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From Antitrust Law Daily, April 1, 2019

Identical gas purchased under different contracts was not ‘of like grade and quality’

By Nicole D. Prysby, J.D.

Because gasoline was sold under different contracts with materially different terms, the gasoline was not "of like grade and quality" and price discrimination claims brought by gas stations against the distributor failed.

Physically identical gasoline sold under different contract terms was not "of like grade and quality" and therefore, gas stations’ price discrimination claims against a distributor failed, according to the federal district court in Baltimore. The gas stations had entered into 20-year fuel purchase agreements with a "rack-plus" pricing formula (the distributor’s cost of the product, also known as the rack cost, plus a mark-up). They sued the distributor, after the distributor negotiated a lower price with the manufacturer but calculated the rack price based on the non-discounted prices the manufacturer charged other distributors instead of its own discounted price. The gas stations alleged price discrimination, but the court rejected their claims. Because the gasoline was sold under different contract terms, it was not "of like grade and quality" even though it was physically identical. The court rejected the arguments that any difference in the fuel costs should have been in their favor. The court also determined that amending the complaint would be futile (Best Effort First Time, LLC v. Southside Oil, LLC, March 29, 2019, Russel, G.).

Background. The Plaintiffs were ten Maryland retail gas stations. In 2009, ExxonMobil agreed to sell the gas stations to Southside Oil, LLC. Southside bought Exxon-branded fuel for resale directly from ExxonMobil under a dealer agreement wherein Southside stepped into the shoes of ExxonMobil as the Plaintiffs’ landlord and supplier of fuels. Prior to the deal closing, Plaintiffs instituted lawsuits against ExxonMobil and Southside. The lawsuits were resolved through settlement agreements which included terms permitting the Plaintiffs to purchase the gas stations they had previously leased from ExxonMobil, conditioned on the requirement that the Plaintiffs purchase all fuel from Southside for a twenty-year term and purchase a minimum number of gallons every year. As to the price of the fuel, Plaintiffs and Southside agreed on a "rack plus" pricing formula (essentially, the distributor’s cost of the product, also known as the rack cost, plus a mark-up). The agreements provided for a mark-up of 1.5-6.5 cents per gallon.

In 2015, Southside began charging the Plaintiffs a per-gallon price with a higher mark-up (as much as 13 cents). Southside had negotiated an agreement with ExxonMobil wherein ExxonMobil would sell its fuels to Southside at a per gallon price that was "considerably lower" than the price it charged to other distributors. Southside then calculated the rack price based on the non-discounted prices ExxonMobil charged other distributors instead of its own discounted price. As a result, the Plaintiffs had to raise their retail prices above a competitive level and lost business. The Plaintiffs sued Southside, alleging price discrimination under the Robinson-Patman Act of 1936 (RPA).

Price discrimination. Plaintiffs alleged a secondary-line injury, price discrimination that injures competition among the discriminating seller’s customers. Southside argued that the claim should fail because the Plaintiffs did not demonstrate that the fuel sold to them was of "like grade and quality" as that sold to other buyers. Southside’s argument was that because the gasoline was not purchased on like terms and conditions, the gas itself could not be of like grade or quality, even though it was physically identical. The court stated that the Fourth Circuit has not addressed the standard for determining whether goods sold under different contract terms are of "like grade and quality" for the purposes of the RPA, but then looked to other circuit courts to determine appropriate guidelines. The court concluded that the commodities at issue are physically identical (all are Exxon-branded gasoline/diesel). However, even though the products are physically identical, because they were sold under materially different terms, they are not "of like grade and quality." The court rejected the Plaintiffs’ argument that the differences in the contracts—specifically, the Plaintiffs’ twenty-year supply contract with "rack plus" pricing versus their competitors’ "short-term open-price term contracts"—are not materially different terms, and consequently, do not affect the "grade and quality" of the fuel at issue. Because long-term and short-term, open price contracts are fundamentally different, the products are not of "like grade and quality." The court also rejected the Plaintiffs’ argument that because the lower price is not in their favor, there is an RPA violation.

Amendment. The court also concluded that giving the Plaintiffs leave to file a second amended complaint would be futile. The amended complaint essentially argued that the differences between the Plaintiffs contracts with Southside and those of their competitors meant that Southside should have offered them a lower price, not a higher one. The second amended complaint conceded that there were contractual differences that could justify differences in price, but argued that the differences should have been in their favor. But that argument has no basis in antitrust law. The Plaintiffs negotiated price terms and while they may have expected to receive better prices than their competitors, the fact that they did not is not a problem for antitrust law to fix.

This case is No. 1:17-cv-00825-GLR.

Attorneys: Alphonse Michael Alfano (Bassman, Mitchell & Alfano) for Best Effort First Time, LLC, HMA, Inc. and AJ&R Petroleum, Inc. Robert Knight Cox (Williams Mullen PC) for Southside Oil, LLC.

Companies: Best Effort First Time, LLC; HMA, Inc.; AJ&R Petroleum, Inc.; Southside Oil, LLC

MainStory: TopStory Antitrust MarylandNews

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