Opinion ID: 755341
Heading Depth: 3
Heading Rank: 2

Heading: The Tosco Agreement

Text: 37 As evidence to show that the prices complained of [were] below an appropriate measure of [ARCO's] costs, Brooke Group, 509 U.S. at 210, 113 S.Ct. 2578, Rebel presented a 1986 Exchange Agreement between ARCO and Tosco Corporation. [SER pp. 555-84] Because ARCO is willing to exchange ANS [Alaska North Slope Crude Oil] for gasoline; and ... Tosco is willing to exchange gasoline for ANS, the parties entered into a buy/sell exchange of ANS for gasoline, [SER p. 555], providing that ARCO would deliver ANS to Tosco, and Tosco would deliver gasoline to ARCO. The quantities to be exchanged were established by a formula set forth in the agreement. The agreement also provided for cash payments by ARCO to Tosco and by Tosco to ARCO when crude oil or gasoline was delivered, and the dollar amounts paid by each party will equal those paid by the other. [SER p. 567] The cash payments were tied to the market price of ANS. [SER pp. 563, 584] 38 Rebel argues there is at least a question of material fact whether the agreement is not an exchange but an agreement to purchase, and thus is a direct measure of ARCO's marginal cost of producing an additional unit of gasoline. This circuit has concluded that a swap of like products is not a sale for the purposes of the Robinson-Patman Act. Airweld, Inc. v. Airco, Inc., 742 F.2d 1184, 1191 (9th Cir.1984), cert. denied, 469 U.S. 1213, 105 S.Ct. 1184, 84 L.Ed.2d 331 (1985); see American Oil Co. v. McMullin, 508 F.2d 1345, 1353 (10th Cir.1975) (where oil company supplies petroleum products from its refinery in Salt Lake City to other oil companies, in return for petroleum products from the other companies' refineries in other areas, [t]he record does not show that these transactions are actually sales.). Because crude oil and gasoline, although related products, are not fungible, the Tosco Agreement does not document an exchange of the same product or like types of gasoline. Airweld, 742 F.2d at 1192. The agreement is therefore not a swap, and we must examine ARCO's marginal cost. ARCO submitted a declaration stating: 39 The Exchange Agreement provided for cash payments by Tosco to ARCO, when crude was delivered, and by ARCO to Tosco, when gasoline was accepted, but those payments were security arrangements, and were in equal amounts. In substance, the Agreement was an in-kind transaction in which crude oil was exchanged for gasoline. 40 [SER p. 455 n. 7] ARCO's declaration also stated: ARCO's cost for the gasoline delivered by Tosco was equal to ARCO's cost to produce and deliver the crude oil to Tosco since there were no net cash payments. [SER p. 455] 41 Rebel's expert witness, Dr. Keith Leffler, testified that 42 In my Report I state that [t]he gasoline received by ARCO from Tosco represents an increment to the supply of ARCO gasoline. The effective economic costs of the gasoline to ARCO thus indicates the marginal cost of ARCO gasoline. The calculation of the economic cost in what is effectively a barter situation of course requires determination of the value of what ARCO gives up. Regardless of whether ARCO bought the crude oil, produced the crude oil or was given the crude oil, the marginal costs to ARCO of obtaining the additional gasoline from Tosco is given by the value of that crude oil that they gave up. 43 [ER p. 194]. Leffler's statement echoes ARCO's labelling of the agreement as an in-kind transaction, but his cost measurement is different. ARCO states that the cost to it was the cost of producing and delivering the crude oil; Leffler states that the cost is instead the market price of the crude oil, i.e. what ARCO would have received for the crude oil if ARCO had sold it rather than traded it to Tosco. 44 The measure of cost proposed by Rebel-the market price of the crude oil-is problematic for two reasons. First, the market price for crude oil is not what ARCO spent in obtaining the crude oil: ARCO produced the crude oil, and did not purchase the crude oil on the market. Second, the market price represents only what ARCO would have received had ARCO sold the crude oil in the market rather than trading it to Tosco for gasoline. The measure of marginal cost proposed by Rebel is thus really the opportunity cost to ARCO of choosing to enter into the exchange agreement rather than selling the crude oil elsewhere. Opportunity costs are vastly different from ARCO's marginal or variable costs, and we agree that the use of the concept of opportunity costs [to show predatory pricing] must be held improper as a matter of law. In re IBM Peripheral EDP Devices Antitrust Litig., 459 F.Supp. 626, 631 (N.D.Cal.1978); Continental Airlines, Inc. v. American Airlines, Inc., 824 F.Supp. 689, 701 (S.D.Tex.1993) (opportunity cost is not one of the costs of implementing a particular business choice, and cannot be included in considering average variable price). 45 Rebel's expert, Dr. Leffler, admitted that it's accepted that ARCO was a low cost producer of crude in this era so, if anything, I would expect it to have lower cost than what was reflected in the market value of that barrel. [SER p. 202] Aside from this admission that ARCO's cost of producing the crude oil was low, Rebel presented no evidence of the actual costs of production. Nevertheless, Leffler argued for the use of market price as a measure of ARCO's cost, taking strong issue with the courts' language in rejecting ... the economic concept of opportunity costs for measuring below cost sales in predatory pricing cases. [ER p. 193 n. 5] Because Rebel offered evidence (Leffler's expert opinion) in its opposition to ARCO's summary judgment motion, and ARCO did not offer conflicting expert opinion, Rebel argues that the district court acted as a finder of fact, impermissibly weighing Rebel's evidence and effectively conducting a bench trial. But where, as here, the expert offers an opinion that courts have rejected as a matter of law, that opinion is not enough to create an issue of material fact that survives summary judgment. In the context of antitrust law, if there are undisputed facts about the structure of the market that render the inference [to be drawn from expert affidavits] economically unreasonable, the expert opinion is insufficient to support a jury verdict. Rebel I, 51 F.3d at 1435-36 (citing Eastman Kodak Co. v. Image Technical Serv., Inc., 504 U.S. 451, 468-69, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992)). Expert testimony is useful as a guide to interpreting market facts, but it is not a substitute for them. Brooke Group, 509 U.S. at 242, 113 S.Ct. 2578; Wallace v. Bank of Bartlett, 55 F.3d 1166, 1170 (6th Cir.1995), cert. denied, 516 U.S. 1047, 116 S.Ct. 709, 133 L.Ed.2d 664 (1996). 46 We conclude that using the Tosco agreement as a measure of ARCO's cost in the way urged by Rebel would require equating ARCO's cost of the crude oil to market price, which is counter to legal definitions of cost. Therefore, the agreement cannot provide a legally sufficient measure of ARCO's cost. 47