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United States v. Socony-Vacuum Oil Co.

July 27, 1939


Appeal from the District Court of the United States for the Western District of Wisconsin; Patrick T. Stone, Judge.

Author: Major

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

MAJOR, Circuit Judge.

These are several appeals from judgments of conviction by the District Court for the Western District of Wisconsin for violation of Section 1 of the Sherman Anti-Trust Act (Act of July 2, 1890, 26 Stat. 209, 15 U.S.C.A. § 1). Appellants are twelve corporations and five of their officers and employees.*fn1 The indictment was returned on December 22, 1936, against twenty-four corporations engaged in the petroleum business (called "defendant major oil companies"), three trade journals, and fifty-six individuals, principally officers and employees of the defendant corporations.*fn2 On October 4, 1937, twenty-three of the corporations, the three trade jourals and forty-six individuals were brought to trial, which continued over three and one-half months before a jury.

At the close of its case, the Government dismissed the indictment as against four major companies, the three trade journals and one individual.*fn3 The court, at the same time, directed verdicts for three corporations*fn4 and four of their officers and employees. During the course of the trial the court granted motions for directed verdicts on behalf of eleven other individual defendants. The jury on the 22nd day of January, 1938, returned verdicts of guilty against the remaining sixteen corporations and thirty individuals.

On July 19, 1938, the trial court set aside the verdicts and dismissed the indictment as to ten of the convicted individuals and one of the convicted corporations. The court also granted new trials to fifteen individuals and three corporations,*fn5 and sustained the verdicts of the jury against the remaining twelve corporations and five individuals, appellants herein.

The Indictment.

The indictment describes the states of Michigan, Wisconsin, Minnesota, North Dakota, South Dakota, Iowa, Illinois, Indiana, Missouri and Kansas as the market territory of defendant Standard of Indiana, sometimes known as the "Standard of Indiana Territory" by reason of said defendants' dominant position in the distribution of gasoline in each of said states. The territory is also described as the Mid-Western area. Each of the defendant major oil companies, so it is alleged, either directly or through subsidiary or affiliated companies markets gasoline in some or all of the states of such area. It is charged that the defendant companies manufacture and distribute to jobbers, dealers and consumers more than 85% of all the gasoline sold therein. It is alleged that the jobbers therein, some 4000 or more, sell more than 50% of all the gasoline sold to retail service stations and that the defendant companies supply more than 80% of the gasoline purchased by those jobbers. During the period of the conspiracy and for many years prior thereto, jobbers purchased gasoline from the defendant companies under long-term supply contracts, which uniformly provided that the price of the gasoline purchased by the jobbers should be determined by the "spot" market prices as published by two trade journals, namely, The Chicago Journal of Commerce, published in Chicago, Illinois, and Platt's Oilgarm, published in Cleveland, Ohio. It is alleged that the defendant companies also distribute gasoline through retail dealers and directly to consumers through their own retail service stations, and that retail prices in the Mid-Western area are directly and substantially influenced by, and fluctuate directly with, the "spot" market price.

The indictment alleges that the defendant companies do not sell any substantial part of their gasoline on the "spot" markets. Independent refiners, located in the Mid-Continent and East Texas oil fields, sell most of the gasoline sold on a "spot" basis and the prices received therefor make the "spot" market quotations which are published each day in the market journals. It is alleged that this gasoline amounts to less than 5% of all the gasoline marketed in the Mid-Western area.

It is alleged that, beginning in the month of February, 1935, and continuing ot the date of the presentation of the indictment, the defendants combined and conspired together for the purpose of articifially raising and fixing the tank-car prices of gasoline in the "spot" amrkets, and artificially raised and fixed said "spot" market tank-car prices of gasoline, and maintained said prices at artificially high and noncompetitive levels and thereby increased and fixed the tank-car prices of gasoline in the Mid-Western area (including the western district of Wisconsin) and arbitrarily, by reason of the provisions of the jobber contracts, exacted large sums of money from jobbers with whom such contracts were made. Thus, the defendants are charged with an unlawful combinantion and conspiracy in restraint of trade and commerce in gasoline in violation of the Sherman Anti-Trust Act.

Then follows the manner and means by which the conspiracy was effectuated. It is alleged that, beginning in the month of February, 1935, the defendants engaged and participated in two concerted gasoline buying programs, described as the East Texas and Mid-Continent buying programs, for the purchase by them of large quantities of gasoline from independent refiners in the East Texas and Mid-Continent fields. The independent refiners selling in the programs are named as co-conspirators, but not as defendants. The substance of the buying programs, as alleged, is that the defendants by their agents and representatives, purchased large quantities of gasoline in accordance with allocations made to the various major companies and that such purchases amounted to nearly 50% of all the gasoline sold by said independent refiners; that such purchases were in excess of the amounts which the defendant companies would have purchased apart from their participation in said buying program, and that said purchases were made at uniformly high, arbitrary and non-competitive prices for the unlawful purpose of increasing the "spot" tank-car price. It is also alleged that the independent refiners, at the instigation of the defendants, curtailed their production of gasoline.

Then follows a paragraph with reference to the "participation of market journals." It is alleged that such journals (theretofore named), together with certain of their officers, participated in the combination and conspiracy, and aided the other defendants in effectuating the same. The market journals are described as "the chief agencies and instrumentalities through which the wrongfully and artificially raised and fixed prices for gasoline paid by the major oil companies have affected the prices paid by jobbers, retail dealers and consumers for gasoline in the Mid-Western area." It is alleged that the quoted price published in said market journals was represented to be the price prevailing in "spot" sales to jobbers in tank-car lots when, as a matter of fact, the quotations thus published were the artificially raised and fixed prices paid by the defendant companies in the buying programs.

The indictment then concludes with a paragraph entitled "Jurisdiction and Venue" wherein it is alleged that the defendant companies sold large quantities of gasoline in tank-car lots to jobbers within the western district of Wisconsin at the artificially raised and fixed and non-competitive prices, and that retail dealers and consumers in said district have been required to pay artificially increased prices for gasoline by reason of the combination and conspiracy and pursuant to the purposes and ultimate objectives thereof.

Statement of Facts.

The record, as might be expected, is voluminous, and we find it difficult to compress the relevant facts in an opinion of reasonable length. The difficulty is increased by the widely disagreeing views of the respective parties as to what the essential facts are. At this point we shall only undertake to review what seem to be the more salient, leaving to a subsequent time facts material in connection with the numerous questions which are presented.

This case is concerned primarily with the marketing of gasoline in the Mid-Western area. (Indictment territory.)*fn6 In normal times this area is supplied chiefly with gasoline refined from crude oil produced in the Mid-Continent oil fields. Over 21% of all the gasoline sold in the United States in 1935, amounting to almost five billion gallons, and over 25% in 1936, amounting to nearly five and one-half billion gallons, was sold in this territory.

The oil industry has four primary functions: (1) Producing crude oil from the earth; (2) transporting it to refineries; (3) refining it into commercial products and (4) marketing the products. In the marketing process there are usually three units: the refiner, the jobber and the dealer. The refiner produces the gasoline; the jobber purchases it from the refiner in tank-car lots, stores it in bulk storage plants and resells it to the dealer in tankwagon lots.

A major oil company is one engaged in all branches of the industry. It produces and stores substantial amounts of crude oil, refines a substantial part of the gasoline which it sells, and owns large amounts of gasoline storage capacity at the refinery. It operates bulk storage plants in the marketing area from which gasoline can be distributed by tank-wagons to retailers. In most instances it operates service stations where its product is sold at retail. Most of the corporate defendants in this case are major oil companies. An independent refiner, as described in the indictment, is one engaged largely in the business of refining, usually has few, if any, bulk storage plants, and seldom operates service stations. The independent refiners far exceed the major companies in number, but their business is comparatively small. Some eighteen major companies sell about 85% of the gasoline consumed in the Mid-Western area, while some seventy independent refiners sell only 15%. Appellants marketed about 54% of the gasoline sold in this territory in 19359 Over 25% was sold by Texas, by Standard of Indiana, and Barnsdall. A jobber is a "middle man" who purchases gasoline in tank-car lots, generally from refiners, and owns storage or bulk plants from which he delivers gasoline in tank-wagons or trucks to service stations or directly to large consumers. In 1935 and 1936 there were more than 4000 jobbers doing business in the Mid-Western area.

At the time the indictment was returned and for many years prior thereto, most jobbers purchased their gasoline in tank-car lots under contracts in which they agreed to purchase, generally for a period of one year, all their gasoline requirements from a single refinery. The defendants prescribed the form of contract made by jobbers purchasing from them. These contracts varied somewhat in form, but generally the price to be paid by virtue of the contracts was upon the basis of what was known as "sport market quotations" appearing daily in one or both of the two defendant trade journals. The price was determined by averaging the high and low "spot" market quotations as they appeared therein. The contracts usually recognized the Standard of Indiana as the market leader in the territory and contained a provision to the effect that the buyer was to have a margin of 5 1/2› per gallon under the service station price as posted by that company. The retail service station prices posted by that company were also followed by jobbers, refiners and retailers. The selling price fixed by that company, as well as by all others, bore a direct relation to the "spot" market quotations during the indictment period. The normal retail price was usually 5 1/2› per gallon more than the "spot" market price.

The daily "spot" market is determined by sales for that day in private transactions at refineries in the field. The principal part of the gasoline on such market is sold by the independent refiners and constitutes from 5% to 7 1/2% of all gasoline sold in the Mid-Western area. The major companies, by reason of storage facilities and their own means of disposing of gasoline, have a more assured outlet than the independent refiners who must depend largely on the "spot" tank-car market. The major companies frequently were required to pruchase from the independent refiners prior to the time of the buying programs hereinafter referred to.

Thus the Government contends that at the beginning of the indictment period and continuing through 1935 and 1936, the prices at which the defendants sold the great bulk of their gasoline were directly controlled and determined by prices received by independent refiners of a relatively small amount of gasoline by reason of the following:

(1) The prices of all gasoline sold by the defendants to jobbers under contract were based upon the spot market quotations as published by the two trade journals.

(2) The prices of all gasoline sold at retail by the defendants were based upon the same spot market quotations.

(3) The spot market prices published in the jurnals were the result of spot sales by independent refiners of gasoline amounting to not more than 7 1/2% of all the gasoline sold in the Mid-Western area.

Prior to a statement concerning the alleged unlawful buying programs, it seems appropriate to refer to the history of the oil industry during the two-yar period prior to the indictment, and the efforts during that time to rehabilitate and stabilize the same, upon which appellants lay great stress.

Many pages of the briefs are thus occupied and again we do not find it easy to condense such a statement and do justice to both sides. It is plainly apparent that for several years prior to the alleged conspiracy, the gravest problem confronting the oil industry was the over-production of crude oil, which inevitably resulted in an over-supply of gasoline. This meant a decline in prices often below the cost of production. As new fields were developed the problem became more acute. Both State and Federal Governments actively engaged themselves in attempting to remedy and solve the problems in various ways, such as curtailment of production, buying programs and the fixing of prices at which crude oil could be sold. The States of Texas, Oklahoma and Kansas passed proration laws limiting production. Crude oil produced in violation of such laws became known as "hot oil" and the gasoline manufactured therefrom, as "hot gasoline." The stats had little success in the enforcement of such laws and as a result legal gasoline was at a great disadvantage in meeting competition. Out of this situation grew price wars of much concern to Governmental agencies, which resulted in great loss to all branches of the industry engaged in the legitimate field.

Beginning in March, 1933, the Federal Government, the interested states and the industry joined in a general movement to eliminate such destructive practices and to restore healthy competitive conditions. The record sustains appellants' statement that it was sought to accomplish three principal objectives:

(1) The restoration of the price of crude oil to a minimum of $1 per barrel. That was the minimum price at which the vast majority of the crude oil wells of the country could operate.

(2) The restoration of the price level of gasoline at wholesale at the refinery to "parity" with crude oil; that is, a price which would reflect the normal relation between the price of gasoline and the price of crude oil from which it is manufactured.

(3) The stabilization of retail prices at a normal spread or margin between the refinery price of gasoline and the retail price.

In June, 1933, Congress passed the National Industrial Recovery Act (48 Stat. 195) which authorized the President to forbid the interstate shipment of oil or gasoline produced or manufactured in violation of state proration laws. On July 11, 1933, the President, by Executive proclamation, forbade such shipments. Under this Act a Code was formulated prohibiting sales below cost, defining the natural parity relationship between the price of a barrel of crude oil and a gallon of refined gasoline as 18.5 to 1, and authorized the fixing of minimum prices for crude oil and its products. The President appointed the Secretary of the Interior to be the Administrator of such Code, and the Secretary selected members of his staff, known as the Petroleum Administrative Board. A committee, known as the Planning and Coordination Committee, to aid in the administration of the Code, was appointed by the President. In addressing this committee in September, 1933, the Secretary of the Interior said: "Gentlemen, we have a solemn duty to perform. Our task is to stabilize the oil industry upon a profitable basis. This is the keen desire of the Administration and we will work with you constantly to that end. * * * "

By September 29, 1933, the price of crude oil was established at $1.00 per barrel and that was the minimum price maintained throughout the Code period. On one occasion the Secretary approved an order fixing minimum prices based upon the cost of production and manufacture for crude oil, gasoline and other petroleum products, but this order never became effective. In April, 1934, an amendment to the Code was adopted under which an attempt was made to balance supply and demand of the refined product by allocating the amount of crude oil which each refiner could process. The Government sponsored various buying programs wherein the major companies contracted to relieve the independent refiners of their surplus gasoline at prices above the going market. It appears that these programs were later suspended because of doubtful legality. "Hot oil" constituted the chief stumbling block to the success of the various programs. Refiners in the field could procure such oil for 35› or less a barrel, and manufacture gasoline therefrom for 2› or 2 1/2› a gallon, while the parity price based upon $1.00 oil was from 5› to 6›.

Another term which finds much use in this case is "distress gasoline." This is described by appellants as legal gasoline manufactured by independent refiners who had to dump it on the market for whatever price it would bring. It is pointed out that the purchase contract of the independent refiner required him to take all the crude oil which the seller was permitted by law to produce. Any cessation of his refinery operations would result in the loss of his crude oil connections. Thus he was compelled to manufacture gasoline regardless of the demand. The government contends that the term "distress gasoline" is a misnomer and that it constituted nothing more than a surplus.

In July, 1934, members of the Petroleum Administrative Board called on appellant Arnott, Chairman of the Marketing Committee of the Planning and Coordination Committee, and requested that he undertake the responsibility of heading a voluntary cooperative movement to deal with price wars. This he agreed to do, pointing out that it would be necessary to eliminate "hot oil" and "distress gasoline." Under date of July 20, 1934, Arnott received a letter from the Secretary of the Interior which, after reviewing the price wars existing in many localities and the resultant effect which they were having upon the market for oil products, pointed out that the existing conditions would tend to frustrate the purposes of the National Industrial Recovery Act by increasing unemployment, reducing standards of labor, and preventing the rehabilitation of the industry. Arnott was authorized to confer, negotiate and hold public hearings for the purpose of stabilizing the price level. In October, 1934, a "Federal Tender Board" was appointed by the Secretary of the Interior for the purpose of preventing shipment ininterstate commerce of "hot oil" and "hot gasoline." Thereafter, oil or gasoline could only be shipped in interstate commerce when accompanied by a certificate or tender issued by the Board certifying as to the legality of its production or manufacture. This action had its immediate effect, increasing the "spot" market tank-car price of gasoline by 1 3/84. The Tender Board was stripped of its authority by the decision of the court in Panama Refining Company v. Ryan, 293 U.S. 388, 55 S. Ct. 241, 79 L. Ed. 446. To meet the emergency thus created, Congress, in February, 1935, passed the Connally Act (15 U.S.C.A. § 715 et seq.) which again prohibited the shipment in interstate commerce of "hot oil" and "hot gasoline," and again the price of gasoline rapidly increased.

We shall now discuss the alleged unlawful buying programs. The formation and operation of the Mid-Continent program is not in dispute. Appellants (with the exception hereinafter noted) admit that they participated in a concerted program for the purchase of gasoline from independent refiners in the Mid-Continent fields at "going market prices" from March, 1935 to May, 1936, for the purpose of stabilizing the tank-car market. The program was organized at a series of meetings held during the first three months of 1935. The first meeting, called by appellant Arnott and attended by all of the appellants, was held in Chicago, January 4, 1935. At this meeting a committee was appointed called the "Tank-car Stabilization Committee," consisting of eight representatives of the defendant companies, including appellants Ashton and McDowell. The situation confronting the industry was discussed at this meeting and it was generally conceded that the gains achieved instabilizing the retail market could not be maintained unless some action was taken with reference to "distress gasoline." The Stabilization Committee had three meetings - one on February 5th in Chicago, another on February 11th in Chicago, and the third on March 5th in St. Louis, Missouri. Without going into detail as to what took place at these meetings, we think the substance of what was accomplished and agreed upon was that the major companies would purchase from the independent refiners the latters' surplus gasoline at going market prices. Surveys disclosed that this surplus gasoline of the independent refiners in the Mid-Continent fields amounted to from 600 to 700 cars each month. Defendant Bourque was designated to make surveys with the view of ascertaining the amount of surplus gasoline and furnishing such information to the defendant companies. A mechanical sub-committee consisting of one Jacobi, the appellant McDowell, and the defendant Tuttle, was appointed to assist in the disposal of surplus gasoline not anticipated by the monthly surveys. It was also a part of the function of this sub-committee to urge companies to pay the fair going market price. The plan was a voluntary one and we find nothing in the record to indicate that anyone participating in the program was to be penalized for non-compliance therewith. The independent refiners who sold to the defendants in the program met with the defendants and agreed to cooperate.

The program commenced operation on March 7, 1935.During that month between 500 and 600 cars were purchased by the defendants, and thereafter, continuing through April, 1936, their purchases amounted to between 600 and 800 cars per month. The Tank-car Stabilization Committee held monthly meetings at which the surveys with reference to surplus gasoline were considered. There is evidence to the effect that the committee recommended the amount which each company should purchase and that the companies felt a moral obligation to comply therewith. The Mechanical Sub-Committee also met frequently and was in frequent contact with the purchasing companies, oftentimes urging them to increase the amount of their purchases. The defendant companies reported monthly to Bourque the volume of purchases and the prices paid in connection therewith. Although there is evidence that the defendants in some instances purchased more gasoline than they actually required, it was all disposed of in the usual channels of trade. There is evidence, rather indefinite and uncertain, that certain employees of the purchasing companies considered that allocations were being made along lines similar to those which had been made under the Code, and that the companies were obligated with respect to such allocations; but the record is far from convincing in this respect. The Tank-car Stabilization Committee was concerned with the price at which purchases were to be made, but it seems the Committee was chiefly interested with prices not below the going market price. In fact, no purchases were made above that price and prices actually paid to the independent refiners varied considerably. This was especially true during March, 1935, when three or four different prices were paid on the same day by the purchasing companies. More than one price was paid on 72% of a certain number of days on which purchases were made in the early part of the alleged conspiracy. The evidence concerning the amount of gasoline purchased by the defendants varies widely. The Government contends that from 34% to 51% in 1935, and from 38% to 58% in 1936, of all the gasoline sold on the "spot" market by the Mid-Continent independent refiners named in the indictment, and from approximately 20% to 30% during both years of all the gasoline sold on such market by twenty-nine independent refiners in the Mid-Continent field was purchased by the defendants; while defendants contend that the total amount purchased from the independent refiners was from 18% to 27%. The Government contends there is evidence to sustain the allegation that the independent refiners "curtailed their production of gasoline," while appellants contend to the contrary.*fn7

The fact is undisputed that the production of the independent refiners in 1935, over the previous year, was from 17% to 21% greater, and that in 1936, the production was 12% greater than in 1935.The Government points out that this situation is deceptive, inasmuch as production was curtailed under the Code during 1934 and the first five months of 1935.

The East Texas buying program referred to in the indictment may be described more briefly. Early in 1935, certain independent refiners in East Texas formed an association called the East Texas Refiners Marketing Association. The purpose of this association was to find a market for its surplus gasoline, and in an effort to accomplish this purpose, it contacted certain of the officials interested in the Mid-Continent program. Previous to this time the East Texas refiners had sold only a small part of their product in the Mid-Western area. Shortly thereafter, certain of the defendant companies commenced purchasing through the association and purchased an average of 600 to 700 cars monthly. The purpose of this buying program was similar to that of the Mid-Continent, i.e., for the purpose of stabilizing the gasoline market.

The defendants evidently realized the importance of buying the surplus product from the Texas field if their effort in the Mid-Continent field was to succeed. This program, like the other, contemplated the purchase of gasoline at fair going market prices and the prices paid generally coincided with the low quotations of Platt's Oilgram. We think it is fair to state, however, that this program was largely under the control of the Secretary of the East Texas Association, and that the program has more of the earmarks of a seller's program by that association than a buyer's program by the defendants. Here again the evidence is in conflict as to the amount purchased - the Government contending that in 1935 the defendants purchased 20% of the total production of all the independent refiners in the East Texas field, while defendants contend that it was about 12%.

It is the contention of the Government that the buying program produced an artificial and non-competitive condition of the tank-car market during the indictment period. We shall reserve discussion of this contention to a later time. The fact is, however, there was a consistent rise in price from March to May of 1935. The increase amounted to about 1 1/2› per gallon between February and June 1st, and from that time until the end of 1935, the price level remained firm, with only slight deviations. The increase in price was attributed by numerous witnesses to the buying programs, although there is substantial evidence that other factors contributed to such increase. In the early part of January, 1936, prices were advanced 1/2› in conformity with a comparable advance in the price of crude oil.

Contested Issues.

Of the many contested issues and assignments of error, we shall only undertake to discuss those which have been argued by the respective parties. Such issues stated by appellants in the affirmative - the Government contending to the contrary as to each - are:

I. There was a total failure of proof as to the essential allegation of the indictment, namely, that the defendants conspired to fix the spot market price of gasoline by purchasing gasoline under two buying programs at high, artificial and agreed on prices and causing such prices to be published in the trade journals and falsely representing them as spot market prices paid by jobbers in purchasing gasoline from independent refiners.

II. There was a material and prejudicial variance between the charge of the indictment and the issues on which the case was permitted to go to the jury.

III. The court committed reversible error in overruling the defendants' motions for directed verdicts.

IV. The trial court committed prejudicial error by (a) improperly limiting the extent to which the jury could consider the facts and circumstances surrounding the defendants' activities, and (b) instructing the jury that an agreement embracing the raising of prices by a group controlling a substantial amount of the trade in a commodity is illegal per se. By so doing the court, in effect, directed a verdict against the defendants.

V. The court committed prejudicial error in excluding the evidence offered by the defense as to the facts and circumstances surrounding the alleged agreement in restraint of trade.

VI. The District Court for the Western District of Wisconsin had no jurisdiction to try these defendants because the proof failed to establish that any overt act was committed within the Western District of Wisconsin.

VII. The court erred in the admission of evidence.

VIII. The court erred and abused its discretion in denying the several motions of ...

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