United States v. Pennzoil Company, Civ. A. No. 65-838.

CourtUnited States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
Writing for the CourtVictor H. Kramer, Arnold, Fortas & Porter, Washington, D. C., for defendants
Citation252 F. Supp. 962
PartiesUNITED STATES of America, Plaintiff, v. PENNZOIL COMPANY and Kendall Refining Company, Defendants.
Decision Date30 December 1965
Docket NumberCiv. A. No. 65-838.

252 F. Supp. 962

UNITED STATES of America, Plaintiff,
v.
PENNZOIL COMPANY and Kendall Refining Company, Defendants.

Civ. A. No. 65-838.

United States District Court W. D. Pennsylvania.

December 30, 1965.


252 F. Supp. 963
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252 F. Supp. 964
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252 F. Supp. 965
COPYRIGHT MATERIAL OMITTED
252 F. Supp. 966
John H. Waters, Dept. of Justice, Washington, D. C., for plaintiff

Victor H. Kramer, Arnold, Fortas & Porter, Washington, D. C., for defendants.

252 F. Supp. 967

ROSENBERG, District Judge.

The United States of America, plaintiff, brings this action for injunctive relief against Pennzoil Company and Kendall Refining Company, defendants, as based upon the provisions contained in § 7 of the Clayton Act (Act of Congress of October 15, 1914, c. 323, § 7, 38 Stat. 731, December 29, 1950, c. 1184, 64 Stat. 1125, 15 U.S.C. § 18)1

The action was filed on August 4, 1965 to enjoin the consummation of an acquisition agreement of Kendall by Pennzoil on the basis that it violated § 7 of the Clayton Act. As originally filed, the complaint requested a temporary restraining order, but after a short hearing, the parties entered into a stipulation whereby the defendants agreed not to consummate the agreement until after a ruling on the plaintiff's motion for preliminary injunction.

In its complaint, the Government averred that the defendants, Pennzoil and Kendall, producers of Penn Grade crude oil and refiners of that product, entered into an agreement dated June 11, 1965, whereby Pennzoil was to succeed to all the rights, properties and assets of Kendall by exchanging Kendall common stock for newly issued Pennzoil cumulative convertible preferred stock. The complaint charged that actual and potential competition between these two corporations in the purchase of Penn Grade would be eliminated; that Kendall would be eliminated as a substantial competitive factor in the purchase of Penn Grade; and, that concentration in the production and purchasing of Penn Grade will be substantially increased.

A hearing on the motion for preliminary injunction was commenced on September 14th and concluded on September 21st. Considerable testimony was taken and a large number of exhibits were presented by the parties. The question is whether or not the plaintiff has met its burden of proving that a preliminary injunction should issue on a violation of § 7 of the Clayton Act.

The plaintiff contends that the consummation of the proposed merger of Pennzoil and Kendall would be an acquisition in a line of commerce (Pennsylvania Grade crude oil) in a section of the country delineated by boundaries of the Pennsylvania Grade crude oil producing area, the effect of which may be to substantially lessen competition or tend to create a monopoly, and that such acquisition is forbidden by § 7 of the Clayton Act.

The defendants, on the other hand, contend that

(1) the plaintiff cannot prevail at a trial on the merits because the evidence established that Pennsylvania Grade crude is not a line of commerce within the meaning of the Clayton Act;

(2) the merger will not substantially lessen competition even if it is assumed, arguendo, that Penn Grade crude oil is a line of commerce within the meaning of the Act;

(3) the merger will not violate § 7 of the Act because it will promote, not lessen competition;

(4) the issuance of a preliminary injunction would inflict irreparable injury on the defendants and amount to a final judgment for the plaintiff; and

(5) even if the plaintiff should ultimately prevail in a trial on the merits, divestiture would be a completely adequate remedy.

Pennsylvania Grade crude oil is extracted from fields known as the oldest commercial oil producing area in the world. The fields are located on the western side of the Appalachian Basin

252 F. Supp. 968
within a definite area located in southwestern New York, western Pennsylvania, eastern Ohio, and all of West Virginia. The crude oil extracted from this Basin has been and is known as Penn Grade crude, and that term is commonly applied to it in all aspects of its commerce. This crude is generally located in and produced from the Ordovician stratum2 of the earth's formation, generally found at depths varying from 1500 feet in Pennsylvania to 3500 feet in West Virginia

Penn Grade crude is extracted by more than 2,000 independent producers operating approximately 100,000 wells with an average daily output of less than one-third barrel per day. The producers include the two defendants, Pennzoil and Kendall, who are also refiners, as well as the third producer-refiner, Quaker State Refining Company. In the past seven or eight years the total annual production of Penn Grade crude has ranged from eleven to twelve million barrels. The largest producer is the defendant Pennzoil with a rated production in 1964 of 25% of the total. In the same year defendant Kendall had a rated production of approximately 3%, as did Quaker State Refining Company. The remaining 68.5% or about 8,200,000 barrels was produced by the independents who are neither refiners nor processors of the crude oil.

The production of Penn Grade crude is, on the whole, by extraction induced by mechanically forced pumping. The reserves or deposits have been subjected to a series of secondary recovery techniques, and currently efforts to increase recoverable reserves are being made with the use of hydraulic fracturing and steam injection.3

Penn Grade crude is distinctive because paraffin comparatively free from impurities forms its major base component, while other crudes have either an asphaltic base or a mixed asphaltic-paraffin base. Because of its paraffin base and its relative freedom from asphalt, carbon and sulphur, Penn Grade crude is easier to refine than are other crude oils. The peculiar chemical composition of Penn Grade crude permits its refiners to omit certain steps which are necessary in the refining of other types of crude oil. Penn Grade crude has been distinctly, easily and exclusively processable into the highest grade of lubricants available. Its composition and lubricant yield of 25% is so distinct as to make it usable for lubrication of certain kinds of large machinery without any processing whatsoever. This, however, is not considered to be its end use. Its primary distinction lies in the fact that it is easily convertible into the highest quality of lubricants obtainable.

Penn Grade crude has in the past been processed in a large number of refineries. These have dwindled to ten refineries, four of which are presently owned by the defendants, Pennzoil and Kendall. Pennzoil operates three and Kendall operates one. Quaker State Refining Company also operates three refineries. All ten refineries are relatively small, with through-put capacity ranging from 1,000 to 10,000 barrels per day. They are principally lubricant plants specially built to utilize this particular grade of crude oil. This is so because Penn Grade crude refiners produce lubricants primarily, with gasoline and other incidentals as side products, as opposed to other crude refiners which produce gasoline primarily, with lubricants and other incidentals as

252 F. Supp. 969
side products.4 All ten refineries for this Penn Grade crude product are located in the Penn Grade crude producing area. So it is that Penn Grade crude is transported only within this geographic section of the country and it is processed exclusively in these refineries

In order to supplement their own production of Penn Grade crude in 1964, the defendants Pennzoil and Kendall and Quaker State purchased substantial quantities from the independent producers. Of the approximately eight million barrels produced by the independents in 1964, Pennzoil, Kendall and Quaker State purchased 93%. Quaker State was the largest purchaser with 3,517,000 barrels comprising 43% of the total so produced by the independents. Pennzoil was the second largest purchaser with 3,106,515 barrels comprising 38% of the total produced by the independents. Kendall was the third largest purchaser with 995,380 barrels comprising 12% of the independents' production.

In 1964, approximately 11,580,360 barrels of Penn Grade crude were run through the ten refineries of Penn Grade crude. Pennzoil accounted for approximately 44%, Quaker State for approximately 29% and Kendall for 13%. Thus, the top three refiners accounted for approximately 86% of the refining runs of Penn Grade crude. The three small refiners ran through only 14%. Pennzoil and Kendall together accounted for 57% of the total refining runs.

The Penn Grade crude refiners have a total refining capacity of 40,320 barrels per day. Of this total, Pennzoil accounts for 40%, Quaker State for 23% and Kendall for 14%. Thus, the top three Penn Grade refiners account for approximately 77% of the total. Pennzoil and Kendall account for 54% of the total refining capacity.

The marketing of oil between the producers and refiner-purchasers is governed by short-term contracts as a general rule, and "transfer orders" which provide for delivery are generally revocable by either party upon notice. Penn Grade crude is sold by the producers at a price which is determined and posted by the refiners. This grade of crude oil commands a premium price in the market place and is currently being sold at an average price of $1.00 more per barrel than other crudes. In 1963 for example, five of the other better quality crudes in the nation ranged from $2.65 per barrel for West Texas crude to $3.15 per barrel for Texas Gulf crude. At the same time Penn Grade in the Bradford Field was priced at $4.63.

Prices vary slightly in the Penn Grade field because the crude is priced so as to arrive at Oil City at one price. The slight variations in the posted price reflect, therefore, the cost of gathering and transporting the crude oil. Delivery of the crude oil to the refiners is made at the producers' wells and it...

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25 practice notes
  • Miller Brewing Co. v. Falstaff Brewing Corp., Civ. A. No. 80-0382.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Rhode Island
    • January 13, 1981
    ...Inc. v. Flesher, 605 F.2d 1130, 1134 (9th Cir. 1979); Grimard v. Carlston, 567 F.2d 1171, 1173 (1st Cir. 1978); U. S. v. Pennzoil Co., 252 F.Supp. 962, 985-87 (W.D. Pa.1965); 7 Moore's Federal Practice, ¶ 65.041, at 35-47. In either case, the issuance of the injunction must serve the public......
  • Intern. Tel. & Tel. Corp. v. General Tel. & Elect. Corp., Civ. No. 2754.
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Hawaii)
    • February 28, 1978
    ...See United States v. Kimberly-Clark Corp., 264 F.Supp. 439, 448 (N.D.Cal.1967) (Kimberly-Clark), citing United States v. Pennzoil Co., 252 F.Supp. 962, 984 (W.D.Pa.1965). 39 Exhibit B, Post-Remand Order # 3, supra. 40 Standard Oil of California v. United States, 337 U.S. 293, 314, 69 S.Ct. ......
  • United States v. Wilson Sporting Goods Co., No. 68 C 549.
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • July 2, 1968
    ...De Nemours Co., 353 U.S. 586, 589, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957). In replying to a similar defense in United States v. Pennzoil, 252 F.Supp. 962, 984 (W.D.Pa. 1965), the Court "It has been stated in evidence that if acquisition is permitted, Pennzoil intends to maintain Kendall as a s......
  • Lazy Oil Co. v. Witco Corp., No. CIV.A.94-110 ERIE.
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • December 31, 1997
    ...Indeed, as Defense Counsel pointed out during the settlement hearing, Judge Rosenberg's 1965 opinion in United States v. Pennzoil Co., 252 F.Supp. 962 (W.D.Pa.1965), observed that there were ten refineries then processing Appalachian crude oil. Thirty years later, there were only three refi......
  • Request a trial to view additional results
23 cases
  • Miller Brewing Co. v. Falstaff Brewing Corp., Civ. A. No. 80-0382.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Rhode Island
    • January 13, 1981
    ...Inc. v. Flesher, 605 F.2d 1130, 1134 (9th Cir. 1979); Grimard v. Carlston, 567 F.2d 1171, 1173 (1st Cir. 1978); U. S. v. Pennzoil Co., 252 F.Supp. 962, 985-87 (W.D. Pa.1965); 7 Moore's Federal Practice, ¶ 65.041, at 35-47. In either case, the issuance of the injunction must serve the public......
  • Intern. Tel. & Tel. Corp. v. General Tel. & Elect. Corp., Civ. No. 2754.
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Hawaii)
    • February 28, 1978
    ...See United States v. Kimberly-Clark Corp., 264 F.Supp. 439, 448 (N.D.Cal.1967) (Kimberly-Clark), citing United States v. Pennzoil Co., 252 F.Supp. 962, 984 (W.D.Pa.1965). 39 Exhibit B, Post-Remand Order # 3, supra. 40 Standard Oil of California v. United States, 337 U.S. 293, 314, 69 S.Ct. ......
  • United States v. Wilson Sporting Goods Co., No. 68 C 549.
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • July 2, 1968
    ...De Nemours Co., 353 U.S. 586, 589, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957). In replying to a similar defense in United States v. Pennzoil, 252 F.Supp. 962, 984 (W.D.Pa. 1965), the Court "It has been stated in evidence that if acquisition is permitted, Pennzoil intends to maintain Kendall as a s......
  • Lazy Oil Co. v. Witco Corp., No. CIV.A.94-110 ERIE.
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • December 31, 1997
    ...Indeed, as Defense Counsel pointed out during the settlement hearing, Judge Rosenberg's 1965 opinion in United States v. Pennzoil Co., 252 F.Supp. 962 (W.D.Pa.1965), observed that there were ten refineries then processing Appalachian crude oil. Thirty years later, there were only three refi......
  • Request a trial to view additional results
1 books & journal articles
  • On the Inefficiencies of Efficiency as the Single-minded Goal of Antitrust
    • United States
    • Antitrust Bulletin Nbr. 60-2, June 2015
    • June 1, 2015
    ...1427 (W.D. Mich. 1989) (refusing torecognize procompetitive effects outside relevant geographic market); United States v. Pennzoil Co., 252 F. Supp. 962,972, 981 (W.D. Pa. 1965) (refusing to recognize procompetitive effects outside relevant product market); Matter ofLitton Indus., Inc., 85 ......

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