United States v. Standard Oil Co. of California

• Decision Date: 17 July 1957
• Citation: 155 F. Supp. 121
• Parties: UNITED STATES of America, Plaintiff, v. STANDARD OIL COMPANY OF CALIFORNIA, The Texas Company, Bahrein Petroleum Company, Ltd., California-Texas Oil Company, Ltd., Caltex Oceanic, Ltd., and Mideast Crude Sales Company, Defendants.
• Court: U.S. District Court — Southern District of New York

155 F. Supp. 121

UNITED STATES of America, Plaintiff, v. STANDARD OIL COMPANY OF CALIFORNIA, The Texas Company, Bahrein Petroleum Company, Ltd., California-Texas Oil Company, Ltd., Caltex Oceanic, Ltd., and Mideast Crude Sales Company, Defendants.

United States District Court S. D. New York.

July 17, 1957.

COPYRIGHT MATERIAL OMITTED

Herbert Brownell, Jr., Atty. Gen., by Milo V. Olson, Sp. Asst. to Atty. Gen., and John Tretheway and Morton Namrow, Trial Attorneys, Department of Justice, Washington, D. C., for the U. S.

Cahill, Gordon, Reindel & Ohl, New York City, John T. Cahill, Milton R. Wessel, and William J. Quinlan, New York City, David R. Hyde, New York City, of counsel, for defendant Standard Oil Co. of California.

Webster, Sheffield & Chrystie, New York City, and Bethuel M. Webster, Frederick P. Haas, Oscar John Dorwin, Robert G. Sprague, Edward L. Rea, Donald J. Cohn, New York City, of counsel, for defendant Texas Co.

Proskauer, Rose, Goetz & Mendelsohn, New York City, Joseph M. Proskauer, George M. Shapiro and Albert E. VanDusen, New York City, Marvin E. Frankel, Washington, D. C., Julius J. Teller, New York City, Norman P. Schoenfeld, New York City, of counsel, for defendants Bahrein Petroleum Co., Ltd., California-Texas Oil Co., Ltd., Caltex Oceanic, Ltd., and Mid-East Crude Sales Co.

THOMAS F. MURPHY, District Judge.

By this action the Government seeks recovery of some sixty-six million dollars, the amount the Economic Cooperation Administration (ECA) and its successor, the Mutual Security Agency (MSA) expended to finance European purchases of Saudi Arabian crude oil supplied by two of the defendants during the period September 1, 1950 to August 31, 1952.

Introduction

A better understanding of this claim requires some brief background on a number of subjects. By way of introduction, we will discuss in a general fashion the European Recovery Program (ERP), the ECA statutory and regulatory scheme, the history of the lawsuit, the present complaint, defendants' corporate relationships and Middle Eastern operations, the world crude oil pricing structure, and plaintiff's various theories.

After World War II it became evident to those in authority that if Europe were to recover from the ravages of war the United States would have to take the laboring oar. In June 1947 General Marshall, then Secretary of State, announced that the time had come for the European countries to cooperate with each other to resist the advance of Communism and the corrosion and destruction of the world. If they did so, he said, their efforts would be echoed on our part by moral and financial assistance. Almost immediately the leaders of the European countries answered the cue and the Organization of European Economic Cooperation (OEEC) was formed for the purpose of supplying the European participating countries with the sinews of recovery, largely in the form of materials. It was a program, at great expense to the American taxpayer, to aid in the establishment of a so-called lasting peace. (Parenthetically, it should be noted that the Soviet Union opposed the plan of European recovery and refused not only to participate itself, but prevented its satellites from so doing.)

At that time there was a tremendous dollar gap in the fiscs of Europe, and in order to buy materials in the world market United States dollars were sorely needed. To remedy this, the United States enacted the Foreign Assistance Act of 1948, 22 U.S.C.A. ?? 1404, 1409, 1410, 1503 et seq., 1651 et seq., 62 Stat. 137, and the Economic Cooperation Administration Act, 22 U.S.C.A. ?? 1503 et seq., 1651 et seq., 62 Stat. 137. Congress said that its purpose was to "promote the general welfare and national interest of the United States by furnishing material and financial assistance to European countries; to develop the military strength of those countries; to promote their industrial and agricultural production; and to facilitate and stimulate the growth of international trade thereby achieving for those countries healthy economies, restoration of individual liberties, and genuine independence".

Under ECA/MSA United States dollars were allocated to the various European nations participating in the foreign aid program by the issuance of "Procurement Authorizations" which set forth the conditions for the procurement of commodities. Firms in participating countries which desired crude oil and other commodities, after obtaining the approval of their respective governments, contracted to purchase those commodities from various suppliers. Such purchasers made payment to their local governments in local currencies, and the money so paid was placed in a "counterpart fund" account for use locally in connection with the foreign aid program. Suppliers of crude oil were paid, on presentation of Supplier's Certificates, in United States currency by ECA/MSA out of appropriated funds, either through the participating countries or through designated banks in accordance with the Procurement Authorizations.

So large scale an expenditure of United States dollars evoked concern on the part of Congress respecting the prices at which ECA should properly finance purchases so as to ensure the most advantageous use of its funds. However, the only statutory provision in the various Acts is the following:

"No funds authorized for the purposes of this Act shall be used for the purchase in bulk of any commodities at prices higher than the market price prevailing in the United States at the time of the purchase, adjusted for differences in the cost of transportation to destination, quality, and terms of payment."

This section, 202 of the Foreign Aid Appropriation Act, 1949, 62 Stat. 1059, became sec. 112(l) of the Economic Cooperation Act, by virtue of an amendment in 1949, 63 Stat. 53, 22 U.S.C.A. ? 1510 (l). At first blush, such provision seems somewhat inadequate for an agency which was to disburse such huge sums of the taxpayers' money. But on closer analysis the reasons for such a general provision become clear. ECA was neither a procurement agency nor a price-fixing agency. Its role was that of an investment banker. All purchases were to be made through ordinary business channels by the individual buyers and sellers with ECA only supplying the dollars to the seller after the buyer had deposited an equal amount of his own currency with his own government. Thus, for policing purposes, ECA relied primarily on the buyer's own self-interest in acquiring his goods as cheaply as possible. It did, however, retain the right to post audit each transaction and to demand reimbursement, in whole or in part, from the buyer's government for any purchases which exceeded the maximum prices.

The ECA Administrator, by statute, was given the authority to promulgate regulations. This he did. The initial regulations restated the statutory test for maximum prices and required a Supplier's Certificate to be signed and filed by each supplier in which he certified, among other things, that upon information and belief and upon such information as was available to him the prices charged were not in excess of the statutory maximum. The supplier also agreed to reimburse the Administrator for any breach of the terms of the Certificate.

This Regulation 1 was amended on May 3, 1949. The statutory maximum price test was again repeated and further language was added to the effect that within that limitation it was ECA's policy to finance only such purchases as were made at prices "that approximate as nearly as practicable, lowest competitive market prices." It also expressed the hope that buyers would agree to pay no more than such prices, and stated that its rules were intended as a guide to buyers and sellers. Then followed the sentence "These rules fix the point beyond which purchases will not be eligible for reimbursement by ECA." (In November 1949 this sentence was amended to read "The rules in this part fix the point beyond which purchases will not be eligible for reimbursement by ECA"). The regulations further provided that ECA would take appropriate action to impose additional limitations if it appeared that the objective of lowest competitive market prices was not being met. This was followed by definitions of various terms, not including lowest competitive market price, and a number of more specific price provisions concerning three classes of commodities not here pertinent. But Class IV stated that the Administrator might from time to time establish special rules for certain unspecified commodities. Lastly there appeared another wholly new price provision which we shall refer to as the comparable sales test. This provided that a price would be approved by ECA if (1) it did not exceed any price charged by the supplier in a comparable sale (individual supplier test), (2) it did not exceed the export market price prevailing in comparable sales by the principal suppliers in the source country (principal supplier test), and (3) it did not exceed the statutory test. The Supplier's Certificate was accordingly amended to include a certification that the price charged was no higher than that calculated in accordance with the applicable price provisions of Regulation 1.

The Three Complaints

With this background we can now turn to a brief history of the lawsuit. The original complaint, filed August 22, 1952, alleged that Bahrein Petroleum Company Limited (Bahrein), California Texas Oil Company, Limited (Caltex), Caltex Oceanic Limited (Oceanic), and Mid-East Crude Sales Company (Mid-East) acted as the alter egos of Standard Oil Company of California (Socal) and The Texas Company (Texas); set forth the statutory and comparable sales tests; and alleged violations of these in that the prices charged were in excess of (a) the prevailing market price in the United States, (b) the prices charged by defendants in comparable export sales, and (c) the export market price prevailing in the Middle East. Damages,...