Shell Oil Company v. FTC

• Decision Date: 18 May 1966
• Docket Number: No. 18967,18969.,18967
• Parties: SHELL OIL COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. The FIRESTONE TIRE & RUBBER COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

360 F.2d 470 (1966)

SHELL OIL COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

The FIRESTONE TIRE & RUBBER COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

Nos. 18967, 18969.

United States Court of Appeals Fifth Circuit.

April 18, 1966.

Rehearing Denied May 18, 1966.

Geo. C. Schoenberger, Jr., New Orleans, La., William Simon, Washington, D. C., William F. Kenney, New York City, John Bodner, Jr., John H. Quinn, Jr., of Howrey, Simon, Baker & Murchison, Washington, D. C., for petitioner, Shell Oil Co.

Francis C. Mayer, Atty., F.T.C., J. B. Truly, Asst. Gen. Counsel, Alvin L. Berman, Atty., F.T.C., Washington, D. C., James McI. Henderson, Gen. Counsel, Lester A. Klaus, Atty., F.T.C., for Federal Trade Commission.

Cantey, Hanger, Gooch, Cravens & Scarborough, Fort Worth, Tex., amicus curiae for Champlin Oil & Refining Co. and others.

Thomas S. Markey, Washington, D. C., Cecil E. Munn, Fort Worth, Tex., Louis A. Gravelle, William W. Rayner, Washington, D. C., for the Firestone Tire & Rubber Co., John F. Floberg, Gen. Counsel, Paul L. Raish, Asst. Counsel, Akron, Ohio, of counsel.

Before BROWN and WISDOM, Circuit Judges, and JOHNSON, District Judge.

WISDOM, Circuit Judge:

This case is one of a trilogy of cases the Federal Trade Commission brought in January 1956 against (1) Atlantic Refining Company and Goodyear Tire and Rubber Company (Atlantic-Goodyear), (2) Texaco (Texas) Company and Goodrich Tire and Rubber Company (Texaco-Goodrich) and (3) Shell Oil Company and Firestone Tire and Rubber Company (Shell-Firestone). In each complaint the FTC challenged the validity of a sales commission contract between the oil company and the rubber company, alleging that the contract was an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.¹

As everyone who drives a car knows, service stations usually carry tires, batteries, and automobile accessories (TBA).² The most widely used plans for marketing TBA are the (1) purchase-resale and (2) sales commission systems. Under the purchase-resale plan, the oil company purchases TBA from the manufacturers and resells the TBA to its service station dealers and wholesale distributors. Under the sales commission plan, the manufacturers sell TBA directly to the oil company's dealers and wholesalers. This system is based on a contract: In return for promoting sales of the rubber company's TBA the oil company receives an overall commission (override)³ on all the supplier's TBA sold at the oil company's wholesale and retail outlets. Shell, Texas Company, and Atlantic use the sales commission system.⁴ They contract with Firestone, Goodrich, and Goodyear, the three largest TBA suppliers, and with other tire and rubber companies; Shell, for example, has a sales commission contract with Goodyear as well as with Firestone.

The same examiner heard all three cases. In each case he found that the sales commission plan was lawful⁵ but that in certain instances the oil companies had used overt coercive tactics.⁶ The Commission adopted the findings of overt coercion. More importantly, in Atlantic-Goodyear and Shell-Firestone the Commission ruled that, considering the "competitive effects resulting from respondent's use" of the sales commission system, the system itself was an "unfair method of competition". The novelty in these rulings was the Commission's rationale:⁷

"Shell has sufficient economic power over its wholesale and retail distributors to cause them to purchase substantial amounts of sponsored TBA even without the use of overt coercive tactics. For reasons set forth hereinafter, we conclude that the exercise of this power by Shell through the use of the sales commission plan in favor of Firestone (Goodyear) constitutes an unfair method of competition and an unfair act or practice in commerce within the meaning of Section 5 of the Federal Trade Commission Act." (Emphasis added.)

March 9, 1961, in Shell-Firestone, the Commission issued broad orders prohibiting Shell's using coercion in marketing TBA; outlawing the oil company's use of the sales commission plan with Firestone or "any other rubber company or tire manufacturer, or any other TBA supplier"; and outlawing the rubber company's use of the plan with Shell or any other oil company. Similar orders were issued in Atlantic-Goodyear. Goodyear Tire and Rubber Company, 58 F.T.C. 309; Firestone Tire and Rubber Company, 58 F.T.C. 309.

In Texaco-Goodrich, unlike the companion cases, the 1961 Commission reached a result the 1966 Commission described as "enigmatic":⁸ "Although `Texaco has sufficient economic power over its wholesale and retail petroleum distributors to cause them to purchase substantial amounts of sponsored TBA even without the use of overt coercive tactics', the record did not contain `sufficient market data to enable the Commission to assess the competitive effects of the sales commission method of distributing TBA'." (Emphasis added.) The Commission therefore remanded the case to the hearing examiner for the taking of additional evidence on that issue.⁹ B. F. Goodrich, 58 F.T.C. 1176. On remand, the examiner found that the Texaco-Goodrich plan was unlawful; the Commission entered orders identical with those entered in the two companion cases. (B. F. Goodrich, Docket 6485, April 15, 1963).

When these cases reached the courts, the Seventh Circuit affirmed the Commission in Atlantic-Goodyear Goodyear Tire & Rubber Co. v. Federal Trades Comm. 1964, 331 F.2d 394; the District of Columbia Circuit reversed the Commission in Texaco-Goodrich¹⁰ and ordered the complaint dismissed, 1964, 336 F.2d 754. The Supreme Court granted certiorari in both cases. This Court withheld its decision pending final action by the Supreme Court in the companion cases. In Atlantic-Goodyear the Court affirmed the judgment. Atlantic Refining Company v. Federal Trade Commission, 1965, 381 U.S. 357, 85 S.Ct. 1498, 14 L.Ed.2d 443; reh. denied 382 U.S. 873, 86 S.Ct. 18, 15 L.Ed.2d 114. In Texaco-Goodrich the Court vacated the judgment with instructions that the case be remanded to the Commission for further proceedings, "in light" of Atlantic.¹¹ Federal Trade Commission v. Texaco, Inc., 1965, 381 U.S. 739, 85 S.Ct. 1798, 14 L.Ed.2d 714.

The parties differ widely in their understanding of Atlantic. The respondent asserts that under Atlantic, a TBA sales commission contract is unlawful per se; the petitioners assert that the Supreme Court decided Atlantic not on any generalized theory of per se illegality but on specific findings of fact supported in that case by substantial evidence. The petitioners' contention serves as the predicate for their argument that the facts here are unlike the controlling facts in Atlantic-Goodyear; the orders against Shell and Firestone should be set aside for lack of substantial evidence; in the alternative, this Court should remand the proceeding to the Commission for further consideration.

On the record before us, the difference between the two interpretations of Atlantic may be more verbalistic than real. Even assuming the correctness of the petitioners' interpretation and even admitting that there are some differences between the Atlantic-Goodyear system and the Shell-Firestone system, the controlling facts in this case are so similar to those in Atlantic that the same result should be reached in both cases. The importance, however, of judicially declaring or not declaring a new category of per se violations affecting every oil company, every TBA supplier, and every car-owner requires the Court to give careful consideration to the factual back-ground and to the conflicting contentions.¹²

I.

A. In Atlantic-Goodyear and Shell-Firestone the Commission, using virtually identical language in the two opinions, found that the oil companies had exercised their economic power "to cause their dealers to purchase substantial amounts of a different class of products, TBA, as a condition to their continuance as * * * lessees and dealers". This finding, "in conjunction with their `market position and the volume of TBA affected, would bring them within the Supreme Court's ruling in Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958) and the more recent decision in Osborn v. Sinclair Refining Co., 4 Cir. 1960, 286 F.2d 832'". And, as the Commission noted, "The Court held in the Northern Pacific case that tying arrangements are per se violative of Section 1 of the Sherman Act `whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the tied product' and a `not insubstantial' amount of interstate commerce is affected". The Commission looked to Osborn, a case involving an implied tie-in, for the content of the phrase "sufficient economic power". Comparing Sinclair Refining Company, the oil company in Osborn, with Shell and Atlantic, the Commission found that these two companies had "sufficient economic power" in the tying commodity — petroleum products — to bring the case within the doctrine of tying arrangements. At that point in the opinion one would have to conclude that the Commission regarded the sales commission system as a tying arrangement per se illegal¹³ on a showing of the oil company's requisite economic power in the tying product.

Precisely at this point in both opinions, however, the Commission broke new ground with the statement: "But we do not rest our decision on a mechanical application of the rule of the Northern Pacific and Osborn cases". Abandoning the tie-in and overt coercion contentions, the Commission stated the issue as "the legality of a particular method of distributing TBA products used by the respondents". This issue, the Commission said, requires an examination and assessment of the anti-competitive effects of the oil company's use of its economic power by means of the sale commission method. In Atlantic-Goodyear therefore...