Opposition Brief — Oahu Gas Service, Inc. v. Pacific Resources, Inc.

No. 87-2096 onresee

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1988

OAHU GAS SERVICE, INC.,

Petitioner,

VS.

PACIFIC RESOURCES INC. and GASco, INC.,

Respondents.

On Petition for a Writ of Certiorari

To The United States Court of Appeals

For The Ninth Circuit

BRIEF IN OPPOSITION

JOHN E. SPARKS

Counsel of Record

WILLIAM S. BoyD

WILLIAM J. TAYLOR

BROBECK, PHLEGER & HARRISON

2900 Spear Street Tower

One Market Plaza

San Francisco, California 94105

Telephone: (415) 442-0900

Counsel for Respondents

BOWNE OF SAN FRANCISCO. INC + 190 NINTH ST. « SF... CA 94103 « (415) 864-2300

i

LIST OF PARENT COMPANIES, SUBSIDIARIES

AND AFFILIATES PURSUANT TO RULE 28.1

Pacific Resources, Inc.

Gasco, Inc.

Enerco, Inc.

PRI Energy Systems, Inc.

Promana, Inc.

Hawaii Energy Resources, Inc.

Hawaiian Independent Refinery, Inc.

PRI International, Inc.

PRI Northwest, Inc.

Pacific Resources Terminals, Inc.

Petroterm, Inc.

International Solarpanel, Inc.

PRI Marine, Inc.

PRI South Pacific, Inc.

South Pacific Resources, Inc.

Triad Pacific Petroleum Limited

Tonga Pacific Limited

Trans Pacific Resources (Fiii) Ltd.

Mid Pacific Resources, Inc.

Paramount Petroleum Corporation

Energy Factors, Incorporated

PRI ASIA PTE LTD.

PRI Eastern Limited

PRI International Limited

PRI Finance Limited

PRI Pacific Limited

Societe Polynesienne de Distribution

D’Hydrocarbures

ASIAN PACIFIC RESOURCES SDN BHD

P.R.I.N. Limited

Pacific Resources (Liberia) Limited

Pacific Resources Limited

Brewer Pacific Agronomics Co.

Pacific Energy Resources, Inc.

Pacific Texas Resources, Inc.

PRI Leasing, Inc.

i

TABLE OF CONTENTS

Page

List of Parent Companies, Subsidiaries and Affiliates Pursu-

2 3 5 ear ara wl Paneer rel ry ire i

Tit AMS 3 iis ce ee eee ill

IRUNER OE TRO LONE i oe ee ee l

J

SN GE TGS eo. sce oe eo ee eee F

Pi.) en I ese 6 a kas 5 oe ee eae eee 2

Te PVG BONO... cc Qizeke ee 2

C. Federal Government Regulation................. 3

D. Modification of HIRI’s Refinery................. 5

E. Gasco’s 1982 Marketing Program................ 7

II

The District Court Proceedings... ... 3. 6.000064 65 cas eaes 8

Ill]

The Proceedings in the Court of Appeals ............... 9

Reasons for Denying the Writ... 02.0.0... 0000s ccuesaud 10

]

The Question Proposed for Review Is Vague, Fact Specific

and Devoid of any Reason for Invoking This Court’s

PI gk eo aks 0 y7n eta ns 4a nee a et 1]

I]

The Court of Appeals Followed Traditional Section 2 Analy-

sis and Correctly Rejected Petitioner's Aberrant Legal

ANNE nce ck keane sdsa sk eee 14

A. Section 2 Does Not Require Manufacture of an

brmiicoent Mew Product... ...ccsucecsnscecdanes 14

B. Section 2 Does Not Prohibit Price Reductions Above

Average Total Cost in the Absence of Injury to

CANON oc as Sb oo enn ee tee ee 18

Conclusion....... cukveesiavadeeested ee 20

iil

TABLE OF AUTHORITIES

Cases

Page

Airweld, Inc. v. Airco, Inc., 742 F.2d 1184 (9th cir. 1984),

oor, meme, 467 US. 1213 (1985) ................... 20

Arthur S. Lagenderfer, Inc. v. S.E. Johnson Co., 729 F.2d

1050 (6th Cir.), cert. denied, 469 U.S. 1036 (1984) .... 13

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

a i ay 86, 37

Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (Ist

ey Sey ence cveesceesseaes's 13

Berkey Photo Inc. v. Eastman Kodak Co., 603 F.2d 263

(2nd Cir. 1979), cert. denied, 444 U.S. 1093 (1980) ... 12

Brown Shoe Co. v. United States, 370 U.S. 294 (1962)... 20

California Computer Products, Inc. v. International Business

Machines Corp., 613 F.2d 727 (9th Cir. 1979) ....... 12, 20

Cargill Inc. v. Montfort of Colorado, Inc., 479 U.S. 104;

8 19, 20

Drinkwine v. Federated Publications, Inc., 780 F.2d 735 (9th

Cir. 1985), cert. denied, 106 S.Ct. 1471 (1986)........ 20

Foremost Pro Color Inc. v. Eastman Kodak Co., 703 F.2d

534 (9th Cir. 1983), cert. denied, 465 U.S. 1038 (1984). 12

GAF Corp. v. Eastman Kodak Co., 519 F.Supp. 1203

EE 17

Gasco Inc., 1 Federal Energy Administration {| 20,724

EE 3

Matshushita Elec. Indus. Co. v. Zenith Radio Corp.,

ee 13, 18

Mobil Oil Corp. v. Federal Energy Admin., 566 F.2d 87

hs cece bss auncdbesecns 16

MCI Communications Corp. v. AT&T, 708 F.2d 1081 (7th

Cir.), cert. denied, 470 U.S. 1005 (1983) ............. 13

Northeastern Tel. Co. v. AT&T, 651 F.2d 76 (2nd Cir.),

cert. denied, 454 U.S. 968 (1981) ................... 13

Oahu LP Gas Service, Inc., 2 FEA ¥ 85,009 (Feb. 11,1975) 16

Olympia Equipment Leasing Co. v. Western Union Tele.

Co., 797 F.2d 370 (7th Cir. 1986), cert. denied, 107 S.Ct.

ed. a sks eceaceessens 16, 20

iV

TABLE OF AUTHORITIES

CASES

Page

Standard Oil Co. of Calif., 2 FEA ¥ 80,618 (June 26, 1975) 16

Southern Pacific Comunic. Co. v. AT&T, 740 F.2d 980

(D.C. Cir.), cert. denied, 470 U.S. 1005 (1984) ....... 13

Transamerica Computer Co. v. International Business

Machines Corp., 698 F.2d 1377 (9th Cir.) cert. denied,

ee ee I eda ee uloe re ocd 13, 19, 20

United States v. Grinnell Corp., 384 U.S. 563 (1966) ...12, 15

United States v. Johnston, 268 U.S. 200 (1925) ......... 14

Western Concrete Structures v. Mitsui & Co. (USA), Inc.,

760 F.2d 1013 (9th Cir.), cert. denied, 474 U.S. 903

SO vey ok ee a oer, Ore. 1]

William Inglis & Sons Baking Co. v. “ITT Continental

Baking Co., 668 F.2d 1014 (9th Cir. 1981), cert. denied,

ae Aa CE id cosa noe etn ed dae kaa 20

Statutes and Regulations

15 United States Code:

BU dane chi k Oh solace ek pled babeaen eens 8

FRIES POU PES ON Pee PEE Ee Oe SE ROO EL passim

§ 3 of Clayton Act ..... Sipe please uptrend pe cag ha Reply: 8

Re Dre AAS arr re rare ere 3

10 Code of Federal Regulations:

Ee niga gre ease aaa aon aah awe 5

PE eee Mee SLC UL sh dase euoaleee ache ee sna ceeds 3

subpart E, § 212.81 ef sem... 2. ccc ccc cece ceee 5

ge ee eer rere 5

Other Authorites

Areeda, P. & Turner, D., III Antitrust Law (1987) ...... 13

Easterbrook, F., On Identifying Exclusionary Conduct, 61

Notre Dame L. Rev. 972 (1986) .................... 18

Liebler, W., Whither Predatory Pricing? From Areeda and

Turner to Matsushita, 61 Notre Dame L. Rev. 1052

REED *s-s.0' bnlae pire a Os ange Eee 13

No. 87-2096

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1988

OaHu GAS SERVICE, INC.,

Petitioner,

VS.

PaciFic RESOURCES INC. and Gasco, INC.,

Respondents.

On Petition for a Writ of Certiorari

To The United States Court of Appeals

For The Ninth Circuit

BRIEF IN OPPOSITION

STATEMENT OF THE CASE

The Petition for Certiorari (“Petition”) presents a question for

review that is entirely fact specific, relating to the individual

“circumstances” of this case, and raises no important issue of law

that is worthy of consideration by this Court. We accept the

question as stated. However, the statements of facts and proceed-

ings before the Court of Appeals are incomplete and inaccurate.

We set forth below a statement of uncontroverted facts supported

by references to the. record before the Court of Appeals and a

summary of the proceedings below.

' The record references are to the record before the Court of Appeals.

We cite the Appendix to the Petition as “App. A”, etc. and the

Appendix to this brief as “App. 1”, etc. Emphasis is added in quoted

matter unless otherwise stated.

2

I

STATEMENT OF FACTS

A. The Parties

Respondent Gasco, Inc. (“Gasco”) is the wholly owned sub-

sidiary of Respondent Pacific Resources, Inc. (“PRI”) (C.R.

265, p.6). Gasco is, and has been since the 1950's, engaged in the

retail distribution and sale of propane and SNG in Hawaii

(RT3:67, 13:13). Petitioner Oahu Gas Service, Inc. (“OGS”)

was formed in late 1972 by a former officer and director of Gasco

and PRI, James Fransden, to engage in the distribution and sale

of propane on the Island of Oahu (C.R. 265, pp.8-9).

B. The Propane Markets

Prior to 1982, Standard Oil Company of California (“Chev-

ron’) was the sole manufacturer of propane in Hawaii, and prior

to 1972, Chevron operated the only petroleum refinery in Hawaii

(RT13:13). At all relevant times, Chevron and the federal gov-

ernment have dominated wholesale propane sales in Hawaii

(App. C, p.20). In 1972 PRI's subsidiary, Hawaiian Independent

Refinery, Inc. (“HIRI”), completed construction of, and intro-

duced into commercial operation, a small refinery on Oahu for

manufacture of petroleum products, not including propane. As

discussed below, HIRI considered entering the wholesale propane

market by adding a propane unit to its refinery prior to the

initiation of federal price control in late 1973, but delayed that

investment until 1982 after the end of price control.

Chevron was for many years the major retail distributor of

propane in Hawaii. Chevron withdrew from that business in the

1950’s and thereafter sold propane to Gasco, which became the

sole retail distributor of propane in Hawaii until the entry of OGS

in 1972. (RT3:67, 13:13.) OGS was conceived to target Gasco’s

large commercial, industrial and multi-family unit customers on

the Island of Oahu. Frandsen recognized that these large volume

propane users, as compared to residential users, required less

handling, less investment and were the “key to this type of

business and always will be” (RT9:142). As the Petition states

(p.4), “Chevron encouraged James Frandsen to form OGS, and

3

eventually contracted with OGS for propane supplies” (Exs. 958,

2074). As Frandsen testified, “they [Chevron] had already estab-

lished the fact that they were going to have a second distributor

out here” (RT9:99). OGS did not enter the less lucrative propane

distribution business on the Neighbor Islands of Hawaii, where

Gasco continued to be the sole propane distributor. After its entry

in 1972, OGS increased market share every year. By 1983 OGS

had 30% of propane retail sales on Oahu (RT4:155-56; Ex. 1318)

and 78% of the sub-market of large commercial and industrial

users (RT3:68-69). A third retail propane marketer, Aloha Gas,

commenced operations on Oahu in 1983 (RT12:107-08).

C. Federal Government Regulation

The Emergency Petroleum Allocation Act was enacted in

November 1973, governing petroleum prices and supply relation-

ships. The federal government (ultimately through the Depart-

ment of Energy (“DOE”)) exercised complete control over both

propane prices and the allocation of propane supplies until 1981]

with the purpose and effect of displacing “normal market forces”

(RT14:193, 194, 198).

The federal regulations superseded the contractual supply rela-

tionship between Chevron and its customers, Gasco and OGS. In

place of a contractual supply commitment from Chevron, DOE

assigned OGS an allocation of a portion of Chevron’s supply to

Gasco during the base period (RT14:205-6). Because price

controls made propane production less profitable than using the

components of propane to produce other products, Chevron

limited its production of propane to the minimum required by

DOE. (E.g., Gasco Inc, 1 FEA § 20,724 (Dec. 6, 1974).) Gasco

was not able to obtain the quantity of Chevron propane necessary

to supply its customers and imported foreign propane at a signifi-

cantly higher cost (RT2:78). OGS obtained all of its supplies

715 USC. §751 et seg. (1973); 10 C.F.R. Part 211 (Mandatory

Petroleum Allocation Regulations) and Part 212 (Mandatory Petroleum

Price Regulations)

4

from Chevron and enjoyed a cost advantage over Gasco.’ This

cost advantage permitted OGS’s business to grow at an even more

rapid rate than OGS predicted in its initial business projections

(RT9:168-69, 15:84-86; Exs. 2120, 2149, 2191).

Even with its rapid growth and cost advantage, OGS did not

utilize all of the propane made available to it by Chevron under

the regulations until 1976 (Exs. 2633, 2822). Over the next

six years, OGS petitioned DOE on numerous occasions seeking

an order requiring Chevron to provide more propane to OGS.

Gasco opposed OGS’s requests on the ground that providing

OGS with a greater percentage of the low price Chevron propane

would only require Gasco to import greater quantities of more

expensive foreign propane and thus increase the cost advantage

that OGS already enjoyed. Based primarily on this reasoning, the

DOE regularly denied OGS's requests.* Finally, in July, 1979,

DOE increased OGS’s supply of domestic propane on the condi-

tion that OGS pay an amount necessary to offset partially the

additional costs Gasco would incur to import more foreign

propane.°

Mr. Frandsen admitted, as the DOE had determined. that OGS

enjoyed a competitive advantage over Gasco in the cost of propane

because OGS purchased only price controlled domestic propane from

Chevron while Gasco purchased additional supplies at higher prices on

the world market (RT12:107-08). The DOE stated (Ex. 110, p.7):

Since OGS purchases only the lower cost domestic propane, its

product cost is considerably less than Gasco’s product costs

“In its Order dated September 20, 1978, the DOE stated (Ex. 97.

p.6):

OGS enjoys a substantial cost advantage over Gasco, a cost

advantage which would certainly be increased by the approval of an

increased base period allocation to OGS.

However, consumers will not necessarily benefit from “competi-

tion” in a market in which one firm enjoys a particular advantage.

’ Ex. 97, pp.26-27. The $163,108 OGS paid in accordance with this

DOE order was awarded trebled to OGS as damages as the “World

Price Adjustment.” OGS also was awarded as damages the $375,000

5

D. Modification of HIRI’s Refinery

The government regulatory program also played a decisive role

in HIRI’s consideration of adding a propane recovery unit to its

refinery in the mid-1970's. The HIRI refinery, which had com-

menced operations in 1972, was constructed to produce fuels for

military uses. In early 1973, HIRI began to consider possible

refinery modifications, including installation of new equipment to

permit production of gasoline and commercial grade propane.

HIRI commissioned both internal and external studies of these

possibilities. (RT13:92, 99-100.) In 1973, HIRI anticipated that

the refinery modifications would be completed by 1976 and that

Gasco would be the primary purchaser of the new propane

(Exs. 243, 381).

The 1973-74 government regulations, enacted after the Arab

oil embargo in September 1973, impacted HIRI’s plans by fixing

a maximum wholesale price that could be charged by a refiner for

propane. Since HIRI had never before produced propane, the

price HIRI could charge would be determined under the “New

Item Rule” (10 C.F.R. § 212.11), which limited HIRI to Chev-

ron’s maximum price for propane in Hawaii. (RT14:216-217.)°

The government ceiling price dramatically altered the eco-

nomic viability of the proposed HIRI investment. As Joseph

Pelletier, Executive Vice President of PRI, testified (RT13:101-

02):

The effect on our propane unit was that as we analyzed the

cost. the investment we would have to put in...and we

looked at and determined through contacts with the Depart-

ment of Energy... what the pricing might be that we could

which Mr. Frandsen “estimated” OGS spent in the various proceedings

before the DOE

° For refiners such as Chevron and HIRI the calculation of maximum

ceiling prices it could charge for gasoline and propane were calculated

under two separate and different formulas. Compare Subpart K, 10

C.F.R. § 212.161 et seg. (Mandatory Petroleum Price Regula-

tions—Natural Gas Liquids) with Subpart E, 10 C.F.R. § 212.81 et seq.

(Mandatory Petroleum Price Regulations—Refiners )

6

sell that propane from the refinery, we found out that it was

not economical.

In fact, we’d have to make an investment in which we’d

have a negative return on it. And so it just did not make

sense to us to go ahead and proceed with it at that time.

Propane production was also uneconomic for Chevron, which

was, nonetheless, required by DOE regulations to continue pro-

pane production and sale at regulated prices (Ex. 2656). How-

ever, HIRI was not required by DOE to construct a propane

production unit and to commence propane production, and HIRI

postponed its plans to do so in the interest of avoiding production

of an uneconomic product. Mr. James Gary, the President and

Chairman of PRI as well as President of HIRI, confirmed that

propane production by HIRI did not make economic sense

(RT:5:85):

{I]t appeared that we would be tied to what Standard of

California, for the allocation period, was being required to

sell propane for also. And there’s no way you could build a

new facility and charge the Standard of California price and

make the thing pay.

The foregoing evidence was uncontroverted. At trial, OGS did

not dispute this evidence but elected instead to attack defendants’

“lack of morality” in allowing Chevron to be saddled alone with

the obligation of refining a commodity on which it was losing

money. (RT18:152.)

Defendants acknowledged that HIRI would be required to sell

propane to OGS if it made the investment to produce propane.’

This was cited by OGS as “evidence” that HIRI’s intent was to

“starve” OGS. However, since HIRI modified its refinery and

” (RT7:165; Exhibits 776, 778, 550.) There was no evidence that

HIRI ever tried to avoid any obligation to supply OGS. To the contrary,

PRI's Chairman, Mr. James Gary, testified that HIRI was prepared to

supply propane to others (RT5:86-87.) He later reiterated that HIRI

would “sell to them [OGS] today. In fact, I think we’ve offered to at

one point or another” (RTS:90). OGS has never even asked to purchase

HIRI propane (RT13:122).

7

commenced propane production in 1982 after the end of price

controls in 1981, it has sold propane to Aloha L.P. Gas, a new

entrant, to Gasco, and has expressed willingness to sell to OGS

(RT6:87-89).

E. Gasco’s 1982 Marketing Program

In late 1981 with the end of federal regulation, propane became

more plentiful, and Gasco was beset by declining sales volume

resulting from the installation of alternative energy devices such

as electric heat pumps and solar powered water heating systems.*

In response to these changing conditions, Gasco undertook a

market analysis and developed a pricing and marketing strategy to

compete with the substitute energy sources and with OGS for the

high volume commercial and industrial users.

In March and April, 1982, Gasco sent more than 3900 letters to

present and potential industrial and commercial users of propane,

including some being supplied under long term contracts with

OGS, offering long term contracts at reduced prices (Exs. 2812,

2813; RT7:50-57). OGS conceded at trial that the prices offered

by Gasco were above Gasco's average tota! costs of supplying

propane.”

In response to Gasco’s offers, OGS immediately instituted

what it called a “temporary voluntary allowance” or “TVA,”

reducing its price to each of its contract customers (RT9:189-

90).'° As a result of the TVA, none of the OGS customers

accepted Gasco’s proposed contract, although all of them bene-

* E.g., Exhibit 2808. Gasco lost 2 to 3 million gallons of propane sales,

approximately 10% of its business, to heat pumps between 1980 and

1985. (RT2:160-161.)

” OGS’s assertion in its complaint that the prices offered by Gasco

were below cost as well as its claims that these offers violated the

Robinson-Patman Act and Hawaii state law were abandoned at trial

(C.R. 310, 341).

'° Mr. Fransden’s unsupported conclusory testimony that the TVA’s

“almost” forced OGS into bankruptcy was belied by the fact that OGS

was profitable throughout the period at issue (RT9:168-69; Ex. 662,

p.33).

8

fited from the lower prices resulting from this competition

(RT9:191). Some existing Gasco customers accepted Gasco’s

contracts, and they also enjoyed reduced propane prices (RT

7:14-17).

II

THE DISTRICT COURT PROCEEDINGS

The complaint was filed in 1977, asserting violations of Sec-

tions 1 and 2 of the Sherman Act, Section 3 of the Clayton Act

and various Hawaii statutes. In 1982 petitioner obtained a prelim-

inary injunction restraining Gasco from soliciting petitioner’s

contract customers (C.R. 184). Thereafter, the court ordered

petitioner to desist from misrepresenting the injunction to poten-

tial and existing customers (C.R. 246).

Throughout the many years of pretrial proceedings in this case,

petitioner’s principal contentions were that respondents had vio-

lated Section 2 by conducting sham proceedings before DOE and

engaging in predatory pricing. At trial, however, petitioner ab-

ruptly abandoned those theories and asserted, instead, that the

violation of Section 2 consists of (1) HIRI’s decision not to invest

in and construct a propane recovery unit at its refinery in 1974 and

1975 and (2) “sham” offers of reduced prices to OGS’s custom-

ers in 1982. (See RT1:9-97, 131; RT17:69, 89; RT18:165; C.R.

363, p.7.) As the District Court noted, “the case which was tried

was entirely different from the case which was filed” (C.R. 379,

p. 8).

The jury returned a verdict in favor of petitioner awarding

damages of $4,963,998 ($1,654,666 trebled).

Following the trial, respondents filed a motion for judgment

n.o.v. on three separate and independent grounds: (1) that the

evidence was insufficient to permit a conclusion that distribution

of propane was susceptible to monopolization by PRI-Gasco;

(2) that petitioner failed to offer sufficient proof of conduct

violative of the standards of competition imposed by Section 2;

and (3) that the evidence of injury and damage was too specula-

tive to go to the jury. On June 2, 1986, the District Court, inter

alia, denied respondents’ motions for a judgment n.o.v. and

9

granted petitioner $873,324 in attorneys’ fees (C.R. 358, 359, 362,

372, 379). The District Court’s memorandum and order devoted

one paragraph to respondents’ motion (C.R. 379):

While the Court had indicated that it might well have found

a different result, or at least made inquiry beyond that

presented to the jury had the case been tried to the Court,

there is substantial evidence to support the jury’s verdict.

The Motion for Judgment Notwithstanding the Verdict is

denied.

Ill

THE PROCEEDINGS IN THE COURT OF APPEALS

The Opinion issued October 9, 1987, (1) reversed the portion

of the judgment based on the refinery modification contention on

the ground that respondents had established undisputed efficiency

justifications for delay of its refinery modification (App. A, p.10);

(2) affirmed the portion based on the 1981 price reductions on

the ground that there was “clear and convincing evidence” to

support the jury’s verdict that respordents’ reduced price offers

were predatory (id. p.12); and (3) remanded to the District

Court to “recalculate” the award of attorneys’ fees (id., p.14).

On October 23, 1987, respondents filed a petition for rehearing,

contending, inter alia, that Gasco’s offers of reduced prices above

average total cost were lawful, regardless of the existence of

predatory intent, in the absence of clear and convincing evidence

of an injury to competition (App. E, p.3). Petitioner did not file a

petition for rehearing but did file a petition for clarification

(App. 1), which urged that the Opinion be “clarified” in two

respects: (1) by defining the term “uneconomical” as used in the

discussion of the refinery modification issue to mean “unprofita-

ble” and (2) by deleting reference to the “clear and convincing”

evidence standard from the discussion of Gasco’s 1982 marketing

campaign.

On November 27, 1987, the Court of Appeals issued its

Amended Opinion, which contains essentially two changes:

(1) the discussion of the refinery modification issue is revised to

10

state, among other things, that the investment required to produce

propane in the HIRI refinery would have resulted in a “negative

return” in the light of “price controls” and, therefore, was “not

economically efficient” (App. B, p.10); and (2) the discussion of

the 1982 marketing program was revised to eliminate the clear

and convincing evidence standard applied in the Ninth Circuit in

predatory pricing cases. The Amended Opinion holds that

“sham” or “fraudulent” offers of reduced prices “whose only

rationale is a desire to drive rivals out of the market” are illegal

under Section 2 and that “the evidence reasonably supported the

jury’s finding of a predatory rationale” (App. B, p.13). The

Amended Opinion does not address, or purport to rule upon,

respondents’ petition for rehearing.

On February 1, 1988, the Court of Appeals issued its Order and

Opinion (App. C). The Order withdraws the earlier two opinions,

and the Opinion reverses the judgment below in its entirety. The

February 1 Opinion contains an expanded discussion of market

power and relevant markets (App. C, pp.8-16), republishes the

Amended Opinion’s discussion of the refinery expansion issue

(App. C., pp.17-20), and reverses the judgment based on the

1982 marketing campaign on the basis of the traditional Section 2

concept that the correct test for predatory conduct arising from

offers of prices above average total cost is whether the offers

“unreasonably restrict competition” (App. C, pp.21-22).

Subsequent to the issuance of the February 1 Opinion, the

Court of Appeals denied respondents’ petition for rehearing as

moot. Petitioner filed a timely petition for rehearing limited to the

issue of the 1982 marketing campaign (App. 2). Consistent with

its position on the October opinion, petitioner did not seek

rehearing with respect to the refinery expansion issue. Petitioner

now seeks to have this Court review the Opinion’s analysis of

Section 2 conduct in toto, claiming that it involves the jury’s

proper role and function in a Section 2 case.

REASONS FOR DENYING THE WRIT

The Opinion applies settled principles of antitrust law to

particular facts. It is highly specific to the particular circum-

11

stances of the case, which occurred, in part, under the discarded

framework of federal regulation over the supply and pricing of

propane. The Petition points to no conflict among the Circuits, no

issue of antitrust law or important aspect of this particular case

that should prompt this Court to entertain a discretionary review.

I

THE QUESTION PROPOSED FOR REVIEW IS VAGUE,

FACT SPECIFIC AND DEVOID OF ANY REASON FOR

INVOKING THIS COURT’S REVIEW

Petitioner seeks to have this Court review an amorphous, open-

ended question, asking (Petition, p.i):

Given monopoly power in properly defined relevant product

and geographic markets, under what circumstances can an

appellate court determine that the monopolist’s conduct is

procompetitive as a matter of law and under what circum-

stances must the appellate court abide the fact finder’s

determination if supported by substantial evidence?

This question is so vague as to ke meaningless and does not

present any issue on which the Circuits are in conflict or any

question of overriding importance of statutory interpretation justi-

fying this Court’s review. The relevant legal standards for review

are set forth in the Opinion,'' and the Petition does not take issue

with them. Rather, the Petition contends that under the circum-

stances of this particular case the Court of Appeals improperly set

aside the verdict of the jury, which, petitioner contends, was

supported by substantial evidence. Even if that were so, which it

is not, review would entail and require a detailed inquiry into the

trial record and would involve only questions of fact and evidence.

'! The Opinion states the standards of review, applicable to species of

conduct found to violate Section 2 (App. C, p.16):

These determinations that specific conduct was anticompetitive in

violation of the Sherman Act are questions of law that we review de

novo. Western Concrete Structures Co. v. Mitsui & Company

(U.S.A.), Inc., 760 F.2d 1013, 1016 (9th Cir.), cert. denied, 474

U.S. 903 (1985).

12

The Petition suggests that by reviewing this case, the Court will

be able to draw a bright line between “what monopolistic behav-

ior can be held procompetitive as a matter of law” and “what

monopolistic behavior presents for a jury a justiciable fact issue”

(Petition, p.12). This suggestion simply does not bear analysis.

The two courses of conduct that were here challenged to be in

violation of Section 2 are well within the zone conceded by the

Petition to be “permissible acts even if done by a monopolist”

(Petition, p.12).

The first was the decision of HIRI about the timing of “entry”

into the “market” of manufacture and wholesale of propane,

which is a market concededly not dominated by respondents

(App. C, p.20). Consistent with the Court’s decision in United

States v. Grinnell Corp., 384 U.S. 563, 571 (1966), the lower

federal courts have refused to second-guess even a monopolist’s

decisions about the timing of market entry. E.g., Berkey Photo,

Inc. v. Eastman Kodak Co., 603 F.2d 263, 286 (2d Cir. 1979)

cert. denied 444 U.S. 1093 (1980) (“Any firm, even a monopo-

list, may generally bring its product to market whenever and

however it chooses. ...”); Foremost Pro Color, Inc. v. Eastman

Kodak Co., 703 F.2d 534, 545 (9th Cir. 1983), cert. denied, 465

U.S. 1038 (1984) (“Without more, it is not unlawful for any

competitor in any market to delay the introduction of a new

product or an entire line of new products until . . . the competition

forces such introduction.”). And a related line of cases holds that

a monopolist may make product changes justified by efficiency.

E.g., California Computer Products, v. International Business

Machines Corp., 613 F.2d 727, 744 (9th Cir. 1979) (Cost-

justified changes in product design “did not present a jury

issue.” ). Compare, Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585 (1985), where the Court upheld a verdict for

the plaintiff based on conduct by a monopolist cancelling a long-

standing market relationship, which effected an “important

change” in the character of the market, on the ground that there

was no business justification (id. at 604-5). Here, the Court of

Appeals refused to permit the jury to second-guess HIRI’s

decision not to invest in propane manufacturing facilities when

propane production was economically inefficient and when the

decision left the existing retail propane markets and supply

13

relationships exactly as they were. Rather than challenging the

formulation of the permissible conduct, the Petition (16-20)

quibbles with the Court of Appeals’ analysis of the economic facts

of record.

The second course of challenged conduct was Gasco’s 1982

marketing program, consisting of offers of reduced prices above

average total cost to high volume propane consumers. Economic

theory and reported decisions suggest that price-cutting in this

range presents no danger to competition and consumer welfare.

E.g., Areeda, P. & Turner D., III Antitrust Law 4714 (1978

ed.) and 9711.1 (Suppl. 1987); Arthur S. Langenderfer, Inc. v.

S.E. Johnson Co., 729 F.2d 1050, 1056 (6th Cir.) cert. denied,

469 U.S. 1036 (1984); Barry Wright Corp. v. ITT Grinnell Corp.,

724 F.2d 227, 232-36 (1st Cir. 1983); Northeastern Tel. Co. v.

AT&T, 651 F.2d 76 (2d Cir.), cert. denied, 454 U.S. 968 (1981);

MCI Communic. Corp. v. AT&T, 708 F.2d 1081, 1111-1123 (7th

Cir.), cert. denied, 464 U.S. 891 (1983); Southern Pacific Com-

munic. Co. v. AT&T, 740 F.2d 980, 1005 (D.C. Cir.), cert.

denied, 470 U.S. 1005 (1984) (conclusive legality for prices

above average cost is “relatively uncontroversial”); see also Mat-

shushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

589 (1986) (“there is consensus among commentators that

predatory pricing schemes are rarely tried, and even more rarely

successful.”); W. Liebler, Whither Predatory Pricing? From

Areeda and Turner to Matshushita, 61 Notre Dame L. Rev. 1052

(1986).'? Again, the Petition does not challenge the rule of law

applied but argues that the Court of Appeals has incorrectly

concluded that Gasco’s price reductions did no injury to

competition.

The Petition in effect suggests that this Court review every

appellate decision arising under Section 2 of the Sherman Act to

assure that the Court of Appeals correctly analyzed the facts and

did not invade the province of the jury. Such a review is not a

\2 In the Ninth Circuit price reductions above average total cost are

predatory only if injury to competition is demonstrated by clear and

convincing evidence. Transamerica Computer Co. v. International Busi-

ness Machines Corp., 698 F.2d 1377, 1387 (9th Cir.), cert. denied, 464

U.S. 955 (1983).

14

suitable exercise of this Court’s discretionary jurisdiction. United

States v. Johnston, 268 U.S. 200, 227 (1925) (“We do not grant a

certiorari to review evidence and discuss specific facts.’’).

Il

THE COURT OF APPEALS FOLLOWED TRADITIONAL

SECTION 2 ANALYSIS AND CORRECTLY REJECTED

PETITIONER’S ABERRANT LEGAL CONTENTIONS

A review of the Opinion below discloses a proper disposition of

the case. The appellate court cited and followed the proper

standard for review of a jury verdict on a j.n.o.v. motion. It also

properly applied mainstream Section 2 principles.

As noted above, petitioner’s disagreement with the Opinion is

in its application of settled law to the specific facts of this case.

Beyond that, the Petition addresses a general lament about the

development of law under Section 2 and invites this Court to

undertake a reversal of field, starting with this fact-specific case.

A. Section 2 Does Not Require Manufacture Of An Inefficient

New Product

As stated above, petitioner’s theory of the case, based upon a

presumed obligation by respondents to invest in refinery improve-

ments for the benefit of petitioner, was advanced on the eve of

trial. It is unprecedented and contrary to the principles of compe-

tition underlying the antitrust laws. It should have been rejected

by the District Court, and reversal by the Court of Appeals did

not even present a close question.’

' Petitioner's show of indignation here is somewhat suspect in the

light of the failure below to raise the issues here presented in a petition

for rehearing. Rather, in its motion for clarification petitioner simply

requested the Court to specify that the refinery construction would have

been uneconomic because “unprofitable.” There was no suggestion of an

evidentiary controversy about such a conclusion, and petitioner’s subse-

quent petition for rehearing (App. 2) does not mention the refinery

modification issue.

15

In attacking that reversal here, petitioner erroneously portrays

the Opinion below as relying solely on the business “acumen”

exception referred to in United States v. Grinnell, 384 U.S. 563,

571 (1966). The Opinion also cites and relies upon the cases,

cited p.19 supra, holding that a monopolist may decide when to

bring a product to market and upon Aspen Skiing Co., supra, and

other cases holding that conduct justified by “efficiency” is

generally exempt from further Section 2 scrutiny. All of these

cases support the conclusion of the Court of Appeals that respon-

dents were not required by Section 2 to begin manufacture of a

new product to assist petitioners, particularly when there is an

efficiency justification for not doing so.

Petitioner’s argument below was based on a misguided exten-

sion of Aspen Skiing and an effort to find support in a line of

supply restriction cases. The Court of Appeals’ analysis is entirely

consistent with those cases, none of which supports petitioner’s

argument.

The basic problem with both analogies is that respondents were

not engaged in the production of propane and had no conceivable

monopoly power in the wholesale propane market. Respondents’

alleged market power was at the next level, retail distribution.'* In

contrast, the monopolist in Aspen Skiing exercised monopoly

power in the same market (the supply of ski lift tickets) from

which plaintiff was excluded. Similarly, in the supply restriction

cases, monopoly power was exercised in the market in which

supply was restricted. This basic distinction is relied upon by the

Opinion below.'°

'* The Opinion (App. C, 12) expresses doubt about the correctness of

the jury’s finding that Gasco exercises monopoly power in a relevant

market for retail distribution of propane.

'S “A theory of liability based on ‘supply restriction’ must fail because

Pacific Resources had no monopoly power over supplies of propane

to Hawaii. Chevron produced all Hawaiian propane until 1982.

Contrary to Oahu’s argument, the regulatory scheme in place in

the 70’s did not give Pacific Resources control over propane

supplies. Oahu appealed to the Department of Energy for larger

16

Aspen Skiing does not support petitioner's theory for a second

important reason. The monopolist in that case, as Justice Stevens’

Opinion carefully notes (475 U.S. at 603), did not merely refuse

to enter into “a cooperative venture” proposed by a competitor.

“Rather, the monopolist elected to make an important change in

a pattern of distribution that had originated in a competitive

market and had persisted for several years.” (/bid.) Here, HIRI’s

election not to commence manufacture of propane made no

change whatsoever in the pattern of distribution or competitive

market. Compare, Olympic Equipment Leasing Co. v. Western

Union Tel. Co., 797 F.2d 370, 375-76 (7th Cir. 1986) cert

denied, 1075 S.Ct. 1574 (1987) (“ ‘There is a difference between

positive and negative duties, and the antitrust laws, like other

legal doctrines sounding in tort, have generally been understood to

impose only the latter.” USM Corp. v. SPS Technologies Inc., 694

F.2d 505, 512-13 (7th Cir. 1982).”).

The fundamental tenet of the Opinion on this issue is that here,

unlike Aspen Skiing, as a matter of law there was an efficiency

justification for delaying investment in the propane unit. This

justification was created by the price control regulations imposed

by the federal government on the manufacture of propane at a

time when HIRI was evaluating proposed refinery modifica-

tions.'° After consulting with DOE and concluding that HIRI

would be tied to Chevron’s pricing under the DOE New Item

Rule and that the investment in a prepane unit would produce a

negative return, HIRI deferred investment in the propane recov-

ery unit until after price controls of propane were discontinued in

early 1981. As stated in the Opinion (App. C, p.18), “in light of

allocations of propane, and it was ultimately successful.” (App. C,

p.20.)

'© The regulatory scheme for propane and natural gases was different

under the regulations from that applicable to gasoline. Because propane

is a heating fuel essential in remote areas and has special importance in

drying crops, there were special concerns about maintaining a lower

price. See Mobil Oil Corp. v. Federal Energy Admin., 566 F.2d 87, 94-97

(TECA 1977). Thus, it was profitable to manufacture gasoline, but not

propane. See Oahu LP Gas Service, Inc. 2 FEA § 85,009 at 85,002 (Feb

11, 1975); Standard Oil Co. of Calif, 2 FEA § 80,618 (June 26, 1975)

17

the then-existent price controls, it was not economically efficient”

to produce propane. Hence, “as a matter of law,” respondents’

“decision to refrain from producing propane because it was not

economically efficient is sufficient justification to preclude anti-

trust liability” (id. at p.20).

The Petition suggests that the Court of Appeals was obligated

to go beyond respondents’ prima facie evidence of efficiency

justification and “ensure” that the justification for the delay in

refinery modification had “the net effect of producing better

products at lower prices or otherwise benefiting consumers”

(Petition, p.19). This assertion is contrary to this Court's state-

ment in Aspen Skiing that any valid business justification for the

exclusionary conduct would exonerate it from further Section 2

scrutiny (472 U.S. at 605)."’ It is axiomatic that demonstration of

efficiency justification will tend to confer economic benefits on

consumers and result in better products and lower prices. Here,

HIRI was a new entrant into the refining market in competition

with Chevron. Decisions designed to avoid money-losing products

would tend to greater efficiency and competitiveness in the

market for other products.

Petitioner points to the evidence that Gasco imported propane

at a higher cost than domestic propane and that the refinery

"” Judge Pierce rejected a similar contention in GAF Corp. v. Eastman

Kodak Co., 519 F.Supp. 1203, 1231-32 (S.D.N.Y. 1981), that Kodak

could be liable under Section 2 for failure to market in the United States

a film being sold by Kodak in other countries, stating as follows:

To create the possibility that treble damages might be awarded on

the basis of a finding (made with the benefit of hindsight) that a

firm’s failure to introduce a product was anticompetitive would

impose a significant chilling effect on innovation and research not

envisioned by §2....The chilling effect on innovation would

encourage the very industrial sluggishness the Sherman Act was

designed to prevent. Notably, so far as this Court is aware, no court

has yet found a monopolist’s failure to market a product as

satisfying § 2's conduct requirement.

Secondly,...the ability of the judicial system to determine

whether a product should have been marketed, and, if so, when is

severely limited . ...

18

modification cost more in 1982 dollars than it would have cost in

1973 dollars, and speculates that HIRI’s investment decision may

not have been in the /ong-run combined economic interests of

HIRI-PRI-Gasco, but petitioner offered no demonstration to the

courts below to substantiate the truth of its speculation. If

petitioner's speculation were accepted as true, it is nonetheless

irrelevant. The essence of predation is action taken that is not

profit-maximizing in the short run and that depends on long-run

recoupment through future monopoly pricing to make it rational

economic behavior. See Matshushita, supra, 475 U.S. at 588-89.

It is perverse for petitioner to argue that a decision not to invest in

propane production equipnrent is predation in violation of Sec-

tion 2 because the investor thereby maximized short run profits at

the expense of unpredictable, uncertain long run benefits. See

generally, F. Easterbrook, On identifying Exclusionary Conduct,

61 Notre Dame iL. Rev. 972 (1986). Moreover, interjecting

retrospective review of events subsequent to the conduct in

question as an element of the test for liability would arbitrarily

punish decision makers with treble damages, would distort invest-

ment decisions and deter investment and would invite antitrust

defendants to argue that adjudication of classic predatory acts

should await excuse through evaluation of their long-run effects.

In short, petitioner advances an aberrant, erroneous theory

B. Section 2 Does Not Prohibit Price Reductions Above Aver-

age Total Cost In The Absence Of Injury To Competition

The 1982 marketing campaign was also adequately addressed

by the Opinion below. Under proper j.n.o.v. standards the Opinion

finds that the parties did not dispute that the price levels of the

offers were above Gasco’s average total cost (App. C, pp.7, 21).""

The Opinion accepts petitioner's contention that the jury found

that the offers were insincerely made for the purpose of inducing

OGS to lower its prices and were for that reason “shams” (ibid)

and then addresses petitioner's contention that sham offers at

levels above average total cost are predatory conduct under

* Petitioner also remained profitable under the new prices. Ex. 662

shows petitioner's pretax profit per gallon to. be 1980-12.05¢, 1981-

17.64¢, 1982-15. 48¢, 1983-15. S8¢

19

Section 2. The Opinion concludes that there was no evidence of

an injury to competition from Gasco’s offers and that the resulting

reduced prices to OGS’s customers were, if anything, procompeti-

tive (id., p.22-25).'* Applying the antitrust axiom that anticom-

petitive intent alone does not establish predatory conduct and

refusing “to turn our back on a large body of case law” (App. C,

p.22) requiring injury to competition for Section 2 liability, the

Court of Appeals reversed the judgment below on the ground that

Gasco’s offers were not illegal under Section 2 as a matter of law.

The Petition argues that the change of position by the Court of

Appeals between its vacated October 9, 1987 Opinion and No-

vember 27, 1987 Amended Opinion and the final February |,

1988 Opinion is “unexplainable” (Petition, p.20). In fact, the

change is readily. explained by the sequence of events described

above (pp.9-10). The first Opinion erroneously held that the jury

had found that Gasco’s conduct amounted to predatory pricing

under the clear and convincing evidence standard that governs

price reductions above average total cost in the Ninth Circuit.”

Inasmuch as the jury had been given no such instruction because

OGS contended that this is not a predatory pricing case, peti-

tioner’s petition for clarification requested that the Opinion be

modified by elimination of the clear and convincing evidence

standard (App. 1, pp.3-4). The November 27, 1987 Amended

Opinion was in fact so modified and was thereby rendered facially

erroneous under traditional Section 2 analysis because respon-

dents’ conduct patently caused no injury to competition. The final

Opinion corrected this error and, belatedly perhaps, reached the

’ Petitioner's argument that it could have made more profits by

maintaining its high prices and pouring the profits back into expanding

its business is not evidence of anticompetitive effect. Every business is

presuined to have a limitless desire for higher profits and to grow and to

evolve as a business. However, the fact that events in the marketplace

may place some limits on the desires of OGS does not make those

events of concern under the antitrust laws where the focus is on injury to

competition and not on injury to a competitor. Cargill, Inc. v. Montfort

of Colorado, Inc., 479 U.S. 104, 107 S.Ct. 484, 492 (1986)

* Transamerica Computer Co. v. International Business Machines

Corp., 698 F.2d 1377, 1388 (9th Cir: 1983)

20

correct conclusion that even a monopolist is entitled to engage in

price reductions, so long as there is no injury to competition.

Cargill, Inc. v. Montfort of Colorado, Inc., 479 U.S. 104, 107

S.Ct. 484, 492 (1986); Drinkwine v. Federated Publications, Inc.,

780 F.2d 735, 739 (9th Cir. 1985), cert. denied 106 S.Ct. 1471

(1986); Airweld, Inc. v. Airco, Inc., 742 F.2d 1184, 1192 (9th Cir.

i984), cert. denied, 469 U.S. 1213 (1985); Transamerica Com-

puter Co. v. International Business Machines Corp., 698 F.2d

1377, 1388 (9th Cir.), cert. denied, 464 U.S. 955 (1983); William

Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668

F.2d 1014, 1028 (9th Cir. 1981) cert. denied, 459 U.S. 825

(1982); California Computer Products, Inc. v. International Busi-

ness Machines Corp., 613 F.2d 727, 740-47 (9th Cir. 1979);

Olympia Equipment Leasing Co. v. Western Union & Tele. Co.,

797 F.2d 370, 379 (7th Cir. 1986) cert. denied 107 S.Ct 1524

(1987): Cf. Brown Shoe Co. v. United States, 370 U.S. 294, 320

(1962).

CONCLUSION

There is no issue of the role and function of the jury in

monopolization cases here worthy of review by the Court. The

Court of Appeals applied conventional Section 2 principles and

standards of appellate review. Its garden-variety reversal of denial

of a j.n.o.v. motion in a Section 2 case does not merit this Court’s

attention. The petition for a writ of certiorari should be denied.

Dated: July 21, 1988.

Respectfully submitted

JOHN E. SPARKS

Counsel of Record

WILLIAM S. Boyp

WILLIAM J. TAYLOR

BROBECK, PHLEGER & HARRISON

Counsel for Respondents

Pacific Resources, Inc. and

Gasco, Inc.

APPENDIX 1

No. 86-2250

IN THE

United States Court of Appeals

FOR THE NINTH CIRCUIT

OAHU GAS SERVICE, INC.,

Plaintiff-Appellee,

VS.

PACIFIC RESOURCES, INC. and C asco, INC.

Defendants-Appellants.

APPELLEE’S PETITION FOR CLARIFICATION

GARY G. GRIMMER

CARLSMITH, WICHMAN, CASE,

MUKAI & ICHIKI

1001 Bishop Street

Pacific Tower, Suite 2200

Honolulu, Hawaii 96813

MAXWELL M. BLECHER

NORMAN PINE

ANN I. JONES

BLECHER & COLLINS, P.C.

611 W. 6TH STREET, SUITE 2800

Los ANGELES, CALIFORNIA 90017

(213) 622-4222

Attorneys for Plaintiff-Appellee

Oahu Gas Service, Inc.

A-2

The Court’s decision in Oahu Gas Service, Inc. v. Pacific

Resources, Inc., slip. op. 86-2250 (October 9, 1987) constitutes

an important new precedent in Section 2 antitrust case law. This

opinion will undoubtedly be looked to by lower courts in deter-

mining what conduct, when taken by a monopolist, violates the

Sherman Act. It is essential, therefore, that its holding be clearly

delineated. Accordingly, without seeking to affect the result

reached, the appellee Oahu Gas Service, Inc. (“OGS”) respect-

fully calls to the Court’s attention two aspects of its opinion which

merit further clarification.

1. Clarification of the term ‘‘uneconomical”’

In its discussion of the appellants’ decision not to expand its

refinery, the Court observed that “[b]ecause producing propane

would have been uneconomical at the time, Pacific Resources’

decision to forego propane production did not exclude competi-

tion unnecessarily.” Jd. at 9. See also id. at 9 n.2, 10 (use of term

“uneconomical”’). The term “uneconomical,” however, is not

defined.

Accepting the Court’s decision that the monopolist’s duty to

cooperate with a competitor is vitiated where the cooperation in

“uneconomical,” id. at 10, there is a real need to delineate

carefully what is encompassed within that term. Clearly, a sweep-

ing definition of “uneconomical” to embrace any reduction of

revenues or profits would emasculate the Court’s basic holding

that in some cases “the antitrust laws impose what may be

characterized as affirmative duties.” /d. at 9. Seldom, if ever, will

cooperating with a competitor be completely without cost. In the

usual case, curtailment of conduct unnecessarily restrictive of

competition will result in the monopolist having to forego at least

some opportunity for increased sales and increased profits. As the

Supreme Court acknowledged in Aspen Skiing Co. v. Aspen

Highlands Skiing Corp., 472 U.S. 585, 105 S.Ct. 2847 (1985),

such lost revenues and profits cannot constitute a business justifi-

cation sufficient to save a non-cooperating monopolist from liabil-

ity. Jd. at 2852.

Unfortunately, if not clarified, the term “uneconomical” may

be construed by lower courts to encompass any diminution of a

monopolist’s revenues or profits, thus vitiating the rule of Aspen

and rendering this Court’s notion of a monopolist’s affirmative

duties a nullity.

A-3

OGS, therefore, respectfully requests the Court to specify that

“uneconomical” means “unprofitable.” Such a definition com-

ports with the appellants’ contentions as to the reasons why it

postponed construction of its propane refinery. See Appellants’

Opening Brief at 9. See also RT 13:101-102 (the refinery invest-

ment would have produced a “negative return.”) Defined as

“unprofitable,” the term “uneconomical” encompasses the partic-

ular facts of this case and provides lower courts with a specific

guide with which to assess the scope of permissible conduct for a

monoplist.

2. Deletion of the opinion’s ‘clear and convincing’ language

In its opinion, the Court stated that “a plaintiff in Oahu’s

position must show by clear and convincing evidence that the

defendant’s pricing policy had a predatory rationale.” Jd. at 12.

(Emphasis added.) In that same paragraph, however, the Court

observed that the relevant evidence was not the prices Gasco

offered but rather the contracts themselves. Jd. Thus, the conduct

challenged in this litigation and found actionable by the Court

was not Gasco pricing practices, but instead its offer of sham

contracts.

The clear and convincing standard articulated in Airweld, Inc.

v. Airco, Inc., 742 F.2d 1184, 1193 (9th Cir. 1984), cert. denied,

469 U.S. 1213 (1985), has been reserved for those cases where

the challenged conduct involves the level at which the defendant

has set its prices, i.e., its pricing policy. See also Transamerica -

Computer Co. v. International Business Machines Corp., 698 F.2d

1377 (9th Cir.), cert. denied, 464 U.S. 955, 104 S.Ct. 370

(1983).' OGS knows of no case, however, where this heightened

standard was applied to non-predatory pricing cases where con-

sumer benefits from lower prices are not implicated.

' The Court limited its holding to cases where the alleged predatory

price is above defendant’s average total cost:

“Therefore, it is appropriate to impose on the plaintiff a greater

burden of proving that prices above average total cost are predatory

than the burden imposed by /nglis to prove that prices between

average variable and average total cost are predatory. We therefore

hold that if the challenged prices exceed average total cost, the

plaintiff must prove by clear and convincing evidence—i.e., that it

is highly probably true—that the defendant’s pricing policy was

predatory.” 698 F.2d at 1388.

A-4

While OGS agrees with the Court’s finding that Gasco’s 1982

Marketing Campaign constitutes “clear and convincing” evi-

dence, it does not agree that this modestly more stringent stan-

dard of proof should be extended to non-predatory pricing cases.

Instead, OGS urges the court to reserve that standard of proof for

cases where the defendant’s pricing policies constitute the essence

of the Section 2 offense. As this is not such a case, OGS

respectfully asks the Court to delete the requirement of “clear

and convincing” evidence set forth in its opinion.’

Dated: October 22, 1987

Respectfully submitted,

By /s/ MAxXweELL M. BLECHER

Attorney for Plaintiff-Appellee

Oahu Gas Service, Inc.

> Additionally OGS respectfully calls the Court’s attention to a factual

inaccuracy in the opinion which should be amended. On page 8 of the

slip opinion the Court states: “The jury could reasonably have concluded

that Oahu’s success in capturing a significant market share on Oahu

may have been due to the ‘insider’ status of its founder, once an

executive with Gasco, who took some large accounts with him when he

left Gasco.”’ The last clause of this sentence is incorrect. Although OGS’

President, James Frandsen had been employed by Gasco prior to

founding the new company, he did not take any accounts with him when

he left. Approximately one year elapsed between the time Mr. Frandsen

left Gasco and when OGS began delivering to customers. OGS, in fact,

did not even solicit customers until mid-1972, over half a year after

leaving Gasco. While it is true that because Gasco had 100% monopoly

of the Oahu propane market all of OGS’ customers were former

customers of Gasco, it was not contended by either party on appeal that

Frandsen took customers with him when he left his former employ.

More accurately. Mr. Frandsen’s long years in the propane business in

Hawaii and his intimate familiarity with that business facilitated OGS’

entry into the propane market. The unintended implications of the

Court’s misstatement that Mr. Frandsen somehow misappropriated

customers from his former employer is not consistent with the record

presented on appeal. OGS, therefore, respectfully requests this Court to

amend this statement striking the last clause.

A-5

APPENDIX 2

No. 86-2250

(USDC Hawaii: Civil No. 77-0444)

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

OAHU GAS SERVICE, INC.,

Plaintiff-Appellee,

vs.

PACIFIC RESOURCES, INC. and GASCO, INC.,

Defendants-Appellants.

PETITION FOR REHEARING

WITH SUGGESTION OF REHEARING EN BANC

|

STATEMENT OF COUNSEL

Oahu Gas Service, Inc. (“OGS’’) respectfully petitions the

Court for reconsideration of the opinion filed on February 1, 1988.

In abruptly reversing its two prior rulings, the Court adopted in

material part the arguments asserted by defendants Pacific Re-

sources, Inc. (“PRI”) and Gasco, Inc. (““Gasco”) in their Octo-

ber 27, 1987 petition for rehearing. OGS, however, was not

afforded an opportunity to respond to the factual and legal

contentions presented in defendants’ petition. OGS, therefore,

now seeks an opportunity to reply.

OGS specifically seeks rehearing on that part of Oahu Gas

Service, Inc. v. Pacific Resources, Inc., No. 86-2250, slip. op. (9th

Cir. February 1, (1988) (“OGS III’) that addresses Gasco’s 1982

marketing campaign against OGS. In early 1982, Gasco imple-

mented a plan to approach OGS customers with offers of prices

substantially below those contained in the customers’ existing

long-term contracts with OGS. In making these offers, ““Gasco’s

true goal was not to attract customers,” but rather to force its

smaller rival to lower significantly the price terms of its existing

contracts. OGS II] at 1275 (“true goal was... to cut into Oahu’s

profits.”). OGS, faced with Gasco’s sudden, intense and repetitive

overtures to its customer base, responded by renegotiating many

A-6

contracts mid-term. By lowering the prices contained in these

contracts, OGS was able to retain its customers, but lost over

$400,000 in revenues as a result.

The Court, while acknowledging that Gasco’s conduct in inter-

fering with OGS’ customers “smacks of unfair competition,” held

that absent proof of anticompetitive effect such conduct did not

violate Section 2. Jd. at 1276. Defining such anticompetitive effect

as “the transfer of resources or patronage away from the rival and

to the monopolist,” the Court concluded that no such anticompe-

titive effect had been shown. /d. at 1277.

OGS respectfully requests reconsideration of the Court’s find-

ing that Gasco’s 1982 marketing program resulted in no anticom-

petitive effect on two grounds:

(1) OGS respectfully submits that the Court’s requirement

that anticompetitive effect be shown by a diversion of resources or

customers from the rival to the monopolist is unduly restrictive

and inconsistent with the case law of this Circuit;

(2) Applying the appropriate analysis of anticompetitive ef-

fect, OGS respectfully submits that there was evidence sufficient

to support the jury’s inference that Gasco’s 1982 marketing

program in fact diminished competition in the Hawaiian propane

market. In holding to the contrary, the Court has overlooked

substantial evidence supporting the jury’s finding.

II

ARGUMENT

A. The Court’s Definition Of Anticompetitive Effect Is Too

Restrictive.

The Court’s reversal of its previous position regarding the

illegality of Gasco’s 1982 marketing campaign is grounded in its

belief that, although reprehensible and arguably tortious, the

defendants’ conduct resulted in no proved anticompetitive ef-

fects.’ Jd. The Court notes that the net effect of Gasco’s sham

offers was merely a lowering of OGS’ prices—an inference based

' It is well-established that competitive torts, when used to achieve or

maintain a monopoly, fall within the ambit of the Sherman Act. Boone,

“Single Corporation Competitive Torts and the Sherman Act,” 2 Ga. L.

f

A-7

on the testimony that Gasco did not obtain OGS customers as a

result of its marketing program. /d. at 1275-76. Thus, the opinion

reasons, because the plaintiff could not demonstrate that the

defendants’ conduct resulted in a diversion of resources or cus-

tomers from OGS to the monopolist, it could not satisfy Sections

2’s requirement of provable anticompetitive effect. Jd. at 1277.

Citing the oft-quoted aphorism that antitrust laws protect compe-

tition and not competitors, OGS I/II rejects plaintiff's claim of

antitrust injury and reverses the jury’s verdict. Jd. at 1276-77.

To require an antitrust plaintiff to prove either a transfer of

resources or patronage in order to establish anticompetitive effect,

however, is both unjustified and contrary to existing authority.

The inquiry into anticompetitive effect is singularly fact-based.

Aydin Corp. v. Loral Corp., 718 F.2d 897, 902 (9th Cir. 1983).

See also Hasbrouck v. Texaco, Inc., 830 F.2d 1513, 1519 (9th

Cir. 1987). Thus, it is not susceptible to a characterization as a

matter of law as suggested by OGS III. Rather, the requirement of

anticompetitive effect mandates that the plaintiff demonstrate,

based on the factual attributes of the market and the particular

conduct at issue, that the vigor of marketplace rivalry, as opposed

merely to the health of individual rivals, has been impaired. See

Kaplan v. Burroughs Corp., 611 F.2d 286, 291 (9th Cir. 1979),

cert. denied, 447 U.S. 924 (1980). See also Brunswick Corp. v.

Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 97 S.Ct. 690, 697

(1977).

That the focus is on competition, as opposed to individual

competitors, however, does not mean that the harm incurred by

an individual rival is eliminated from the analysis. To quote from

a recent Ninth Circuit opinion:

The oft-quoted chestnut distinguishing between protecting

competition and protecting competitors has been miscon-

strued with some regularity by antitrust defendants who

appear to argue in all types of antitrust cases that the effect

of unlawful conduct on competitors is irrelevant. The pur-

pose of drawing a distinction between harm to competition

and harm to competitors is to point out that not all acts that

Rev. 372, 374 (1968) See also L. Sullivan, Handbook of the Law of

Antitrust, 112-13 (1977).

A-&

harm competitors harm competition. However, the converse

is not true. Injury to competition necessarily entails injury to

at least some competitors. Competition does not exist in a

vacuum; it consists of rivalry among competitors. Clearly,

injury to competitors may be probative of harm to competi-

tion, although the weight to be attached to such evidence

depends on its nature and on the nature of the challenged

conduct. The aphorism may not be invoked blindly in re-

sponse to a showing that competitors have been harmed;

otherwise it would often serve to shield unlawful conduct

that adversely affects competition.

Hasbrouck, 830 F.2d at 1518 (emphasis added)

Antitrust plaintiffs in the Circuit and in others have demon-

strated anticompetitive effect in a myriad of ways. For example,

proof that the defendant’s conduct has resulted in a diversion of

resources or customers away from the rival and to the monopolist

may evidence that the defendant’s conduct has actualiy lessened

competition. See Western Concrete Structures Co. v. Mitsui & Co.,

760 F.2d 1013, 1018 (9th Cir.), cert. denied, 474 U.S. 903

(i985); Havoco of America, Ltd. v. Shell Oil Co., 626 F.2d 549,

556 (7th Cir. 1980). Such a showing, however, is not the only

way to demonstrate anticompetitive effect. Other recognized

indicia of anticompetitive effect include: raised barriers to entry as

a result of defendant’s conduct (Helix Milling Co. v. Terminal

Flour Mills Co., 523 F.2d 1317, 1322 (9th Cir. 1975), cert

denied, 423 U.S. 1053 (1976); Woods Exploration & Producing

Co. v. Aluminum Company of America, 438 F.2d 1286, 1307 (Sth

Cir. 1971), cert. denied, 404 U.S. 1047 (1972)); increased costs

incurred by a rival because of the monopolist’s actions (Handg-

ards, Inc. v. Ethicon, Inc., 743 F.2d 1282, 1296 (9th Cir. 1984),

cert. denied, 469 U.S. 1190 (1985); Grip-Pak, Inc. v. Illinois Tool

Works, Inc., 694 F.2d 466, 472 (7th Cir. 1982), cert. denied, 461

U.S. 958 (1983)); and lost profits incurred by a plaintiff due to

the defendant’s manipulation of otherwise competitive prices

(Malcolm v. Marathon Oil Co., 642 F.2d 845, 856-57 (Sth Cir.),

cert. denied, 454 U.S. 1125 (1981); General Industries Corp. \

Hartz Mountain Corp., 810 F.2d 795, 807 (8th Cir. 1987).)

Notably, these latter three manifestations of anticompetitive

effect do not require that the monopolist be the direct beneficiary

A-9

of its rival’s lost patrons or revenues. In these situations, the

defendant's reward is indirect. By impairing the ability of a rival

to challenge its monopoly, the defendant reduces competition in

the relevant market despite the fact that no sales or customers are

diverted to it.

OGS Ill, by rejecting any indicia of anticompetitive effect

absent proof of a diversion of resources or customers away from

the rival, overlooks the substantial body of authority mandating a

broader viewpoint. As established in Brunswick, it is not necessary

for an antitrust plaintiff to demonstrate an actual lessening of

competition in order to recover. Brunswick, 429 U.S. at 489 n. 14,

97 S.Ct. at 698 n. 14. See also Lee-Moore Oil Co. v. Union Oil

Co., 599 F.2d 1299, 1304-05 (4th Cir. 1979).

OGS IITs holding that only those anticompetitive effects result-

ing in direct and provable benefits to the monopolist satisfy

Section 2 is not only impermissibly restrictive but it also directly

contradicts the well-established rule requiring a plaintiff to miti-

gate its loss. Golf City, Inc. v. Wilson Sporting Goods Co., 555

F.2d 426, 436 (Sth Cir. 1977). This tension is demonstrated by

the facts presented in this case. Gasco approached OGS’ custom-

ers with sham offers. OGS had two choices: it could either stand

idly by and see how many customers would be drawn away by

Gasco; or, it could seek to mitigate its loss by lowering its

contractual price terms and by seeking a temporary injunction to

halt Gasco’s interference. Had OGS chosen not to respond at all,

it is likely that it would have lost customers and even gone

completely out of business. Ironically, such dramatic losses would

satisfy OGS IITs rigid definition of provable anticompetitive

effect. OGS’ ability to recover for these direct effects, however,

would have been vitiated by a claimed failure to mitigate. Con-

versely, by choosing to mitigate those losses caused by the

monopolist and enabling itself to survive, OGS became ineligible

for recovery under the narrow anticompetitive effect requirement

of OGS III. To create such a catch-22 for the victims of predation

by a monopolist is wholly inequitable and requires, plaintiff

respectfully submits, reconsideration by this Court.

A-10

B. OGS Adduced Ample Evidence from Which the Jury Could

Reasonably Infer that Gasco’s Conduct Caused Anticompe-

titive Effects

Once the analysis of anticompetitive effect is recognized to

include consideration of conduct which impairs competition with-

out directly transferring resources to the monopolist, it is apparent

that the jury could reasonably infer that Gasco’s 1982 marketing

Strategy negatively impacted both OGS and competition in the

Hawaiian propane market.’ Specifically, the jury could have

reasonably inferred that the purpose and effect of Gasco’s con-

duct, i.e., reducing OGS’ revenues, resulted in both a lessening of

competition in Oahu and the absolute prohibition of competition

in the Neighbor Islands.

1. Gasco’s Conduct Reduced Competition in Oahu

An assessment of anticompetitive effect requires an examina-

tion of the market in which the defendant's conduct occurred. See

Kaplan, 611 F.2d at 291. The propane market in Oahu consisted

essentially of two competitors—Gasco and OGS. Until OGS’

entry in 1972, Gasco was the sole supplier of propane in Hawaii.

OGS III at 1259. Other than OGS, there were no other competi-

tors in the Oahu market who could realistically challenge Gasco’s

position.’ /d. at 1269. In addition, OGS proved that entry barriers

in this isolated marketplace were high, thus permitting a reasona-

ble inference by the jury that were OGS’ competitive viability to

be significantly impaired, no other rival would be likely to enter

tire Oahu market to take its place. /d.

* In order for this Court to reverse the jury's finding on this issue, it

must conclude that the plaintiff failed to adduce sufficient evidence from

which a reasonable mind could infer that Gasco’s marketing program

had a negative effect upon competition. See California Computer

Products, Inc. v. International Business Machines Corp., 613 F.2d 727,

733-34 (9th Cir. 1979).

*The jury could reasonably infer that a third supplier of propane,

Aloha Gas, did not qualify as a viable challenger to Gasco’s monopoly

(T.R. 14:109-10.) Aloha’s market share was less than one-tenth of one

percent (Ex. 1318), a fact which even OGS II] acknowledges supports

plaintiff's contention that Aloha’s presence did not evidence a break-

down of entry barriers in this market. OGS /// at 1269.

A-1]

Given an Oahu market occupied by only two rivals, the jury

could reasonably infer that any program undertaken to eliminate

or handicap OGS would inevitably result in a reduction in

competition. See, e.g. D & S Redi-Mix v. Sierra Redi-Mix &

Contracting Co., 692 F.2d 1245, 1249 (9th Cir. 1982); Helix

Milling, 523 F.2d at 1320. See also H. J. Heinz Co. v. Beech-Nut

Life Savers, Inc., 181 F.Supp. 452, 464 (S.D.N.Y. 1960) (recog-

nizing the anticompetitive effect inherent in eliminating or crip-

pling one of only three competitors in market.)

So too could the jury infer, based on substantial evidence, that

the purpose and actual effect of Gasco’s campaign was to cripple

its only effective rival. As shown by the testimony, the purpose of

Gasco’s 1982 campaign was to lessen the revenues and profits of

OGS. (Ex. 1161) (T.R. 2:199). “Where, as here, the defendants

have acted with intent to eliminate competition, the proof of

resulting injury need not be overwhelming.” D & S, 692 F.2d at

1249. Also in the trial record is the fact that OGS lost over

$400,000 in revenues as a result of Gasco’s conduct. The jury was

entitled to infer that had these revenues been available, OGS

would have been able to finance a variety of activities, such as

inprovements in its plant and equipment, expansion of its cus-

tomer base or enhancement of services offered to its customers. A

reasonable jury could permissibly infer, therefore, that Gasco’s

depression of OGS’ revenues and the attendant prohibition of

these activities effectively diminished the vigor of competition in

the Oahu marketplace.

2. Gasco’s Conduct Eliminated Competition in the Neigh-

bor Islands

In addition, the jury could have reasonably inferred that

Gasco’s reduction of OGS’ revenues resulted in provable an-

ticompetitive effects in the Neighbor Islands. At the time it

planned the 1982 Blitz, Gasco knew that OGS was positioned to

expand to the outer islands. (T.R. 2:187-88.) One of the stated

goals of Gasco’s campaign, in fact, was to prevent OGS from

obtaining the revenues necessary to finance such entry. (Ex.

1161.) In addition, the jury heard testimony that between 1982

and 1985 OGS did not enter the Neighbor Islands. (Ex. 1318)

(T.R. 9:192). From this evidence, the jury could reasonably infer

that Gasco’s reduction of OGS’ revenues had the effect of

A-12

eliminating OGS as a potential competitor on the Neighbecr

Islands. Such an elimination of competition satisfies even the

most stringent definition of cognizable anticompetitive effect. See

Western Concrete Structures, 760 F.2d at 1018.

Based on the testimony regarding the structural dimensions of

the Hawaiian propane market, and the evidence regarding the

purpose and actual negative effect of Gasco’s sham offers on

OGS, it was wholly reasonable for the jury to infer that Gasco’s

infliction of financial loss of OGS necessarily translated into a

diminution in competition. The marketplace at issue in this case

was not one populated with rivals so that the loss or handicapping

of a single competitor would not adversely impact competition.

Rather, it was a two-competitor marketplace in an isolated

geographic area with little or no possibility of further entry. OGS

III at 1269. Given the facts of this particular market, the jury

could reasonably conclude that injury to a competitor was synony-

mous with injury to competition.’

Il]

CONCLUSION

For all the foregoing reasons, we respectfully request that the

petition be granted and that rehearing beheld by the Court sitting

en banc.

Dated: February 16, 1988

Respectfully submitted,

By /s/ ANN I. JONES

Attorney for Plaintiff-Appellee

Oahu Gas Service, Inc.

* While it is arguable that the jury could have alternatively inferred

that OGS’ injury as a competitor did not result in a lessening of

competition, it is not for this Court to substitute inferences where, as

here, the plaintiff has adduced sufficient evidence to support the jury’s

conclusions. Los Angeles Memorial Coliseum Commission v. National

Football League, 726 F.2d 1381, 1392 (9th Cir.), cert. denied sub nom

National Football League v. Oakland Raiders, Ltd, 469 U.S. 990

(1984).