United States v. Phillips Petroleum Company

• Court: U.S. District Court — Central District of California
• Writing for the Court: FERGUSON
• Citation: United States v. Phillips Petroleum Company, 367 F.Supp. 1226 (C.D. Cal. 1973)
• Decision Date: 13 November 1973
• Docket Number: Civ. No. 66-1154-F.
• Parties: UNITED STATES of America, Plaintiff, v. PHILLIPS PETROLEUM COMPANY and Tidewater Oil Company, Defendants.

367 F. Supp. 1226

UNITED STATES of America, Plaintiff, v. PHILLIPS PETROLEUM COMPANY and Tidewater Oil Company, Defendants.

Civ. No. 66-1154-F.

United States District Court, C. D. California.

November 13, 1973.

COPYRIGHT MATERIAL OMITTED

Melvin J. Duvall, Jr., William S. Farmer, Jr., David T. Alexander, Shirley Z. Johnson, Antitrust Div., Dept. of Justice, San Francisco, Cal., for plaintiff.

O'Melveny & Myers, Everett B. Clary, Los Angeles, Cal., Sullivan & Cromwell, William Piel, Jr., John Dickey, Richard E. Carlton, New York City, Lloyd G. Minter, S. E. Floren, Bartlesville, Okl., for defendant Phillips Petroleum Co.

Brobeck, Phleger & Harrison, Moses Laskey, C. B. Cohler, San Francisco, Cal., Hays, Landsman & Head, C. Lansing Hays, Jr., New York City, R. D. Copley, Jr., Los Angeles, Cal., for defendant Tidewater Oil Co.

OPINION

FERGUSON, District Judge.

This civil antitrust action was commenced on July 13, 1966, when the government filed its complaint alleging that the purchase of the Western Manufacturing and Marketing Division of the defendant Tidewater Oil Company by the defendant Phillips Petroleum Company violates ž 7 of the Clayton Act as amended, 15 U.S.C. ž 18.¹

At the time of the filing of the complaint, Phillips and Tidewater each engaged in the acquisition of oil and gas lands; the production of crude oil, natural gas and natural gas liquids; the manufacture of refined petroleum products; and the transportation and marketing of crude oil and products derived therefrom. Both were "corporations engaged in commerce" within the meaning of ž 7 of the Clayton Act.

The court holds that where objective factors indicate that the market is highly concentrated with high barriers to entry, the acquisition of the seventh largest company in the market, with a 6-7% market share, by a likely potential entrant, which ranks tenth in the national market, is illegal under ž 7 of the Clayton Act. The court finds that the acquisition produced a substantial lessening of competition through Phillips' elimination as a potential competitor, both through the removal of the likelihood that it would enter the market unilaterally in the future and through the elimination of the procompetitive influence it exerted from its presence on the edge of the market.

Product and Geographic Markets

The parties have agreed that the relevant line of commerce under ž 7 is the sale of motor gasoline, and that the relevant "section of the country" is the State of California. The term "market" shall be used to denote the sale of motor gasoline in California.

The Government's Contention

The only respect in which the government contends that the acquisition may substantially lessen competition in violation of ž 7 of the Clayton Act involves potential competition in the sale of motor gasoline in California. The government does not contend that actual competition, in the sense of existing competition between Phillips and Tidewater or between Phillips and other companies, was affected by the acquisition.

The Acquisition

The Tidewater assets acquired by Phillips for $366 million on July 14, 1966 consisted of a refinery at Avon, California, which had a rated operating capacity of 135,000 barrels per day and manufactured a full line of refined petroleum products; 13 product terminals; 219 bulk plants for local distribution of products; approximately 3,250 service stations displaying the Tidewater brand name (Flying A); the capital stock of Seaside Oil Company, a wholly owned subsidiary of Tidewater which marketed motor gasoline under its own brand name through some 400 service stations, primarily in California; transportation facilities related to the operations of Tidewater's Western Marketing and Manufacturing Division, such as pipelines and five tankers; Tidewater's office building in Los Angeles; and Tidewater's inventory of crude oil, products, material and supplies on hand at the transfer date. In addition, Phillips acquired certain contractual rights to crude oil produced by Tidewater from its California oil fields. Although the 3,250 Tidewater brand service stations were scattered throughout California, Oregon, Washington, Hawaii, Idaho, Nevada and Arizona, the great majority were on the West Coast ÔÇö in California and west of the Cascade Mountains in Oregon and Washington. This area accounted for 90% of Tidewater's motor gasoline sales in the Western states, with California alone accounting for 79% of such Western sales. Approximately 2,200 of the 3,250 Tidewater brand stations were located in California.

Of the approximately 3,650 combined Tidewater and Seaside service stations obtained by Phillips from Tidewater, about 2,100 were owned or leased by Tidewater or Seaside, while the others were "contract resellers" which sold motor gasoline under the Tidewater or Seaside brand name pursuant to contractual arrangements. About 1,600 of the approximately 2,550 Tidewater and Seaside stations in California were owned or leased by Tidewater or Seaside. Of these 1,600 stations, about 1,400 operated under the Tidewater brand and the remainder under the Seaside brand.

The Acquiring Company

Phillips is a corporation organized and existing under the laws of the State of Delaware, with its principal office located at Bartlesville, Oklahoma. Phillips began as a small Oklahoma crude oil producer in 1917, with assets of $3,000,000 and 27 employees. By the company's own admission, it has "grown into a giant and assumed a place of leadership in both the petroleum and chemical industries." At the time of the Tidewater acquisition, Phillips had assets of over $2,000,000,000, ranking among the eight largest domestic oil companies in the nation in assets. It ranked tenth among the domestic majors in gross sales ($1.46 billion in 1965) and ninth in net income ($127.7 million in 1965). In terms of operating indicators, Phillips ranked eleventh among the domestic majors in refining capacity, with about 3% of total domestic capacity. It ranked eighth in liquid hydrocarbons production, with 2.7% of total domestic production. At the time of the Tidewater acquisition, Phillips had six domestic refineries with total operating capacity of approximately 293,000 barrels per day.²

The Acquired Company

At the time of the filing of the complaint, Tidewater was a corporation organized and existing under the laws of the State of Delaware. Getty Oil Company owned over half the capital stock of Mission Development Company, which in turn owned over half the capital stock of Tidewater. On September 30, 1967, Tidewater and Mission Development Company were merged into Getty Oil Company.

Tidewater marketed on both the East and West Coasts. It had total assets of approximately $1,000,000,000 at the end of 1965, ranking fifteenth among the domestic majors. It also ranked fifteenth in gross sales ($834 million), sixteenth in net income ($56 million), and fourteenth in both domestic refining capacity (260,000 barrels per day) and domestic net petroleum production (140,000 B/D). Its domestic motor gasoline sales totaled approximately 100,000 barrels per day.

Tidewater's share (including Seaside) of motor gasoline sales in California was 6.8% in 1965. This represented a decline from 9.9% in 1960 and 7.8% in 1963. The Tidewater brand accounted for about 5.7% of 1965 motor gasoline sales, and Tidewater's Seaside outlets accounted for an additional 1% of the California market. Tidewater ranked seventh in motor gasoline sales in California in 1965 and had ranked fourth in 1960. It ranked fourth in refining capacity in California in 1965 and third among California refiners in California net petroleum production.

At the end of 1965, Tidewater (including Seaside) owned or had a leasehold interest in 1,949 operating service stations. Of these, 1,454 were in California, representing a decline from 1,650 California stations in 1960. In addition, 891 other service stations in 1965 purchased Tidewater's branded gasolines and resold them, representing a decrease from 1,019 in 1961.

Between 1960 and 1965, the volume of Tidewater's sales of branded motor gasoline in California (including Seaside) declined by a proportion of 13.2% while total sales of motor gasoline of all sellers in California increased by 26%.

At the end of 1964, Tidewater had proved domestic reserves of crude oil and field condensate estimated at more than 650,000,000 barrels. At the time of the filing of the complaint, Tidewater's Delaware refinery had a crude oil operating capacity of 125,000 barrels per day, and its Avon, California, refinery had a capacity of 135,000 barrels per day. The Avon refinery accounted for about 10% of California refining capacity in 1966, and for 8.6% of West Coast capacity. The combined capacity of the two refineries amounted to approximately 2.6% of the total operating capacity of all domestic refineries.

The Market

The California market for motor gasoline sales was the largest and fastest-growing motor gasoline market in the United States at the time of the acquisition. For several years prior to the filing of the complaint, including 1965, there were more motor vehicle registrations and motor gasoline consumption in California than in any other state. In 1965 there were 9.9 million motor vehicle registrations in California, about 4 million more than in New York, which ranked second. The California figure constituted 11% of the total motor vehicle registrations in the United States.

California ranks first among the states in population, total personal income, number of motor vehicles, number and sales of service stations, and gasoline consumption. California has experienced the largest absolute amount of increase in each of these categories during recent years and has been among the leading states in percentage increases.³

California motor gasoline sales contain the highest percentage of sales of premium grade gasoline of any state, amounting to 60.4% of California...