Tenoco Oil Co., Inc. v. Department of Consumer Affairs, 86-1590

• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)
• Writing for the Court: Before CAMPBELL, Chief Judge, SELYA; LEVIN H. CAMPBELL
• Citation: 876 F.2d 1013
• Parties: TENOCO OIL COMPANY, INC., et al., Plaintiffs, Appellees, v. DEPARTMENT OF CONSUMER AFFAIRS and Pedro Ortiz-Alvarez, Secretary of the Department of Consumer Affairs, Defendants, Appellants. . Heard
• Docket Number: No. 86-1590,86-1590
• Decision Date: 07 September 1988

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876 F.2d 1013 TENOCO OIL COMPANY, INC., et al., Plaintiffs, Appellees,
v.
DEPARTMENT OF CONSUMER AFFAIRS and Pedro Ortiz-Alvarez,
Secretary of the Department of Consumer Affairs,
Defendants, Appellants. No. 86-1590. United States Court of Appeals,
First Circuit. Heard Sept. 7, 1988.
Decided June 2, 1989.

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Lynn R. Coleman with whom Douglas G. Robinson, Matthew W.S. Estes, Washington, D.C., William S. Scherman, Henrietta Wright, Washington, D.C., Thomas J. Dougherty, Lori Weiner Lander, Skadden, Arps, Slate, Meagher & Flom, Boston, Mass., Marcos A. Ramirez, Dennis A. Simonpietri and Ramirez & Ramirez, Hato Rey, P.R., were on brief, for defendants, appellants.

Maximiliano Trujillo on brief for Asociacion de Detallistas de Gasolina de Puerto Rico, Inc., amicus curiae.

Rafael Perez-Bachs with whom Nestor M. Mendez-Gomez, Maggie Correa-Aviles, Ana Matilde Nin, Arturo J. Garcia-Sola, McConnell Valdes Kelley Sifre Griggs & Ruiz Suria, Hato Rey, P.R., Igor Dominguez, William Estrella Law Offices, Noel S. Gonzalez-Miranda, Mario L. Paniagua and Sweeting, Gonzalez & Cestero, Hato Rey, P.R., were on brief for plaintiffs, appellees Shell, Mobil, Phillips, Texaco and Careco.

Etienne Totti del Valle, Hato Rey, P.R., Carlos Romero Barcelo and Dominguez & Totti, Hato Rey, P.R., on brief for plaintiff, appellee Tenoco Oil Co., Inc.

Jaime Sifre-Rodriguez, Luis Sanchez-Betances and Sanchez-Betances & Sifre, Hato Rey, P.R., on brief for appellee Esso Standard Oil Co. (P.R.).

Alvaro R. Calderon, Jr., Hato Rey, P.R., on brief for plaintiffs-appellees Isla Petroleum Corp. and Gasolinas de Puerto Rico, Inc.

Before CAMPBELL, Chief Judge, SELYA, Circuit Judge, and TAURO, ^* District Judge.

LEVIN H. CAMPBELL, Chief Judge.

This appeal is from a permanent injunction issued by the United States District Court for the District of Puerto Rico invalidating gasoline price regulations issued by an agency of the Puerto Rico government. ¹ The opinion of the district court is published at Isla Petroleum Corp. v. Department of Consumer Affairs, 640 F.Supp. 474 (D.P.R.1986). As we believe the enjoined price order was not yet ripe for constitutional review, we vacate the district court's injunction.

I. BACKGROUND

This dispute arose when the Puerto Rico Department of Consumer Affairs (referred to herein as DACO, the acronym of its Spanish title, Departamento de Asuntos del Consumidor ) issued in early 1986 consecutive orders regulating the price of gasoline

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in Puerto Rico. The plaintiffs in this litigation composed of eight separate suits consolidated for trial, comprised most of the gasoline wholesalers and refiners serving the Puerto Rico market. ²

DACO is empowered by Puerto Rico law to regulate the prices and profit margins of goods and services provided to the Puerto Rico public in order to protect consumers' rights and restrain inflation. P.R.Laws Ann. tit. 3, Sec. 341b (1982). From 1973 until 1981, however, gasoline prices in Puerto Rico, as in the mainland United States, were regulated by the United States government, preempting separate regulation by DACO. ³ Federal price controls took the form of a limitation upon the gross profit margin obtained from gasoline sales. In 1981, the gross profit margin on gasoline was limited by federal law to 8.6cents per gallon for the wholesale sale of gasoline and 17.7cents per gallon for the retail sale. The term "gross profit margin" refers to the difference between a seller's sales price and the seller's acquisition cost. "Acquisition cost" includes the price the seller paid for gasoline plus excise taxes, but not the seller's transportation costs and other operating costs. A "gross" margin differs from "net" margin in that the latter excludes operating costs as well as acquisition costs. Thus the 8.6cents per gallon gross profit margin set by the federal government for wholesalers in 1981 was intended to encompass the wholesaler's operating costs plus a return on its investment.

In 1975, anticipating the federal government's imminent withdrawal from gasoline price regulation, DACO promulgated Price Regulation 45, which authorized DACO's Secretary to regulate the prices and "maximum margins of benefits" of gasoline, kerosene, and diesel fuel. ⁴ However, in December 1975, Congress extended the period of federal regulation until 1981. 15 U.S.C. Sec. 760g (1976). DACO accordingly amended Price Regulation 45 to provide that it would not take effect until the federal government ceased its regulation. Price Regulation 45, Amend. 1 (July 23, 1976) (hereinafter "Regulation 45"). The amendment to Regulation 45 provided that once federal price controls over gasoline and other oil products were lifted, and so long as DACO's Secretary had not yet issued a price order, no person could increase the selling price of gasoline without giving 15 days' written notice of the change to the Secretary. Regulation 45, Art. 3. The same regulation authorized the Secretary to issue orders "fixing and revising prices and the maximum margins of benefits on the sale of the regulated product at any distribution level," and established criteria to be used by the Secretary in fixing prices and margins. ⁵ Regulation 45, Art. 4. The Secretary was empowered to request any data necessary to attain the regulation's purposes. Regulation 45, Art. 8.

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The federal government lifted its controls over gasoline prices in 1981, but for the next four years DACO's Secretary did not exercise the authority contained in Regulation 45 to issue orders fixing prices and maximum margins. Instead, DACO officials informally indicated to the oil companies during this period their expectation that gross margins should stay within levels formerly prevailing under federal regulation. The district court found "that DACO and the wholesalers/retailers adopted informally as a reference point for future regulation the federal margins as they existed on January 28, 1981." It also found that one wholesaler, Shell, had made refunds in 1982 and 1983 of amounts received in excess of the earlier 8.6cents per gallon gross profit margin limitation. Nonetheless, DACO promulgated no regulation specifically fixing a maximum margin or otherwise controlling gasoline prices. Although there was some compliance with Article 3's 15-day notice requirement relative to price increases, compliance appears to have been spasmodic, and DACO seems to have made no consistent attempt to enforce it.

In January 1985 a new governor of Puerto Rico took office, and appointed a new Secretary of DACO. In September 1985, without issuing any price orders, the new Secretary issued a memorandum to the industry indicating DACO's intent to "supervise" the gross profit margins of 17.7cents and 8.6cents per gallon that (in the words of the memorandum) were "maintained" when federal controls were eliminated. Distributors "at all levels of distribution" were warned to comply with Regulation 45. During the first quarter of the following year, 1986, there were significant reductions in world oil prices. However, the wholesale and retail selling prices of gasoline in Puerto Rico did not go down by a corresponding amount. Evidence presented at trial indicates that at least one, and probably several wholesalers' gross profit margins were at this time in excess of 20cents per gallon.

There were many complaints about the high gasoline prices on the island, and these caused the Puerto Rico legislature to take action in March of 1986. In order to recoup (for the government) some of the "excessive profits" that the oil companies were believed to be reaping, the legislature imposed an additional excise tax on crude oil and refined petroleum products. ⁶ To make sure that the oil companies paid the new tax out of excess profits, without passing the tax through to the consumer in the form of even higher prices, DACO for the first time issued orders controlling prices pursuant to its authority under Regulation 45. But first, immediately after the new excise tax took effect, the Secretary issued, on March 26, 1986, an "interpretation" of Regulation 45, reminding the industry that Regulation 45 forbade oil companies to raise prices without first notifying the Secretary. This was followed, on April 23, 1986, by orders allowing refiners to pass the excise tax through to wholesalers; forbidding wholesalers from passing the tax through to retailers; and freezing wholesale and retail prices at their March 31, 1986 levels. ⁷ The April 23 order also

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scheduled a public hearing to address the appropriate form for future regulation, which was held on May 12.

On April 28, 1986, the two newest and smallest wholesalers, Tenoco and Coqui, petitioned the Secretary for reconsideration of the April 23 order. ⁸ To maintain their competitive position, Tenoco and Coqui historically had charged lower prices than the other wholesalers in Puerto Rico and consequently were limited by the April 23 order to selling gasoline at prices lower than those charged by the other wholesalers. The next day, April 29, DACO issued an order rescinding the April 23 order as it applied to Tenoco and Coqui. Instead, because DACO found that Tenoco and Coqui had not exceeded the informal 8.6cents per gallon gross profit margin, the April 29 order allowed Tenoco and Coqui to raise their prices to the same level as prices charged by other wholesalers under the April 23 order, subject to the further provision that Tenoco and Coqui could not achieve a gross profit margin of more than 8.6cents per gallon.

Soon after the Secretary had issued the April 23, 1986 orders, world oil prices rose. With their selling prices frozen, and DACO's prohibition against passing through the new excise tax, many wholesalers were forced to charge prices for gasoline below their acquisition costs. By early May, refiners and wholesalers filed eight separate complaints in the United States District Court for the...