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GO-TANE SERVICE STATIONS, INC. v. ASHLAND OIL

United States District Court, Northern District of Illinois, E.D


February 5, 1981

GO-TANE SERVICE STATIONS, INC., PLAINTIFF,
v.
ASHLAND OIL, INC., DEFENDANT.

The opinion of the court was delivered by: Aspen, District Judge:

MEMORANDUM OPINION AND ORDER

Plaintiff, Go-Tane Service Stations, Inc. ("Go-Tane"), filed this action against defendant, Ashland Oil, Inc. ("Ashland"), alleging that Ashland sold motor gasoline to Go-Tane at prices in excess of those permitted by the Mandatory Petroleum Allocation and Price Regulations, 10 C.F.R. §§ 211 and 212, promulgated pursuant to the Emergency Petroleum Allocation Act, 15 U.S.C. § 751 et seq., and the Economic Stabilization Act of 1970, 84 Stat. 799, as amended 85 Stat. 743. Jurisdiction is grounded in 28 U.S.C. § 1331(a) and the amount in controversy is alleged to be in excess of $10,000 exclusive of interest and costs. Presently before this Court is Go-Tane's motion to strike Ashland's sixth affirmative defense,*fn1 in which Ashland asserts that even if Go-Tane can prove its overcharge allegations it did not suffer any damages since it merely passed on any overcharges to its own customers. Fed.R.Civ.P. 12(f).*fn2 Go-Tane further moves this Court for a protective order prohibiting any discovery by Ashland in support of its sixth affirmative defense. Fed.R.Civ.P. 26(c).

In Hanover Shoe, Inc. v. United Shoe Machine Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), the Supreme Court held that, as a general rule, the "pass-on" theory was not available as a defense in an antitrust case in which the plaintiff sought treble damages for alleged overcharges resulting from the defendant's antitrust violations. The Court noted that, "in the real economic world rather than an economist's hypothetical model," it would be extremely difficult to determine what part of a direct purchaser's price increase was in response to an overcharge, and thus what portion of the overcharge was passed through to indirect customers. 392 U.S. at 493, 88 S.Ct. at 2231. The Court barred the defensive use of the pass-on theory for two reasons: to avoid the long and complex proceedings that would be necessary to prove that the direct purchaser passed on all overcharges to its customers and to deter unlawful activity by ensuring that those who violate the antitrust laws do not retain the "fruits of their illegality," merely because the one potential plaintiff with sufficient incentive to sue — the direct purchaser — is barred from bringing the action.*fn3 392 U.S. at 493-94, 88 S.Ct. at 2231-32. The Court did recognize, however, that "there might be situations — for instance, when an overcharged buyer has a pre-existing `cost-plus' contract, thus making it easy to prove that he has not been damaged — where the considerations requiring that the passing-on defense not be permitted" would not be present. 392 U.S. at 494, 88 S.Ct. at 2232.

In Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), the Court had another occasion to consider the pass-on theory, this time as an offensive weapon used by indirect purchasers alleging that they were passed on to them through direct purchasing middlemen. The Court held that the Hanover Shoe rationale barred the offensive as well as defensive use of the pass-on theory, except in narrowly defined situations in which the proof problems discussed in Hanover Shoe would not present an insurmountable burden to the parties and the court.*fn4 Justice White, writing for the majority, reiterated that the exception to the bar on the pass-on theory was necessarily limited to narrowly drawn circumstances:

  [T]his Court in Hanover Shoe indicated the narrow
  scope it intended for any exception to its rule
  barring pass-on defenses by citing, as the only
  example of a situation where the defense might be
  permitted, a pre-existing cost-plus contract. In such
  a situation, the purchaser is insulated from any
  decrease in its sales as a result of attempting to
  pass on the overcharge, because its customer is
  committed to buying a fixed quantity regardless of
  price. The effect of the overcharge is essentially
  determined in advance without reference to the
  interaction of supply and demand that complicates the
  determination in the general case. Id. at 735-36, 97
  S.Ct. at 2069.*fn5

  Several courts have also permitted the use of the pass-on theory in cases involving the "functional equivalent" of a cost-plus contract, which present none of the proof problems that disturbed the Court in Hanover Shoe and Illinois Brick. See In re Beef Antitrust Litigation, 600 F.2d 1148 (5th Cir. 1979), cert. denied, ___ U.S. ___, 101 S.Ct. 280, 66 L.Ed.2d 137 (1980); In re Western Liquid Asphalt Cases, 487 F.2d 191 (9th Cir. 1973), cert. denied sub nom., 415 U.S. 919, 94 S.Ct. 1419, 39 L.Ed.2d 474 (1974); Obron v. Union Camp Corporation, 477 F.2d 542 (6th Cir. 1973). Two of these cases involved the offensive use of the pass-on theory by indirect purchasers against defendants farther up the distribution chain, the other involved the defensive use of the theory by the seller in a suit brought by the direct purchaser.*fn6

In the most recent of these cases, In re Beef, the United States Court of Appeals for the Fifth Circuit approved the offensive use of the pass-on theory by plaintiffs alleging the functional equivalent of a cost-plus contract. In that case, primary producers of beef cattle filed suit against certain retail food chains, a wholesale grocer, a national trade association, and a beef industry price reporting publication, alleging that the price the primary producers were paid for their product by the wholesale middlemen was depressed by price fixing at the retail level. Thus, an asserted "undercharge" was passed through to the primary producers by the direct purchasers, the middlemen. The district court had dismissed the case on the pleadings, but the court of appeals reversed, holding that the primary producers had stated a claim that fell within the cost-plus exception to the pass-on bar since they alleged that the pricing decisions of the middlemen were predetermined according to a formula without regard to the interactions of supply and demand. 600 F.2d at 1165. Thus, the court reasoned that the proof problems that troubled the Supreme Court in Hanover Shoe and Illinois Brick were not present because the free market forces that ordinarily would have determined what portion of the alleged "undercharges" was passed on to the primary producers were inhibited by the defendants' pricing practices.*fn7

Relying primarily on In re Beef, Ashland contends that the Mandatory Petroleum Allocation and Price Regulations, 10 C.F.R. §§ 211 and 212, impose the functional equivalent of a cost-plus pricing scheme upon direct gasoline purchasers such as Go-Tane, thus fitting the instant case within the exception recognized in Hanover Shoe and Illinois Brick. Ashland argues that if it can show, through discovery, that Go-Tane set its prices under the regulations so as to recover all its increased product costs by selling at the maximum lawful price, then it will have overcome the problems of speculative proof that troubled the Supreme Court in Hanover Shoe and Illinois Brick.*fn8 In the case at bar, however, the Mandatory Petroleum Allocation and Price Regulations governing Go-Tane's pricing decisions merely establish a formula for determining the maximum price that Go-Tane may charge its customers. Under the regulations, Go-Tane is clearly entitled to charge less than the maximum.*fn9 Indeed, Go-Tane maintains, and Ashland does not dispute, that it did charge its customers less than the maximum allowable price for several years in response to the forces of supply and demand that created substantial competition in the retail gasoline market. Go-Tane's vice-president, Mr. Eugene V. Silveri, stated that from April, 1974, through May, 1979, the competition in the industry was such that Go-Tane was unable to recover its purchase price plus the allowable margin under the regulations and it was thus forced to sell at less than the maximum allowable level in order to remain competitive. See Silveri Deposition, October 29, 1980.

Accordingly, the impact of the regulations on Go-Tane's pricing could not have been known in advance since the regulations delineate only one end of the possible price spectrum. Ashland's sixth affirmative defense alleges that Go-Tane "passed through all charges" to its customers, but absent a pre-existing contractual or regulatory framework requiring such a pass-through there can be no justification for the pass-on defense. The speculative nature of Ashland's argument implicates the proof problems that the Supreme Court in Illinois Brick identified as the key to Hanover Shoe. See Eastern Air Lines, Inc. v. Atlantic Richfield Co., 609 F.2d 497, 498-99 (Emerg.Ct. of App. 1979).

In addition to the fact that the regulations do not impose the functional equivalent of a cost-plus contractual scheme upon Go-Tane's relationship with its customers, Ashland's pass-on defense also fails because it has not shown that Go-Tane did not suffer a loss in volume as a result of the overcharges. While some courts and commentators have argued that an indirect purchaser seeking to use the pass-on theory offensively need not necessarily show that the direct purchaser has suffered no volume loss as a consequence of the alleged overcharge,*fn10 it has never been suggested that a supplier who invokes the pass-on theory defensively is exempt from such a showing. In Illinois Brick the Court explicitly stated that "[i]n the latter case, even if the defendant shows that as a result of the overcharge the direct purchaser increased its price by the full amount of the overcharge, the direct purchaser may still claim injury from a reduction in the volume of its sales caused by its higher prices." Illinois Brick Co. v. Illinois, supra, 431 U.S. at 732 n. 13, 97 S.Ct. at 2067 n. 13. As a prerequisite to asserting the pass-on defense, the proponent must show that "the [direct] purchaser is insulated from any decrease in its sales as a result of attempting to pass on the overcharge, because its customer is committed to buying a fixed quantity regardless of price." 431 U.S. at 736, 97 S.Ct. at 2069. In the instant case, Go-Tane's customers — retail gasoline consumers — are not committed to buying a fixed quantity of Go-Tane's gasoline regardless of price. They can either use less gasoline, or purchase it from different retailer. Thus, even if Ashland established through discovery that Go-Tane was passing on the entire alleged overcharge to its customers and selling its product at the maximum lawful price, Ashland would not be entitled to assert the pass-on defense unless it could somehow demonstrate that Go-Tane's sales to its customers continued at the same level regardless of the price of its product. This speculative exercise would involve massive discovery, one of the pitfalls which the Court sought to avoid in Hanover Shoe and Illinois Brick.

The Court in Hanover Shoe also cited deterrence*fn11 of unlawful activity as a reason for limiting the availability of the pass-on defense in overcharge cases. If a direct purchaser's cause of action could be defeated by the pass-on defense, the wrongdoer might well retain the "fruits of [its] illegality" since the ultimate consumer would probably have little incentive to sue in its own behalf. Hanover Shoe, Inc. v. United Shoe Machine Corp., supra, 392 U.S. at 494, 88 S.Ct. at 2232. In creating a private right of action to redress violations of the price regulations, see section 210 of the Economic Stabilization Act of 1970, set out in the notes following 12 U.S.C.A. § 1904, Congress intended to ensure that violators would be discovered and deterred by persons bringing private lawsuits. See Senate Rep. No. 92-507, 92nd Cong., 1st Sess. (1971); H.R.Rep. No. 92-714, 92nd Cong., 1st Sess. at 8 (1971):

  The Committee, in line with the Administration's
  emphatic request for voluntary surveillance to assure
  compliance with price and rent regulations and
  orders, adopted this section so that it would serve
  as a strong deterrent to those who would willfully
  violate this Act.

In the context of the case at bar, Go-Tane's customers — retail gasoline purchasers — would have a very small stake in a potential suit against Ashland. If Ashland is permitted to assert the pass-on defense against Go-Tane, Ashland might be effectively immunized from suit on the overcharge theory, a result that concerned the Court in Hanover Shoe.

Accordingly, Go-Tane's motion to strike Ashland's sixth affirmative defense is granted for the reasons set forth in this opinion.*fn12 It is so ordered.


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