State ex rel. Van de Kamp v. Texaco, Inc.

Decision Date07 November 1985
Citation219 Cal.Rptr. 824,193 Cal.App.3d 8
CourtCalifornia Court of Appeals Court of Appeals
PartiesPreviously published at 193 Cal.App.3d 8 193 Cal.App.3d 8, 1985-2 Trade Cases P 66,858 STATE of California ex rel John K. VAN DE KAMP, As Attorney General, etc., Plaintiff and Appellant, v. TEXACO, INC., et al., Defendants and Respondents. Civ. 24506.

John K. Van de Kamp, Atty. Gen., Andrea Sheridan Ordin, Chief Asst. Atty. Gen., Michael J. Strumwasser, Sp. Counsel to the Atty. Gen., Sanford N. Gruskin, Asst. Atty. Gen., Michael I. Spiegel, Owen Lee Kwong, Richard Light and Lawrence R. Tapper, Deputy Attys. Gen., for plaintiff and appellant.

Leslie C. Randall, Kaye, Scholer, Fierman, Hays & Handler, Milton J. Schubin, New York City, and Aton Arbisser; Hefner, Stark & Marois, Sacramento and David G. Yetter, Los Angeles, for defendants and respondents.

CARR, Associate Justice.

The State of California (State), through the Attorney General, brought an action under the Cartwright Act (Bus. & Prof.Code, § 16720 et seq.), and the California unfair competition law (Bus. & Prof.Code, § 17200 et seq.) to enjoin Texaco, Inc., from acquiring the California assets of Getty Oil Company pursuant to a merger between the two companies. The trial court sustained the demurrer of Texaco, Inc., without leave to amend and dismissed State's complaint. On appeal State contends: (1) the court erred in concluding the Cartwright Act does not apply to mergers; (2) the court erred in concluding the merger is not subject to the unfair competition law; (3) State's action is not preempted by federal law, nor does it unduly burden interstate commerce; and (4) it is entitled to a preliminary injunction. We conclude State's action is preempted by federal regulation of the merger; on that basis, we shall affirm.

FACTUAL AND PROCEDURAL BACKGROUND

On January 9, 1984, Texaco, Inc. (Texaco) commenced a tender offer for 35 percent of the voting shares of Getty Oil Company (Getty) with the intention of subsequently completing a merger for the remaining outstanding shares. Prior to the tender offer, Texaco and Getty entered into a merger agreement under which Getty granted Texaco an option to purchase authorized but unissued shares amounting to 10.2 percent of the total Getty shares that would be outstanding after the issuance. Texaco and Getty further entered into two agreements to purchase voting shares constituting, respectively, 11.8 percent and 40.2 percent of the outstanding Getty shares. The total value of the transaction was approximately $10.1 billion and, when consummated, would result in the second largest petroleum company in the United States. (49 Fed.Reg. 8554 (March 7, 1984).)

The Federal Trade Commission (FTC), concerned with potential anticompetitive effects of the merger on the petroleum industry in California and other regions of the country, drafted a complaint charging Texaco with a violation of Section 7 of the Clayton Act (15 U.S.C. § 18) 1 and section 5 of the Federal Trade Commission Act (15 U.S.C. § 45). 2 (Id., at p. 8553.)

As to the effects of the merger on the California petroleum industry FTC alleged, in part, that both Getty and Texaco own oil refineries on the West Coast with Getty's refinery being located in Bakersfield, California; Texaco owns refineries in Wilmington, California and Anacortes, Washington. Getty produces substantially more heavy crude oil from its California oil fields than it can refine in its Bakersfield refinery; Texaco produces substantially less heavy crude oil in California than it can refine in its two West Coast refineries. Getty owns and operates a proprietary pipeline system which gathers heavy crude oil from its fields in the San Joaquin Valley and transports it from Bakersfield to the San Francisco Bay Area.

Texaco's West Coast refineries compete with independent or "non-integrated" refiners in California. 3 Texaco has an incentive to increase its refining capacity and lessen competition from non-integrated refiners. The acquisition of Getty's California oil assets is likely to increase Texaco's incentive and ability to deny heavy crude oil to non-integrated refiners and sever their access to proprietary pipelines. (49 Fed.Reg., supra, at pp. 8554-8555.)

An FTC staff analysis more fully explains the potential adverse effects of the merger on California's non-integrated refiners: "The problem arises because Getty owns substantial heavy crude oil reserves in California. This crude oil is denser (lower in gravity) than most crude oil produced in the world and often has a high nitrogen content. These characteristics make the crude more costly to refine. Getty has 17 percent of the production of such crude oil in the San Joaquin Valley of California, and about 140 MBD [thousand] barrels per day production across the entire state. Getty also has an extensive crude oil gathering and trunkline system capable of transporting heavy crude to California refineries. This includes a heavy crude oil trunkline with about 200 MDB in capacity, linking Bakersfield, California to San Francisco.

"Getty's crude oil production is about 100 MBD in excess of the operating capacity of its one small refinery in California. Texaco, on the other hand, refines more crude than it produces on the West Coast, with production of only 33 MBD in California, compared to about 153 MBD in refining capacity in California and Washington.

"At present, Getty is a substantial seller of heavy crude oil to 'non-integrated' California refiners--i.e., refiners that are not also crude oil producers. These non-integrated refiners are to some degree tied to the California heavy crude oil market because of the substantial investment they have made to process this type of crude oil. If such refiners were forced to process lighter, more expensive crude oils, their investment in heavy crude oil processing equipment might no longer be economically viable.

"Non-integrated refiners face an additional problem in gaining access to heavy crude oil. Such crude oil is rarely produced anywhere else in the world and is not imported. The refiners must therefore rely on California production. However, most California producers are tied to pipeline gathering systems that are privately-owned, which are in turn tied to trunkline systems that are also privately-owned. Unlike the systems in most states, California pipelines are not common carriers. Non-integrated California refiners are therefore not guaranteed access to much of the local crude oil production.

"The above factual situation may have led to a 'two-tier' market. Major gatherers may be able to 'post' and buy crude oil at one price, while non-integrated refiners may be required to pay premiums above the posted price for the more limited supplies of crude oil available to them. (The posted price is the price at which major, integrated purchasers offer to buy crude oil from third parties, rather than the price at which sellers offer to sell crude oil to third parties.) For example, non-integrated refiners cite the $2-$3 per barrel premiums that they have offered for crude oil available from the Elk Hills Naval Petroleum Reserve in California. Texaco, with more refining capacity than West Coast crude production, is in fact one of the few major companies to bid at Elk Hills, winning 10 MBD of crude oil at $2.10 premium above the posted price. Most major integrated oil companies have not participated at the Elk Hills' auctions, relying instead on their own production and purchases at the posted price.

"As a result of the acquisition, Texaco may have some incentives to divert the Getty heavy crude oil to its own refining system. This may be more profitable than selling the crude oil to others because of the crude oil Windfall Profit Tax Act of 1980. A sale of the crude oil at a premium over the posted price might, in some situations, increase Texaco's Windfall Profit Tax liability. Alternatively, if Texaco were to process the crude oil internally, it might be able to lower its tax payments by transferring the crude oil into its refinery at the lower posted price and by shifting the profits to its refining subsidiary, where they would be taxed at a lower rate.

"Certain non-integrated California refiners might be vulnerable if Texaco should decide to utilize Getty heavy crude oil in this manner. In particular, non-integrated refiners in the San Francisco area served by the Getty trunkline may have no economic alternative source of supply. If these refineries were to fail and Texaco were to acquire them in order to process additional heavy crude oil, the West Coast refining HHI [Herfindahl-Hirschman Index, a measure of market concentration] would increase by 74 points to 1206. Additional refining failures in other parts of California might result in a greater increase in concentration." (49 Fed.Reg., supra, at pp. 8561-8562; fns. omitted.)

To alleviate the enunciated and other potential anticompetitive effects while allowing the merger to proceed, the FTC entered into an agreement with Texaco which comprehensively regulates the merger between Texaco and Getty on a nationwide basis. (Id., at p. 8550; 49 Fed.Reg. 30059 (July 26, 1984).) In summary, the agreement, which was incorporated into a consent order, requires Texaco to divest, within 12 months, all Getty assets listed in an attached schedule, including certain of Getty's petroleum-related assets in the northeastern United States, a Texaco refinery located in the Northeast, and certain Getty petroleum assets in specified Rocky Mountain, midwestern With respect specifically to the acquisition of Getty's California oil reserves and pipeline, the consent order requires Texaco to sell California crude oil of similar grade and quality to that sold by Getty in 1983 to each eligible refiner specified in an attached schedule, in accordance with the terms and conditions listed therein. (Id., at p. 30061.) However, this...

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  • General Motors Corp. v. Abrams
    • United States
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    ...580 (1984), in holding that an FTC consent order preempted state statutes. That case is State ex rel. Van de Camp v. Texaco, Inc., 193 Cal.App.3d 8, 219 Cal. Rptr. 824 (Cal.App. 3 Dist.1985), aff'd. on other grounds, 46 Cal.3d 1147, 252 Cal. Rptr. 221, 762 P.2d 385 (Cal.1988). In Van de Cam......
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