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LEFRAK v. ARABIAN AMOCO

January 10, 1980

Samuel J. Lefrak, et al.
v.
Arabian American Oil Co., et al.



The opinion of the court was delivered by: COSTANTINO

MEMORANDUM OF DECISION AND ORDER

In 1974, the plaintiffs, a group of home heating oil consumers (collectively referred to as "Lefrak"), brought a civil antitrust action to recover treble damages for overcharges due to price-fixing by the defendants, the major oil suppliers in the United States (collectively referred to as "Aramco"). *fn1" Over a period of five years, the court oversaw a series of complicated legal stratagems which often raised new legal issues. The parties engaged in extensive discovery and settled into a long and extremely hard fought battle during the course of this litigation. On the eve of trial, and after such a brilliant exhibition of legal acumen and professionalism, a significant assembly of facts unravels itself before the court. Now, the saga has culminated not with trial but with a voluminous defense motion for summary judgment involving a controlling legal issue. As a result of the decisive nature of that issue, Lefrak's case has been halted as if by a wall an Illinois Brick wall. *fn2"

 Aramco contends by its motion that Lefrak is barred by the principles of Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977) ("Illinois Brick"). That decision holds that as a matter of law an indirect purchaser of goods is not entitled to sue for damages under the antitrust laws. Aramco had previously moved for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) on the basis of Illinois Brick. Lefrak survived that motion by amending its complaint, by leave of court, to allege an exception to Illinois Brick in that Aramco was controlling prices through so-called "pre-existing cost-plus contracts." *fn3" Thereafter, the parties engaged in an extended period of discovery predicated upon the existence of cost-plus contracts. Aramco's motion, and Lefrak's opposition to it, hinges upon that issue.

 Aramco argues that Lefrak is an indirect purchaser, who did not buy oil from the defendants, and who did not purchase oil on the basis of pre-existing cost-plus contracts. Aramco contends that the same considerations presented in Illinois Brick exist here and require a summary judgment disposition.

 Lefrak alleges that material issues of fact exist as to both its indirect purchaser position and the existence of a cost-plus contract. It presses the court to leave the resolution of those issues to the jury. Basically, Lefrak asserts that since it views the same contracts presented by Aramco in a different light, the court must deny Aramco's motion. Thus, Lefrak would have the jury determine the ultimate legal issue of the case.

 The court finds that it must grant Aramco's motion for summary judgment. Lefrak's simple, broad and conclusory allegations, despite the persistence of Lefrak's urgings, are insufficient to overcome that motion. After five years of almost continuous activity, every avenue of discovery has been exhausted. Yet, the facts before the court indicate that Lefrak was an indirect purchaser who did not buy fuel oil through pre-existing cost-plus contracts. Accordingly, Lefrak cannot prevail, as a matter of law, under the principles of Illinois Brick. Any prior reluctance of this court to dismiss pursuant to Fed.R.Civ.P. 12(c) has disappeared in light of the long period of discovery and Lefrak's inability to demonstrate a factual basis for its claim sufficient to raise a material issue of fact.

 I. THE FACTUAL BACKGROUND

 Lefrak is a group of large housing complexes which does business in the New York City metropolitan area. During the years 1968 to 1974 it purchased heating oil to fuel the furnaces in the housing complexes. *fn4"

 Aramco represents the large oil suppliers ("suppliers") who supply the national market for petroleum products at the top end of the distribution chain. Aramco's heating oil market includes direct wholesale distribution to distributors, and in turn, indirectly includes a retail market between distributors and consumers. Through a complex process, it obtains oil from foreign oil producers ("producers"). *fn5" Aramco converts its purchase and business costs into a marketing price and offers its products to independent distributors who resell it on the retail market. *fn6"

 During the period in question, Lefrak consumed between 11 million and 15 million gallons of oil for each of the relevant years. These large quantities made Lefrak an unordinary consumer. As a result, Lefrak entered into large quantity contracts of a requirements nature to insure a steady supply of heating oil at a predictable and cost-efficient price.

 Lefrak had four major distributors. They were Whaleco Fuel, formerly known as Whale Oil ("Whaleco"), Howard Fuel ("Howard"), Premium Coal & Oil ("Premium") and Castle Coal & Oil ("Castle"). These distributors purchased their fuel oil from suppliers on the open market, and resold the oil to Lefrak pursuant to contract. Thus, a distribution chain, marked by independent and readily definable levels, existed beyond the production stage. For this case, that distribution chain is as follows:

 TABLE

 The facts before the court lead to certain conclusions about the distribution process. First, Aramco did not supply Lefrak and Lefrak did not purchase directly from Aramco. Rather, an intermediate link existed in the distribution chain between the oil suppliers and the oil consumers. Second, the oil suppliers dealt at arms length with the distributors. The distributors were not owned or controlled by the producers, and were free to set prices with their customers on the basis of their own profit goals and cost demands. Where one distributor was unwilling or unable to meet a customer's supply needs or price demands, there was a competing distributor ready to fill the gap in the market structure. See e.g. Plaintiff's Exhibits Vol. II, Carini Affidavit P 13. Thus, the distributor's price to its customer was a result of an independent decision in a competitive market. *fn8"

 Lefrak's consumption of oil and its relationship to this distribution chain is reflected in its contracts with the distributors during the years 1968-1974. Both Lefrak and Aramco point to those contracts but give different interpretations of them and draw different conclusions from them. Since the court's understanding of the contractual terms and meanings and their relationship to the market structure will be decisive, the court must focus on those contracts.

 In a sense, the Lefrak contracts represent a return to the "good old days" when oil supplies seemed plentiful and prices incredibly low by present standards. Those contracts reflect an enviable pattern of stable supply and price which was interrupted by the 1973 oil embargo induced by the foreign oil producers. The post-1973 contract reflects the market changes, and an emphasis in the Lefrak organization on the efficient use of fuel oil. Despite the apparent simplicity of the contracts or the availability of supply in a stable market, however, the facts before the court indicate that hard negotiation and practical concerns were a benchmark for those contracts. It is important to remember throughout that Lefrak was a large consumer, and his concerns and demands were not those of a consumer on a small scale. A review of the combined exhibits will demonstrate the considerations which shaped the provisions of the contracts.

 Lefrak contracted for large quantities of fuel oil. For the period 1967 to 1971 Lefrak contracted with the Whale Oil Company for an unspecified quantity of fuel oil for each of the four contract years, and in fact purchased a large quantity. For the period 1971 to 1972 Lefrak contracted with Premium for approximately 6 million gallons of fuel oil, and with Howard Oil for a similar amount but at a different price *fn9" and under different terms. For the period 1972-73 Lefrak contracted with Whaleco for approximately 15 million gallons of fuel. For the period 1973-1974 Lefrak contracted with Castle for approximately 8 million gallons of fuel, and with Whaleco for approximately 7 million gallons but at a higher price. *fn10" In any given year, Lefrak required approximately 12 million gallons, and its contracts reflect that approximate consumption. *fn11" Lefrak contracted with those distributors which could guarantee supply at a favorable price. *fn12" Deft. App. Vol. II at 27-37.

 TABLE

 Lefrak and its distributors also set pricing terms in their contracts. Both Lefrak and the distributors agreed to use either the Exxon Consumer New York Harbor barge price ("Exxon" or "barge price") or the Shell Asiatic New York Cargo Price ("Shell" or "barge price") as a reference point in the marketplace. These price indexes were readily available to the public in the New York Journal of Commerce or Platt's Oilgram, two industry journals. As to price, the contracts indicate that a price was set to cover the cost of the product. Some contracts specified an additional charge to cover profit, transportation and overhead.

 The contracts also provided that the price of the fuel oil would rise or fall according to increases or decreases in the posted barge price. While the pre-1971 contracts did not indicate a limit on the amount of the increase, the post-1971 contracts indicate that a limit of 95% of the increase would be added to the price of the product. No provision was made concerning the amount of decrease in price, although pro-rata reduction provisions were included in some contracts.

 The barge prices, however, were not invariably tied to actual prices and costs. They were instead an indicator used by the parties to estimate costs and negotiate prices. Defendant's Reply App. Exh. A, B. Thus, the ultimate contract prices were not identical to the posted barge prices. This was because different pressures came to bear on both suppliers and distributors in their respective positions in the marketplace. A supplier's costs and prices could vary from the posted barge price of another supplier which was used as a reference point for a contract. Similarly, the distributors were faced with economic conditions that could vary the actual price from the barge price. Thus, competitive edges and other business concerns allowed for variations in the prices ultimately placed in the contract and paid by Lefrak. Deft. Reply App. Exh. B.

 Another reason for the fluctuations in price was the absence of any requirement in the industry to follow any barge price in reaching a contract price. Indeed, the barge price did not reflect the individual market positions of the distributors or suppliers. Contractual arrangements, though indexed to the barge prices as a bargaining and reference point, varied with market conditions and the bargaining position of the distributor and its buyer. *fn13" Deft. App. Vol. II 37-38; Deft. Reply App. Exh. A, B.

 The relative simplicity of the contracts and the convenient indexing system for pricing are belied by the actual contract negotiations that continued throughout the contract period. Moreover, although the contracts were similar in general format, there were notable variations in some.

 For example, the pre-1971 contracts with Whale included provisions which allowed Lefrak to purchase up to 2.5 million gallons of fuel oil at a price referenced to the contract price at the date of purchase. Thus, Lefrak could purchase and accept large quantities of oil and avoid the costs of subsequent increases. *fn14" Deft. App. II at 20. In the 1972-1973 period, Lefrak contracted to purchase its year's requirements from Whaleco. That contract differed from the others by setting a maximum annual price over which further increases would not be added. Thus, unanticipated price or cost increases created a risk of loss for the distributors. See Deft. App. Vol. II at 55-60.

 The contracts were executed in a competitive market of large distributors. Each distributor negotiated with the suppliers on the price of the product. Thus, their purchase price was not inexorably tied to a prevailing barge price. Rather, the price varied with market conditions and bargaining strength.

 In turn, Lefrak, as a large consumer, commanded a favorable bargaining position, which it used to its benefit. Thus, when Lefrak requested that the Exxon or Shell price be used as a reference point for negotiations, the distributors acceded to the request. When Lefrak expressed a desire for price accommodations, the distributors varied their pricing arrangements to meet its demands. Deft. Reply App. Exh. C.

 Lefrak's ability to negotiate its prices was due largely to the competitive distributors' desire to gain the Lefrak contract. Deft. App. Vol. II. Thus, Lefrak negotiated for a price which it considered to be favorable. It also negotiated the actual price due under the terms of the contractual increases and sought to obtain a lower price. For example, Lefrak did not approve certain increases posted by Whaleco in 1974, and was successful in negotiating the increase downward, thereby avoiding a full pass-on of the increased fuel oil costs. Pltf. Exh. Vol. I, Exh. B; Deft. App. Vol. I, Exh. 23, 24, 25, 26.

 Another example of Lefrak's bargaining position was Lefrak's ability to change distributors to its satisfaction. Thus, in 1974 Lefrak changed from Howard Fuel to Castle to gain a better price. Deft. App. Vol. I Exh. 6, 7, 8; Deft. App. Vol. II 101-102. In that year, Lefrak also switched from Castle to Whaleco, and from Whaleco back to Castle in a very short period of time to gain a price and supply advantage. Deft. App. Vol. II 115-116. Thus, Lefrak negotiated its contracts independently with each distributor to gain the best service at the best price. As a result, the prices of fuel oil varied among the Lefrak distributors. Def. App. Vol. II at 118-119.

 Lefrak also reserved the flexibility to seek other distributors for supply and price. (Pl. Vol. I Exh. A-1, A-2; Def. App. Vol. II 90-105). This was because Lefrak did not always meet the contractual approximation of gallonage, and was able to purchase elsewhere at a better price. (Deft. Reply App. Exh. C)

 Thus, the surface clarity of the contracts is belied by the extensive negotiations conducted by the parties throughout the contracts' existence. Lefrak's position in the market allowed it to negotiate the contracts and maintain a favorable and flexible position in the marketplace. As a result, Lefrak could change distributors, purchase in addition to its contracts, and get a price that was not unalterably tied to the Lefrak-preferred barge price. Thus, it appears throughout that Lefrak's position in the market produced a favorable, if not timid, response from its distributors who sought to maintain a lucrative account. (Deft. Reply App. Exh. C) As a result, the distributors were placed in a dilemma. They could either negotiate the price downward and thereby lessen their profits and increase their risk of loss by unexpected price increases or they could maximize profits and increase prices and lose a lucrative account that sought usually one or two distributors to supply the bulk of its needs. Thus, Lefrak's market position placed it in a good position at the expense of and with risk to the distributors.

 II. THE LAW OF SUMMARY JUDGMENT

 The principles of law applicable to a motion for summary judgment are well established. The movant must demonstrate that there is no genuine issue of material fact. Fed.R.Civ.P. 56(c).

 
(T)he "fundamental maxim" remains that on a motion for summary judgment the court cannot try issues of fact; it can only determine whether there are issues to be tried . . . Moreover, when the court considers a motion for summary judgment, it must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought . . . with the burden on the moving party to demonstrate the absence of any material factual issue genuinely in dispute . . . .

 Heyman v. Commerce and Indus. Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir. 1975). See also Ambook Enterprises v. Time, Inc., 612 F.2d 604, No. 79-7184 (2d Cir. Oct. 29, 1979).

 This is not to say that the non-moving party may remain idle. Simple, conclusory statements alleging the existence of a factual issue are insufficient to defeat a motion for summary judgment. Donnelly v. Guion, 467 F.2d 290, 293 (2d Cir. 1972). The opposing party cannot withhold its evidence until trial. Rather, it must come forward with specific evidence to support its claim of a factual issue. Beal v. Lindsay, 468 F.2d 287 (2d Cir. 1967); Donnelly v. Guion, supra.

 Moreover, the court is mindful of the restricted role that summary judgment usually plays in antitrust matters. Poller v. Columbia Broadcasting, 368 U.S. 464, 473, 82 S. Ct. 486, 491, 7 L. Ed. 2d 458 (1962). However, even in an antitrust action, Rule 56 does not "permit plaintiffs to get to a jury on the basis of the allegations in their complaints, coupled with the hope that something can be developed at trial in the way of evidence to support those allegations . . ." First ...


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