State of California ex rel. Van de Kamp v. Texaco, Inc., S.F. N

• Decision Date: 20 October 1988
• Docket Number: S.F. N
• Citation: 762 P.2d 385,46 Cal.3d 1147,252 Cal.Rptr. 221
• Court: California Supreme Court
• Parties: , 762 P.2d 385, 57 USLW 2265, 1988-2 Trade Cases P 68,288 The 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. o. 24987.

Page 221

252 Cal.Rptr. 221

46 Cal.3d 1147, 762 P.2d 385, 57 USLW 2265,

1988-2 Trade Cases P 68,288

The 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.

S.F. No. 24987.

Supreme Court of California In Bank.

Oct. 20, 1988.

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

Leslie C. Randall, Hefner, Stark & Marois, David G. Yetter, Sacramento, Heller, Ehrman, White & McAuliffe, M. Laurence Popofsky, San Francisco, Kaye, Scholer, Fierman, Hays & Handler, Milton J. Schubin and Aton Arbisser, New York City, for defendants and respondents.

LUCAS, Chief Justice.

The California Attorney General sued under the Cartwright Act (Bus. & Prof. Code, § 16720 et seq.) and the Unfair Practices Act (id., § 17000 et seq.) to enjoin defendants Texaco, Inc., (Texaco) et al., from acquiring the California assets of Getty Oil Company (Getty) pursuant to a merger between the two companies. ¹ The trial court sustained defendants' demurrer without leave to amend, and dismissed the complaint. In the Court of Appeal, the Attorney General asserted the lower court erred in concluding that neither the Cartwright Act nor the Unfair Practices Act applies to an acquisition or merger, and that the action is preempted by the supremacy clause (U.S. Const., art. VI, cl. 2) by virtue of a consent decree issued by the Federal Trade Commission (FTC). Additionally, the Attorney General asserted, the lower court erred to the extent it held the action is preempted by the commerce clause (id., art. I, § 8, cl. 3).

The Court of Appeal held the action preempted by federal antitrust law under the supremacy clause, and affirmed judgment for defendants on that ground. We affirm the judgment of the Court of Appeal, but we do not reach the preemption questions because we hold that neither cited state law regulates a merger.

I. Facts and Procedure

Texaco and Getty entered into a merger agreement under which Texaco would acquire Getty, and thereby become the second largest petroleum company in the United States. Pursuant to 15 United States Code section 18a, the firms notified the FTC and the United States Justice Department of their agreement, and the FTC proceeded to investigate whether the proposed merger would violate federal antitrust law. Thereafter the FTC filed and accepted comments on a provisional consent order concerning both firms. Based in part on comments from, inter alia, the California Attorney General, the FTC issued a complaint under section 7 of the Clayton Act (15 U.S.C. § 18), detailing the potential anticompetitive effects of the proposed merger. At the same time, the FTC entered into an agreement, in the form of a consent order, with Texaco. The consent order bound Texaco to divest itself of certain Getty assets located throughout the country; offer pipeline access to former Getty customers; and refrain from acquiring wholesale distribution firms in various states. Regarding California assets, the order required Texaco to sell crude oil of specified grade to certain former Getty customers for five years.

The Attorney General was unsatisfied with the consent order, however, and filed the present action, which essentially copies the FTC's complaint based on section 7 of the Clayton Act. The Attorney General's complaint asserted the merger may in several specific respects substantially lessen competition in the state market for crude oil and related products. In other words, the complaint claimed the merger posed an incipient threat to competition.

II. Application of the Cartwright Act to a Merger

A. Words of the Statute

The Cartwright Act (Stats. 1907, ch. 530, pp. 984-987) states, "Except as provided in this chapter, every trust is unlawful, against public policy and void." (Bus. & Prof.Code, § 16726.) The Act defines "trust" as "a combination of capital, skill or acts by two or more persons for any of the following purposes: (a) To create or carry out restrictions in trade or commerce.... (e) To make or enter into or execute or carry out contracts, obligations or agreements of any kind or description, by which they ... [a]gree to pool, combine, or directly or indirectly unite any interests that they may have connected with the sale or transportation of any ... article or commodity, that its price might in any manner be affected." (Id., § 16720, subds. (a) & (e)(4), italics added.) The Act makes agreements in violation of its provisions void and unenforceable (id., § 16722), and subject to injunction (id., § 16754.5) and civil actions for damages (id., § 16750). Another section makes violation of the Act subject to fine or imprisonment, or both. (Id., § 16755, subd. (a).)

The Attorney General asserts that a merger is "precisely" a "combination of capital," hence the statute covers mergers. It is questionable, however, whether the statutory meaning of "combination" is so broad. As defendants suggest, the word combination might well contemplate a situation in which separate entities that maintain separate and independent interests, act in concert--"combine"--for a certain purpose, but which thereafter perdure, i.e., continue to maintain their separate identities and interests. ² A bona fide merger, however, is not such a relationship; in a merger the entities lose forever their separate identities, and become a new, independent entity.

Accordingly, we question whether the words of the statute support the Attorney General's assertion that it was intended to apply to mergers. On the other hand, we cannot confidently know, without further inquiry, that defendants' interpretation is the intended one. In this situation, it is appropriate to look beyond the statute's terms to discover its intent. (E.g., Solberg v. Superior Court (1977) 19 Cal.3d 182, 198, 137 Cal.Rptr. 460, 561 P.2d 1148.)

B. Purpose of the Statute

The Attorney General first asserts that his interpretation of the statute, and of the word "combination" in particular, best comports with the asserted "manifest purpose" of the statute: protecting competition. (Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 928, 130 Cal.Rptr. 1, 549 P.2d 833.) His point, however, begs the question. Beyond doubt, the Act was intended to protect and foster competition. The question is, to what lengths did the drafters intend to go to accomplish that goal? Did they intend to regulate any form of business transaction that may affect competition? Or did they intend merely to regulate certain types of collusive arrangements between ongoing, separate businesses? As the following discussion discloses, we conclude the drafters did not intend the Act to regulate a merger.

C. Derivation of the Statute

In the past, we have attributed various (and sometimes conflicting) roots to the Cartwright Act. We have (i) asserted that it was patterned after a proposed alternative bill to what became the Sherman Act (15 U.S.C. §§ 1-7) (Palsson, supra, 16 Cal.3d 920, 926, 130 Cal.Rptr. 1, 549 P.2d 833; Cianci v. Superior Court (1985) 40 Cal.3d 903, 919, 221 Cal.Rptr. 575, 710 P.2d 375); (ii) suggested that it was modeled after the Sherman Act itself (e.g., Palsson, supra, 16 Cal.3d at p. 925, 130 Cal.Rptr. 1, 549 P.2d 833); and (iii) stated that it codified the common law (e.g., Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 852, 94 Cal.Rptr. 785, 484 P.2d 953). (See Lasky, Folklore and Myth in Judicial Opinions--Some Reflections Inspired by Texaco-Getty (1987) 20 U.C.Davis L.Rev. 591.) As discussed below, the first position--or at least a variation of it--is most historically correct, and it discloses most clearly the probable intent of the drafters.

1. The Texas Antitrust Act, and Its Progeny

a. Senator Reagan's Bills of 1888 and 1890

As noted above, we have previously stated that the Cartwright Act was modeled after a bill that was proposed (but rejected) in the United States Senate as an alternative to what became the Sherman Act. This shorthand description of the Act's lineage was adequate for purposes of our analysis in Palsson and Cianci (16 Cal.3d 920, 130 Cal.Rptr. 1, 549 P.2d 833; 40 Cal.3d 903, 221 Cal.Rptr. 575, 710 P.2d 375), but for present purposes we need to analyze in greater detail the Act's ancestry.

The chronology is as follows: Senator Reagan of Texas introduced a short "bill to define trusts" in the United States Senate in 1888, on the same day Senator Sherman of Ohio introduced his bill. (19 Cong.Rec. 7512-7513 (1888).) The Senate did not debate the subject, however, until early 1890. In the meantime, several states passed their own antitrust acts. (Davies, Trust Laws and Unfair Competition, Dept. of Commerce, Bureau of Corps. (1916) p. 9; Rush, Historic Origins of Anti-Trust Legislation (1953) 18 Mo.L.Rev. 215, 246; Rubin, Rethinking State Antitrust Enforcement (1974) 26 U.Fla.L.Rev. 653, 657-658, and authorities cited in fn. 22.) Of those acts, the Maine and Kansas laws were the first. (1889 Me.Acts, ch. 266 (Mar. 7, 1889); 1889 Kan.Sess.Laws, ch. 259 (Mar. 9, 1889).)

The Kansas act, similar to the Maine law, made illegal "all arrangements, contracts, agreements, trusts or combinations ..." for various improper purposes. (Italics added.) In the next two years, most states that enacted antitrust legislation followed the Kansas-Maine scheme. (1889 Neb.Laws, ch. 69; 1889 Iowa Acts, ch. 28; 1889 Mich.Pub.Acts, No. 225; 1889 Tenn.Pub.Acts, ch. 250; 1889 N.C.Sess.Laws, ch. 374; 1889 Mo.Laws, p. 96; 1890 N.D.Sess.Laws, ch. 174; 1890 S.D.Sess.Laws, ch. 154.) During the same period, the Texas Legislature considered a number of antitrust bills, and in late March 1889, enacted a law (1889 Tex.Gen.Laws,...