Opinion ID: 543660
Heading Depth: 1
Heading Rank: 4

Heading: appellants' claims of a conspiracy to restrict supply

Text: 112 In the proceedings below, the plaintiffs also alleged that the defendants engaged in a conspiracy to restrict the supply of crude oil and refined petroleum products. The plaintiffs claimed that the defendants' efforts to restrict supply culminated in the August 1972 restoration to end all restorations. That is, after August 1972, price cycling stopped; from that point forward the pressure created by supply shortages was sufficient to keep prices at their restored normal level, and indeed, in 1973 retail prices began a steady climb as supplies continued to prove inadequate to meet growing demand. The district court, however, concluded that the plaintiffs had failed to produce sufficient evidence to support their claims of a conspiracy to restrict supply, and it therefore granted summary judgment to the defendants. 113 On appeal, the appellants assert that they produced sufficient evidence to permit a jury to conclude that the appellees agreed to engage in various activities designed to reduce the domestic supply of petroleum products. They contend that, as part of this conspiracy, the appellees agreed to exchange information concerning actual production levels, expected future demand, and expected supply projections. The appellants also assert that, as part of the same plan, the appellees conspired to reduce the amount of crude oil lifted overseas and shipped into the United States. We will consider each of these contentions in turn.
114 The appellants have produced evidence indicating that by the early 1970s several of the appellees had come to the conclusion that excess production was a key factor in creating price wars. As the district court noted, The files of several of the defendants contained in-house memoranda that expressed dissatisfaction with the practice by their respective employers of producing so much gasoline that they were obliged to sell the surplus to independents, who, in return, competed with the sellers at reduced prices. Petroleum Prods., 656 F.Supp. at 1307. The appellants also produced evidence indicating that several of the appellees had begun thinking that it would be better to eliminate this excess production, but that they also recognized that this could not be accomplished without some sort of joint action. For example, in commenting on the National Oil Jobbers' Council's recommendation that excess production be eliminated, a 1971 internal Shell memorandum remarked: good thought--how accomplish short of collusion. An earlier May 1971 Shell memorandum had reached a similar conclusion: 115 If the wholesale price of gasoline moves up commensurate with the current and anticipated crude price increases and refinery operations are geared to maintaining such increased wholesale prices, then cut-price marketers will have to raise their prices proportionately.... [This alternative] involves one refiner after another acting in statesmanlike fashion. 116 (emphasis added). 117 The appellants contend that the appellees reached an agreement or understanding to restrict supply in this fashion in part by means of an exchange of information concerning projected supply and demand. In this regard, we note that the record indicates that several of the appellees did in fact occasionally obtain information, sometimes through direct personal contacts, concerning supply and demand forecasts and production levels. For example, a May 1972 Mobil memorandum summarized the aggregate crude oil demand forecasts of several competitors, including appellees Mobil, Exxon, Texaco, Gulf, and Shell. The memorandum indicated that the information had been obtained from a variety of sources, including direct competitor contacts. The memorandum noted that [i]n several cases we were able to get quite specific volume figures by area from direct contacts. In most of the other cases, the information had been obtained from press releases, public statements, or annual reports, and in many of these instances, Mobil was able to render [the figures] more precise by checking them out with people we know inside the companies. The exchange of supply information among the appellees is further indicated by the fact that ARCO had in its files a copy of a detailed summary of supply and demand forecasts that had been prepared by Union. 118 In addition, the appellants produced a June 1972 Mobil memorandum reporting the results of direct competitor contacts with officials of Texaco, Exxon, and Gulf concerning sour crude production capabilities. The memorandum indicates that the competitors had provided fairly detailed information concerning refinery processing levels. Although, as the appellees note, the memorandum indicates that the information was obtained for the purpose of buying and selling crude oil, one could reasonably conclude that the detail of the information obtained exceeded that which was necessary for this purpose. 119 The appellants also presented evidence indicating that the appellees were able to obtain detailed competitive information concerning supply by participating as observers at meetings of the Independent Petroleum Association of America (IPAA). For example, a memorandum in Standard's files contained an IPAA chart listing the supply projections made by several different oil companies. The chart lists, for each quarter of 1970, the supply projections for several different types of petroleum products. Although the chart anonymously labels each company by a code letter, the Standard copy has the names of the various companies handwritten along the top of the chart. The companies listed include Union, Getty, and Shell. The record also indicates that Standard itself submitted supply projections for 1970 to the IPAA. 120 The record also reveals that ARCO obtained similar IPAA supply forecasts for the year 1971. ARCO's 1971 chart, like Standard's 1970 chart, contains additional notations indicating which companies made which forecasts. The cover memorandum accompanying the chart states that this information is valuable because the exact expectations of 8 oil companies and 2 banks are revealed in detail. The memorandum also noted that, although most majors did not formally participate in IPAA activities, most are present as observers to receive the materials and to contribute to the discussions. This includes even the usually highly reticent Texaco. 121 We also note that the appellants have produced an Exxon memorandum from August 1972 (the month that price cycling ended) indicating that Exxon had contacted a large number of oil companies in order to determine their crude oil supply situation. The memorandum contains a chart summarizing the information obtained as a result of these contacts. Among the companies whose supply information is listed are ARCO, Standard, Getty, Gulf, Mobil, and Shell. The information obtained indicates that most of these companies expected to experience supply shortages during the remainder of 1972. 122 In response to this evidence, the appellees raise two arguments. First, they contend that these exchanges of information were innocuous and that no inference of conspiracy can be drawn from them. This argument cannot be squared with the Supreme Court's holding that, under certain circumstances, the exchange of production and supply information may supply an attractive basis for cooperative, even if unexpressed, 'harmony' with respect to future prices. American Column & Lumber Co. v. United States, 257 U.S. 377, 398, 42 S.Ct. 114, 116, 66 L.Ed. 284 (1921); see also Sullivan, Antitrust Sec. 97 (1977) (Data as to production figures can be used to police production quotas imposed by a cartel or, in an oligopolistic structure, can facilitate interdependent action in reducing output.) American Column & Lumber teaches that production and supply data dissemination cannot be treated as categorically different from price information exchanges. Accordingly, application of the principles of Container in the supply data context suggest that an agreement to exchange supply and production information may, under appropriate circumstances, serve as circumstantial evidence of an agreement to restrict supply and raise prices. We think that, in light of the evidence concerning the appellees' intent to stabilize the market by reducing excess capacity, see infra, an inference of conspiracy drawn from the appellants' evidence of supply data exchanges is plausible. 123 Second, the appellees argue that the shortages experienced during 1972 and 1973 were real, and that their production facilities operated at record levels during this period. In particular, the appellees point out that their refineries were operating at the maximum sustainable rate. The appellants do not dispute this latter point; instead, they claim that the appellees deliberately chose not to expand refinery capacity and that they did so in order to create a shortage. 124 In support of this claim, the appellants produced evidence indicating, for example, that Standard chose not to expand refinery capacity, despite long-range forecasts of a shortage. Similarly, an Exxon employee based his conclusion that Exxon's refining capacity was sufficient on the assumption that sales of gasoline to the independents would be curtailed. A Shell official reached a similar conclusion that a conservative program of refinery expansion would avoid throwing surplus products into the market place. Furthermore, as the district court noted, see Petroleum Prods., 656 F.Supp. at 1307, an Exxon study committee recommended that refining capacity not be expanded until forecasts show large and growing shortages for at least two years prior to the onstream time of the expansion. Other items in the record further indicate the appellees' concern with the problem of spare capacity. For example, a 1971 Exxon memorandum noted that Exxon considered the spare capacity problem to be the single most important problem facing the refining segment of our business over the next several years. Finally, the appellants produced evidence indicating that the resulting lull in domestic refining capacity construction contributed to tight supplies and upward pressure on petroleum prices. As one September 1972 Shell memorandum put it, The current shortage being proclaimed is more apparent than real. Refining capacity has merely moved from a 'long' supply position to what could be characterized as a 'balanced' position.... It just feels 'tight' to some people who have been used to a 'long' situation for a number of years. 125 The district court, in ruling on the motion for summary judgment, simply accepted the defendants' explanations for the shortage and for the lack of refinery expansion. With respect to the failure to expand refinery capacity, the court noted that the cost of constructing refineries had gone up, that environmental litigation was a concern, that it was hard to estimate how much refinery capacity was necessary, and that price controls were a disincentive to further expansion. Petroleum Prods., 656 F.Supp. at 1307-08. With respect to the shortage, the court blamed it mostly on increasing demand. The court asserted that demand had increased due to various factors, such as more people driving and the increasing number of cars with air conditioning and power-operated features. Id. at 1308. The court finally concluded that the evidence showed quite clearly that the defendants' actions were the result of independent decisions. Id. at 1309. 126 We think that the district court misconceived the nature of its task under Matsushita. As noted earlier, Matsushita does not authorize the district court to weigh the evidence and decide which inference is the more plausible one; so long as a particular inference is plausible and permissible under Matsushita, it is for the jury to decide whether to draw it. Matsushita, 475 U.S. at 587-88, 106 S.Ct. at 1356-57. The district court in this case appears simply to have adopted one of two competing theories of the evidence. Matsushita does not authorize this sort of resolution, on summary judgment, of disputed issues of fact. 127 Appellants have offered a plausible conspiracy theory. The evidence supports the conclusions that (1) in the early 1970s several of the appellees began taking steps to reduce excess capacity; (2) they did so with the intent and effect of reducing the strength of the independent sector of the market; (3) during this period the appellees exchanged information concerning supply forecasts and production levels, and (4) the shortage of refining capacity, as well as the foreign activities of several of the appellees (discussed below), resulted in supply shortages and upward price pressure. Most significantly, however, it seems clear that these objectives could only be achieved if all others performed similar actions. A single company reducing output would lose market share and sales. Only if all the companies reduced supply would the price rise enough to increase profits. The risk involved in leading a supply reduction suggests that purely interdependent supply decisions are unlikely. Changes in refinery capacity are not readily reversible. Once a company is committed to reducing its capacity it cannot easily recover if the other companies do not follow its lead. Thus, it is unlikely that a firm would undertake a reduction in its refinery capacity without some advance agreement from competitors. It is in this context that the exchange of supply and demand forecasts must be considered. We think that, viewing all of this evidence, a rational jury could conclude that the appellees had agreed to exchange supply and demand forecasts in order to facilitate mutual decelerations of increases in production capacity. 128 This does not settle the matter, however. The question remains whether permitting an inference of conspiracy from the evidence that the appellants have produced would have the effect of deterring important independent conduct. We conclude that it would not. As we stated previously, appellants have offered evidence that the exchange of information followed by shortage was accompanied by appellees' actions to reduce excess capacity, appellees' anticompetitive intent, the actual reduction in the independent sector, and appellees' recognition of the need for parallel action. Appellants have also offered evidence of market conditions in which interdependent supply decisions are unlikely. Although an inference of conspiracy could not permissibly be drawn solely from the exchange of supply forecasts followed by a shortage, we can conceive of no significant procompetitive behavior that will be deterred by permitting an inference of conspiracy when the combination of actions and intent described above occurs. 23
129 The appellants also contend that, as part of the alleged conspiracy to restrict supply, the appellees agreed to restrain Middle East production of petroleum products. In support of this contention, the appellants point to a number of items of evidence indicating that the appellees engaged in discussions about how to keep supply pressures under control. For example, in response to the problem of spare capacity in Iran, the five American majors (Exxon, Gulf, Texaco, Mobil, and Standard) who owned shares of the Iranian Consortium (IOP) agreed in 1968 that in deciding upon planned capacity targets, the group should be careful not to rely simply on their own estimated needs inasmuch as this procedure might result in capacity figures being set too high. As a memorandum distributed among the five companies indicated: 130 Members should [review] the IOP weighted figures to be sure that growth rates in planned capacity are consistent with annual growth rates generally expected for demand, rather than relying solely on the composite of individual Member estimates for each forward year. In this regard it should be appreciated that small changes in growth percentages lead to plans for rather large capacity additions several years forward. 131 The record also indicates that the IOP members jointly agreed to resist the Shah of Iran's efforts to get IOP to increase available capacity. 132 The record also contains evidence indicating that the owners of Aramco (Exxon, Standard, Mobil, and Texaco) held a two-day meeting aimed at arriving at a response to Saudi Arabian complaints that their oil liftings were not keeping pace with those of other countries such as Iran. During the course of these discussions, Texaco proposed that, if the other IOP owners who were also owners of Aramco would do likewise, it was willing to reduce its liftings in Iran in order to improve Aramco's relative position. Although, as the appellees note, Mobil labeled this blatant cartel allocation proposal ridiculous, Mobil did state, however, that if [they] had a competitive price in Aramco, they felt it would definitely hold down the growth rate in Iran. Similarly, although Exxon also rejected Texaco's proposal legally and for other reasons, it also stated that it would be our policy to have our Iranian liftings so that they could be defensible with our Aramco performance. Other evidence further indicates that the Aramco owners recognized the need to coordinate production levels among Iran and Saudi Arabia in order to alleviate Saudi pressure for increased production. 133 Finally, we note that the appellants produced evidence indicating that, in connection with these various activities, several of the appellees circulated amongst themselves memoranda containing specific information regarding supply and demand projections for various regions of the world. 134 The appellees raise a number of arguments in response to this evidence. First, they contend that, because IOP and Aramco were created or operated with the knowledge and acquiescence of the United States Government, the actions taken by the two consortiums cannot serve as a basis of antitrust liability in this case. This argument is without merit. Even if the President had approved the cartel there is no evidence indicating that he authorized any of the appellees' alleged concerted efforts to hold down the growth of foreign production. 24 135 Second, the appellees argue that each item of evidence upon which the appellants rely does not in fact support an inference of conspiracy. Indeed, they assert that the evidence indicates normal business behavior. Once again, however, we emphasize that it is not our task to decide whether we think that an inference of innocent conduct is more plausible than an inference of conspiracy. Rather, our task is to consider whether an inference of conspiracy is plausible and whether permitting such an inference would have the effect of deterring significant procompetitive conduct. We recognize that it is possible that each IOP owner company independently resisted the increases in production requested by the Shah. However, when considered in the context of their domestic activities with regard to prices and supply, the various actions that the consortium members took in order to control the level of growth in Middle East production plausibly could be construed as part of a conspiracy to restrict supply. In addition, appellees have suggested no procompetitive behavior that would be deterred if plaintiffs were allowed to bring antitrust actions against defendants who undertook the domestic and foreign supply actions alleged in this case. 136 We conclude that the appellants have presented sufficient evidence concerning their allegations of a conspiracy to create a shortage to warrant submission of the issue to a jury. Accordingly, the district court erred in granting summary judgment on these claims. Furthermore, we note that since the parties agree that the shortage, however caused, led to the elimination of the competitive bidding market in bulk sales to government entities, the appellees may be held liable for this consequence if the jury concludes that they did in fact jointly act to restrict supply.