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MARTIN OIL SERVICE, INC. v. KOCH REFINING CO.

February 1, 1984

MARTIN OIL SERVICE, INC., PLAINTIFF,
v.
KOCH REFINING CO. AND KOCH INDUSTRIES, INC., DEFENDANTS.



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

MEMORANDUM AND ORDER

Before the court is defendants' motion for partial summary judgment. By consent of both parties this court deferred decision on this motion pending the result in two consolidated cases before the Temporary Emergency Court of Appeals, the court with exclusive appellate jurisdiction over this case. On December 20, 1983, the appellate court reached its decision.

I. Background

Plaintiff brought this action to recoup overcharges on 875,900,000 gallons of motor gasoline sold to it by defendants between August 19, 1973 and January 28, 1981. Plaintiff's fourth cause of action alleges that defendants increased their prices beyond the level allowed under the applicable regulations by misapplying the Federal Energy Agency's (FEA)*fn1 deemed recovery rule. Defendants' twelfth affirmative defense alleges the invalidity of that rule. Defendants move for partial summary judgment asking for dismissal of plaintiff's fourth cause of action and judgment in defendants' favor on its twelfth affirmative defense. Defendants argue that the deemed recovery rule is invalid on procedural and substantive grounds.

The deemed recovery rule will be discussed only briefly because both sides are well aware of its mechanics. At the time of enactment of the deemed recovery rule an oil refiner could not charge a class of purchasers more than the base price for the product sold, except under certain specific conditions. 10 C.F.R. § 212.82 (1975).*fn2 A class of purchasers is made up of purchasers to whom a seller has charged a comparable price for comparable property pursuant to customary price differential between purchasers. See 10 C.F.R. § 212.31 (1975). One purpose of the deemed recovery rule was the maintenance of these price differentials. See Mobil Oil Corp. v. Department of Energy, 728 F.2d 1477 at 1480, (Temp.Emer.Ct.App., 1983). The base price for a product was the cost for that product on May 15, 1973, plus increased product costs incurred between May 1973 and the measurement month, usually the month before the sale. See 10 C.F.R. § 212.82(b) (1975).

The refiner, though unable to charge more than the base price, was allowed to charge less than that price. The regulations allow the refiner to carry over or "bank" the increased product costs it failed to recover by charging less than the base price. See 10 C.F.R. § 212.83(e)(1) (1975). Whenever a refiner added previously unrecouped costs to its price it had to reduce its bank value accordingly. See generally Mobil Oil Corp. v. Department of Energy, supra, at 1480-1481.

In September 1975, without prior notice or opportunity for comment, the FEA promulgated the deemed recovery rule. That rule required the refiner to pass through its increased costs uniformly among all classes of purchasers or suffer a cost recovery penalty. The rule stated that refiners would be deemed to have recovered their increased costs as if they had recovered from all classes of purchasers costs equal to the highest increment actually recovered from any one class. Thus, if a refiner applied increased costs unequally, by adding varying increments of increased costs to prices charged to different classes of customers, the refiner could not bank all of its unrecouped costs. See id. at 1482-1483; 10 C.F.R. § 212.83(e)(1) (1975).

Plaintiff alleges in its fourth cause of action that defendants banked increased product costs that the rule required to be deemed recovered. Plaintiff claims defendants added these improperly banked costs to prices charged, resulting in prices above defendants' allowable base price. Defendants counter by attacking the validity of the rule on both procedural and substantive grounds.

II. Procedural Attack

Defendants charge that the deemed recovery rule was procedurally invalid because the FEA failed to give notice and allow for public comment. They also claim that the FEA did not meet the stringent conditions required to show cause for dispensing with notice and public comment. Finally, they claim that there was insufficient notice for comment with regard to the repromulgation of the rule.

Defendants' procedural attack against the deemed recovery rule has been entirely defused by the Temporary Emergency Court of Appeals decision in Mobil Oil Corp. v. Department of Energy, 728 F.2d at 1480, (Temp.Emer.Ct.App., 1983). In Mobil Oil, the Court held that the FEA's finding that an announcement of the deemed recovery rule before promulgation could have caused serious market distortions was adequate support for its decision to promulgate the rule without prior notice or opportunity for comment. Id. at 1490-1494. The Court also held that subsequent notice of comment on the rule, on December 5, 1974, was also procedurally valid. Id. at 1494-1496. In short, the Court completely upheld the procedural validity of the rule.

The Temporary Emergency Court of Appeals has exclusive appellate jurisdiction over the questions presently before this court. See 12 U.S.C. § 1904 note (Economic Stabilization Act of 1970, § 211(b)(2)). This court is bound by the decisions of the Temporary Emergency Court of Appeals regarding this issue. Accordingly, pursuant to Mobil Oil, the court denies defendants' procedural attack on the deemed recovery rule.

III. Substantive Attack

Defendants also attack the deemed recovery rule on two substantive grounds. First, they claim the rule is inconsistent with the express provisions of the Emergency Petroleum Allocation Act of 1973 (EPAA), 15 U.S.C. § 751, et seq., the enabling act for the regulation in question. Second, they claim the FEA failed to properly consider the explicit statutory objectives of the EPAA, as required by the statute. Judicial review of informal rule-making, as was involved in the promulgation of the deemed recovery rule, is governed by the provisions of 5 U.S.C. § 706(2). See Mobil Oil ...


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