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Siegel v. Shell Oil Co.

March 26, 2007


The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge


On December 1, 2005, Plaintiffs Michael and Rebecca Siegel filed in the Circuit Court of Cook County, Illinois a purported nationwide class action complaint against Defendants Shell Oil Company, BP Corporation North America, Inc., Citgo Petroleum Corporation, Marathon Oil Company and Exxon Mobil Corporation (collectively, "Defendants"). Defendants removed the case based on the grant of federal jurisdiction found in 28 U.S.C. §1332(d)(2) and then moved jointly to dismiss the complaint. The Court granted that motion without prejudice, finding that many of Plaintiffs' averments of fraud failed to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"). (R. 74-1, Order of July 26, 2006.)

Plaintiffs since have filed an amended complaint, alleging, as they did in the original complaint, (1) that Defendants are liable under the Illinois Consumer Fraud and Deceptive Business Practices Act (the "Consumer Fraud Act"), 815 ILCS 505/1, et. seq., and the Illinois common law doctrines of unjust enrichment and civil conspiracy, and (2) that Defendants are liable to the purported class under the consumer fraud statutes and common law of various other states. (R. 77-1, Am. Compl.) Defendants have moved to dismiss the amended complaint (the "Complaint"), arguing that Plaintiffs' averments of fraud still fail to satisfy Rule 9(b). Defendants also urge dismissal under Federal Rule Civil Procedure 12(b)(6) ("Rule 12(b)(6)"), arguing that for various reasons the Complaint fails to state claims upon which relief can be granted. The Court grants Defendants' motion in part and denies it in part. As explained below, Plaintiffs have in large measure failed to satisfy Rule 9(b)'s heightened pleading standard, but their Complaint nonetheless states a claim for relief.


I. The Parties

Plaintiffs Michael and Rebecca Siegel are citizens of Illinois and residents of Cook County, Illinois who purchased gasoline from the various Defendants. (R. 77-1, Pl.'s Am. Compl. at ¶11.) Defendants Shell Oil Company ("Shell"), BP Corporation North America, Inc. ("BP"), Marathon Oil Company ("Marathon"), Exxon Mobil Corporation ("Exxon"), and Citgo Petroleum Corporation ("Citgo") are entities that use agents, employees, dealers, distributors, brokers, affiliates and/or subsidiaries to sell, market, advertise and distribute gasoline to consumers in the State of Illinois and throughout the United States. (Id. at ¶¶12-16, 18.)

II. Factual Allegations

The Complaint alleges the following facts. Defendants dominate the market for gasoline in the United States and control a substantial portion of the nation's gasoline supply. (Id. at ¶20.) Defendants have used their market dominance in concert to increase the price of gasoline to consumers by (1) controlling inventory, production, and exports, (2) limiting supply, (3) restricting purchase, (4) using "zone pricing," (5) falsely advertising the scarceness of gasoline, and (6) excessively marking up the price between gasoline and crude oil prices -- actions that have caused both the price and demand for gasoline to remain artificially high, and the supply artificially low. (Id. at ¶¶1, 2, 23.)

In part, Defendants are able to create these artificial prices because they can gauge the current level of production by monitoring the crude oil sales and published reports of the volume of crude oil going into each refinery. (Id. at ¶5.) Because they share common storage tanks and pipeline schedules, each refiner can quickly determine the movement of gasoline, level of import or export, and existing inventory levels. (Id.) Defendants keep the level of gasoline inventories in storage tanks as low as possible to maximize price, but just high enough to avoid an unexpected disruption of flow into storage that "draws the inventory down." (Id. at ¶25.)

Defendants also have used their market dominance to create constant increases and decreases in production (resulting in price spikes and "just-in-time inventories") and to "tread on national emergencies" by using events such as Hurricanes Katrina to artificially raise prices. (Id. at ¶¶21, 22; see also id. at ¶25 (further alleging that "just-in-time inventories" is industry terminology for the practice of maintaining low levels of inventory).) For example, during peak usage periods, Defendant Shell decreased production at its Bakersfield California refinery and, at times, was producing far less than the site's capacity. (Id. at ¶3.) Shell also announced plans to close the Bakersfield refinery, which has achieved "world-class performance" two years in a row and has the largest profits per gallon of any Shell refinery in the nation. (Id.) Amid protests that the closure was intended to inflate gasoline prices by decreasing supply, the California Attorney General effectively forced Shell to find a buyer for the refinery, which is still in use today. (Id.) Shell employees have reportedly claimed that Shell lied and led people to believe that it limited refinery production or sought to close the refinery due to inadequate supply of crude oil, and internal Shell documents repeatedly show that operations at the refinery were running well and that Shell was capitalizing on high profit margins. (Id.)

Likewise, in August 2006, Defendant BP shut down half of the nation's largest oil filed/pipeline, which accounts for eight percent of U.S. oil output, after an inspection revealed a small pipeline leak. (Id. at ¶4.) By reducing supply, the shutdown increased gasoline prices and boosted Defendants' profits. (Id.) In addition, the pipeline shutdown was preventable, in that BP knowingly allowed the pipeline to corrode and leak, rather than reinvest in adequate maintenance. (Id.) The U.S. Department of Transportation has reported that it has not received a reasonable explanation of why BP had not cleaned the pipeline in years, noting that another Alaskan pipeline is cleaned every two weeks. (Id.) Several present and former BP employees have stated publicly that "they were told to cut back on maintenance of the pipeline and falsify records regarding same." (Id.)

As a result of such conduct, the gas industry has in recent years achieved record-high profits. In 1999, U.S. oil refiners made 22.8 cents per gallon of gasoline refined from crude oil. By 2004, they were making 40.8 cents for every gallon refined -- a price that escalated even higher to 99 cents on each gallon sold in 2005. (Id. at ¶34; see also id. at ¶33 (further alleging that, since 1999, the average margin of refinery charges has increased by 85 percent while, in the previous seven years that margin increased by only 20 percent).) The increase in price per barrel yielded profits to the gas industry of more than $25 billion in the July-September quarter of 2005, the quarter in which the price of crude oil hit $70.00 a barrel and gasoline surged to record levels after the disruption of Hurricanes Katrina and Rita. (Id. at ¶24.) On November 2, 2005, in response the release of these quarterly profits, Bill O'Reilly, host of The O'Reilly Factor, interviewed former Energy Secretary Bill Richardson. When asked, "[d]o you think that major oil companies price gouged the American public?" Richardson responded, "I do believe so, Bill. There's no correlation right now between $3 at the gasoline pump and the price per barrel in the international market. If it were $3, which it is now or close to it, it should be $90 per barrel on the international market and it's $65. So the economics don't work. I do believe that there's price gouging." (Id. (excerpting an additional exchange to the same effect).) Regarding Defendants specifically, (1) Shell reported earnings of $7.32 billion in the second quarter of 2006, up 40 percent from the previous year, (id. at ¶12); (2) BP recorded a 30 percent increase in profits to $7.3 billion in the second quarter of 2006 compared to the second quarter of 2005, (id. at ¶13); (3) Marathon's second quarter 2006 profits more than doubled due to strong gasoline prices and almost double refining margins, (id. at ¶14); and (4) Exxon's second quarter 2006 profits increased 36 percent to $10.36 billion, the second largest quarterly profit ever for a publicly traded company. (Id. at ¶15.)

In sum, beginning the first date that Defendants placed their gasoline into the stream of commerce and continuing through the present, Defendants, individually and jointly, have "engaged in misrepresentations, unlawful schemes and courses of conduct . . . that induced Plaintiffs and the Class to purchase gasoline . . . [by] illegally and artificially restraining trade and increasing the price of gasoline to consumers by controlling inventory . . ." and by "falsely advertising the scarceness of gasoline and excessive mark up between gasoline and crude prices . . ." (Id. at ¶55 (quoting Nichols, Donald A., Economic Outlook for Late 2005 and 2006, Strong Growth with a Bit of Inflation Fed by the Katrina Boom).) Further, Defendants intended for Plaintiffs to purchase Defendants' gasoline in reliance upon Defendants' unfair and/or deceptive acts in the marketing and sale of their gas. (Id. at ¶65; see also id. at ¶¶17, 56 (further alleging that each of the Defendants caused artificially inflated gasoline prices to be listed and gasoline to be provided for sale to Plaintiffs at each of their agent's respective gas stations).) Plaintiffs have periodically purchased several gallons of gasoline in each of the Defendants' Chicago area gas stations at the artificially inflated prices advertised by the Defendants at the pumps and store signs of Defendants' gas stations. (Id. at ¶56; see also id. at ¶57 (citing examples of Plaintiffs' gasoline purchases).)


I. Rule 8

"A complaint's ability to survive a Rule 12(b)(6) challenge inevitably turns on its ability to satisfy Rule 8 of the Federal Rules of Civil Procedure -- the general rules of pleading a claim for relief." Lekas v. Briley, 405 F.3d 602, 606 (7th Cir. 2005). Under Rule 8, a "plaintiff's complaint need only contain 'a short and plain statement of the claim showing that the pleader is entitled to relief.'" Id. (quoting Fed. R. Civ. P. 8(a)(2)). Generally, a complaint satisfies the "short and plain statement" requirement if it "narrates an intelligible grievance that, if proved, shows a legal entitlement to relief." United States v. Gypsum Co. v. Ind. Gas Co.,350 F.3d 623, 626 (7th Cir. 2003). Rule 8, that is, does not require "an exhaustive recitation of the facts," Lekas, 405 F.3d at 606, and does not require a plaintiff "to identify, [or] plead specifically to, each ingredient of a sound legal theory" -- "[p]laintiffs need not plead facts; they need not plead law; they plead claims for relief." Doe v. Smith, 429 F.3d 706, 708 (7th Cir. 2005); Bennett v. Schmidt, 153 F.3d 516, 518-19 (7th Cir. 1998) (complaints need not identify a legal theory to survive motion to dismiss). "Indeed, 'a complaint should be dismissed for failure to state a claim only if no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Lekas, 405 F.3d at 606 (quoting DeWalt v. Carter, 224 F.3d 607, 612 (7th Cir. 2000) (some internal punctuation omitted)); Smith, 429 F.3d at 708 ("A complaint suffices if ...

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