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From Antitrust Law Daily, June 9, 2016

Kentucky's antitrust claims against Marathon move forward

By Jeffrey May, J.D.

Marathon Petroleum Company failed to convince the federal district court in Louisville to dismiss antitrust claims brought by the Commonwealth of Kentucky. The state adequately alleged that the gasoline distributor used exchange agreements with competitors, supply agreements with unbranded retailers, and deed restrictions with Speedway LLC retail gas station operators to unreasonably restrain trade and monopolize the market for reformulated gasoline (RFG) in Louisville and Northern Kentucky. The court rejected Marathon’s assertions that the claims failed to meet the plausibility standard of Iqbal and that the state lacked the authority to bring its claims (Kentucky v. Marathon Petroleum Co., June 8, 2016, Hale, D.).

Kentucky Attorney General Jack Conway has filed the lawsuit against Marathon in May 2015, alleging that Kentucky residents and businesses were overcharged for gasoline. In its suit, the state challenged the following types of agreements: (1) Marathon's exchange agreements with major rivals to allegedly keep other potential RFG suppliers out of Kentucky; (2) supply contracts with Kroger and Swifty, requiring them to purchase all of their gasoline from Marathon or pay a penalty; and (3) deed restrictions on a significant number of Speedway gas station properties that limited gasoline sales on the property only to Marathon gasoline. The court concluded that these allegations were sufficient to sustain claims under the federal and state antitrust laws.

The court ruled that the state’s conspiracy claims based on Marathon’s agreements did not amount to per se violations; however, it concluded that there were sufficient facts to support a Section 1 claim under the rule of reason. In rejecting per se illegality, the court pointed out that there were no allegations that the agreements contained clauses in which the competitors agreed not to compete, and the agreements had redeeming qualities, such as allowing other petroleum producers access to the market without the upfront cost of building a refinery. Marathon owned the only refinery in Kentucky, it was noted.

For purposes of rule of reason claims, the state alleged a conspiracy, as well anticompetitive effects in the form of Marathon’s high market share and the region’s higher prices than comparable markets. The court also was satisfied that the state alleged that that the scheme affected the relevant market of RFG sales; that the conspiracy’s goal of maintaining higher prices and a monopoly and the related conduct—the horizontal agreements, supply agreements, and deed restrictions—were illegal; and that the restraint was the proximate cause of the plaintiff’s antitrust injury—higher prices.

The court rejected Marathon's assertion that harm to overall competition was not plausible. Despite possible procompetitive benefits from the exchange agreements, such as allowing petroleum companies access to markets without substantial investments in refineries, there were sufficient facts for the court to draw the reasonable inference that the exchange agreements were meant to further Marathon’s alleged stranglehold on RFG in Louisville and Northern Kentucky.

Monopolization. Marathon’s motion to dismiss the monopolization claims also was denied. The state alleged monopoly power. Marathon has an approximate RFG wholesale market share of 90 to 95 percent in Louisville and Northern Kentucky and uses that share to execute beneficial agreements, according to the allegations. In addition, the state alleged that Marathon exercised its monopoly power through anticompetitive conduct in the form of the challenged agreements. According to the court, it was plausible that: Marathon intended to foreclose the market with its exchange agreements; the supply agreements could help Marathon control output and increase prices of RFG in the market; and the deed restrictions explicitly kept competitors out of the market.

Exclusive dealing. Claims that Marathon's supply agreements, which required retailers to buy 100 percent of their listed RFG amounts from Marathon or pay a penalty, violated Section 3 of the Clayton Act also were deemed sufficiently pleaded. The state alleged the two elements of the claim: (1) exclusive dealing and (2) foreclosure of or "substantially lessened" competition. The state alleged sufficient facts concerning exclusivity to avoid dismissal because the "practical effect of requiring a retailer to buy 100% of its listed RFG amounts from Marathon or pay a penalty is to prevent the purchase of a competitor’s products." Moreover, it would be improper to dismiss this claim at the pleading stage for a failure to show substantial foreclosure, in the court's view. Marathon was alleged to have a dominant market share of RFG in Louisville and Northern Kentucky.

Standing. The court rejected Marathon's contentions that the indirect-purchaser rule barred the state from bringing its antitrust claims for damages and that the state was prohibited from bringing a Clayton Act claim due to its lack of parens patriae authority. The indirect-purchaser doctrine did not bar the state’s claims because the "control exception" to the doctrine was valid and applied in this case, according to the court. While an entity that does not purchase directly from the alleged antitrust violator generally lacks standing under federal antitrust laws to recover damages under the indirect-purchaser doctrine, a control exception applies where there is effectively only one sale. The state alleged sufficient facts to meet the exception with respect to sales by Speedway and other petroleum suppliers. The apparent control was based on the fact that Speedway is a wholly-owned subsidiary of Marathon. Moreover, the exchange and supply agreements, coupled with Marathon’s dominant market position, gave Marathon control over petroleum suppliers, in the court’s view. Lastly, the state asserted that it was suing on behalf of consumers who purchased gasoline at retail outlets owned or controlled by Marathon.

The court also held that the state could bring a claim for damages under the Clayton Act. Marathon unsuccessfully asserted that the state's parens patriaeauthority was limited to the Sherman Act claims.

Kentucky Consumer Protection Act claim. Marathon unsuccessfully contended that a Kentucky Consumer Protection Act claim, based on unfair, false, misleading, or deceptive acts or practices, should be dismissed because it was based on implausible facts and because there was no privity of contract between the people the state represented and the relevant agreements. The privity requirement applied to private individuals and did not limit the Kentucky attorney general’s power to bring consumer protection suits, the court noted. Moreover, the alleged facts supported a reasonable inference of unfair conduct for the same reasons that they supported a reasonable inference of federal and Kentucky antitrust violations. An unjust enrichment claim was, however, dismissed.

The case is Civil Action No. 3:15-cv-354-DJH.

Attorneys: Elizabeth U. Natter, Kentucky Attorney General's Office, and Helen M. Maher (Boies, Schiller & Flexner LLP) for Commonwealth of Kentucky. Matthew C. Blickensderfer (Frost Brown Todd LLC) for Marathon Petroleum Co. LP.

Companies: Marathon Petroleum Co. LP; Speedway LLC

MainStory: TopStory Antitrust FranchisingDistribution StateUnfairTradePractices KentuckyNews

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