United States v. Oil Co Oil Co v. United States

Decision Date06 May 1940
Docket Number347,Nos. 346,SOCONY-VACUUM,s. 346
Citation84 L.Ed. 1129,60 S.Ct. 811,310 U.S. 150
PartiesUNITED STATES v. OIL CO., Inc., et al.OIL CO., Inc., et al. v. UNITED STATES
CourtU.S. Supreme Court

Messrs. John Henry Lewin, of Baltimore, Md., and Thurman W. Arnold, Asst. Atty. Gen., for the United States.

[Argument of Counsel from pages 154-158 intentionally omitted] Messrs. William J. Donovan and Ralstone R. Irvine, both of New York City, and Herbert H. Thomas, of Madison, Wis., for Socony-Vacuum Oil Co., Inc., et al.

[Argument of Counsel from Pages 158-164 intentionally omitted]

Page 165

Mr. Justice DOUGLAS delivered the opinion of the Court.

Respondents1 were convicted by a jury2 (United States v. Standard Oil Co., D.C., 23 F.Supp. 937) under an indictment charging violations of § 1 of the Sherman Anti-Trust Act,3 26 Stat. 209, 50 Stat. 693.

Page 166

The Circuit Court of Appeals reversed and remanded for a new trial. 7 Cir., 105 F.2d 809. The case is here on a petition and cross-petition for certiorari, both of which we granted because of the public importance of the issues raised. 308 U.S. 540, 60 S.Ct. 124, 84 L.Ed. —-.

The indictment was returned in December 1936 in the United States District Court for the Western District of Wisconsin. It charges that certain major oil companies,4 selling gasoline in the Mid-Western area5 (which includes the Western District of Wisconsin), (1) 'combined and conspired together for the purpose of artificially raising and fixing the tank car prices of gasoline' in the 'spot markets' in the East Texas6 and Mid-Continent7 fields; (2) 'have artificially raised and fixed said spot market tank car prices of gasoline and have maintained said prices at artificially high and non-competitive levels, and at levels agreed upon among them and have thereby intentionally increased and fixed the tank car prices of gasoline contracted to be sold and sold in interstate commerce as aforesaid in the Mid-Western area'; (3) 'have arbitrarily', by reason of the provisions of the prevailing form of jobber contracts which made the price to the jobber dependent on the average spot market price, 'exacted large sums of money from thousands of jobbers with

Page 167

whom they have had such contracts in said Mid-Western area'; and (4) 'in turn have intentionally raised the general level of retail prices prevailing in said Mid-Western area.'

The manner and means of effectuating such conspiracy are alleged in substance as follows: Defendants, from February 1935 to December 1936 'have knowingly and unlawfully engaged and participated in two concerted gasoline buying programs' for the purchase 'from independent refiners in spot transactions of large quantities of gasoline in the East Texas and Mid-Continent fields at uniform, high, and at times progressively increased prices.' The East Texas buying program is alleged to have embraced purchases of gasoline in spot transactions from most of the independent refiners in the East Texas field, who were members of the East Texas Refiners' Marketing Association, formed in February 1935 with the knowledge and approval of some of the defendants 'for the purpose of selling and facilitating the sale of gasoline to defendant major oil companies.' It is alleged that arrangements were made and carried out for allotting orders for gasoline received from defendants among the members of that association; and that such purchases amounted to more than 50% of all gasoline produced by those independent refiners. The Mid-Continent buying program is alleged to have included 'large and increased purchases of gasoline' by defendants from independent refiners located in the Mid-Continent fields pursuant to allotments among themselves. Those purchases, it is charged, were made from independent refiners who were assigned to certain of the defendants at monthly meetings of a group representing defendants. It is alleged that the purchases in this buying program amounted to nearly 50% of all gasoline sold by those independents. As respects both the East Texas and the Mid-Continent buying programs, it is alleged that the purchases of gasoline were in excess of the amounts which defendants would have

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purchased but for those programs; that at the instance of certain defendants these independent refiners curtailed their production of gasoline.

The independent refiners selling in these programs were named as co-conspirators, but not as defendants.

Certain market journals—Chicago Journal of Commerce, Platt's Oilgram, National Petroleum News—were made defendants.8 Their participation in the conspiracy is alleged as follows: that they have been 'the chief agencies and instrumentalities' through which the wrongfully raised prices 'have affected the prices paid by jobbers, retail dealers, and consumers for gasoline in the Mid-Western area,' that they 'knowingly published and circulated as such price quotations the wrongfully and artificially raised and fixed prices for gasoline paid by' defendants in these buying programs, while 'representing the price quotations published by them' to be gasoline prices 'prevailing in spot sales to jobbers in tank car lots' and while 'knowing and intending them to be relied on as such by jobbers and to be made the basis of prices to jobbers.'

Jurisdiction and venue in the Western District of Wisconsin are alleged as follows: that most of defendant major oil companies have sold large quantities of gasoline in tank car lots to jobbers in that district at the 'artificially raised and fixed and non-competitive prices'; that they have 'solicited and taken contracts and orders' for

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gasoline in that district; and that they have required retail dealers and consumers therein 'to pay artificially increased prices for gasoline' pursuant to the conspiracy.

The methods of marketing and selling gasoline in the Mid-Western area are set forth in the indictment in some detail. Since we hereafter develop the facts concerning them, it will suffice at this point to summarize them briefly. Each defendant major oil company owns, operates or leases retail service stations in this area. It supplies those stations, as well as independent retail stations, with gasoline from its bulk storage plants. All but one sell large quantities of gasoline to jobbers in tank car lots under term contracts. In this area these jobbers exceed 4,000 in number and distribute about 50% of all gasoline distributed to retail service stations therein, the bulk of the jobbers' purchases being made from the defendant companies. The price to the jobbers under those contracts with defendant companies is made dependent on the spot market price, pursuant to a formula hereinafter discussed. And the spot market tank car prices of gasoline directly and substantially influence the retail prices in the area. In sum, it is alleged that defendants by raising and fixing the tank car prices of gasoline in these spot markets could and did increase the tank car prices and the retail prices of gasoline sold in the Mid-Western area. The vulnerability of these spot markets to that type of manipulation or stabilization is emphasized by the allegation that spot market prices published in the journals were the result of spot sales made chiefly by independent refiners of a relatively small amount of the gasoline sold in that area—virtually all gasoline sold in tank car quantities in spot market transactions in the Mid-

Page 170

Western area being sold by independent refiners, such sales amounting to less than 5% of all gasoline marketed therein.

So much for the indictment.

II. Background of the Alleged Conspiracy.

Evidence was introduced (or respondents made offers of proof) showing or tending to show the following conditions preceding the commencement of the alleged conspiracy in February 1935. As we shall develop later, these facts were in the main relevant to certain defenses which respondents at the trial unsuccessfully sought to interpose to the indictment.

Beginning about 1926 there commenced a period of production of crude oil in such quantities as seriously to affect crude oil and gasoline markets throughout the United States. Overproduction was wasteful, reduced the productive capacity of the oil fields and drove the price of oil down to levels below the cost of production from pumping and stripper9 wells. When the price falls below such cost, those wells must be abandoned. Once abandoned, subsurface changes make it difficult or impossible to bring those wells back into production. Since such wells constitute about 40% of the country's known oil reserves, conservation requires that the price of crude oil be maintained at a level which will permit such wells to be operated. As Oklahoma and Kansas were attempting to remedy the situation through their proration laws, the largest oil field in history was discovered in East Texas. That was in 1930. The supply of oil from this

Page 171

field was so great that at one time crude oil sank to 10 or 15 cents a barrel, and gasoline was sold in the East Texas field for 2 1/8¢ a gallon. Enforcement by Texas of its proration law was extremely difficult. Orders restricting production were violated, the oil unlawfully produced being known as 'hot oil' and the gasoline manufactured therefrom, 'hot gasoline'. Hot oil sold for substantially lower prices than those posted for legal oil. Hot gasoline therefore cost less and at times could be sold for less than it cost to manufacture legal gasoline. The latter, deprived of its normal outlets, had to be sold at distress prices. The condition of many independent refiners using legal crude oil was precarious. In spite of their unprofitable operations they could not afford to shut down, for if they did so they would be apt to lose their oil connections in the field and...

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