of Mart work in Waco, they may compare Mart prices with Waco prices and lighten competition between major company outlets in the two locations. Prices in Mart were consistently higher than those charged in Waco, but in 1964 Lehrman was able to compete with the Waco stations for a time because Gulf was granting him regular allowances to permit him to keep pace with the self-serve Cape Oil station in Mart which had opened in the late months of 1963.2 Indeed, it appears from the record that Lehrman's chief concern with the self-serve station in Mart was as a vehicle to enable him to secure pricing competitive with dealers in Waco and Harrison Switch.

In early 1965 Durst, a Cape Oil representative, called Stokes, Gulf's district manager, and complained that Lehrman was posting Gulftane too cheaply—within a penny, and not two cents, of the self-serve station's prices. After this complaint from Lehrman's competitor, Gulf never again granted significant price support to Lehrman.3 The result was that his retail prices rose to two or three cents above those charged by the selfserve station, which were in turn higher than Waco prices. In short, after Durst complained that Gulf was granting TCAs enabling Lehrman to price his gasoline too cheaply, Gulf sharply curtailed its allowances to Lehrman. He could not compete with the Waco stations and still pay the wholesale prices demanded of him by Gulf. In 1967, upon sustaining a sizable net loss, Lehrman went out of business.

II. JURISDICTION

At the outset, we are met with Gulf's contention that the lower court lacked subject matter jurisdiction over this case. Gulf says that its actions of which Lehrman complains, neither occurred in commerce nor had a "substantial adverse effect on interstate commerce", and that Lehrman therefore failed to make out a valid claim under the Sherman Act.4 In support of its position, Gulf points out that although the crude oil from which the gasoline was made was produced 85 percent in Texas and 15 percent in Louisiana, the gasoline sold to Lehrman was manufactured entirely in Texas and once placed in the pipeline, never left Texas. Lehrman sold so little gasoline compared with Gulf's Texas and American sales that Lehrman's sales and Gulf's relations with Lehrman had only a "de minimis" effect on interstate commerce.

Without so deciding, we assume Gulf is correct in its contentions that gasoline sold by Lehrman never moved in interstate commerce before Lehrman sold it and that his gasoline sales were small relative to Gulf's national and state-wide totals. By the same token, we take it to be true that Gulf's TCA system is in effect throughout much of the Southwest and that this system does have a significant effect upon the distribution of large amounts of gasoline, some of which, of course, moves in interstate commerce before it is sold as well as after. There is evidence in the record to support this proposition and none to contradict it.

Lehrman has consistently asserted that the TCA system of pricing is in effect beyond his own operation and far beyond the Mart-Waco area, and that this broad focus is the proper one for a jurisdictional determination in this treble damage action. Gulf, however, would have us concentrate for purposes of determining jurisdiction upon the volume of the business of the specific individual who complains of anti-trust violation. The jurisdictional problem in this case, then, reduces to whether a business practice, benign on its face, with an undeniably powerful effect on interstate commerce, may be the subject of a treble damage suit by a single entrepreneur, inspired by coercive application of the practice, whose own operation is relatively small and whose individual effect on interstate commerce is insignificant.

A. The Supreme Court considered a similar question in Simpson v. Union Oil, supra, where a single gasoline station operator successfully complained of price-fixing under a lease-consignment agreement which Union conceded was extensively used in eight Western states. Without any discussion of the volume of Simpson's own business, the Court had no trouble finding jurisdiction. It stated, though without elaboration, that "there is actionable wrong whenever the restraint of trade or...

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