Petition — Murphy Oil Corp. v. Naph-Sol Refining Co.
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88-1509 FILED
No. 83- MAR 12 teegt
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IN THE come
Supreme Court of the Gnited States
OCTOBER TERM, 1983
Murpuy OIL CoRPORATION,
Petitioner,
Vv.
NAPH-SOL REFINING COMPANY,
Respondent.
PETITION FOR A WRIT OF
CERTIORARI TO THE TEMPORARY
EMERGENCY COURT OF APPEALS
OF THE UNITED STATES
Of Counsel: R. Bruce McLean, P.C.
H. Y. Rowe Danie. Josep, P.C.
W. Bay.ess Rowe Counsel of Record
Murpuy O1L Corporation Epwarp L. Rusinorr
200 Peach Street Akin, Gump, Strauss,
El Dorado, Arkansas 71730 HAUER & FELD
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
(202) 887-4000
Counsel for Petitioner
Murphy Oil Corporation
LS LET OE a a PE ES
PRESS OF BYRON S. ADAMS PRINTING, INC., WASHINGTON, D.C. (202) 347-8203
i
QUESTIONS PRESENTED
1. Where the Administrative Procedure Act, 5 U.S.C.
§ 553(b)(B), requires that an agency publish with a rule a
contemporaneous “statement of reasons” explaining its finding
of good cause for issuing regulations without first providing
notice and an opportunity for public comment, did the court of
appeals err (and depart from holdings of other courts of
appeals) in sustaining the agency’s action on the basis of mate-
rial, including that drawn from argument of agency counsel,
that was not part of the statement of reasons published with
the rule?
2. a. Did the court of appeals err (and depart from hold-
ings of other courts of appeals) in holding that an agency may
find good cause to adopt a rule without public notice and
comment not only where an emergency requires the govern-
ment to act immediately, but also where, in the absence of an
emergency, the agency predicts that publication of a notice of
proposed rulemaking itself will cause untoward effects?
b. Did the court of appeals err in holding that an agen-
cy may justify adoption of a rule without public notice and
comment in such circumstances when any untoward effects
could have been avoided, and public notice and comment
nonetheless provided, if the agency had simply proposed to
make any final rule effective as of the date of the proposal?
3. Is the proper scope of judicial review of an agency
determination to adopt a regulation without public notice and
an opportunity for comment the doctrine of “extreme defer-
ence” applied by the court of appeals in the present case?
4. Did the court of appeals err by sustaining a second
agency publication of the rule, following purported notice and
comment, where the court recognized that the statement of
basis and purpose required by 5 U.S.C. § 553 (c) did not even
mention the proposal, the rule, or any comment thereon?
TABLE OF CONTENTS
Page
EEE TE i
ne ccacacebncnesececceece Vv
Cee eee vec wcabiacsecesesuce 1
Nee a ve bebeeccccces 2
STATUTES AND REGULATIONS INVOLVED ............... 2
cca voces cccsacvesccvecce 2
See I PIOUS sv cc cccccccccccccccvccs 4
1. The September 5, 1974 promulgation of the
equal application/deemed recovery rule ..... 5
2. The purpose and effect of the equal application/
deemed recovery rule .................005. 6
3. The September 10, 1974 proposed rulemaking 7
4. The December 1974 notices ................ 4
5. The November 3, 1980 revocation of the equal
application/deemed recovery rule .......... 9
B. The Decision of the District Court ............. 10
C. The Decision of the Court of Appeals ........... 11
REASONS FOR GRANTING THE WRIT ............---000 12
I. THE CourToF APPEALS HAs IMPROPERLY EXPANDED
THE SCOPE OF SECTION 4(b)(B) OF THE ADMINISTRA-
TIVE PRocEDURE Act, 5 U.S.C. § 553(b)(B) ...... 13
A. The Court Of Appeals Upheld Use Of Section
553(b)(B) Even Though The DOE Had Not Pro-
vided A Statement Of Reasons That Supported
Its Conclusion That Notice And Public Com-
ment Were Against The Public Interest .... 14
B. The Court Of bee me Impermissibly And Un-
necessarily Broadened The Scope Of The “Good
EE 17
C. The Court Of Agqoats Drastically And
Improperly Limi udicial Review ....... 19
II. THE CourToF APPEALS IGNORED THIS CouRT’s HoLp-
ING IN Motor VEHICLE MANUFACTURERS’ ASSOCIA-
TION V. STATE FARM MUTUAL AUTOMOBILE IN.
ESS ESET 22
III. Tuts Case PRESENTs ISSUES OF GENERAL IMPORT-
ANCE Not LIMITED TO ENERGY REGULATION ...... 24
Ss vn wcaeeee 26
Vv
TABLE OF AUTHORITIES
CASES: Page
Bray v. United States, 423 U.S. 73 (1975) ........... 26
Buschmann v. Schweiker, 676 F.2d 352 (9th Cir.
BEE 64-kn'Sbacaaueeneds Uaneth es hberessraukuees 14, 26
California v. Simon, 504 F.2d 480 (TECA 1974) cert.
dented, 419 U.S. 1081 (1974)... nc cccccccccscecs
Cities : Preserve Overton Park v. Volpe, 401 U.S. 402
ED <cpsReeGUSl Ss ccscvvevetensescecees ence
De Rieux v. Five Smiths, Inc., 499 F.2d 1321 (TECA
1974) cert. denied, 419 U.S. 896 (1975) ..........
Imperial Refineries Corp. 9 DOE § 83,035 (1982) ..... 8
——- v. United States Department of Interior, 339 F.
WO. BUGS CE.D. Cab. BOGE oles cccccssvcncccves 14
Mobil Oil Corp. v. Department of E , 610 F.2d 796
(TECA 1979) cork. dented, 446 U. 31 (1980) .... 17
Motor Vehicle Manufacturers’ Assn. v. State Farm
Mutual Automobile Insurance Co., 103 S. Ct. 2856
(BOGE) occccscsrccvccsaccenvess 13, 14, 16, 23, 24, 26
Nader v. Sawhill, 514 F.2d 1064 (TECA 1975) ....... 20
National Nutritional Foods Assn. v. Kennedy, 572 F.2d
377 (2nd Cir. 1978) (dictum) .............: 14, 18, 26
a Oil Co. v. FEA, Civil Action No. C-77-2196-
AI (N.D. Cal., filed September 30, 1977) ......
SEC v. Chenery Corp., 322 U.S. 194 (1947) .......... 24
St. Louis Fuel and Supply Co., 10 DOE § 83,004 (1982) 8
State of New Jersey v. Environmental Protection Agen-
cy, 626 F.2d 1038 (D.C. Cir. 1980) .............. 18
United States Steel Corp. v. Environmental Prctection
Agency, 649 F.2d fe | arr 18
Vermont Yankee Nuclear Power Co. v. Natural Re-
sources Defense Council, Inc., 485 U.S. 519 (1978) 19
eee eee eee eee eee eee ee
vi
Table of Authorities, Continued
Page
STATUTES AND REGULATIONS:
Administrative Procedure Act, 5 U.S.C.
I Uh as cone cade ekon 2, 12, 138, 14
Economic Stabilization Act, 12 U.S.C. § 1904 note, as
_ 64 in Emergency Petroleum Allocation
eee | FP peer re
jaan Energy Administration Act, 15 U.S.C.
PN astra ieee iliresisscvh eucbaes saxbau 2, 22
Robinson-Patman Act, 15 U.S.C. §13 ............... 21
SP OE, EE oc cccpacsveccenseenciven 21
eT sb cece Saccicns bntccdcveeescanent 7, 21
ee EE OE OS sc nk bocesiuws censuses 2,4, 5
EXECUTIVE MATERIALS:
38 Fed. Reg. 22536 (August 22, 1973) ............... 5
39 Fed. Reg. 5311 (February 12, 1974) .............. 21
39 Fed. Reg. 32306 (September 5, 1974) ... 5, 6, 16, 21, 22
39 Fed. Reg. 32717 (September 10, 1974) ............ 8
39 Fed. Reg. 42368 (December 5, 1974) ............. 9
39 Fed. Reg. 44407 (December 24, 1974) ............ 9, 25
45 Fed. Reg. 44238 (June 30, 1980) ..............085 9
45 Fed. Reg. 72626 (November 3, 1980) ............. 10
Executive Order No. 12287, 46 Fed. Reg. 9909 (January
Wy. MEE GPA Wbdtaaibe sks cvecdsacednnsseeeons
CONGRESSIONAL MATERIALS:
S. ~~. No. 752, 79th Cong., lst Sess. (1945) reprinted in
dministrative Procedure Act: Legislative ve History
79th Cong., 2nd Sess. (1946) .............. 4, 18, 19
IN THE
Supreme Court of the Anited States
OCTOBER TERM, 1983
No. 83-
MuRPHY OIL CORPORATION,
Petitioner,
Vv.
NAPH-SOL REFINING COMPANY,
Respondent.
PETITION FOR A WRIT OF
CERTIORARI TO THE TEMPORARY
EMERGENCY COURT OF APPEALS
OF THE UNITED STATES
Murphy Oil Corporation respectfully petitions for a writ of
certiorari to review the judgment of the Temporary Emergen-
cy Court of Appeals in Naph-Sol Refining Company v. Mur-
phy Oil Corporation, No. 6-31, entered on December 20, 1983.’
OPINIONS BELOW
The opinion of the Temporary Emergency Court of Appeals
is not yet reported, but is reproduced in the Appendix as Pet.
App. A (la-43a). The opinion of the United States District
Court for the Western District of Michigan is reported at 550
F. Supp. 297 (W.D. Mich. 1982). Pet. App. B (44a-65a). The
! The court of appeals consolidated oral argument of this case, No. 6-31,
with Mobil Oil Corporation, et al . v. Department of Energy, No. 2-40,
(N.D.N.Y. 1982) and issued a single opinion in both cases. The caption of this
Petition contains the names of all parties to the proceeding whose judgment
is sought to be reviewed. The U.S. Department of Energy filed a brief
amicus curiae in the court of appeals. A listing of Murphy’s non-wholly-
owned subsidiaries and affiliates, required by Rule 28.1 of this Court's Rules,
is set forth in the Appendix to this Petition as Pet. App. G (117a).
2
decision of the United States District Court for the Northern
District of New York in the companion case of Mobil Oil
Corporation, et al. v. Department of Energy is reported at 547
F. Supp. 1246 (N.D.N.Y. 1982). Pet. App. C (66a-110a).
JURISDICTION
The court below entered judgment on December 20, 1983,
Pet. App. D (111la), and a timely petition for rehearing and
suggestion for rehearing en banc was denied on February 10,
1984, Pet. App. E (112a). The jurisdiction of this Court to
review the judgment below is invoked under Section 211(g) of
the Economic Stabilization Act (“ESA”), 12 U.S.C. § 1904
note, as incorporated in Section 5(a)(1) of the Emergency Pet-
roleum Allocation Act (“EPAA”), 15 U.S.C. § 754(a)(1), and 28
U.S.C. § 1254(1).
STATUTES AND REGULATIONS INVOLVED
The pertinent provisions of the Administrative Procedure
Act (“APA”), 5 U.S.C. § 558, the Federal Energy Administra-
tion Act (“FEAA”), 15 U.S.C. § 766(i)(1), and the equal
application/deemed recovery rule, 10 C.F.R. § 212.83(e)(1)
(1975), are reprinted in the Appendix as Pet. App. F (113a-
116a).
STATEMENT OF THE CASE
Naph-Sol Refining Company (“Naph-Sol”) brought this ac-
tion pursuant to Sections 210 and 211 of the ESA, as incorpo-
rated in Section 5(a) of the EPAA, claiming the right to recover
price “overcharges” allegedly incurred in its purchases of re-
fined petroleum products from Murphy Oil Corporation (“Mur-
phy”) during the period October 1973-January 1981. Naph-Sol
contended that Murphy's prices were in excess of the max-
imum allowable prices permitted under the refiner price rules
of the Mandatory Petroleum Price Regulations, 10 C.F.R.
§ 212.81 et seq., including a rule known as the “equal
application/deemed recovery” rule.? The equal application/
2 Naph-Sol’s complaint also contained other allegations of regulatory and
contractual violations. These other counts are not relevant here.
3
deemed recovery rule was published by a predecessor of the
Department of Energy on September 5, 1974, without prior
notice or an opportunity for public comment. The rule imposed
substantial penalties on petroleum refiners (and resellers)
which, in response to competition and improving supply condi-
tions, charged prices below maximum allowable levels to some,
but not all, of their customers. The basis for the agency’s
determination that it could adopt the rule without first provid-
ing notice and an opportunity for public comment was its
unsupported speculation that advance notice of the proposed
amendment would “:ighlight” alleged “ambiguities” in the ex-
isting regulations, which could lead some sellers to take advan-
tage of the “ambiguity” by lowering prices to some, but not all,
of their customers, a practice which the agency believed would
be “injurious to the public welfare.”
The district court, consistent with the decisions of the chief
judges of the two other district courts that had independently
reviewed the equal application/deemed recovery rule, held
that the agency’s failure to follow proper rulemaking proce-
dures invalidated the regulation. The district court found that
circumstances at the time did not rise to the level of an
emergency which would have justified waiver of notice and
comment procedures. The district court also rejected the argu-
ment that the equal application/deemed recovery rule was
“repromulgated” in a rulemaking commenced on September
10, 1974 and concluded on December 5, 1974, holding that the
December 5 publication did not contain an adequate statement
of the basis and purpose for retaining the rule.
The Temporary Emergency Court of Appeals (“TECA”)
reversed the decision of the district court. According “extreme
deference” to the agency’s “forecast” concerning the potential
adverse consequences of giving advanced notice of the pro-
posed rule, TECA concluded that the agency had good cause
for dispensing with public rulemaking procedures. In so doing,
TECA allowed the agency to support its position with material
outside the record of the September 5, 1974 rulemaking.
TECA also held that, even if the September 5, 1974 promulga-
4
tion was procedurally invalid, its infirmities were “cured” by
the September 10, 1974 rulemaking which, in the Court’s opin-
ion, resulted in the “repromulgation” of the equal application/
deemed recovery rule on December 5, 1974. Moreover, TECA
held that the absence of an explicit statement of the rule’s basis
and purpose was not fatal to the December 5, 1974
“repromulgation” since the agency’s reasons for repromulgat-
ing the rule were “reasonably clear” to the court notwithstand-
ing the lack of any explanatory material contained in that
notice. In a notice published later in December 1974, however,
the agency noted that it had not yet decided what to do about
the September 10 proposal.
Murphy filed a Petition for Rehearing and a Suggestion for
Rehearing En Banc on January 23, 1984. TECA denied that
petition on February 10, 1984. Pet. App. E (112a).
A. Regulatory Background
While the details of the refiner price rules are complex, the
theory of their operation is relatively simple.’ Through a com-
plicated formula which allowed refiners to pass through their
increased costs, the regulations established maximum prices
that refiners could charge in their sales of “covered products,”
including motor gasoline.‘ The regulations, however, did not
require refiners to charge the maximum prices allowed under
3 A detailed explanation of the operation of these regulations is set forth in
the opinion of the court of appeals. Pet. App. A (4a-12a) Basically, the
regulations provided that a refiner “could not charge any class of purchaser a
price in excess of the base price” of a particular covered product, except
under certain circumstances not relevant here. 10 C.F.R. § 212.82 (1975).
The “base price” of a covered product was “the weighted average price at
which the item was lawfully priced in transactions with the class of purchaser
concerned on May 15, 1973, plus increased product costs incurred between
the month of measurement and the month of May 1973 .. .” 10 C.F.R.
§ 212.82(f)(1)i1975).
‘The price rules governing gasoline prices were promulgated in 1973, 38
Fed. Reg. 22536 (August 22, 1973), and were rescinded by President Reagan
on January 27, 1981, Executive Order No. 12287, 46 Fed. Reg. 9909 (January
30, 1981).
5
the refiner price rules or to recover all of their increased costs
immediately after they were incurred. Rather, a refiner was
entitled, once it established its maximum prices for sales of a
covered product, to charge those prices or any lower price. Ifa
refiner charged prices lower than the maximum, or for some
reason was unable to recover all of its increased costs in its
actuai selling prices, the refiner was entitled to carry forward,
or “bank,” its unrecovered increased costs for inclusion in the
computation of maximum prices for the next month. 10 C.F.R.
§ 212.83(e)(1)(1975). The ability to bank increased costs for
future recovery meant that custs need not be passed on to
consumers immediately. The banking of unrecovered in-
creased costs lies at the heart of Naph-Sol’s claims that it was
overcharged by Murphy under the equal application/deemed
recovery rule.
1. The September 5, 1974 promulgation of the equal
application/deemed recovery rule.
On September 5, 1974, the Federal Energy Administration
(“FEA”), a predecessor to the Department of Energy, prom-
ulgated an amendment to the banking regulation without
providing prior notice or an opportunity for public comment. 39
Fed. Reg. 32307 (September 5, 1974). The amendment, known
as the “equal application/deemed recovery” rule, penalized
refiners and resellers which charged prices below maximum
allowable levels to some customers while charging higher (i.e.,
up to the maximum) prices to other customers. The rule gener-
ally provided that, in calculating the amount of increased costs
available for passthrough in succeeding months, a refiner (or a
reseller) was to pretend that the highest increment of in-
creased costs included in the price charged to any one customer
of a covered product was included and recovered (albeit
fictitiously) in the prices charged to all customers of the prod-
uct.® This deeming of fictitious cost recoveries reduced the
amount of unrecouped increased costs that could be banked
5 The full text of the September 5, 1974 amendment is reprinted at Pet.
App. F (115a-116a).
6
and included in prices charged in future months. The effect of
the equal application/deemed recovery rule, then, was to pre-
clude a seller from ever recovering a portion of the increased
costs it had incurred.
In promulgating the equal application/deemed recovery
rule, FEA resorted to its frequent practice of waiving prior
notice and an opportunity for public comment on the basis of an
alleged emergency. This “emergency” was claimed to have
arisen because: (1) the agency had “only recently” learned that
sellers, responding to increased supplies, were charging prices
below maximum allowable levels that did not reflect an equal
application of costs among different classes of purchaser; (2)
immediate action remedying “current ambiguities in the
regulations” was necessary to stop “circumvention of FEA
regulations”; and (3) notice and comment procedures, by
“highlighting” the regulatory “ambiguities,” would enable sel-
lers to “take advantage of’ the ambiguities during a comment
period. 39 Fed. Reg. at 32307. The agency then simply
asserted, without explanation or factual support, that the
“continuation or initiation” of the pricing practices at issue
would be “injurious to the public welfare, in view of the number
of cireumventions of FEA regulations and substantial com-
pliance difficulties which would result.” Jd.
2. The purpose and effect of the equal application/deemed
recovery rule.
By imposing substantial penalties for unequal cost pass-
throughs, the equal application/deemed recovery rule sought
to discourage the allegedly discriminatory pricing practice per-
mitted by the existing regulations, wherein suppliers could
reduce prices to certain customers while charging other cus-
tomers higher prices up to the maximum permitted by the
regulations. 39 Fed. Reg. 32306, 32307 (September 5, 1974).°
5 Notwithstanding this claim, it is clear that the agency’s existing regula-
tions, as well as the anti-trust laws, already prohibited such pricing prac-
tices. For example, 10 C.F.R. § 210.62(b) prohibited “any form of dis-
crimination among purchasers” which had “the effect of frustrating or
impairing the objectives [of the EPAA].”
7
Although the rule ostensibly intended only to prevent price
discrimination, the rule turned out to be much more onerous
since it apparently also penalized sellers which mistakenly or
inadvertently increased some prices more than they increased
other prices. This inequitable (and apparently unintended)
result of the equal application/deemed recovery rule is vividly
illustrated by Naph-Sol’s allegations that it was overcharged
by Murphy in violation of the regulation.
Naph-Sol’s “overcharge” claims are not based on any sales in
which it was a disfavored customer that was discriminated
against by Murphy as a result of having been charged prices
which reflected a disproportionate amount of Murphy’s in-
creased costs. Quite the contrary. Naph-Sol insists that it is
entitled to a refund because Murphy accidentally charged other
customers prices which included a higher cost increment than
the prices which Murphy charged Naph-Sol.’ Under this theo-
ry, Murphy is deemed to have recovered the higher increment
of increased costs mistakenly charged to other customers in its
sales to ail customers, including Naph-Sol. This deeming of
fictitious cost recoveries retroactively reduces (and frequently
eliminates) the banks of unrecouped increased costs which
Murphy had available to support the prices it charged Naph-
Sol.
3. The September 10, 1974 proposed rulemaking.
Just five days after it adopted the equal application/deemed
recovery rule, FEA, ina notice of a proposed “comprehensive
7This occurred because some independent businessmen who were
Murphy-branded commission dealers and bulk plant operators occasionally
disregarded Murphy’s pricing guidelines and charged prices in excess of
those authorized by Murphy. Where such transgressions were identified,
Murphy typically ordered the offender to reduce prices in a subsequent
period in order to refund the overrecovery to those customers which re-
ceived the unauthorized price increase. Supplemental Appendix on appeal at
000049-50, 000067-69, 000075, 000126-127.
8
revision” to the price regulations, expressed its awareness
that the equal application/deemed recovery rule:
is responsible for an inflexibility in the price regulations
which becomes more troublesome and causes more dis-
locations in the market as supplies of petroleum products
increase and there is greater need for the price mechanism
to begin to play its customary role in the markets.
39 Fed. Reg. 32717 (September 10, 1974). The agency noted,
for example, that the rule “runs counter to the interest of
independent regional marketers” in certain circumstances and
that it “can have results that appear to be at odds with the
objectives of the EPAA.” /d.* Accordingly, the agency there-
fore
concluded that the geste of the equal application
requirement should be modified. . . totake such problems
into account. However, to the extent that the current
requirement serves to protect the independent sector of
the market, FEA has concluded that it must be retained.
Id. FEA then proposed two limited amendments to the equal
application/deemed recovery rule, as well as numerous modifi-
cations to other price regulations.
* The very independent segment which FEA asserted must be protected
by the rule has been the most frequent challenger of it. In Olympian Oil Co. v.
FEA, Civil Action No. C-77-2196-WAI (N.D. Cal., filed September 30,
1977), an independent marketer filed a class action on behalf of all marketers
claiming, inter alia, that the equal application/deemed recovery rule was
procedurally invalid. The district court certified Olympian as a proper repre-
sentative of this class. The two largest associations of independent marke-
ters (The Society of Independent Gasoline Marketers of America and the
National Oil Jobbers Council) participated as amici curiae supporting Olym-
pian.
Independent marketers individually have also challenged the validity of
the deemed recovery rule in litigation, e.g.; Lakes Gas Company v. DOE, 477
F. Supp. 187 (D. Minn. 1979); Western Petroleum Company v. DOE, No.
3-80-626 (D. Minn. 1981), and in DOE enforcement proceedings, e.g.; Impe-
rial Refineries Corp., 9 DOE € 83,035 (1982); St. Louis Fuel and Supply Co.,
10 DOE # 83,004 (1982), on virtually the same grounds as those raised here.
9
4. The December, 1974 notices.
On December 5, 1974, FEA adopted several of the changes
to the price regulations it had proposed on September 10, 1974
and, in publishing the amended regulations, republished the
equal application/deemed recovery rule without modification.
39 Fed. Reg. 42368 (December 5, 1974). The regulatory pream-
ble made no mention of the rule or any comments received in
response to the agency’s September 10 proposals to amend the
rule. Instead, the preamble stated that “those possible revi-
sions which have not been acted on continue to be under active
consideration.” Jd. Nineteen days later, in a notice adopting
several more of the amendments proposed on September 10,
1974, FEA specifically stated that it had “not yet completed its
analysis of [the September 10) proposal” to modify the equal
application rule. 39 Fed. Reg. 44407, 44410 (December 24,
1974).
5. The November 3, 1980 revocation of the equal
application/deemed recovery rule.
After FEA adopted the equal application/deemed recovery
rule, it was criticized for discouraging refiners and resellers
from competitively reducing their prices. This criticism con-
tinued until the Department of Energy (“DOE”) finally pro-
posed to eliminate the rule in its entirety. 45 Fed. Reg. 44238
(June 30, 1980). After considering the comments of interested
parties, including many independent marketers and the Anti-
trust Division of the Department of Justice (which were
adverse to the rule), DOE revoked the equal application/
deemed recovery rule for all sales of gasoline, concluding that
“by reducing the regulatory restraints associated with the
equal application rule, we are fostering competition in the
marketplace, minimizing regulatory interference with market
mechanisms, and promoting economic efficiency.” 45 Fed.
Reg. 72626, 72628 (November 3, 1980).
B. The Decision Of The District Court
On October 1, 1982, Judge Douglas W. Hillman granted
summary judgment in favor of Murphy on Naph-Sol’s equal
10
application/ deemed recovery rule violation cause of action,
holding that Naph-Sol was not entitled to recover overcharges
since the equal application/ deemed recovery rule was
procedurally invalid. The district court concluded that the
agency lacked good cause to issue the rule without notice or
comment, finding that “there were no compelling circum-
stances surrounding the discriminatory pricing practices cited
by the agency, or discernible to this Court, to justify waiver of
formal rulemaking procedures.” 550 F. Supp. at 322-333, Pet.
App. B (60a).° Judge Hillman rejected as pure speculation
Naph-Sol’s argument that pricing decisions by sellers during a
brief notice and comment period would have had a severe
economic impact on the national economy. Additionally, the
district court held that the equal application/deemed recovery
rule was not validly repromulgated since the December 5, 1974
rulemaking did not include an adequate statement of the basis
and purpose for retaining the rule, as required by 5 U.S.C.
553(c). § 550 F. Supp. at 325, Pet. App. B (64a).
3. The Decision Of The Court Of Appeals
On appeal, TECA reversed the district court’s decision and
the decision in the Mobil case. TECA excused the agency’s
waiver of the notice and comment procedures required by
Congress based solely on the agency’s unsupported
speculation—which TECA declined to “second guess”—that
adverse consequences might flow from the act of notice. Pet.
® Chief Judge Devitt in Lakes Gas Co. v. DOE, 477 F. Supp. 187(D. Minn.
1979), and Chief Judge Munson in Mobil Oil Corp. et al. v. DOE, 547 F. Supp.
1246 (N.D.N.Y. 1982), also had previously reached the same conclusion. In
the Mobil decision, Judge Munson, after a thorough examination of the
rulemaking record, concluded that:
To maintain that an agency action in furtherance of regulatory objec-
tives amounts to “ cause” would be to en the general rulemak-
ing requirements onto the exception. In order to have warranted this
suspension of normal rulemaking procedures under the “ cause”
exception, there must have been some type of exigency. Here, there
[were] no compelling circumstances surrounding the discriminatory
pricing practices cited by the agency.
547 F. Supp. at 1269, Pet. App. C (107a-108a).
1]
App. A (29a-31a). Thus, without engaging in any independent
review of the record to determine if the agency’s fears were
justified, TECA simply accorded “special deference” to the
agency’s “predictive judgment” that a notice period would be
harmful. Jd. at 30a. Moreover, since the explanation given by
the agency in the September 5, 1974 notice clearly was inade-
quate to support a “good cause” finding, TECA looked to
materials outside the September 5, 1974 record to find good
cause for excluding the public from the rulemaking process,
including the agency’s subsequent proposal to modify the rule
and the post hoc rationalizations of the agency’s litigation coun-
sel. Pet. App. A (27a, 30a-32a).
TECA further held that, even if the September 5, 1974
promulgation of the equal application/deemed recovery rule
was procedurally invalid, any infirmities were “cured” by the
rulemaking commenced on September 10, 1974 and concluded
on December 5, 1974. Pet. App. A (33a). TECA found that the
agency’s September 10 proposal to amend the equal
application/ deemed recovery rule also constituted a proposal
to abolish the equal application/deemed recovery rule. /d. at
34a. Based on this determination, TECA concluded that refin-
ers had been given an opportunity “to urge (the rule’s) repeal.”
Id. at 35a. In other words, the agency on September 10, 1974
had concluded that the rule was both sufficiently necessary
that emergency rulemaking procedures could be invoked and
sufficiently detrimental that the rule should be abolished.
Finally, TECA found that the agency had set forth in the
December 5, 1974 preamble a sufficient statement of the basis
and purpose for repromulgating the equal application/deemed
recovery rule, despite the fact that the agency in that notice
never mentioned the rule, any comments received, or any
reasons for retaining the rule. Pet. App. A (36a-38a). TECA
concluded that even a “non-existent” basis and purpose state-
ment is adequate where “the agency’s path may reasonably be
discerned” by the reviewing court. /d. at 37a. In the opinion of
the court of appeals, the agency’s reason for retaining the equal
12
application/deemed recovery rule was “reasonably clear.”
Ibid.”
REASONS FOR GRANTING THE WRIT
In a departure from its narrow jurisdiction over certain
energy matters, the Temporary Emergency Court of Appeals
has written an opinion that will widely affect rulemaking
proceedings under the Administrative Procedure Act. Revers-
ing two district courts, the court of appeals recognized that it
was greatly expanding the circumstances in which an agency
may find “good cause” to adopt a regulation without notice,
opportunity for comment, or public participation. At the same
time, the court of appeals held that an agency may support its
finding of good cause with material and government counsel’s
arguments outside of the “statement of reasons” that the Ad-
ministrative Procedure Act, 5 U.S.C. § 553(b)(B), provides
must accompany the publication of a regulation adopted with-
out notice or comment. To compound the problem, the court of
appeals announced a doctrine of “extreme deference” to the
agency’s subsequently developed rationale on judicial review,
thus further reducing the accountability of agencies that dis-
pense with notice and comment.
The court also sought to buttress its conclusion by holding
that the rule in question was subsequently validly adopted
following notice and comment. But when the rule was reissued,
the agency failed to provide any statement of basis and purpose
(required by 5 U.S.C. § 553(c)) concerning it. The court of
appeals upheld the repromulgation, holding that it could
nonetheless “discern” what the agency’s rationale was. This
conclusion flies in the face of this Court’s decision in Motor
This conclusion contradicts the contemporaneous agency statement,
made nineteen days after the December 5, 1974 amendmenis, that it had not
yet completed its analysis of the September 10, 1974 proposal to modify the
equal application/deemed recovery rule. Although Murphy pointed out this
inconsistency to the court in its Petition for Rehearing, TECA denied the
Petition without commenting on the discrepancy. Pet. App. E (112a).
13
Vehicle Manufacturers’ Association v. State Farm Mutual
Automobile Insurance Co., 103 S. Ct. 2856 (1983).
Certiorari is warranted for two reasons. First, the court of
appeals’ holdings conflict with those of other courts of appeals
and this Court. Second, the expansion of agencies’ ability to
adopt rules without public participation, and the simultaneous
and severe constriction of the scope of judicial review of such
agency actions, are of profound importance to the administra-
tion of the Administrative Procedure Act.
I.THE COURT OF APPEALS HAS IMPROPERLY
EXPANDED THE SCOPE OF SECTION 4(b)(B) OF THE
ADMINISTRATIVE PROCEDURE ACT, 5 U.S.C. § 553(b)(B).
Section 4(b)(B) of the Administrative Procedure Act, 5
U.S.C. § 553(b)(B), permits a federal agency to adopt a regula-
tion without first providing notice and an opportunity for pub-
lic comment when it finds that notice and comment are “im-
practicable, unnecessary, or contrary to the public interest”
and “incorporates the finding in a brief statement of reasons
therefor in the rules issued.” The court of appeals largely did
away with agencies’ statutory obligation to explain the basis
for their findings under this section and the courts’ obligation
to review the justification of that use. These holdings conflict
with holdings of other courts of appeals, and at least with the
reasoning of this Court’s holding in Motor Vehicle Manufac-
turers’ Assn. v. State Farm Mutual Automobile Insurance
Co., 103 S. Ct. 2856 (1983). Moreover, the decision is of great
importance because of the pervasive role of notice-and-
comment rulemaking and the ever-present temptation to agen-
cies to act without public participation and without explaining
the basis for their actions. This Court has spoken strongly on
these subjects in Motor Vehicle Manufacturers’ Association,
where the agency had purported to follow the notice-and-
comment procedures. However, Motor Vehicle did not discuss
the use of section 553(b)(B) of the APA to avoid notice and
comment altogether. The decision of the court below, unless
reversed, will surely be relied upon by agencies seeking to use
14
the good cause exception as the “escape clause” from the
notice-and-comment requirements that Congress feared. S.
Rep. No. 752, 79th Cong., Ist Sess. (1945), reprinted in Admin-
istrative Procedure Act: Legislative History, 79th Cong., 2d
Sess. at 200 (1946).
A. The Court Of Appeals Upheld Use Of Section 553(b)(B)
Even Though The DOE Had Not Provided A Statement
Of Reasons That Supported Its Conclusion That Notice
And Public Comment Were Against The Public In-
terest.
A clear and explicit requirement of section 553(b)(B) is that a
federal agency invoking it “incorporate[ ] the finding in a brief
statement of reasons therefor in the rules issued... .” The
Ninth Circuit has held that this language means what it says
and that materials not published with the rule should not be
accepted by a court where the statement published with the
rule is missing or inadequate. Buschmann v. Schweiker, 676
F.2d 352, 356-357 (9th Cir. 1982). Accord, Kelly v. United
States Department of Justice, 339 F. Supp. 1095, 1100-1101
(E.D. Cal., 1972) (3-judge court). As Judge Friendly has ex-
pressed it for the Second Circuit:
Congress could well have wished to require an agency to
address its mind to whether a case fell within the excep-
tions before it committed itself to final regulations, not
after it had done so without —- with 5 U.S.C.
§ 553(b) and (c) procedures and thereby created a need for
self-justification.
National Nutritional Foods Assn. v. Kennedy, 572 F.2d 377
(2d Cir. 1978) (dictum).
In the present case, the court of appeals held the opposite; it
explicitly upheld the DOE’s position on the basis of material
that was not published along with the regulation on September
5, 1974.
The court did this in two ways. First, it acknowledged that
the September 5 regulatory preamble made no mention of who
would be injured by promulgation of a proposed rule or how
15
that injury could occur. Pet. App. A (32a). It held, however,
that something the agency later said could fill in this gap in the
preamble. /bid. This flatly contravenes the requirement of
section 553(b)(B) that the explanatory statement of reasons be
“incorporate[d] . . . in the rules issued.” The court of appeals
sought to excuse this violation of the statute by pointing out
that the statement that it used to supplement the inadequate
September 5 preamble was issued by DOE only five days later,
on September 10, as part of the notice of a proposal to modify
the deemed recovery rule; the court said that this was a “con-
temporaneous statement,” and not “made for litigation.” Pet.
App. A (82a).
In addition to simply departing from the terms of the stat-
ute, the difficulty with this approach is obvious. The Septem-
ber 10 notice says nothing about the decision to adopt the
deemed recovery rule without notice and comment. It does not
purport to support that issuance. There is no way of knowing
from the record whether the material in the September 10
proposal was thought by the agency at the time to support the
September 5 decision to adopt the rule without notice and
comment. Thus, while the September 10 preamble may not be
“made for litigation,” the government’s decision to offer it as
pertinent to and supportive of the earlier promulgation is not
supported in the record and was “made for litigation.” It is the
argument of the agency’s litigation counsel alone that identifies
matters in the September 10 preamble as supporting the Sep-
tember 5 decision."' This is impermissible. See Motor Vehicle
Manufacturers Assn, supra, 103 S. Ct. at 2870; cf. Citizens To
Preserve Overton Park v. Volpe, 401 U.S. 402, 419 (1971).
The second improper way in which the court of appeals
upheld the September 5 rulemaking was by relying on asser-
tions from DOE counsel that were not reflected in the record
And, as we show below (at fn. 12), agency counsel only adopted this
rationale after it became clear that the agency’s original rationale—that
actually expressed in the September 5 publication—proved to be legally
inadequate.
16
anywhere. All the agency said on September 5 was that “an-
nouncement of these amendments as proposals would highlight
current ambiguities in the regulations and could result in sel-
lers seeking to take advantage of that ambiguity or of the
contract exception to the regulations.” 39 Fed. Reg. at 32307.
The September 10 statement said coincidentally that the rule,
the agency thought, would serve to protect independents and
unspecified areas of the country. The agency’s counsel made
arguments that went much further than these bland state-
ments, and the court of appeals accepted them. It found that, if
a proposed rule were issued, refiners could “threaten the
competitive viability of the independents” by “passing through
proportionately greater costs to independent outlets.” Pet.
App. A (27a). The court also held that “refiners would seek to
take advantage of the ‘contract exception’ to the deemed recov-
ery rule and ‘grandfather in’ unequal cost pass-throughs to
refiner operated stations by entering into long-term con-
tracts.” Jd. It concluded that “severe market dislocations and
erosion of the class of purchaser scheme so central to the Price
Regulations” would result from notice and an opportunity for
public comment. /bid.
None of these dire results was predicted or referred to by the
agency either in the preamble accompanying the promulgation
of the rule, the September 10 preamble, or anywhere else,
before this issue began to be litigated. Neither preamble
2 The public record shows that agency counsel concocted this explanation
relatively recently. In 1979, in defending the validity of the deemed recovery
rule against a refiner’s procedural attack in Coastal Corp. v. DOE, No.
78-549 (D. Del.), the government used reasoning drawn directly from the
September 5, 1974 promulgation: “the agency specifically found that an
emergency situation existed which required immediate guidance to prevent
circumvention of regulations central to the realization of EPAA objectives.”
DOE Brief on Summary Judgment at 28. TECA then disapproved this
“immediate guidance” rationale in another context (Mobil Oil Corp. v. De-
partment of Energy, 610 F.2d 796 (TECA 1979, cert. denied, 446 U.S. 37
(1980)); see Pet. App. A (28a fn. 19). DOE then settled the Coastal case.
Thus, the rationale accepted by the court of appeals in the present case was
not only net present in the preamble to the promulgation of the original rule,
it was not even formulated by the agency’s counsel until after it was clear
that the original “immediate guidance” rationale would not work.
17
mentions, or even hints, at threats to “competitive viability,”
“severe market dislocations,” or the other results conjured up
by the government and accepted by the court. Yet it is these
unsupported conclusions, rather than what is in the record, on
which the court relied in sustaining the agency.Pet. App. A
(27a, 30a-31a). Even the court of appeals did not hold that the
bare record supports the action."
B. The Court Of Appeals Impermissibly And Unnecessari-
ly Broadened The Scope Of The “Good Cause” Excep-
tion.
The court of appeals also ignored other major restraints on
the exercise of authority under section 553(b)(B). In doing so,
it clearly placed itself at odds with the uniform interpretation
of the section by other courts of appeals.
In enacting the Administrative Procedure Act, Congress
provided only very limited circumstances in which an agency
might avoid the general, and clearly beneficial, obligation to
provide public notice and obtain comment from affected per-
sons before issuing a final rule. Congress insisted that there be
a true necessity or emergency and that “the due and required
execution of agency functions would be unavoidably pre-
vented by its undertaking public rulemaking proceedings.” S.
Rep. No. 752, 79th Cong., Ist Sess. (1945); reprinted in Admin-
istrative Procedure Act: Legislative History, 79th Cong., 2d
Sess. at 200 (1946) (emphasis added). Thus, the situation must
be so threatening that an agency must have no choice but to
'8 The court of appeals did offer the assertion that the agency is entitled to
deference in assessing and predicting impacts of its actions. Pet. App. A
(29a-30a). If this was offered in support of its extravagant stretching of the
record, the court’s discussion misses the point completely. The agency’s
reasons for avoiding notice and comment, whether those reasons be predic-
tive or not, must be stated “with the rule” when it is published. Here the
court of appeals gave deference not to the reasons the agency gave for
dispensing with public notice and comment when the rule was promulgated;
rather the court deferred to the additions to and elaborations of the published
record that were provided by the agency’s litigation counsel.
18
adopt a rule immediately, without time for public notice and
comment, in order for that step to be justified. £.g., United
States Steel Corporation v. Environmental Protection Agen-
cy, 649 F.2d 572 (8th Cir. 1981); State of New Jersey v. En-
vironmental Protection Agency, 626 F.2d 1038 (D.C. Cir.
1980); National Nutritional Foods Association v. Kennedy,
572 F.2d 377 (2d Cir. 1978).
The court of appeals here went beyond these holdings, as its
opinion recognizes. Pet. App. A (28a-29a). The court held that
the good cause exception also reaches situations in which no
emergency or exigent circumstances exist at the time the
regulation is issued. Rather, it held, “good cause” can also be
found where the agency believes that issuance of a proposed
rule will create untoward effects. The court held that, where
the “very announcement of a rule can be expected to precipi-
tate activity by affected parties that will harm the public
welfare,” dispensing with public notice and an opportunity for
comment is justified. Pet. App. A (28a). There is no precedent
for this outside of TECA. Indeed, the court itself recognized
that this ruling is a new departure that may “become an all
purpose escape-clause.” Pet. App. A (28a-29a). Agencies can-
not be expected to resist the temptation to claim that a notice of
proposed rulemaking suggesting the existence of a problem or
proposing to curb or to promote some kind of behavior would
itself have an impact on persons who would be adversely
affected should a rule become effective. The broad new
justification for issuance of rules without notice or any oppor-
tunity for members of the public to comment demands review
by this Court.
This is all the more so because there was a way for the agency
both to protect against any injury that might have resulted
from publishing notice and still to engage in the full notice-and-
comment procedure. The agency could have published notice of
the proposed rule, solicited public comment, and provided in
the notice that the effective date of the rule, if adopted, would
be the publication date of the original proposal. This would
have discouraged anyone from taking advantage of the propos-
19
al, while still allowing affected persons to comment on the
proposal and have those comments considered by the agency.
This procedure had been used by the agency, and approved by
the court of appeals, before promulgation of the deemed recov-
ery rule. California v. Simon, 504 F.2d 430 (TECA 1974), cert.
denied, 419 U.S. 1021 (1974).
The court of appeals did not disagree that this device would
have satisfied concerns over persons taking advantage of a
proposal while still permitting notice and comment. Rather,
the court invoked this Court’s decision in Vermont Yankee
Nuclear Power Co. v. Natural Resources Defense Council,
Inc. 4385 U.S. 519 (1978), as forbidding the court of appeals
from so holding. Pet. App. A (81a fn. 21).
This misinterprets the Vermont Yankee holding. As we have
seen, Congress insisted that public notice and an opportunity
for comment be provided unless the agency is “unavoidably
prevented” from doing so. S. Rep. No. 752, supra. If there is a
means for an agency to prevent injury and still provide notice
and comment, then it must use that means. A holding to that
effect would keep the good cause exception narrow and enforce
the availability of the important rights of public participation
provided in the APA just as Congress intended; it would not
add new rights in the manner disapproved in Vermont Yankee.
Congress did not intend that agencies should have a choice of
either providing notice and comment or making the proposal
effective without notice or comment."
“ The court of appeals held, curiously, that Murphy’s argument that the
agency could have solved its problem by making the proposed rule effective,
if finally promulgated, on the date of proposal “proved too much since it
would swallow the good cause exception as we have interpreted it in Nader v.
Sawhill (514 F.2d 1064 (TECA 1975)] and De Rieux v. Five Smiths, Inc. [499
F.2d 1321 (TECA 1974), cert. denied, 419 U.S. 896 (1975)].” Pet. App. A (3la
fn. 21). In those cases, the court of appeals made similar holdings in cireum-
stances that it recognized here were more exigent than those of the present
case. Pet. App. A (29a). But if the effective date device would have allowed
notice and comment without injury to the public, those holdings should be
“swallowed.”
20
C. The Court Of Appeals Drastically And Improperly Lim-
ited Judicial Review.
The court of appeals has also made it too easy for agencies to
invoke the broadened “good cause” exception. The doctrine
will thus become the very “all purpose escape-clause” that the
court was concerned about. The court held that the agency
cannot find good cause to avoid notice and comment unless
publication of a notice would cause a “significant threat of
serious damage to important public interests.” Pet. App. A
(29a). But it immediately watered down that phrase (so that
the facts of this case, in which no such thing was shown, could
be fit in). The court announced a rule of “extreme deference” to
agency predictions and “forecasts” about what kind of injury
could result from announcement of a proposed rule. Pet. App.
A (30a). This represents a major opportunity for agencies to
adopt regulations without providing notice and comment and
to avoid meaningful judicial review.
The undisputed record shows just how uncritical the court of
appeals was in examining the record. First, in September 1974
there already existed an FEA regulation providing that “[n]Jo
supplier shall engage in any form of discrimination among
purchasers of any allocated product.” 10C.F.R. § 210.62(b), 39
Fed. Reg. 5311 (February 12, 1974). Moreover, predatory
Indeed, in Nader v. Sawhill, the court held that it had reached the limit of
the good cause exception of section 553(b)(B). It said that in “less calamitous”
circumstances it would not approve the use of the exception where the
problem was behavior anticipated as the result of publishing a notice of
proposed rulemaking. 514 F.2d at 1068. In the present case, the court of
appeals acknowledged that the circumstances were less calamitous, Pet.
App. A (29a), but appro he avoidance of notice and comment anyway.
This demonstrates the power of the court’s reasoning to extend itself into
less and less urgent circumstances.
‘5 The existence of this regulation banning discrimination by sellers is no
doubt part of the reason why the agency attempted originally to defend the
September 5 promulgation as merely providing “immediate guidance” and
clearing up “ambiguities” in the existing regulations. As pointed out in
footnote 12 above, it was only when it became clear that that line of argument
would fail that agency counsel switched to the new assertions deferentially
accepted here by the court of appeals.
21
pricing and other forms of price discrimination had long been
prohibited by the Sherman Act, 15 U.S.C. § 2, and the
Robinson-Patman Act, 15 U.S.C. § 13. Although these
prohibitions were called to the court’s attention, neither the
agency nor the court explained why publishing notice would
have caused an emergency despite these existing prohibitions.
Second, the condition that the agency asserted gave rise to
the need for the deemed recovery rule was the return of the
supply of crude oil to normal conditions after the end of the
Arab oil embargo period. The agency said—in a classic ox-
ymoron of regulator’s vision—“as the supply situation becomes
more favorable, the incentive to depart from the [regulations]
becomes greater.” 39 Fed. Reg. at 32307 (September 5, 1974).
The practices that the agency feared—suppliers’ cutting prices
to some customers—were normal and beneficial competitive
practices made possible again with a more normal market-
place. The court did not inquire or discuss why a return to more
normal competitive conditions was cause for alarm."
Third, there was a strong indication—utterly ignored by the
court—that the conduct that the agency said it feared from
publication of notice would not in fact have materialized. The
September 5 preamble itself said that “some” sellers already
believed that the regulations did not already prohibit the prac-
tices said to be feared (39 Fed. Reg. at 32307, Col. 1). The
administrative record showed that the agency had known of
such practices for more than-a month anda half before the
‘6 Actually, the court of appeals took refuge in a bit of disingenuousness on
this score. It described the supply situation in September 1974 as “volatile,”
Pet. App. A (30a), suggesting that it was fluctuating. That was incorrect; the
supply situation was steadily improving, and even the agency never claimed
that it was “volatile.” Moreover, such a claim would have been illogical as a
- basis for this rule. A supplier does not cut prices to any customer when
supplies are or threaten to become tight. No “discrimination” occurs in such
circumstances. Rather, the agency here saw the problem as one of maintain-
ing the rigidities of controls when supplies and competitive practices were
getting back to normal.
22 ’
September 5 promulgation of the deemed recovery rule." If
the effects of such behavior would have been as catastrophic as
the court believed, there would have been examples of catas-
trophe adduced in the September 5 preamble or elsewhere, or
some explanation of why they were lacking. The court was
silent on this point as well.
Fourth, unlike other agencies, which are required to provide
30 days after notice for comments, the FEA was allowed by
section 7(i)(B) of the Federal Energy Administration Act to cut
this period to 10 days. Thus, a full rulemaking, with effort by
the agency, could have been completed in less than a month. It
is difficult to imagine how, with normal or near-normal supply,
selective discounting could have the disastrous effects pre-
dicted by the court in such a short time. The court of appeals
paid no attention to this point.
In sum, we submit that the “extreme deference” paid by the
court of appeals to the agency’s rationale effectively abdicates
any significant judicial control or review over the agency’s
extension of the “good cause” rationale, and creates the very
all purpose escape clause to the restrictions of section 553(b)
that the court said it was avoiding.
II. THE COURT OF APPEALS IGNORED THIS COURT’S
HOLDING IN MOTOR VEHICLE MANUFACTURERS’
ASSOCIATION v. STATE FARM MUTUAL AUTO-
MOBILE INSURANCE COMPANY.
The court of appeals (perhaps concerned that its reliance on
the September 5 promulgation was not well placed) sought to
buttress its holding by concluding that on September 10, 1974,
the agency proposed to eliminate the deemed recovery rule,
accepted comments and, having considered the comments,
validly repromulgated the rule as part of a broader promulga-
tion on December 5, 1974. Pet. App. A (33a-38a).
17 Memorandum of Sigmund L. Sklar, head of FEA’s refiner audit unit, of
July 18, 1974. The memorandum described this issue as one “upon which we
now have a position and are prepared to move.” Supplemental Appendix on
appeal at p. 765.
23
In so holding, the court of appeals simply ignored this
Court’s holding in Motor Vehicle Manufacturers’ Association
v. State Farm Mutual Automobile Insurance Co., 103 S. Ct.
2856 (1983) since the regulatory preamble published on Decem-
ber 5 did not mention the deemed recovery rule at all. There
was no “statement of basis and purpose” (as required by 5
U.S.C. § (c)) for adoption of that rule; no comment or issue
raised during the comment period was mentioned. The court of
appeals acknowledged that this was the case, holding that
“even when the basis and purpose statement is cursory, or,
indeed, non-existent, a rule may be upheld when the agency’s
path may reasonably be discerned.” Pet. App. A (37a).
This is directly contrary to this Court’s holding in Motor
Vehicle Manufacturers’ Association that in informal rulemak-
ing “the agency must examine the relevant data and articulate
a satisfactory explanation for its action, including a ‘rational
connection between the facts found and the choice made’ ” 103
S. Ct. 2866-2867 (emphasis added; citation omitted). This
Court also held, quoting SEC v. Chenery Corp., 332 U.S. 194,
196 (1947), that a reviewing court “ ’may not supply a reasoned
basis for the agency’s action that the agency itself has not
given’.” 103 S. Ct. at 2867.
Nonetheless, the court of appeals held that the absence of
any statement from the agency was not fatal since the court
could “reasonably discern{]” why the agency had adopted the
rule despite all the unfavorable comments: “the agency con-
cluded that the needs of regions and independents outweighed
the benefits of price flexibility.” Pet. App. A (37a).
This is unacceptable for two reasons. First, it is no more than
saying that the agency decided to adopt the rule because it
thought that it was better to have the rule than not to have it.
That judgment can always be “discerned” from the fact that
the rule has been adopted. If that is all that is necessary, then
no agency ever need explain why it has adopted a rule or pay
any attention to this Court’s Motor Vehicle Manufacturers’
Association decision again.
24
Second, the record reveals with clarity that the agency had
not even made the hypersimplified conclusion that the court of
appeals “discerned” that it had. Several weeks after the agen-
cy made the December 5 non-statement in which the court of
appeals felt that it could discern the basis for an agency deci-
sion, the agency published another rulemaking, concerning
natural gas liquids, in which it specifically stated that it had
not completed its analysis on the deemed recovery rule propos-
al of September 10 and was not ready to act upon it. Thus, the
decision that the court of appeals thought it could perceive on
December 5 did not exist. To put it mildly, this underscores the
wisdom of this Court’s requirement in Motor Vehicle that an
agency provide an explicit statement explaining what it has
done and that the reviewing courts not supply one where the
agency has not. Nonetheless, the court of appeals’ holding, as
we have shown, provides a road map for avoiding the Motor
Vehicle decision and should be reviewed for that reason.”
'8 The agency said in part on December 24:
The September 10 ne proposed to eliminate the equal application
[i.e., deemed —— ponent except to the extent that it is
necessary to protect the independent sector of the market. The FEA
has not completed its analysts of the September 10 l as to the
pricing ao products [i.e., products refined from crude oil] in
= ut it has conclude that a revision to its lations in this
cemafing ne prices (the limited subject of the December 24
if is appropriate at this time, in light of the special considera-
tions whick affect the pr the prices of this product.
39 Fed. Reg. 44407, 44410 (December 24, 1974; emphasis added). As far as
we are aware, the agency never acted on the deemed recovery rule portion of
the September 10, 1974, proposal. It certainly never said that it was doing
80.
18 Two related points should be made. First, the agency did not argue to
the court of appeals that it had made the decision to promulgate the rule on
December 5; the court of appeals came up with that perception sua sponte.
The December 24 Federal Register announcement was specifically called to
the court of appeals’ attention on petition for rehearing. The court of appeals
denied the petition without comment. Pet. App. E (112a).
Second, the court seems to have drawn some comfort from the fact that
this challenge did not reach it until eight years after promulgation. Pet. App.
A (38a). However, Murphy, as the defendant in this lawsuit, had no control
over when it was sued and, because it believed that it never violated the
equal application rule, could hardly have sued DOE earlier. It would be quite
unfair to deprive Murphy of a defense because of delays beyond its control.
25
III. THIS CASE PRESENTS ISSUES OF GENERAL IM-
PORTANCE NOT LIMITED TO ENERGY REGULA-
TION.
The Temporary Emergency Court of Appeals was ereated
by Congress to provide fast and uniform decisions of issues
arising under the Economic Stabilization Act, 12 U.S.C. § 1904
note, and the Emergency Petroleum Allocation Act, 15 U.S.C.
§ 751, et seg. Bray v. United States, 423 U.S. 73 (1975). The
government has frequently opposed certiorari to this Court on
the ground, among others, that decisions of TECA do not
create general precedent and have little effect outside of that
court. E.g., Energy Resources Group, Inc. v. Hodel, No.
82-628, Brief for the Federal Respondents in Opposition at 7.
Moreover, TECA has been told by the government that this
Court has a “longstanding practice” of denying review of
TECA’s decisions.”
The present case, as we have seen, concerns the Administra-
tive Procedure Act, a statute of great importance applicable to
most federal agencies. TECA has made holdings of broad
significance that will affect all agencies subject to that statute.
Indeed, the government has, on behalf of other agencies,
urged other courts to follow TECA’s decisions interpreting the
APA. See, e.g., Buschmann v. Schweiker, 676 F.2d 352, 357
(9th Cir. 1982); National Nutritional Foods Assocation v.
Kennedy, 572 F.2d 377, 384 (2d Cir. 1978). It will no doubt do
the same with the decision in the present case, which greatly
and unnecessarily expands the ground for avoiding notice and
comment in informal rulemaking and evades the force of this
Court’s holding in Motor Vehicle Manufacturers’ Association.
® Department of Energy v. The Honorable Clarence A. Brimmer, TECA
Nos. 10-40 and 10-41, Opposition to Motion for Stay of Mandate, served
March 29, 1982.
26
CONCLUSION
For the foregoing reasons, we urge this Court to review the
decision of the Temporary Emergency Court of Appeals.
Of Counsel:
H. Y. Rowe
W. Bay.ess Rowe
Murpry O11, CorPporaTIoNn
200 Peach Street
El Dorado, Arkansas 71730
Dated: March 12, 1984
Respectfully submitted,
R. Bruce McLean, P.C.
DANIEL JOSEPH, P.C.
Counsel of Record
Epwarb L. RusBinorr
AKIN, Gump, STRAUSS,
Haver & FEeLp
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
(202) 887-4000
Counsel for Petitioner
Murphy Oil Corporation
la
APPENDIX A
TEMPORARY EMERGENCY COURT OF APPEALS
OF THE UNITED STATES
No. 2-40
MoBIL OIL Corporation, EXXON CORPORATION,
Gutr OIL CORPORATION, and MARATHON OIL CORPORATION,
Plaintiffs-Appelilees,
¥e
THE DEPARTMENT OF ENERGY and JAMES B. EDWARDS,
Defendants-Appellants.
and
No. 6-31
NAPH-SOL REFINING COMPANY,
Plaintiff-Appellant,
v.
Murpny OIL CorPORATION,
Defendant-Appellee.
Appeals From The U.S. District Court For The
Northern District Of New York And The U.S. District
Court For The Western District Of Michigan
(No. 79-CV-11 and No. G79-14-CA6, respectively)
(Argued: April 15, 1983 Decided: December 20, 1983)
Davip A. ENGELS, Department of Energy, Washington, D.C.,
with whom Thomas C. Newkirk, Larry P. Ellsworth, Floyd I.
Robinson, Thomas A. Schweitzer and Dennis M. Moore of the
same agency, were on the brief for the Appellants in No. 2-40.
2a
DONALD B. CRAVEN, Miller & Chevalier Chartered, Washing-
ton, D.C., with whom Jay L. Carlson, James P. Tuite and Scott
E. Pickens of the same firm; Jay W. Wason, Mackenzie Smith
Lewis Mitchell & Hughes, Syracuse, New York; Barbara Fin-
ney, Exxon Company, U.S.A., Houston, Texas; Robert F.
Ochs and J. Ronald Sandberg, Gulf Oil Corporation, Houston,
Texas; Andrew J. Kilcarr and James P. Shaughnessy, Dono-
van Leisure Newton & Irvine, Washington, D.C.; Thomas R.
Trowbridge III, Donovan Leisure Newton & Irvine, New
York, New York; John M. Freyer, Bond, Schoeneck & King,
Syracuse, New York; Charles S. Lindberg and Francis A.
Rowen, Jr., New York, New York; Daniel Joseph, Warren E.
Connelly and Edward L. Rubinoff, Akin, Gump, Strauss,
Hauer & Feld, Washington, D.C.; Donald L. Nicholas, Costel-
lo Cooney & Fearon, Syracuse, New York; and John A. Evans,
Marathon Petroleum Company, Findlay, Ohio, were on the
brief for the Appellees in No. 2-40.
Neva T. Campbell, Schwabe, Williamson, Wyatt, Moore &
Roberts, Portland, Oregon, on the brief for Amici Curiae
Richard W. Dyke, dba Western Stations Co., Colvin Oil Com-
pany and F. O. Fletcher, Inc., dba Fletcher Oil Company;
Steven Schaars and Joan Goldfrank, Collier, Shannon, Rill &
Scott, Washington, D.C., on the brief for Amici Curiae Go-
Tane Service Stations, Inc., Kickapoo Oil Company, Inc. and
Lake Shore Oil Company; James F. Flug and Mark Hessel,
Lobel, Novins & Lamont, Washington, D.C. on the brief for
Amici Curiae Attorneys General of Michigan, Alabama, IIli-
nois and Pennsylvania, and the Controller of California; and
Charles W. Petty, Jr., Anthony J. Thompson, Charles E.
Sliter, Robert F. Reklaitis and Janet E. Pitterle, Hamel, Park,
McCabe & Saunders, Washington, D.C. on the brief for Ami-
cus Curiae Growmark, Ine., in No. 2-40.
WILLIAM H. Bopbe, Spriggs, Bode & Hollingsworth, Washing-
ton, D.C., with whom John E. Varnum and Tobey B. Marzouk
of the same firm, were on the brief for the Appellant in No.
6-31.
3a
DANIEL JOSEPH, Akin, Gump, Strauss, Hauer & Feld, Wash-
ington, D.C., with whom R. Bruce McLean, Edward L. Rubi-
noff and Phyllis R. Anderson of the same firm; William K.
Holmes, Warner, Norcross & Judd, Grand Rapids, Michigan;
and H. Y. Rowe and W. Bayless Rowe, Of Counsel, Murphy
Oil Corporation, E] Dorado, Arkansas, were on the brief for
the Appellee in No. 6-31.
Thomas C. Newkirk, Larry P. Ellsworth, David A. Engels,
Floyd I. Robinson, Thomas A. Schweitzer and Dennis M.
Moore, Department of Energy, Washington, D.C., on the brief
for Amicus Curiae The United States Department of Energy
in No. 6-31.
Before METZNER, PECK and Lacey, Judges.
LACEY, Judge.
INTRODUCTION
The Department of Energy (“DOE”) and Naph-Sol Refining
Co. (“Naph-Sol”) appeal from orders entered by, respectively,
the District Court for the Northern District of New York and
the District Court for the Western District of Michigan that,
inter alia, invalidated the “deemed recovery rule” as
procedurally defective. Mobil Oil Corp. v. DOE, 547 F. Supp.
1246 (N.D.N.Y. 1982),' is a declaratory judgment action
brought to challenge the validity of a “three cent” retail price
equalization rule and, alternativly, of the “deemed recovery
rule.” Naph-Sol Refining Co. v. Murphy Oil Corp., 550 F.
Supp. 297 (W.D. Mich. 1982), is an action for recovery of
overcharges with respect to Naph-Sol’s purchase of gasoline
from Murphy Oil Corporation (“Murphy”) at prices allegedly in
excess of those permitted by the petroleum price regulations,
10 C.F.R. pt. 212, including the “deemed recovery rule,” and
by the supply contracts existing between the parties. Al-
' Plaintiffs in Mobil v. DOE are Mobil Oil Corporation, Gulf Oil Corpora-
tion, Exxon Corporation, and Marathon Petroleum Corporation. Unless
otherwise indicated, a reference to Mobil encompasses all these parties.
4a
though, as will become apparent, other issues are also before
this court, the invalidation of the “deemed recovery rule” was
pivotal to both district court rulings and resulted in the con-
solidation of these appeals.
I. BACKGROUND
A. Regulatory Background
We first survey the various regulations involved, deferring
until a subsequent section any detailed presentation of the
procedural aspects of the rulemakings here in issue.
1. Petroleum Price Regulations
Prior to the rulemakings involved here, the Mandatory Pet-
roleum Price Regulations.* 10 C.F.R. pt. 212, established
limitations on the maximum prices refiners could charge in the
2 In November 1973, Congress passed the Emergency Petroleum Alloca-
tion Act (“EPAA”). Pub. L. No. 93-159, 87 Stat. 6280, 15 U.S.C. §§ 751 et
seq. Pursuant to the statute, the President established the Federal Energy
Office (“FEO”) and delegated to it the authority to implement the allocation
and price stabilization provisions of the EPAA. Exec. Order No. 11748, 38
Fed. Reg. 33575 (Dec. 6, 1973). The FEO adopted and republished without
significant alternation the Cost of Living Council’s Phase IV petroleum price
regulations. 3: Fed. Reg. 744, 761 (Jan. 2, 1974); 39 Fed. Reg. 1924 (Jan. 15,
1974). These were the regulations in existence prior to the adoption of the
rules involved in these cases.
On May 7, 1974, the Federal Energy Administration Act (“FEAA”) was
enacted. Pub. L. No. 93-275, 88 Stat. 97, 15 U.S.C. §§ 761 et seg. In June
1974, the President abolished the FEO and replaced it with the Federal
Energy Administration (“FEA”). Exec. Order No. 11790, 39 Fed. Reg.
23185 (June 27, 1974). The FEA was a predecessor to the Departm, °t of
Energy (“DOE”), which was established in 1977, pursuant to the Depart-
ment of Energy Organization Act, Pub. L. No. 95-91, 91 Stat. 567, 42 U.S.C.
§§ 7101 et seg. Federal control of the price and allocation of petroleum
products was discontinued on January 28, 1981. Exec. Order 12287, 46 Fed.
Reg. 9909 (Jan. 30, 1981).
In text, regulations are cited to the first edition of C.F.R. in which they
appear. Between 1973 and 1981 some of the regulations underwent amend-
ments not relevant to the challenges in this case.
5a
sale of “covered products” or of “special products.” such as
motor gasoline.’ Under the “price rule,” a refiner could “not
charge to any class of purchaser a price in excess of the base
price” of the covered product except under certain specified
conditions. 10 C.F.R. § 212.82 (1975). A “class of purchaser”
was defined as “purchasers. . . to whom a person has charged
a comparable price for comparable property or services pur-
suant to customary price differentials between those purchas-
ers. . . and other purchasers... . .” 10 C.F.R. § 212.31 (1975).
One purpose of these price rules was to maintain the supplier-
purchaser relationships as they existed in 1972-73, prior to the
statutory regulation of the petroleum industry.
The “base price” was “the weighted average price at which
the item was lawfully priced in transactions with the class of
purchaser concerned on May 15, 1973, plus increased product
costs incurred between the month of measurement and the
month of May 1978... .”10C.F.R. § 212.82(f) (1) (i) (1975). To
calculate its base price for a given month, therefore, a refiner
had to: 1) establish its classes of purchaser; 2) compute its
increased product costs and apportion these among the various
products it sold; and 3) allocate the increased costs for each
product among its classes of purchasers of that product.
The “refiner cost allocation formula” governed apportion-
ment of increased product costs.‘ As it operated in January
1974, this formula yielded a cents per gallon figure, referred to
as “du,” that represented the maximum amount of increased
product cost that a refiner might apportion to a given special
product:
dw = the dollar increase that a A be applied in the period
“y” (the current month) to the May 15, 1973, selling price
3 “Special products,” with which we ave concerned, included no. 2 heating
oil and 2-D diese! fuel as well as motor gasoline. 10 C.F.R. § 212.31 (1975).
‘ We consider the rules for “special products.” The details of the rules for
non-special products are not pertinent here.
A verbal formulation of the “refiner cost allocation formula” is set out in
note 5 infra.
6a
of the special product . . . to each class of purchaser to
compute the base price to each class of purchaser. .. .
10 C.F.R. § 212.83(c)(2) (1975).
The dw calculation established the maximum increment of
increased product costs a refiner could pass through to each
class of purchaser of a particular special product. Since dj was
a single number, the result of the formula was the equal appli-
cation of increased product costs among classes of purchasers
when the maximum was passed through. This rule was de-
signed to distribute the burden of increased costs as uniformly
as feasible.
The Regulations, however, did not require refiners actually
to charge the base price. In certain market conditions, refiners
might choose to set prices below base price by not immediately
passing on some of the increased product costs. Whether, as of
January 15, 1974, refiners were obligated to pass through
increased product costs equally to each class of purchaser when
selling prices were below base price is a matter in issue.
As noted, the Regulations did not require a refiner to recov-
er all of its increased product costs for a given month in that
month. The “cost bank rule,” 10 C.F.R. § 212.83(e)(1) (1975),
allowed the refiner to carry over, or “bank,” its unrecovered
increased product costs for inclusion in the calculation of base
prices in a later month:
(e) Carryover of costs. (1) If in any month... a firm
charges prices for a special product which result in the
recoupment of less total revenues than the entire amount
of increased product costs calculated for that product pur-
suant to the general formula. . . the amount of increased
products costs not recouped may be added to the May 15,
7a
1973 selling prices to compute the base prices for that
special product for a subsequent month.
Whenever a refiner added previously unrecouped costs to its
current price, of course, it had to reduce its “bank” of these
costs.°
In addition, the refiner could add to the base price certain
increases in non-product costs incurred since May 1973 but
only if the refiner satisfied certain profit margin limitations
and complied with a prenotification procedure that required
advance notice of the proposed price increase to the agency for
its approval. 10 C.F.R. § 212.87 (1975). The sum of the base
price and allowable nonproduct cost increases was the refiner’s
maximum lawful price.
2. April 1974 Three-Cent Rule‘®
The “retail price equalization,” or “three-cent,” rule, prom-
ulgated in April 1974, was a response to an unintended price
disparity that had developed between independent and
5 This carried over unrecouped cost was part of the calculation in figuring
the numerator in the formula for dw. In verbal form, the du formula was as
follows:
total volume
total cost of gasoline total
of crude sold in 3 increased banked product
in period month period costs of increased costs
de = “u" x including + increased + costs = allocable to
period “u” of purchased attrib- gasoline
previous year gasoline in utable to that a
total volume period “u” gasoline refiner had
he ny allocated to
im that products
pemod
the volume of gasoline that the refiner estimates that it will sell in the current
month “u”
See 10 C.F.R. § 212.83 (c) (2) (i) (1975).
* This rule, the “old” three cent rule, and the May 1977 three cent rule, the
“new” three cent rule, are relevant to Mobil v. DOE, but play no part in the
Napk-Sol v. Murphy Oil appeal.
8a
refiner-operated gasoline stations. See 39 Fed. Reg. 12013,
13013-14 (April 2, 1974). In January and February 1974, the
FEO authorized independent and refiner-operated retailers of
motor gasoline to increase their retail selling prices by up to
three cents a gallon to reflect increases in nonproduct costs
incurred in the marketing of gasoline. See 39 Fed. Reg. 809
(Jan. 3, 1974); 39 Fed. Reg. 7795 (Feb. 28, 1974). Since refiner-
operated stations were subject to profit margin and
prenotification restrictions, however, they generally did not
attempt to recover the three cent marketing cost allowance.
As a result, independents were faced with either foregoing the
three cent allowance or being undersold by the refiner-
operated stations.
FEO responded by promulgating an amendment to the re-
finer cost allocation formula for calculating dw:
dw = The dollar increase that may be ree in the period
“4” (the current month) to the May 15, 1973 selling price of
[a be aon product] to each class of urchaser to compute
ase price to each class of purchaser, except that the
‘ilar increase that may be applied in the’ period “u” to the
May 15, 1978 selling aes of gasoline to compute ante _—
prices to the classes of purchaser which pure
at retail from a refiner at service stations penned ee by
py of the — may be “dj.” plus a maximum of
gallon of gasoline provided that, in computing
oe. the numerator of the [general formula] i is reduced ~
an amount equal to the product of the actual amount of
cents per gallon increase added to 2 above multiplied
by the estimated number of gallons o line to be sold
during the period “u” at retail aoenah sorviee stations
operated by employees of the refiner.
10 C.F.R. § 212.83(c)(2) (1975), 39 Fed. Reg. 12013 (April 2,
1974).
The three cent rule thus allowed refiners to pass through an
additional three cents per gallon of increased product costs in
sales of motor gasoline at refiner-operated stations. The rule,
however, did not increase the total amount of increased prod-
uct costs a refiner could recover. The refiner had to subtract
the dollar amount recovered under the three cent rule from the
9a
amount of increased product costs otherwise available for re-
covery under dis.’
3. Deemed Recovery Rule
In September 1974, without prior notice or opportunity for
comment, and in reliance on the “good cause” exception to this
procedural requirement, see 5 U.S.C. § 553 (b)(B), the FEA
promulgated an amendment to the cost bank rule. 39 Fed.
REg. 32306 (Sept. 5, 1974). The amendment, addressing a
supposed “ambiguity” in the Regulations and directed to
preserving “customary price differentials,” id. at 32307, made
explicit that the requirement that refiners pass through in-
creased product costs equally among classes of purchaser ap-
plied to actual, and not just maximum, selling prices. It also
provided for a “deemed recovery” penalty should actual prices
not reflect equal application of costs:
§ 212.83. Allocation of refiner’s increased costs.
(e) Carryover of costs.
(1) ... With respect to each special product. . . when
a firm calculates the amount of in product costs not
recouped, which may be added to the May 15, 1978 selling
prices to compute the base prices for that special product
in a subsequent month, it shall calculate its revenues as
though the greatest amount of increased product costs
actually added to any May 15, 1978 selling price of that
— product and included in the price c to any
class of purchaser, had been added, in the same amount, to
the May 15, 1973 selling price of that special product and
included in the price to each class of purchaser;
except that, where an equal amount of increased product
cost is not included in price charged to a purchaser
because of a price term of a written contract covering the
sale of such product which was entered into on or before
’ Thus, “the cents per gallon increase added to the retail price for gasoline
multiplied by the estimated number of gallons to be sold in the period ‘u’,”
was a separately computed term, to be subtracted from the numerator of the
dw formula set forth in note 5 supra.
10a
September 1, 1974, that portion of the increased product
costs not included in the price charged to such a purchaser
need not be included in the calculation of revenues.
10 C.F.R. § 212.83(e)(1) (1975).
Under the deemed recovery rule, then, the refiner had to
pass through increased product costs uniformly among all
classes of purchaser or suffer a cost recovery penalty. Specifi-
cally, each month the refiner was required to compute its bank
of unrecovered costs as though it had charged all classes of
purchaser the largest increment of increased costs it charged
to any one class of purchaser, even though, in fact, it did not. If
a refiner applied increased costs unequally, thus, it had to
reduce its bank of previously unrecouped costs by an amount
that was larger than the amount of increased costs actually
recouped. The refiner, that is, was “deemed” to have reco-
vered costs it, in fact, did not. By penalizing selective price
increases, therefore, the deemed recovery rule provided an
economic incentive for equal pass through of increased product
costs in actual selling prices.
In the September 5, 1974 rulemaking, the FEA stated that it
intended to hold public hearings regarding propoesd revisions
to the Regulations and that, at that time, it would receive
comments on the deemed recovery amendment. 39 Fed. Reg.
at 32307. On September 10, 1974, the FEA published a notice
of a proposed “comprehensive revision” of the Regulations. 39
Fed. Reg. 32718 (Sept. 10, 1974). The proposed revisions in-
cluded certain modifications of the rules governing equal appli-
cation of increased product costs and the recoupment of unrec-
overed increased product costs. Jd. at 32718-24. The FEA
received oral and written comments on the proposed revisions.
On December 5, 1974, the FEA repromulgated the deemed
recovery rule in its September 5, 1974 form. 39 Fed. Reg.
42368, 42372 (Dec. 5, 1974).
4. May 1977 Three Cent Rule
On January 27, 1977, the FEA published various amend-
ments affecting the pricing of gasoline. One change modified
lla
the definition of du, altering it from a cents per gallon figure toa
total dollar figure of increased product costs that a refiner
could allocate to a given product. 42 Fed. Reg. 5030, 5031 (Jan.
27, 1977). This new definition did not contain the three cent
retail price equalization rule that had been introduced into the
definition of dw in April 1974.
On May 5, 1977, without prior notice or opportunity for
comment, and in reliance on the interpretative rule exemption
to this procedural requirement, see 5 U.S.C. § 553 (b)(A), the
FEA published a “corrective amendment” to the price rule to
replace the “inadvertently omitted” three cent rule:
§ 212.83 Price Rule...
(h) Equal Application among classes of purchaser
(2) Special Rules...
(iv) Retail sales of gasoline by refiners. When a refiner
calculates the amount of increased costs not recouped that
may be added to May 15, 1973, selling prices of gasoline to
compute maximum allowable prices in a subsequent
month, it may, notwithstanding the general rule in para-
ph (b)(1) of this section, compute revenues as though
A) the greatest amount of increased costs actually added
to any May 15, 1978, selling price of gasoline and included
in the price charged to any a of purchaser that purchas-
es gasoline at retail from a refiner at any service station
ti by employees of the refiner had been added to
the May 15, 1973, selling price of gasoline and included in
the price charged to any class of purchaser that purchases
gasoline at retail from a refiner at any service station
Minne by employees of the refiner had been added, in
the same amount (less any actual differential or three
os per gallon, tana is wap te - May 15, 1973
selling prices of gasoline and included in the price charged
to all other classes of purchaser.
10C.F.R. § 212.83(h)(2)(iv) (1978), 42 Fed. Reg. 22881 (May 5,
1977).
The FEA indicated that this new three cent rule was merely
making explicit the equal application requirement, and
12a
deemed recovery penalty, that was implicit in the original
three cent rule. /d.*
In March 1978, Mobil filed a request for a formal interpreta-
tion of the three cent rule. The FEA ruled that, since its
inception in April 1974, the three cent rule was but a “limited”
exception to the equal application requirement. Although it
permitted unequal recovery of increased product costs as be-
tween retail classes of purchaser of motor gasoline as a group
and all other classes of purchaser of gasoline, it did “not autho-
rize any price variations between individual refiner owned
stations without penalty.” Mobil Oil Corp., Interp. no. 78-53,
43 Fed. Reg. 40207 (Feb. 11, 1978), 6 En. Mgmt. [CCH]
§ 56444 (1978). See Atlantic Richfield Co., Interp. 78-36, 43
Fed. Reg. 29541 (June 9, 1978), 6 En. Mgmt. [CCH] § 56,427
(1978).
In the FEA’s view, therefore, whenever, under the three
cent rule, a refiner passed through $.03 of increased product
costs to any one refiner-operated gasoline station, it would be
deemed to have passed through the full $.03 to all refiner-
operated stations even though, in fact, it did not.°
B. Proceedings in the District Courts
In January 1979, Mobil brought an action challenging the
validity of the new three cent rule and, alternatively, of the
September 1974 deemed recovery rule. Mobil’s position was
that by reading an equal application requirement and deemed
8 In this regard, it is notable that the original three cent rule was located in
the section setting forth the refiner cost allocation formula (du), 10 C.F.R.
§ 212.83(c) (1975), while the new three cent rule was placed into the
then-existing equal application provisions in the Regulations, 10 C.F.R.
§ 212.83(h) (1978).
® In this view, the deemed recovery rule would apply to the last term in the
numerator of the dw formula, the three cent rule term, see notes 5 & 7 supra,
such that refiners would be subject to a cost recovery penalty if they passed
through the three cent cost allowance unequally among refiner-operated gas
stations.
13a
recovery penalty into the three cent rule, at least among indi-
vidual refiner operated stations, the new three cent rule did
not merely interpret the Regulations but substantively
changed them. Accordingly, since the FEA did not follow
notice and comment procedures in promulgating it, the new
three cent rule was procedurally defective.
Mobil maintained that, under the rule as promulgated in
April 1974, there was no requirement that recovery of the
three cent allowance be uniform among classes of purchaser or
among refiner operated gasoline stations. Mobil further
argued that the September 4, 1974 deemed recovery rule ap-
plied only to the dw increment and not to recovery of the three
cent allowance. Should the district court have been inclined to
a different view of the effect of the September deemed recov-
ery rule on the three cent rule, Mobil, in the alternative,
argued that the deemed recovery rule itself was procedurally
invalid.
In the district court, the DOE pressed the position that the
September deemed recovery rule by its terms applied to all
increased product costs passed through in actual selling prices,
including the three cent allowance. Thus, whether the three
cent rule contained an equal application requirement and im-
posed a deemed recovery penalty in April 1974 vel non, it did so
in September 1974. The 1977 rule, therefore, was merely an
interpretive elaboration of the existing regulatory scheme.
The DOE additionally maintained that the deemed recovery
rule was validly promulgated in September 1974 under the
“good cause” exception, and, further, validly repromulgated in
December 1974.
The district court agreed with Mobil that, as promulgated in
April 1974, the three cent rule “contained no equal application
requirement pertaining to the pass-through of increased prod-
uct costs... .” Mobil v. Doe, supra, 547 F.Supp. 1246, 1270,
See id. at 1266. The district court, however, never ruled on the
impact of the September 1974 deemed recovery rule on the
l4a
April 1974 three cent rule. Rather, the court invalidated the
deemed recovery rule as procedurally defective.
The court found there was no emergency in September 1974
justifying the FEA’s bypass of the notice and comment proce-
dures. Jd. at 1268-69."° The court also rejected the argument
that the deemed recovery rule was validly repromulgated in
December 1974, finding that the September 10, 1974 notice of
proposed rulemaking was inadequate to inform interested par-
ties that the agency was evaluating the deemed recovery rule
de novo. Id. at 1269.
Since there was no equal application requirement inherent in
the April 1974 three cent rule and the September 1974 deemed
recovery rule was procedurally invalid and, thus, a nullity, the
May 1977 three cent rule effected a substantive change in the
Regulations. Since the FEA promulgated this rule without
following notice and comment procedures, it, too, was
procedurally invalid. For these reasons, the district court en-
tered summary judgment in favor of Mobil.
In January 1979, Naph-Sol brought an action to recover
price overcharges allegedly incurred in its purchase of refined
petroleum product from Murphy Oil Corp. Naph-Sol’s claim
that Murphy’s prices were in excess of the maximum allowed
under the Petroleum Price Regulations was, principally, two
fold."
First, Naph-Sol alleged that the price that Murphy charged
on May 15, 1973 was in excess of that permitted by the parties’
supply contract and, therefore, that Murphy used an unlawful
May 15 price in calculating its maximum allowable price under
the Regulations.
10 We will consider the procedural arguments in detail in Part IV infra.
'! Naph-Sol’s complaint also contained other allegations of regulatory and
contractual violations. These other counts are not relevant to the present
appeal.
l5a
Second, Naph-Sol contended that Murphy computed its sell-
ing pricee in violation of the equal application and deemed
recovery requirements. Thus, Naph-Sol claimed that Murphy
passed through increased product costs unequally and then
computed its cost bank without regard to the deemed recovery
principle. Murphy thereby calculated its prices to purchasers
as though banked, unrecouped cost increases were available to
be passed through when, under the deemed recovery rule,
they were not. This resulted in overcharges to purchasers, of
whom Naph-Sol was one.
On September 17, 1982, the district court granted summary
judgment in favor of Murphy on the unlawful May 15 selling
price claim and, on October 1, 1982, it granted summary judg-
ment to Murphy on the deemed recovery rule violation claim.
The district court ruled, as a matter of law, that the price
Murphy charged Naph-Sol on May 15, 1973 was permissible
under the supply contracts between the parties. There was,
therefore, no contractual violation and, consequently, no regu-
latory violation. Naph-Sol v. Murphy Oil Corp., supra, 550 F.
Supp. at 305-06.
The court also invalidated the deemed recovery rule on
procedural grounds. The court found that no emergency ex-
isted in September 1974. Jd. at 322-23. Additionally, the court
held that the deemed recovery rule was not validly reprom-
ulgated since the December 5, 1974 publication did not incluide
an adequate statement of the basis and purpose for retaining
the rule. Jd. at 323-24. This ruling effectively disposed of
Naph-Sol’s claim that it was entitled to recover for over-
charges due to Murphy’s violation of the deemed recovery rule.
II. STANDARD OF REVIEW
The judicial review provisions of § 211(d) (1) of the Economic
Stabilization Act, 12 U.S.C. § 1904 note, which were incorpo-
rated into the Emergency Petroleum Allocation Act by 15
U.S.C. § 754(a)(1), limit the scope of our review to a
determination of whether regulations were issued in excess of
agency authority, are arbitrary or capricious, or otherwise not
l6a
in accordance with law under the criteria set forth in 5 U.S.C
§ 706(2)."* The relevant provisions of 5 U.S.C. § 706(2) are:
The reviewing court shall—
(2) hold unlawful and set aside agency action, findings,
and conclusions found to
(A) arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law...
see KR KH
(B) without observance of procedure required by
eric
The Supreme court, drawing on its earlier decisions in Bow-
man Transportation Inc. v. Arkansas-Best Freight System,
419 U.S. 281 (1974), and Citizens to Preserve Overton Park v.
Volpe, 401 U.S. 402 (1971), has recently summarized the ap-
propriate scope of review under the arbitrary and capricious
standard:
The scope of review . . . is narrow and a court is not to
substitute its judgment for that of the agency. Neverthe-
less, the agency must examine the relevant data and ar-
ticulate a satis actory explanation for its action including a
‘rational connection between the facts found and the
choice made.’
Motor Vehicle Manufacturer’s Ass’n v. State Farm Mutual
Insurance Co., 102 S.Ct. 2856, 2866-67 (1983) (citation omit-
ted). A reviewing court, thus, may not set aside an agency rule
that is the product of reasoned decisionmaking, based on con-
sideration of relevant factors, and within the scope of the
authority delegated to the agency by statute. See id. at 2866,
2871. This court has followed the “rational basis” test. See
2 The “substantial evidence” test mentioned in § 211(d)(1) of the ESA, 12
U.S.C. § 1904 note, expressly applies only to agency orders and not, as is the
case here, to the issuance of regulations by means of informal rulemaking.
See McCulloch Gas Processing Corp. v. DOE, 650 F.2d 1216, 1221 n.7 (Temp.
Emer. Ct. App. (hereinafter TECA) 1981).
17a
McCulloch Gas Processing Corp. v. DOE, 650 F.2d 1216, 1221
(TECA 1981) (citing cases).
An agency’s procedural compliance with statutory norms,
however, is subject to closer scrutiny. The reviewing court,
having competence in this arena, must satisfy itself that there
was procedural integrity in the promulgation of the regulations
in question. See [TT World Communications v. FCC, 699 F.2d
1219, 1246 (D.C. Cir. 1983); National [sic] Resources Defense
Council v. SEC, 606 F.2d 1031, 1048 (D.C. Cir. 1979);
Weyerhaeuser Co. v. Costle, 590 F.2d 1011, 1027 (D.C. Cir.
1978). Nevertheless, although a court may exercise greater
independent judgment when reviewing agency action on pro-
cedural, rather than substantive grounds,. see id., to the ex-
tent that the requisite procedures involve factual determina-
tions, deference is still afforded to agency judgments. See
Philadelphia Citizens in Action v. Schweiker, 669 F.2d 877,
886 (3d Cir. 1982) (“good cause” determination); Coalition of
Michigan Nursing Homes, Inc. v. Dempsey, 537 F. Supp. 451,
458 (E.D. Mich. 1982) (same). The ultimate question remains
whether or not the agency’s action was arbitrary and capri-
cious, that is, unreasonable. See TT v. FCC, supra, 699 F.2d
at 1246; Philadelphia Citizens v. Schweiker, supra, 669 F.2d
at 886; NRDC v. SEC, supra, 606 F.2d at 1050.
Since we review the agency’s actions on the identical basis as
did the district courts, our review need accord no particular
deference to the district courts’ conclusions as to whether the
administrative record does or does not support the administra-
tive determination as reasonably based. See Louisiana En-
vironmental Society v. Dole, 707 F.2d 116, 118 (5th Cir. 1983);
Committee for An Independent P-I v. The Hearst Corp., 704
F.2d 467, 472 (9th Cir. 1983); Brown v. United States Dep’t of
the Interior, 679 F.2d 747, 748-49 (8th Cir. 1982); Philadelphia
Citizens v. Schweiker, supra, 669 F.2d at 886 n.10. We are free
to make an independent determination of the legal quetion as
to whether the agency has made a showing of good cause. See
Brown & Williamson Tobacco Corp. v. FTC, 710 F.2d 1165,
1171 (6th Cir. 1983); Washington State Farm Bureau v. Mar-
18a
shall, 625 F.2d 296, 306 (9th Cir. 1980). See also Reeves v.
Simon, 507 F.2d 455, 458-59 (TECA 1974), cert. denied, 420
U.S. 991 (1975).
III. LACHES
Initially, however, we must address DOE and Naph-Sol’s
contention that these 1979 challenges to the procedural valid-
ity of the 1974 deemed recovery rule are barred by laches. The
district court in Mobil v. DOE considered and rejected the
argument:
Inasmuch as the focus of this action is upon the May 5, 1977
three cent rule, and in view of the relatively brief period of
time between the issuance of the rule and the commence-
ment of this action. . . this Court is not inclined to dismiss
this action on the ground of laches.
547 F. Supp. at 1265. Although we recognize that laches is an
equitable defense addressed to the sound discretion of he trial
judge, see e.g., Moore v. Smith, 694 F.2d 115, 119 (6th Cir.
1982), cert. denied, 103 S.Ct. 1442 (1983); University of Pitts-
burgh v. Champion Products, 686 F.2d 1040, 1045 (3d Cir.),
cert. denied, 103 S.Ct. 571 (1982); Dickey v. Aloca Steamship
Co., 641 F.2d 81, 82 (2d Cir. 1981), we cannot uphold the Mobil
court’s laches ruling.
By asking the district court to declare the 1974 deemed
reovery rule invalid on procedural grounds, Mobil shifted the
“focus” of this action. This is no less true because Mobil’s
challenge to the validity of the 1974 rule remains embedded
within its challenge to the validity of the 1977 rule. The “focus”
might reasonably be said to be the 1977 rule if this action
involved merely the proper interpretatin of the 1974 rule.
Mobil, however, moved the case considerably beyond this.”
8 Although the DOE did draw attention to the deemed recovery rule, it
was Mobil, both in its complaint, see Stip. Record pp. 000021-22, and in its
motion for summary judgment, see id. pp. 000235-310, that put the question
of the validity, as opposed to the interpretation, of this rule into issue.
Absent this, the district court would not have ruled on the validity of the
deemed recovery rule.
19a
Moreover, there is no logical stopping place to the district
court’s “focus” analysis. New rules typically build on existing
ones and an action to declare a current rule invalid could always
be cast, in the alternative, as a challenge to the longstanding
rule on which the new rule is premised. Under the district
court’s reasoning, since the “focus” would be on the new rule,
laches could never bar the challenge to the old rule, no matter
how untimely, or how prejudicial to the defendant. This argu-
ment ignores the basic equitable precepts that laches reflects
and, as well, would seriously undermine administrative stabil-
ity. It cannot be sustained.
Mobil, however, also urges that laches is not available in a
“defensive” declaratory judgment action like that here. Mobil
argues as follows. Statutes of limitations, and laches, do not
run against defenses. Mobil therefore would be able to assert
the procedural invalidity of the deemed recovery rule in an
enforcement action brought by the DOE. Although nominally
the “plaintiff’ in the pre-enforcement declaratory judgment
action now before the court, Mobil must be viewed in the
context of its being the defendant in an neforcement action.
Since DOE cannot raise laches in an enforcement action, it
should not be permitted to raise laches in a declaratory judg-
ment action seeking only to establish the validity of a defense to
the anticipated enforcement action.
It is true that laches, and statutes of limitations, do not run
against a defense. See, e.g., 118 East 60th Owners v. Bonner
Properties, 677 F.2d 200, 203 (2d Cir. 1982); Northern Pacific
Ry. Co. v. United States, 277 F.2d 615, 623-24 (10th Cir. 1960);
these doctrines are available “‘only as a shield. not as a
sword.’” Id. at 623-24 (citations omitted). There is little au-
thority, however, on the question whether a declaratory judg-
ment plaintiff like Mobil can, for these purposes, be assimilated
to the status of a defendant; what there is suggests that it may
not.
Thus, in Abbott Laboratories v. Gardner, 387 U.S. 126
(1967), which held that a pre-enforcement action for declarato-
20a
ry relief could be entertained by the courts if ripeness and
exhaustion requirements were met, the Supreme Court
stated:
Further, the declaratory judgment and injunctive reme-
dies are equitable in nature, and other equitable defenses
may be interposed. .. . The defense of laches could be
asserted if the Government is prejudiced by a delay.
Id. at 155 (citations omitted). One district court, in part relying
on Abbott, has held that a pre-enforcement declaratory judg-
ment action challenging the validity of the deemed recovery
rule was properly characterized as “affirmative” in nature:
[Plaintiff has had a claim for relief ripe from the institu-
tion of the regulations. That claim when it became ripe
was not defensive in nature, but affirmative. . . . Without
regard to the institution of administrative enforcement
proceedings, — has had an equitable claim for relief
since 1974. The interposition of the administrative
— does not alter the affirmative nature of this
claim.
United Refining Co. v. DOE, Civ. No. 79-144, slip op. at 4-5
(W.D.Pa. 1983). Laches therefore was available to the DOE."
We find it particularly difficult to view Mobil’s challenge to
the deemed recovery rule as “defensive.” Mobil, presumably,
anticipates being a defendant in an action to enforce the 1977
three cent rule and, thus, aims preemptively to establish the
nonenforceability of that rule. Mobil’s declaratory judgment
action, however, goes considerably further: it challenges the
validity of a rule other than the one whose enforcement is,
“In an earlier ruling, relied on by Mobil here, the district court had
speculated that laches might not be available. See United Refining Co. v.
DOE, 4 Energy Mgmt. (CCH) 4 26,264 (W.D.Pa. 1980). Upon further
reflection, however, the court held to the contrary.
The other case relied on by Mobil, Luckenbach Steamship Co. v. United
States, 312 F.2d 545 (2d Cir. 1963), involved a statute of limitations, not
laches, and in any event, plainly sought only a simple declaration of
non-liability for payments allegedly due.
2la
ostensibly, impending. Although the 1974 deemed recovery
rule might somehow be related to the 1977 rule, in these
circumstances it would be stretching concepts far too thin to
characterize Mobil’s challenge to the deemed recovery rule as
defensive, or to consider Mobil only “nominally” a plaintiff.
Accordingly, since it is clear that laches can be invoked
against a declaratory judgment plaintiff who affirmatively
challenges an agency rule, see, e.g., Citizens and Landowners
Against the Miles City/New Underwood Powerline v. Secreta-
ry of DOE, 683 F.2d 1171, 1175 (8th Cir. 1982); Independent
Bankers Assoc. v. Heimann, 627 F.2d 486, 487 (D.C. Cir.
1980); Michigan v. City of Allen Park, 501 F. Supp. 1007,
1016-18 (E.D. Mich. 1980) (counterclaim); cf. Energy Coopera-
tive Inc. v. DOE, 659 F.2d 146 (TECA 1981) ‘exhaustion of
remedies), we find that laches is available to the DOE.
Laches reflects the principle that “equity aids the vigilant,
not those who slumber on their rights.” Gull Airborne Instru-
ments v. Weinberger, 694 F.2d 838, 843 (D.C. Cir. 1982),
quoting 2 J. Pomeroy, Equity Jurisprudence § 418 (5th ed.
1941). Two elements are essential to a laches defense: 1) in-
excusable delay in instituting suit; and 2) prejudice to the
defendant from such delay. See, e.g., Gulf Airborne, supra,
694 F.2d at 843; University of Pittsburgh v. Champion Prod-
ucts, supra, 696 F.2d at 1044.
Many of DOE’s arguments with respect to delay and preju-
dice, on their face, are impressive. First, and most significant-
ly, is the obvious fact that Mobil’s procedural challenge is
brought some five years after the fact of promulgation. Mobil
and other oil companies promptly challenged other regulations
issued at essentially the same time as the deemed recovery
rule and there has been no satisfactory explanation of why, in
this case, there was a delay. This is particularly significant
here since the judicial review provision in § 211 of the Econom-
ic Stabilization Act, 12 U.S.C. § 1904 note, was expressly
designed to ensure prompt review of agency action. See S. Rep.
No. 92-507, 92nd Cong., Ist Sess., reprinted in 1971 U.S. Code
Cong. & Ad. News 2283, 2292-93.
22a
The apparent effects of the delay are considerable. DOE
would now be unable to cure any procedural informity [sic] by
repromulgating the deemed recovery rule. It is arguable that
invalidation at this juncture would run afoul of congressional
intent with respect to petroleum pricing in the period of con-
trols. There is some evidence that Congress never explicitly
enacted equal application legislation because, in part, the
deemed recovery rule existed. See S.Rep. No. 94-26, 94th
Cong., lst Sess. 37-38 (1975). Moreover, invalidation could be
seen as prejudicing those refiners who had set their prices in
accordance with the rule. Finally, the lost time and expense of
DOE’s ongoing enforcement actions is to be considered.”
Nevertheless, we cannot decide the merits of the laches
defense on the present record. All else being equal, we would
be inclined to remand the case for factual findings on the
question of delay and prejudice. In view of the Naph-Sol v.
Murphy appeal, however, we would not thereby be relieved of
the responsibility of deciding the merits of the procedural
validity of the deemed recovery rule.
Murphy raised its challenge to the validity of the deemed
recovery rule as a defense to Naph-Sol’s claim that it was
overcharged due to Murphy’s violation of the rule.”* Although
we recognize that this suit, unlike an ordinary contract action,
implicates a regulatory scheme and not simply the rights of the
parties, we believe that Murphy’s challenge falls within the
rule that laches does not run against a defense. Naph-Sol
cannot both seek to recover payments and bar Murphy from
defending by challenging the statutory basis upon which the
5 Interestingly, in a separate action, Mobil invoked and apparently
defended the deemed recovery rule to avoid liability under a New York
statute. See Mobil Oil Corp. v. Tully, 499 F. Supp. 888, 904-07 (N.D.N.Y.
1980), aff'd, 653 F.2d 497 (TECA 1981), 639 F.2d 912 (2d Cir. 1981), vacated
and remanded on other grounds, 455 U.S. 245 (1982).
‘6 On appeal, Naph-Sol urges that Murphy’s challenge is barred by laches,
relying on essentially the same arguments with respect to delay and
prejudice as does the DOE.
23a
claim for recovery is based. Murphy’s procedural challenge,
thus, cannot be barred by laches; the Naph-Sol appeal, there-
fore, cannot be decided on laches grounds. In view of this, and
given our view of the deemed recovery rule issue, we proceed
to decide both cases on the merits.
24a
IV. VALIDITY OF THE DEEMED RECOVERY RULE
Before considering the validity of the deemed recovery rule,
the subject matter of this section, one further issue, relevant to
the Mobil v. DOE appeal, must be addressed. DOE’s 1978
Interpretations of the three cent rule seemingly found that an
equal application requirement, with a deemed recovery com-
ponent, was inherent in the original April 1974 rule. If this
were true, the May 1977 three cent rule could be upheld as an
interpretive rule whether or not the September 1974 deemed
recovery rule was valid. The district court, interpreting the
language of the original three cent rule, and relying on this
court’s decision in Standard Oil Co. v. DOE, 596 F.2d 1029,
1040-45 (TECA 1978), held that the April 1974 three cent rule
did not, of its own force, require that the three cent cost
allowance be equally applied. In reaching this result, the court
gave little weight to the agency interpretations to the contra-
ry. 547 F. Supp. at 1266-67.
The DOE apparently has abandoned the position that an
equal application requirement was implicit in the original three
cent rule. Its brief on appeal makes no mention of the argument
and, indeed, its summary judgment brief ii: the district court
renounces it. See Stip. Record p. 000777. In view of this, and
based on our reading of the regulations as of April 1974, we find
it unnecessary to expand on the district court’s analysis of this
issue, which we adopt. Accordingly, the May 1977 three cent
rule cannot be upheld as an interpretive rule without a consid-
eration of the impact of the deemed recovery rule on it. We
therefore finally turn to the question of the procedural validity
of the deemed recovery rule.
A. September 5, 1974 Rulemaking: Good Cause Excep-
tion
The notice and comment procedures of the Administrative
Procedure Act (APA), 5 U.S.C. §§ 551 et seq., and the Federal
Energy Administration Act (FEAA), 15 U.S.C. §§ 761 et seq.,
applied to FEA’s September 5, 1974 promulgation of the
25a
deemed recovery rule. The FEA did not observe these re-
quirements, relying on the “good cause” exceptions in eaeh act.
Under the APA, an agency may promulgate a rule without
prior notice and comment
when the agency for good cause finds (and incorporates
the finding in a brief statement of reasons therefor in the
rules issued) that notice and public procedure thereon are
‘impracticable, unnecessary or contrary to the public in-
terest.
5 U.S.C. § 553(b)(B). Under the stricter FEAA requirements,
notice and comment
may be waived where strict compliance is found to cause
serious harm or ey to the public health, safety, or
welfare, and such finding is set out in detail in such rule,
regulation, or order.
15 U.S.C. § 766(i) (1) (B).
Notice and comment procedures afford interested parties a
meaningful opportunity to participate in the rulemaking proc-
ess and assure that an agency’s decisions will be informed and
responsive. See, e.g., McCulloch Gas Processing Corp. v.
DOE, supra, 650 F.2d at 1221; Mobil Oil Corp. v. DOE, 610
F.2d 796, 802 (TECA 1979), cert. denied, 446 U.S. 937 (1980);
State of New Jersey v. EPA, 626 F.2d 1038, 1045 (D.C. Cir.
1980). Accordingly, exceptions to § 553 will be “narrowly con-
strued and only reluctantly countenanced.” Jd. ; accord S.Rep.
No. 742, 79th Cong., lst Sess. 16 (1945); Kollett v. Harris, 619
F.2d 134, 145 (1st Cir. 1980); Sharon Steel Corp. v. EPA, 597
F.2d 377, 379-80 (3d Cir. 1979); National Nutritional Foods
Ass’n v. Kennedy, 572 F.2d 377, 384-85 (2d Cir. 1978). Courts
will closely examine the agency’s proffered rationale, see Na-
tional Federation of Fedral Employees v. Devine, 671 F.2d
607, 610 (D.C. Cir. 1982) (per curiam); Mobil Oil Corp. v. DOE,
supra, 610 F.2d at 804, but may uphold a finding of good cause
justified by obvious and compelling facts that can be judicially
noticed. See National Helium Corp. v. FEA, 569 F.2d 1137,
1141-46 (TECA 1977); Nader v. Sawhill, 514 F.2d 1064, 1068
(TECA 1974). The waiver provision of the FEAA is similarly
26a
to be used sparingly. See Sen. Conf. Rep. No. 93-788, 93d
Cong., 2d Sess., reprinted in [1974] U.S. Code Cong. & Ad.
News 2939, 2977. Despite the narrowness of the exceptions,
we are persuaded that FEA had “good cause” for promulgating
the deemed recovery rule without prior notice and opportunity
for comment.
The preamble to the deemed recovery rule explained that
the amendment was intended to clarify an “ambiguity” in the
Regulations by putting
all sellers ... mney on notice that prices actually
charged, and not ray d prices calculated as a lawful
maximum, must reflect the equal application of increased
product costs, except where a pre-existing contract pre-
vents the implementation of such a price.
39 Fed. Reg. 32306, 32307 (Sept. 5, 1974). Although “most
sellers” had been equally applying costs in prices below base
prices,
(a)s an improved supply situation has be to have a
restraining influence on prices, the FEA has become
aware that certain sellers have taken the position that
they may selectively ‘bank’ increased product costs as to
certain classes of purchaser, for recoupment in a sub-
sequent month, as long as the prices c d to other
classes of purchaser do not exceed the maximum lawful
price.
Id. Such practices “could obviously serve to avoid the intent of
the overall framework of the price regulations,” particularly
the goal of preserving the “customary price differentials”
among classes of purchaser. See id. The deemed recovery rule
was designed to prevent this.
The FEA promulgated the rule without prior notice and
comment, finding that an emergency existed and explaning
that:
[A]Js the supply situation becomes more favorable, the
incentive to depart from the equal application require-
ment becomes stronger. Moreover, announcement of
these amendments as proposals would highlight current
27a
ambiguities in the regulations and could result in sellers
seeking to take advantage of that ambiguity or of the
contract exception to the regulation.
The FEA has determined that the continuation or initia-
tion of such practices would be injurious to the public
welfare, in view of the number of circumventions of FEA
regulations and the substantial compliance difficulties
which would result.
According to appellants, then, the FEA feared that
highlighting the gap in the Regulations through advance notice
would promote discriminatory pricing against independent
distributors and, as well, against certain regions of the coun-
try, particularly the Northeast. By passing through
proportionately greater costs to independent outlets, for in-
stance, refiners could threaten the competitive viability of the
independents. Moreover, there was a risk that refiners would
seek to take advantage of the “contract exception”” to the
deemed recovery rule and “grandfather in” unequal cost pass-
throughs to refiner operated stations by entering into long-
term contracts. Thus, advance notice would result in severe
market dislocations and erosion of the class of purchaser
scheme so central to the Price Regulations, therby justifying
waiver of notice and comment procedures.
Both district courts rejected this argument, finding that the
circumstances did not warrant dispensing with notice and com-
ment procedures:
Here, there was no compelling circumstances surrounding
the discriminatory pricing practices cited by the agency.
No users had been totally deprived of a supply of motor
gasoline, no violence had sartiead or ap imminent,
and, more importantly, no sudden, disruptive change
appears to have occurred with respect to either the dis-
' This exception permitted unequal application of increased product costs
when existing contracts required refiners to sell product to customers at a
price below that the refiner was charging to other classes of purchaser.
28a
tribution or pricing of motor gasoline on or about the time
the September 5, 1974 rule issued.
Mobil v. DOE, supra, 547 F.Supp. at 1269; accord NaphSol v.
Murphy Oil, supra, 550 F.Supp. at 323." We disagree, both as
a matter of law and fact.
“Good cause” is most typically found when circumstances
pre-existing the rulemaking call for immediate agency re-
sponse and waiver is required to accomplish the necessary
speed. See generally K. Davis, Administrative Law Treatise
§ 6.29 (Supp. 1982)."* Although it is not free from doubt, both
district courts here appeared to find that, as a matter of law,
this is the only sort of exigency that would justify by-passing
the notice and comment procedure. On a number of occasions,
however, this court has held that, in special circumstances,
good cause can exist when the very announcement of a pro-
posed rule itself can be expected to precipitate activity by
affected parties that would harm the public welfare. See Nader
v. Sawhill, supra, 514 F.2d at 1068; DeRieux v. Five Smiths,
Inc., 499 F.2d 1321, 1832 (TECA), cert. denied, 419 U.S. 895
(1974); see also Reeves v. Simon, supra, 507 F.2d at 458-59.
We recognize that agencies might frequently assert that
someone will take advantage of the situation if advance notice
is given. If the exception is not to become an all purpose
18“In the present case, there were no compelling circumstances
surrounding the discriminatory pricing practices. . . . In September of 1974,
there was no apparent disruption of petroleum supplies or distribution which
created an immediate threat to the public.” 550 F. Supp. at 323.
9A mere desire to provide guidance and information, or to clarify
regulations, however, does not suffice for good cause. Mobil v. DOE, supra,
610 F.2d at 803. To the extent that the FEA justified the need for regulations
on the basis of “clarifying ambiguities” alone, it would not amount to good
cause. However, we understand the principal justification to be the harm
attendant upon announcement of the proposed rule itself: refiners “taking
advantage” of the situation. Moreover, FEA sought to do more than simply
clarify ambiguities: “It sought to remedy shortcoming in its
which had become serious only as a result of sudden changes in market
conditions.” Shimek v. DOE, 685 F.2d 1372, 1375 (TECA 1981).
29a
escape-clause, therefore, the anticipated response must in-
volve a significant threat of serious damage to important public
interests. The circumstances in the present case perhaps were
less “calamitous,” see Nader v. Sawhill, supra, 514 F.2d at
1068, than where announcement of a future price increase
would exacerbate existing oil supply shortages, see id., or
announcement of a future price freeze would generate a “mas-
sive rush to raise prices.” DeRieux v. Five Smiths, supra, 499
F.2d at 1332. Nevertheless, in view of the emergency condi-
tions prompting the petroleum price legislation, see Pasco v.
FEA, 525 F.2d 1391, 1894 (TECA 1975), and assuming that
announcement of the deemed recovery rule would cause price
discrimination and other market dislocations and dampen com-
petition, we find that the threat to the public would be
sufficently dire for good cause to be found.
The question thus becomes whether, as a matter of fact,
FEA’s finding of good cause is supported by the administrative
record. It appears that the district courts were skeptical, and
appellees here urge that there is no showing that in fact in-
dependents would be injured during the notice and comment
period. In considering this question it is essential to recognize
that we are being called upon, some eight years after the fact,
to review agency determinations that were, in large measure,
of a judgmental or predictive nature. Whether, in the economic
circumstances of late summer 1974, independents and geo-
graphic regions were particularly vulnerable to price dis-
crimination and, more importantly, whether refiners were
likely to engage in discriminatory pricing if informed of the
impending rule change, are not strictly factual questions; they
involve subjective judgments.
Judgments of a predictive nature “necessarily involve
deductions based on expert knowledge of the Agency”; com-
plete factual support in the record “is not possible or required.”
FCC v. National Citizens Committee for Broadcasting, 436
U.S. 775, 814 (1978); accord NAACP v. FCC, 682 F.2d 993,
1001 (D.C. Cir. 1982); NRDC v. SEC, supra, 606 F.2d at 1052’
see also Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Ins.
30a
Co., supra, 103 S.Ct. at 2871-72. Since forecasts are not sus-
ceptible of strict factual proof, they are, in the context of
substantive agency decision making, entitled to special defer-
ence. The court must simply satisfy itself that the agency
explains the facts and policy concerns it relies on, and that,
given these, a reasonable person could have made the judg-
ment the agency did. See NAACP v. FCC, supra, 682 F.2d at
1001; NRDC v. SEC, supra, 606 F.2d at 1052. Admittedly, as
our discussion in part II suggests, this extreme deference
might be inappropriate in reviewing compliance with procedu-
ral requirements. Nevertheless, our examination of FEA’s
proffered good cause rationale must reflect the predictive ele-
ment in the agency’s determination and the agency’s special
expertise over such questions. See genrally K. Davis, Admin-
istrative Law Treatise § 29.00-1 (Supp. 1982).
Although September 1974 was a period of increasing oil
supply, it was still a volatile time, not that far removed from
the Arab oil embargo of fall 1973, and far distant from the
relative stability in the oil market of 1979 or 1983. Given the
changed market conditions in late summer 1974, the relatively
recent awareness that this was encouraging selective cost
banking, and the policy of preserving the class of purchaser
scheme, we are unable to say that the FEA’s judgment that
notice would lead to price discrimination and pressure on in-
dependents and regions was unreasonable. It is easy, in retro-
spect, to state that FEA’s fears were exaggerated. FEA,
however, was in a better position in August 1974 to appreciate
the economic dynamics of the oil industry at that time than the
courts are today; we must avoid being hampered by 20/20
hindsight. Certainly, just as “the announcement of a price
increase at a future date could have resulted in producers
withholding crude oil from the market,” Nader v. Sawhill,
supra, 514 F.2s at 1068 (emphasis added), and advance notice
of a price freeze led to a “massive rush to raise prices,” De-
Rieux v. Five Smiths, supra, 499 F.2d at 1332, announcement
of the deemed recovery rule could have generated selective
pricing and “grandfathering” of unequal prices in favor of
refiner-operated stations. We are not in a position to second-
3la
guess this judgment, or the determination that this would have
contributed significantly to eroding the class of purchaser
scheme and undermining competitive forces.
Moreover, no one claimed otherwise in September of 1974.
None of the oil companies, who were not reluctant to challenge
regulations, rejected the FEA’s good cause argument by
attacking the procedural falidity of the deemed recovery rule
in 1974 or 1975. This gives some credence to the FEA’s predic-
tive judgment and finding of good cause. So, too, do the numer-
ous comments independents submitted to the FEA in response
to the FEA’s concern that independents and regions were
susceptible to discriminatory pricing.” For these reasons, we
conclude that the record supports FEA’s good cause finding.
Appellees also argue that the September 5 preamble did not
adequately recite the reasons for FEA’s finding of good
cause.” In particular, they contend that the FEA’s supposed
concern with price discrimination and solicitude for in-
dependents and geographic regions is simply a post-hoc
rationalization advanced by appellants in these actions. We
disagree.
*” These comments include those by: Independent Gasoline marketers
Council, app. at 01007; Independent Terminal Operators Association, app. at
01012; Powerine Oil Co., app. at 00322; Independent Fuel Terminal
Operators Association, app. at 00811; Oil Heat Institute of Westchester,
app. at 00800; New England Fuel Institute, app. at 00837.
21 Appellees other arguments need be addressed only briefly. The harm
that could have resulted from discriminatory pricing was clearly to the
general public and not simply, as appellees maintain, to one segment of the
petroleum industry.
The contention that FEA could have solved the problem by publishing a
notice of proposed rulemaking that indicated that the rule would be effective
as of the date of the notice proves too much since it would swallow the good
cause exception as we have interpreted it in Nader v. Sawhill, supra, and
DeRieux v. Five Smiths, supra. Moreover, the suggestion that we impose a
new procedural requirement is contrary to Vermont Yankee Nuclear Power
Co. v. NRDC, 435 U.S. 519 (1978).
32a
In the September 5 preamble, the FEA indicated that some
sellers were “selectively bank[ing] increased product costs as
to certain classes of purchaser,” while charging others the
“maximum lawful price,” 39 Fed. Reg. 32306, 32307 (Sept. 5,
1974), that the “improved supply situation” provided an “in-
centive” for sellers to engage in such practices, id., and that
announcement of the proposed amendment would prompt sel-
lers “to take advantage ‘of the situation.” Jd. We find this a
sufficiently clear expression of concern with price discrimina-
tion. The September 5 preamble, it is true, did not specifically
mention independents and regions of the country. The pream-
ble, however, stated that a notice of hearings on proposed
revisions of the Regulations would appear “in the near future.”
id., which turned out to be September 10, 1974. The Septem-
ber 10 notice did explicitly indicate that the deemed recovery
rule served to protect independents, and regions, from selec-
tive pricing. See 39 Fed. Reg. 32718, 2722-23 (Sept. 10, 1974).
The September 10 notice was a contemporaneous statement of
the agency’s views, and not within the “made for litigation”
rationalization proscribed by SEC v. Chenery Corp., 332 U.S.
194, 196 (1947).”
For the foregoing reasons we conclude that the FEA was
justified in using emergency rulemaking procedures to prom-
ulgate the deemed recovery rule under the APA, and under
§ 7(i)(1)(B) of the FEAA, 15 U.S.C. § 766(i)(1)(B), as well. See
Shimek v. DOE, 685 F.2d 1372, 1874-75 (TECA 1981); Dor-
chester Gas Producing Co. v. DOE, Civil No. CA-3-75-0836,
slip op. at 18 (N.D. Texas June 24, 1983). Accordingly, we hold
that the deemed recovery rule was validly promulgated on
2 Moreover, even if the good cause statement were inadequate, we would
be disinclined to invalidate the rule when we had found that, in fact, good
cause existed, see Texaco Inc. v. FEA, 531 F.2d 1071, 1082 (TECA), cert.
denied, 426 U.S. 941 (1976); DeRieux, supra, 499 F.2d at 1333, all the more
so since the rulemaking here in issue preceded this court’s admonition that
technical noncompliance [with the APA] will not be tolerated.”
Nader v. Sawshill, supra, 514 F.2d at 1069.
33a
September 5, 1974. The decisions of the district courts on this
issue were erroneous.
B. December 5, 1974 Rulemaking -
Even had the September 5, 1974 promulgation been
procedurally defective, the infirmity would have been cured by
the rulemaking commencing on September 10, 1974 and con-
cluding on December 5, 1974. Both district courts held that the
deemed recovery rule was not validly repromulgated, the Mo-
bil court finding that the September 10 notice was inadequate
and the Naph-Sol court holding that the December 5 publica-
tion did not contain an adequate statement of “basis and pur-
pose” with respect to the deemed recovery rule. We disagree.
1. Adequacy Of The September 10, 1974 Notice
The APA requires that notice of a proposed rule be pub-
lished in the Federal Register and include “either the terms or
substance of the proposed rule or a description of the subjects
and issues involved,” 5 U.S.C. § 553(b)(3), and that interested
persons be given an opportunity to comment on the rule. /d.
§ 553(c). The stricter FEAA required that notice “shall be
given by publication of [the] proposed rule” in the Federal
Register and that a “minimum of ten days following such
publication shall h yerw-rided for opportunity for comment.” 15
U.S.C. § 766(iIXE KH),
Notice and the opportunity to comment serve to educate the
agency, provide fair treatment to persons affected by the rule,
and assist judicial review. See Small Refinery Lead Phase-
Down Task Force v. EPA, 705 F.2d 506, 574 (D.C. Cir. 1983);
Standard Oil Co. v. DOE, supra, 596 F.2d at 1057-58; Shell Oil
Co. v. FEA, 574 F.2d 512, 516 (TECA 1978). Notice is suffi-
cient if it “ ‘fairly apprise[s] the interested parties’ of the sub-
jects and issues before the Agency,” American Iron and Steel
Institute v. EPA, 568 F.2d 284, 291 (3d Cir. 1977); accord
McCulloch Gas Processing Co. v. DOE, supra, 650 F.2d at
1221, and thereby “affords interested persons a reasonable and
meaningful opportunity to participate in the rulemaking proc-
34a
ess.” Id.; accord Atlatntic Richfield Co. v. Doe, 655 F.2d 1118,
1126 n.6 (TECA 1981).
In this instance, the basic question is whether the Septem-
ber 10 notice revealed FEA’s willingness to reevaluate the
deemed recovery rule” or, rather, that the agency’s mind was
closed. See id. at 1127 n.7; Texaco Inc. v. FEA, supra, 531
F.2d at 1078-79; State of Sourth Carolina ex rel. Patrick v.
Block, 558 F. Supp. 1004, 1020 (D.S.C. 1983).
The September 10 notice proposed the elimination of the
equal application requirements with two exceptions: 1) within
a given geographic marketing area the costs passed through to
a class of purchaser including independents could not be great-
er than those passed through to classes of purchaser not includ-
ing independents; and 2) the unequal pass through of costs as
between marketing areas could not exceed 10%. 39 Fed. Reg.
32718, 32727 (Sept. 10, 1974) (proposed 10 C.F.R.
§ 212.83(c)(1)(iii)). The “cost bank” rule proposed on Septem-
ber 10 deleted the deemed recovery penalty as it had appeared
in the September 5 promulgation. See 39 Fed. Reg. at 32729
(proposed 10 C.F.R. § 212.83(1)(d)).
The Septembr 10 preamble expressly reserved judgment on
placing restriction on the unequal pass through of costs as
between regions:
Comments are specifically requested on whether this
limitation on proposed regional flexibility in pricing is
needed and, if so, whether the proposed 10 percent limita-
tion is appropriate.
Id. at 32723 (emphasis added). The preamble also stated that
“to the extent that the current [equal application] requirement
serves to protect the independent sector of the market, FEA
has concluded that it must be retained.” Jd.
% We use this term as a shorthand to refer to the requirements that costs
be applied equally in actual selling prices and that a deemed recovery penalty
obtain when they are not.
35a
This last statement reveals that the FEA indeed was com-
mitted to protecting independents. Nevertheless, in view of
the September 5 preamble’s promising an opportunity to com-
ment on the deemed recovery rule; the deletion of the deemed
recovery penalty in its September 5 form from the September
10 proposed rule; the elimination of other equal application
requirements; and the solication of comments on the limitation
on unequal pass throughs among regions, we do not find that
the September 10 notice, taken as a whole, establishes that the
agency was unprepared to reevaluate the deemed recovery
rule.
Moreover, the reaction to the notice shows that interested
parties were alerted that the deemed recovery rule was under
review. Many of the comments from the large refiners urged
repeal of the deemed recovery rule and all equal application
requirements, while others proposed extensive revisions.” In-
dependents, on the other hand, supported retention of the
existing rules. Our reading of these comments convinces us
that interested parties did not believe that the FEA’s mind
was closed on the question of retention of the equal applicaton/
deemed recovery rule.
One other factor persuades us that the notice was sufficient
to apprise interested parties that the deemed recovery rule
was before the agency. Unlike as in [sic] the typical “inade-
quate notice” situation, the refiners, who presumably opposed
the newly promulgated cost bank amendment, here had every
incentive to read the September 10 notice of proposed
rulemaking expansively, and to take it as an opportunity to
comment on the deemed recovery rule and to urge its repeal.
36a
For these reasons. we find the notice was adequate under
the APA and the FEAA.*
2. December 5, 1974 Publication: Statement Of Basis And
Purpose
Effective December 1, 1974, the deemed recovery rule was
readopted in its September 5, 1974 form as section 212.83(e) of
the Petroleum Price Regulations, 10 C.F.R. pt. 212 (1975); 39
Fed. Reg. 42368 (Dec. 5, 1974). The district court in Naph-Sol
v. Murphy held that this December 5, 1974 repromulgation
was invalid since it did not include an adequate statement ofthe
“basis and purpose” for retaining the deemed recovery rule,
550 F.Supp. at 310.
The purpose of a contemporaneous “basis and purpose”
statement is to facilitate meaningful judicial review by enabl-
ing the court to become aware of the legal and factual back-
ground of the agency’s action. Action on Smoking & Health v.
CAB, 699 F.2d 1209, 1215-16 (D.C. Cir. 1983); State of Mis-
souri ex rel. Freeman v. Block, 690 F.2d 139, 143 (8th Cir.
1982); Baltimore & Ohio Chicago Terminal RR Co. v. United
States, 583 F.2d 678, 687 (ed Cir.), cert. denied, 440 U.S. 968
(1978). Although an exhaustive listing of findings or a full
analysis is not required, it is desirable for the agency to re-
spond in a reasoned manner to the comments received and to
explain how the decision was arrived at. See Action on Smok-
ing v. CAB, supra, 699 F.2d at 1216. The statement of basis
and purpose need not be published at the exact same moment
as the rule. The inquiry must be whether “the rules and state-
ment are published close enough together in time so that there
is no doubt that the statement accompanies rather than
* The FEA published notice of the exact terms of the proposed rules in
satisfaction of 15 U.S.C. § 766(i1B)’s requirements.
"The APA requires that “{a}fter consideration of the relevant matter
presented, the agency shall incorporate in the rules adopted a concise
general statement of their basis and purpose.” 5 U.S.C. § 568(c).
37a
rationalizes the rule.” Tabor v. Jt. Board for Enroliment of
Actuaries, 566 F.2d 705, 711 n.14 (D.C. Cir. 1977); accord
Baltimore & Ohio v. United States, supra, 583 F.2d at 688.
In the December 5, 1974 preamble, the FEA indicated that it
had decided to revise the price regulations on the pass through
of non-product cost increases by refiners. The preamble con-
tinued:
Action on all other revisions to the price regulations pro-
posed in the September 10 notice is defe until a later
date. However, those possible revisions which have not
been acted on continue to be under active consideration by
FEA for decision in this proceeding.
39 Fed. Reg. at 42638.
Admittedly, this is hardly a model statement of the reasons
for the agency’s decision to retain the deemed recovery rule.
Nevertheless, even when the basis and purpose statement is
cursory, or, indeed, non-existent, a rule may be upheld when
the agency’s path may reasonably be discerned. Alabama
Ass’n of Insurance Agents v. Board of Governors of the Feder-
al Reserve System, 533 F.2d 224, 237 (5th Cir. 1976), cert.
denied, 435 U.S. 904 (1978); Hoving Corp. v. FTC, 290 F.2d
803, 807 (2d Cir. 1961); United States v. Exxon Corp., 561
F.Supp. 816, 828 (D.D.C. 1983); see also DeRieux v. Five
Smiths, supra, 499 F.2d at 1333. Such is the case here.
The September 5, 1974 preamble promised the opportunity
‘to comment on the newly promulgated deemed recovery rule.
39 Fed. Reg. at 32307. The September 10 preamble canvassed
in some detail the opposing policy considerations involved,
principally the interest in permitting refiners flexibility in
pricing to respond to market conditions as against the concern
that regions and independents not suffer unfairly from “selec-
tive” flexibility. 39 Fed. Reg. at 32722-23. The comments the
FEA received elaborated these competing positions. Despite
the abbreviated statement of basis and purpose, then, FEA’s
reason for retaining the deemed recovery rule is reasonably
clear: the agency concluded that the needs of regions and
independents outweighed the benefits of price flexibility.
38a
It should be apparent that the sort of truncated basis and
purpose statement contained in the December 5 preamble is
not recommended: an agency should respond meaningfully to
comments and explain its decision. In this case, however, we
are disinclined, some eight years after the event, to invalidate
a rule on the technical ground of a deficient statement of basis
and purpose when we can fairly discern the agency’s aims.
Accordingly, we find that the December 5, 1974 promulga-
tion was procedurally valid. The deemed recovery rule, there-
fore, was validly repromulgated as of December 1, 1974.
In sum, we hold that the deemed recovery rule was validly
promulgated on September 5, 1974 and validly repromulgated
on December 5, 1974. The decisions of the district courts on this
question are reversed. Since the Mobil court’s ruling that the
May 1977 three cent rule was procedurally invalid was premis-
ed on the invalidity of the 1974 deemed recovery rule, that
ruling is vacated. The case is therefore remanded for consider-
ation of the impact of the September 1974 deemed recovery
rule on the April 1974 three cent rule, directed toward
determining whether the May 1977 three cent rule was validly
promulgated as an interpretive rule.
That portion of Naph-Sol v. Murphy ruling that Naph-Sol
was not entitled to recovery for overcharges due to Murphy’s
violation of the deemed recovery rule is vacated. The case is
remanded for determination of whether, in fact, Murphy
violated this rule and overcharged Naph-Sol thereby. Unlike
our review of Mobil v. DOE, our review of Naph-Sol v. Mur-
phy is not yet complete. We must consider the claim that
Murphy’s May 15, 1973 selling price was in violation of the
contract between the parties and, therefore, of the Price
Regulations.
39a
V. PRICE OVERCHARGE: MAY 15, 1973 TRANSACTION
PRICE
A. Jurisdiction
Initially, Murphy raises the question of our jurisdiction over
Naph-Sol’s appeal from the district court’s determination that
the prices Murphy charged Naph-Sol on May 15, 1983 were
permissible under the parties’ supply contracts and, therefore,
lawful under the Price Regulations.”
Section 211(b)(2) of the Economic Stabilization Act of 1970,
12 U.S.C. § 1904 note, granted the Temporary Emergency
Court of Appeals “exclusive jurisdiction over all appeals from
the district courts of the United States in cases and con-
troversies arising under this title or under regulations or
orders issued thereunder.” Section 5 of the Emergency Pet-
roleum Allocation Act, 15 U.S.C. § 754(a)(1), incorporated this
special grant of jurisdiction. Two principal inquiries guide our
determination of TECA jurisdiction: whether resolution of the
litigation in its entirety requires the application or interpreta-
tion of the EPAA and regulations, Citronelle-Mobile Gather-
ing, Inc. v. Gulf Oil Corp., 591 F.2d 711, 716 (TECA), cert.
denied, 444 U.S. 879 (1979), and whether an EPAA issue has
been adjudicated in the district court. Texaco Inc. v. Doe, 616
F.2d 1198, 1198 (TECA 1979); Coastal States Marketing Inc.
v. New England Petroleum Corp., 604 F.2d 179, 187 (2d Cir
1979); see Francis Oil & Gas Inc. v. Exxon Corp., 687 F.2d
484, 487 (TECA 1982).
Naph-Sol seeks recovery for overcharges pursuant to
§ 210(b) of the ESA, 12 U.S.C. § 1904 note. Thus allegations in
the complaint implicate the EPAA and its implementing
* Under the Regulations, a refiner’s base price was “the weighted average
price at which the item was lawfully priced in transactions with the class of
purchaser concerned on May 15, 1973 plus increased product costs. . .” 10
C.F.R. § 212.82(b\1) (1975). The maximum allowable price was base price
plus allowable nonproduct cost increases. Naph-Sol alleges that it
constituted a separate and individual single member class of purchaser.
40a
regulations. Indeed, the claim rests entirely on the Regula-
tions and its resolution involves their application. The in-
terpretation of the terms of the supply contracts between
Naph-Sol and Murphy was incident to, and interwoven with,
the question whether Murphy’s May 15, 1978 selling price was
lawful under the Regulations. Although based on its in-
terpretation of the contract, the district court was required to
resolve the litigation and held that Murphy had not violated the
Price Regulations; therefore, an EPAA issue has been adjudi-
cated and we have jurisdiction over this appeal. See Citronelle-
Mobile Gathering, Inc. v. Gulf Oil Corp., supra, 591 F.2d at
716; Mountain Fuel Supply Co. v. R. Johnson & Johnson Oil
Co., 586 F.2d 1375, 1384 (10th Cir. 1978).
B. MERITS
The contract prices in each of the two supply agreements
between Naph-Sol and Murphy” were set by reference to, and
fluctuated with, “Platt’s Chicago Postings,”® but were “sub-
ject to. . . minimum and maximum prices” for each product.
Stip. Record on Appeal at 89-94. Under the contracts, Naph-
Sol was required to purchase a minimum of 7.5 million gallons
of motor gasoline at Ferrysburg and 1 million gallons of gaso-
line at Marquette. The supply agreement also included a “price
adjustment” clause, which read as follows:
Price Adjustment. MURPHY reserves the right at any
time during the period of this agreement to increase or
decrease the agreement price provided for herein. In the
* The firs\: contract governed purchases by Naph-Sol at Murphy’s
terminal at l‘errysburg, Michigan; the second governed purchases at
Murphy’s terminal at Marquette. Wisconsin.
* Platt’s Chicago Posting is an average of refiners’ posted prices at
Chicago, Illinois, for a particular refined product, as published in Platt’s
Oilgram, a daily industry newsletter.
In the Ferrysburg contract, Naph-Sol agreed to pay Murphy a price equal
to Platt’s Chicago Posting minus $.0025 per gallon, and in the Marquette
contract, Platt’s Chicago Posting plus $.0025 per gallon.
4la
event any such increase or decrease in price is unaccept-
able to Purchaser, Purchaser shall have the right to cancel
the agreement on written notice insofar as the icular
product or products involved are concerned, said cancella-
tion to be effective at the time stated in said notice. On the
failure of Purchaser to exercise this right of cancellation,
the increase or decrease in prices shall me automatic-
ally effective.
Id. at 91.
On or shortly before May 15, 1973. Murphy began to charge
prices in excess of the maximum stated in the supply
agreements." Naph-Sol accepted fuel shipments and paid
these higher prices. Naph-Sol, which purchased petroleum
from Murphy at least through the filing of its complaint in 1979,
alleges that the prices charged by Murphy violated the supply
contracts and, therefore, the Price Regulations. Murphy, rely-
ing on the price adjustment provision, maintains the prices
were valid under the contracts.
The district court granted summary judgment in favor of
Murphy. The court found that the contract terms were un-
ambiguous and that the price adjustment provision permitted
Murphy to charge Naph-Sol prices in excess of the maximum in
the supply agreements. Since Naph-Sol accepted fuel ship-
ments at these prices, under the price adjustment clause the
prices automatically became effective. The court rejected
Naph-Sol’s argument that the price adjustment term was in-
consistent with the minimum-maximum provision and that the
specific term (the minimum-maximum term) governed over
the general term. Under the agreements Naph-Sol was obli-
gated to purchase minimum amounts of gasoline when prices
were within the minimum and maximum range. Naph-Sol,
however, could be excused from meeting its minimum pur-
chase requirements if Murphy increased its prices in accord-
*! These prices were based on Murphy’s prevailing terminal wholesale
postings (“rack prices”).
42a
ance with the price adjustment clause. The two provisions, the
court reasoned, are therefore not inconsistent. Naph-Sol v.
Murphy Oil, supra, 550 F. Supp. at 306.
We agree with the district court’s construction. The contract
terms are unambiguous. In particular, by its plain language
the price adjustment clause authorized Murphy to increase its
prices beyond those expressly provided for in the contracts.”
Contrary to Naph-Sol’s argument, advanced in the distrct
court and renewed on appeal, this provision may reasonably be
harmonized with the minimum-maximum clause, as the dis-
trict court has shown, such that effect many be given to all the
terms in the contract.”
Accordingly, we hold that Murphy’s May 15, 1978 selling
price was permissible under the parties’ supply agreements
% Naph-Sol’s argument that the price adjustment clause meant that
Murphy could arbitrarily choose to vary prices within the minimum-maxi-
mum range ignores the plain language stating that Murphy could, at any
time, “increase or decrease the agreement price provided herein.” The
agreement price can only be understood as the Platt’s Chicago Posting price
up to the maximum. Moreover, under Naph-Sol’s interpretation, it would
have had the right to cancel the contract even when the price Murphy
charged was within the contract ceiling. This interpretation is not plausible.
8 Naph-Sol urges that it would be “ridiculous” for it to have entered a
contract that gave Murphy the power unilaterally to raise prices with
Naph-Sol’s only recourse being to terminate the contract. This being as it
may, when the contract is unambiguous, the courts may not write a party a
better agreement than it entered.
Naph-Sol frequently refers to the price adjustment clause as mere
“boilerplate” in a “form contract” prepared by Murphy as though, somehow,
the term therefore did not count. Naph-Sol, however, does not allege that
this was a contract of adhesion and, given the status of the parties, there is no
suspicion that it was. Further, the contract was only three pages in length,
typed, and easily readable. Moreover, on the first page, € 4 specifically
stated that “The Provisions of Agreement stated below, except those that by
their terms are inapplicable, are part of this agreement.” Stip. Record on
Appeal 89. The price adjustment clause was found under the “Provisions of
Agreement.”
43a
and, therefore, that Murphy used a lawful May 15, 1973
transaction price under the price regulations.
VI. CONCLUSION
In conclusion, we rule as follows. In Mobil v. Doe we hold
that: (1) the April 1974 three cent rule did not itself require
equal application of the three cent cost allowance: (2) the
promulgation of the deemed recovery rule on September 5,
1974 was procedurally valid: and 3) the repromulgation of the
deemed recovery rule on December 5, 1974 was procesurally
valid. The district court’s judgment that the May 5, 1977 three
cent rule was procedurally invalid is vacated. The case is
remanded for consideration of the impact of the deemed recov-
ery rule on the April 1974 three cent rulx and, in this light, of
the procedural validity of the May 1977 three cent rule.
Affirmed in part, reversed in part, vacated in part, and
remanded for further proceedings consistent with this opinion.
In Naph-Sol v. Murphy Oil we hold that: 1) Murphy’s May
15, 1973 selling price was permissible under the parties’ supply
contracts and lawful under the price regulations: 2) the
promulgation of. the deemed recovery rule in September 5,
1974 was procedurally valid; and 3) the repromulgation of the
deemed recovery rule on December 5, 1974 was procedurally
valid. The case is remanded for determination of whether, in
fact, Murphy violated the deemed recovery rule and thereby
overcharged Naph-Sol.
Affirmed in part, reversed in part, and remanded for further
proceedings consistent with this opinion.
dda
APPENDIX B
UNITED STATES OF AMERICA
DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
Case No. G79-14 CA6
NAPH-SOL REFINING COMPANY,
Plaintiff,
Ve
Murpuy O1L CorPoratTION,
Defendant.
RECEIVED
10-5-82
ORDER
This matter is before the court on defendant’s motion for
summary judgment on plaintiff's fourth cause of action, and in
accordance with the opinion filed this date,
It Is HEREBY ORDERED that the equal application rule did
apply to the establishment of base prices, whether at or below
the maximum allowable base price for nonspecial products;
It Is FURTHER ORDERED that the equal application rule did
not apply to special products after September 13, 1973;
It Is FURTHER ORDERED that the September 5, 1974,
45a
It Is FURTHER ORDERED, therefore, that defendant’s motion
for summary judgment on the plaintiff's fourth cause of action
is granted in part and denied in part.
DoucLas W. HILLMAN
Douglas W. Hillman
District Judge
Dated: October 1, 1982.
Certified As A True Copy
Gerald H. Liefer, Clerk
By S. Walker
Deputy Clerk
U.S. District Court
Western Dist. of Michigan
Dated: Oct. 1, 1982
46a
UNITED STATES OF AMERICA
DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
Case No. G79-14 CA6
NAPH-SOL REFINING COMPANY,
Plaintiff,
Vv.
Murpuy OIL CORPORATION,
Defendant.
RECEIVED
10-5-82
OPINION RE: DEFENDANT’S MOTION FOR SUMMARY
JUDGMENT ON PLAINTIFF’S FOURTH CAUSE OF
ACTION
Presently before the court is defendant’s motion for sum-
mary judgment on plaintiff's fourth cause of action. The court
held this motion in abeyance when it issued its earlier opinion
on defendant’s various motions. Following a status conference
at which the importance and applicability of the deemed recov-
ery rule were clarified, the court is now prepared to address
defendant's motion.
Plaintiff seeks to apply the equal application and deemed
recovery rules to Murphy in support of its claims for over-
charges in the fourth cause of action. Plaintiff claims that:
“52. each month of the period relevant to this
complaint, urphy has applied a lesser proportion ofits
increased costs to its own “Spur” re-
ott than it has ap in determining its selling
47a
— — to st te ——- rin which Naph-Sol
ro ongs than it a , ON a proportionate
Sats, to ether cesses of parcuaser.* ae
Based on these allegations, plaintiff claims that defendant
miscalculated the amount of “banked” costs available for
recoupment in each month and improperly computed the max-
imum allowable prices for covered products sold to plaintiff.
Defendant Murphy Oil has moved for summary judgment
arguing that the deemed recovery rule is both procedurally
and substantively invalid.
STANDARD FOR SUMMARY JUDGMENT
On a motion for summary judgment, the movant has the
burden of showing conclusively that there exists no genuine
issue as to material fact and that the moving party is entitled to
summary judgment as a matter of law. Smith v. Hudson, 600
F.2d 60 (6th Cir. 1979); Tee-Pak, Inc. v. St. Regis Paper Co.,
491 F.2d 1199 (6th Cir. 1974).
In determining whether there are issues of fact requiring a
trial, “the inferences to be drawn from the underlying facts
contained in [the affidavits, attached exhibits and depositions]
must be viewed in the light most favorable to the party oppos-
ing the motion.” United States v. Diebold, Inc., 369 U.S. 654,
655 (1962). Accord, Bohn Aluminum & Brass Corp. v. Storm
King Corp., 303 F.2d 425 (6th Cir. 1962). Even ifthe basic facts
are not disputed, summary judgment may be inappropriate
when contradictory inferences may be drawn from them. Diel-
bod, supra; EEOC v. United Association of Journeymen &
Apprentices of the Plumbing & Pipefitting Industry, Local
189, 427 F.2d 1091, 1093 (6th Cir. 1970). In making this
determination, the court must make reference to the entire
record and all well-pleaded allegations are to be accepted as
true. Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d
389 (6th Cir. 1975). These guidelines will be adhered to as
substantive issues of the various motions are examined.
Xs
48a
EQUAL APPLICATION
As will be explained more fully below, the deemed recovery
rule was adopted as an amendment to the refiner’s price rule,
10 C.F.R. § 212.83, on August 30, 1974. 39 Fed. Reg. 32306
(Sept. 5, 1974). Stated simply, the rule required that refiners
either pass through equal increments of increased product
costs over May 15, 1973, selling prices to all purchasers of a
particular product, or charge different increments, but absorb
the differences rather than “banking” or carrying over the
unrecouped costs. An important preliminary issue, which may
affect the procedural validity of the deemed recovery rule, is
whether the prior regulations required such “equal applica-
tion.”
The original regulations were adopted by the Cost of Living
Council under the Economic Stabilization Act of 1970, 12
U.S.C. § 1904 (note), on August 22, 1973. 6 C.F.R. § 150,
Subpart L, 38 Fed. Reg. 22536 (Aug. 22, 1973). These controls
placed ceilings on the prices which refiners could charge for
covered products. They did not require that the maximum
allowable prices be charged, a theme which would carry
through the entire regulatory period.
The first suggestiwn of an equal application requirement
appears in the preamble to these original regulations. It states
in part:
“Any increase in base prices ... of a product due to
increased costs of crude petroleum or increased costs of
imports must be a plied equally to all classes of purchas-
ers of that product.
38 Fed. Reg. 22536, 22537. The regulations describing alloca-
tion of increased crude oil costs for special products (gasoline,
#2 oils) stated:
“{A] refiner may, in computing its base prices for [speci
products}. . . include an amount to reflect increased costs
. . . Which are attributable to that product. . . . In no case
may the ratio that the attributed bears to the total
increased costs . . . exceed the ratio which sales during
49a
the corresponding fiscal quarter of the preceding year of
the partionler product receiving this shlocation bears to
the total sales of covered products during the same
quarter.”
Sections 150.356(f), 150.357(d). 38 Fed. Reg. at 22540, 22541.
For covered products other than special products (also re-
ferred to herein as nonspecial products) the rules stated:
“(A) refiner may, in computing its base prices for (nonspe-
cial products] . . . include an amount to reflect increased
costs . . . which are attributable to all of its covered prod-
ucts. To the extent that a refiner does not allocate in-
creased costs ... pursuant to this paragraph, it may
include that of its increased costs. . . attributable to
[special ucts] in computing its base prices for those
products.
Sections 150.356(e), 150.357(c). 38 Fed. Reg. at 22540, 22541.
Both section 150.356 (allocation of increased costs of im-
ported crude oil) and section 150.357 (allocation of increased
costs of domestic crude oil) concluded with the requirement
that “(t]he amount of increased costs . . . included in comput-
ing . . . base prices of a particular product must be equally
applied to each class of purchasers of that product.”
The basic refiner’s price rule stated:
“A refiner may not charge a price for an item in excess of
the base price of that item except [prenotified, nonproduct
cost increases).”
Section 150.358(b), 38 Fed. Reg. at 22541.
In its memorandum in support of its motion for summary
judgment, defendant argues that the equal application rule
applied only to nonspecial products. This completely ignores
the early history of the regulations. The original regulations,
as quoted above, clearly require equal application for all prod-
ucts.
On September 12, 1973, the regulations were amended and
clarified. 38 Fed. Reg. 25686 (Sept. 14, 1973). At that time a
formula was introduced which was to be used to calculate the
50a
maximum amount of increased crude oil costs which could be
added to the May 15, 1973 selling price of a particular product.
Section 150.356(c)(2). The formula yielded a “D” term which
was defined as “The dollar increase that can be applied to each
May 15, 1973, selling price of the covered product concerned to
each class of purchaser to compute... the. . . base price to
each class of purchaser. 38 Fed. Reg. at 25688. The same
formula and the same “D” term applied to both special products
and products other than special products. Section 150.356(c)(1)
allowed the carryover of unrecouped costs. Section 150.356(e)
stated that refiners could increase prices other than a special
product to reflect increased crude oil costs, “provided that the
amount of increased costs included in computing base prices of
a particular covered product other than a special product must
be equally applied to each class of purchaser.” The explicit
equal application requirement no longer included special prod-
ucts.
On October 31, 1973, further amendments were prom-
ulgated. 38 Fed. Reg. 30267 (Nov. 2, 1973). These retained the
single formula scheme with an express equal application
requirement for computing base prices of nonspecial products
only. Compare § 150.356(c)(i) with § 150.356(c)(ii). A new sec-
tion 150.356(d) was introduced containing banking provisions.
This section expressly required equal application of banked
costs to each class of purchaser of nonspecial products in
computing base prices.
For special products the carryover provision stated:
“If ... a firm charges prices for a special product .. .
which result in the recoupment of less total revenues than
the entire amount of increased costs of . . . crude pet-
roleum calculated for that product ... the amount of
increased costs not recouped may be added to the May 15,
1973, selling prices to compute the base prices for that
special product . . . for a subsequent month.”
Section 150.356(d)(i).
On November 30, 1973, 38 Fed. Reg. 33577 (Dec. 6, 1973),
the rules were significantly amended with the introduction of
-
5la
two general allocation formulas, one for the special products,
the other for nonspecial. Section 150.356(c)(2). The general
formula for special products established “the dollar increase
that may be applied. . . tothe May 15, 1978 selling price of the
special product . . . of the type ‘i’ to each class of purchaser to
compute the base price to each class of purchaser.” This
amount is designated in the formula as “dju”. This formula is
almost identical to the former single formula adopted in Sep-
tember, 1973. Compare “D” at 38 Fed. Reg. 30270 with “du” at
38 Fed. Reg. 33580.
The requirement of equal application in computing base
prices for nonspecial products again appeared at section
150.356(c)(1)(ii).
“In computing base prices for a covered product other
than a spe Cpagoag ee a refiner may increase its May 15,
1973 se | ey to each class of purchaser .. . by an
amount to re Reet the increased uct costs attributable
to sales of covered products other proc. yore products
. provided that the amount of in product costs
included in com a base prices of a particular covered
product other t product must be equally ap-
plied to each class of perehaser.”
Similarly, section 150.356(d)(2) required equal application of
banked costs when used to compute base prices of nonspecial
products. Cf. § 150.356(d)(1) (no express equal application
requirement when applying banked costs to special products).
On December 27, 1973, the regulations were repromulgated
by reference in 10 C.F.R. § 201. 39 Fed. Reg. 744 (Jan. 2,
1974). On January 14, 1974, the regulations were republished
in full at 10 C.F.R. § 212. 39 Fed. Reg. 1924 (Jan. 15, 1974).
More specifically, 6 C.F.R. § 150.356 became 10 C.F.R.
§ 212.83. The relevant regulations remained unchanged from
those promulgated on October 30, 1973, and quoted above.
These were also the regulations as they existed immediately
prior to the adoption of the deemed recovery rule.
The regulations clearly required equal application of in-
creased nonproduct costs for both special and nonspecial prod-
52a
ucts. 10 C.F.R. §§ 212.83(c)(2)(i)(b), (ii)(b), 39 Fed. Reg. at
1953. At issue is whether these regulations required equal
application of increased product costs even if a refiner chose
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