Oahu Gas Service, Inc. v. Pacific Resources, Inc.

• Decision Date: 01 February 1988
• Docket Number: No. 86-2250,86-2250
• Citation: 838 F.2d 360
• Parties: , 1988-1 Trade Cases 67,895 OAHU GAS SERVICE, INC., Plaintiff-Appellee, v. PACIFIC RESOURCES INC., Gasco, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 360

838 F.2d 360

56 USLW 2494, 1988-1 Trade Cases 67,895

OAHU GAS SERVICE, INC., Plaintiff-Appellee, v. PACIFIC RESOURCES INC., Gasco, Inc., Defendants-Appellants.

No. 86-2250.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 10, 1987.

Decided Feb. 1, 1988.

William S. Boyd (argued), Brobeck, Phleger & Harrison (John E. Sparks, William J. Taylor and Stephen L. Meagher, Brobeck, Phleger & Harrison, San Francisco, Cal., and John A. Hoskins, Reinwald, O'Connor, Marrack & Hoskins, Honolulu, Haw., on the brief), San Francisco, Cal., for defendants-appellants.

Maxwell Blecher (argued), Blecher, Collins & Weinstein (Norman Pine and Ann I. Jones, Blecher & Collins, P.C., Los Angeles, Cal., on the brief), Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the District of Hawaii.

Before WRIGHT, FARRIS and THOMPSON, Circuit Judges.

ORDER

The Opinion filed October 9, 1987 and amended November 27, 1987 is withdrawn.

OPINION

FARRIS, Circuit Judge:

Oahu Gas Services, Inc., sued Pacific Resources, Inc., under Section 2 of the Sherman Act for monopolization and attempted monopolization of propane sales in Hawaii. Oahu Gas alleged that Pacific Resources' unlawful conduct included: (1) a decision in 1974 not to begin producing propane and (2) a campaign in 1982 to force Oahu to lower prices by offering sham cut-rate contracts to Oahu's customers. After trial, a jury found in favor of Oahu and awarded treble damages of $4,963,998.00. Pacific Resources appeals the denial of its motion for judgment notwithstanding the verdict.

BACKGROUND

Until 1972, Gasco, a subsidiary of Pacific Resources, was the sole retail seller of propane gas in Hawaii. It received virtually all its propane from Chevron, which operated the only propane refinery in Hawaii. In 1972, Oahu Gas Service was formed and began selling propane on Oahu. Its propane supplies also came from Chevron. Beginning in 1973, the federal government controlled the price and allocation of propane. The base period for determining allocations was May 1972, before Oahu Gas had begun business. Oahu therefore had to apply to the Department of Energy for a "base period volume" of propane that Chevron would be required to supply.

During the energy crisis, price controls on domestically produced propane led Chevron to produce the minimum required by the Department of Energy. Gasco bought increasing amounts of propane from foreign suppliers. During these years, Oahu Gas repeatedly applied to the Department of Energy for larger allocations of propane. Gasco opposed these applications because giving Oahu more low-cost domestic propane would require Gasco to buy more expensive foreign propane, thus increasing Oahu's cost advantage. The Department of Energy denied Oahu's requests until, in July 1979, the Department increased Oahu's share of domestic propane on the condition that Oahu pay Gasco $163,108.00 to offset some of Gasco's additional costs for importing more foreign propane.

One basis for Oahu's Sherman Act allegations was the decision of Hawaiian Independent Refinery, Inc.--a subsidiary of Pacific Resources--not to produce propane in the 1970s. Hawaiian Independent Refinery began operating a petroleum refinery in 1972, producing chiefly military fuels. In early 1973, before price controls went into effect, Hawaiian planned to modify its refinery to permit production of propane and gasoline. The plans assumed that the modifications could be completed by 1976 and that Gasco would be the chief customer for propane. Under price controls, however, Hawaiian's propane would have had the same ceiling price as Chevron's. Thus the refinery expanded only to permit gasoline production, which began in May 1975. After price controls ended in 1981, the refinery was modified to produce propane. It has sold propane to Gasco and to Aloha Gas, a small new propane distributor. It has expressed a willingness to sell propane to Oahu Gas.

Another basis for Oahu's allegations was Gasco's marketing program in 1982. During the energy crisis, demand for propane fell as consumers turned to alternative energy sources. With the end of regulation in 1981 and the beginning of propane production at Hawaiian's refinery in 1982, propane supplies became more plentiful. Gasco began a marketing program in 1982 that included offers of low-cost longterm contracts to large-volume purchasers, both its own customers and customers served by Oahu Gas. The prices offered were above Gasco's average total cost of supplying propane, but Oahu asserted at trial that the offers were "shams," designed to force Oahu to cut prices to its own customers. Oahu did cut prices to those customers, resulting in such low profits, Oahu claims, that it was nearly put out of business. None of Oahu's customers accepted Gasco's offers. Several of Gasco's own customers accepted the offers. In June 1982, Oahu sought and obtained an injunction prohibiting Gasco from soliciting Oahu's customers while they were under contract to Oahu.

The record indicates several uncontroverted facts relating to the relevant market and market shares of Gasco and Oahu Gas. Before Oahu began business in 1972, Gasco served 100% of the propane market on Oahu and in the "outer islands." After Oahu Gas began operating, Gasco's share of the market on Oahu declined steadily. By 1983, before the trial, Oahu sold about 30% of the propane in Oahu. Oahu Gas dominated sales to high-volume commercial and industrial users on Oahu, supplying 78% of that sub-market in 1985. Gasco supplied about 20% of those customers; Aloha Gas supplied the remaining 2%. Oahu Gas did not sell propane in the outer islands.

Oahu's claims of monopolization and attempted monopolization went to trial in 1985. The jury returned a verdict in favor of Oahu and found treble damages of $4,963,998.00. The court also awarded attorneys fees of $873,324.00.

DISCUSSION

I. MONOPOLY POWER IN THE RELEVANT MARKET

The offense of monopolization under Section 2 of the Sherman Act has two elements: "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966); see also Catlin v. Washington Energy Co., 791 F.2d 1343, 1347 (9th Cir.1986) (making explicit as a third factor the implicit requirement of "causal antitrust injury"). We review first the jury's finding that Gasco possessed monopoly power in the Hawaiian propane market from 1972 to 1983, the relevant period for purposes of Oahu's allegations of exclusionary conduct. Our previous decisions establish that both market definition and market power are essentially questions of fact. See, e.g., Twin City Sportservice v. Charles O. Finley & Co., 676 F.2d 1291, 1299 (9th Cir.1982) ("The definition of the relevant market is basically a fact question dependent upon the special characteristics of the industry involved ..."); Greyhound Computer Corp. v. International Business Machines Corp., 559 F.2d 488, 496-97 (9th Cir.1977), cert. denied, 434 U.S. 1040 98 S.Ct. 782, 54 L.Ed.2d 790 (1978) (reviewing the jury's finding of monopoly power for sufficiency of the evidence). We thus review the evidence on these factual issues in the light most favorable to Oahu and draw all reasonable inferences in its favor, for this is an appeal from the denial of a motion for judgment notwithstanding the verdict. See Peterson v. Kennedy, 771 F.2d 1244, 1252 (9th Cir.1985), cert. denied, 475 U.S. 1122, 106 S.Ct. 1642, 90 L.Ed.2d 187 (1986) ("A JNOV is improper if reasonable minds could differ over the verdict").

A. Market Definition

A determination of the relevant market typically requires an inquiry into the nature of the product, see, e.g., United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 1004, 100 L.Ed. 1264 (1956), and the geographical area of effective competition. United States v. Grinnell, 384 U.S. at 575-76, 86 S.Ct. at 1706. Although product definition and geographical definition are theoretically separable inquiries, in this case they are intimately intertwined. Oahu asks us to affirm the jury's finding that the relevant market was inclusive of all propane sales in Hawaii. Gasco, on the other hand, argues that the relevant market was limited to high-volume industrial and commercial users of propane. These high volume users, the evidence suggested, were located either primarily or exclusively in Oahu. The arguments made at trial and pressed before us, though not extensive on the issue of market definition, make clear that the crux of the parties' dispute is product definition rather than geographical definition. We thus focus on product definition first, keeping in mind the importance of delineating the geographical market as well for its bearing on Gasco's market power.

The issue of product definition, though always an inexact science often requiring distinctions in degree rather than kind, see 2 P. Areeda & D. Turner, Antitrust Law p 518 (1978), is especially complicated in this case. During the course of the litigation, three plausible product markets have been suggested by the parties as the proper subjects of focus for purposes of our antitrust inquiry. On the broad end of the scale, it was suggested by Gasco at trial and in its motions before the district court, though not before us, that the jury erred by failing to include in its product definition numerous alternative energy sources that were said to constrain significantly any potential control over prices or competition in the propane market. A second possible delineation of the product market, the one with an intuitive if not necessarily a strong economic appeal, is all propane distribution in Hawaii; this is the market definition...