A closely divided California Supreme Court on Thursday rejected a challenge to Texaco’s $10.1-billion purchase of Getty Oil in 1984, ruling that state antitrust law cannot be used to attack corporate mergers.
The justices, by a 4-3 vote, turned down an attempt by state Atty. Gen. John K. Van de Kamp to invoke a 1907 state statute to challenge the second-largest merger in history.
Van de Kamp contended that the acquisition, which had received federal approval, would reduce competition in the oil business, force independent refiners out of business by restricting their supply of oil and ultimately raise the prices consumers pay for gasoline, heating oil and other products.
Cartwright Act Questioned
The attorney general had conceded that, at this point, the state could not actually undo the merger. But had he won the case, he could have sought court orders guaranteeing that independent refiners continue to get the crude oil they have been receiving from Getty and retain access to a 600-mile-long Getty pipeline transporting oil into the state.
The novel test of the state law had gained added attention at a time federal authorities have become increasingly reluctant to use federal antitrust laws against mergers. One recent study, cited by the court’s dissenters, showed that the U.S. Department of Justice challenged only 26 of more than 10,000 merger applications in a five-year period ending in 1986.
At issue in the case was the meaning of a provision of the Cartwright Act prohibiting “a combination of capital” that restricts trade or affects prices.
The court majority, in an opinion by Chief Justice Malcolm M. Lucas, found that the 1907 law was intended by the Legislature to apply to collusive acts by separate, competing companies--not the purchase of one firm by another.
“Any other interpretation of the drafters’ intent cannot be reconciled with the Act’s history,” Lucas wrote.
The chief justice noted that while the act had been amended some 26 times in the past 80 years, the Legislature had never enacted a provision dealing with mergers. The lawmakers’ inaction, Lucas said, contrasted with steps taken in other states to amend their laws to allow moves against mergers.
In an unusually detailed, 89-page dissent, Justice Stanley Mosk, joined by Justices Allen E. Broussard and Marcus M. Kaufman, contended that the 1907 law was clearly aimed at preventing mergers as “a palpable threat to the general economic welfare of the citizens of this state.”
“This conclusion is unavoidable if the statute is construed in accordance with the plain meaning of its express terms and with an eye on the object it seeks to achieve and the evil it aims to prevent,” Mosk wrote.
At a news conference, Van de Kamp called the ruling “a setback to consumers” and said the merger still “poses a threat to the pocketbook of every California motorist.”
Gas Price Claim Disputed
The attorney general pledged to seek new legislation that would specifically allow the state to move against mergers under state antitrust law--and said he would continue to go to federal courts under federal antitrust law to challenge anti-competitive mergers.
He said that Thursday’s decision would not affect a separate attempt by his office to challenge the merger of Alpha Beta and Lucky markets in a suit pending in U.S. District Court in Los Angeles.
An attorney for Texaco, Laurence M. Popofsky of San Francisco, welcomed the ruling Thursday as a “carefully crafted and scholarly study” of the history and purpose of the Cartwright Act. “There is no merger regulation under California law now applicable, unless the Legislature acts,” he said.
Popofsky sharply disagreed with Van de Kamp’s predictions of higher gasoline prices under the merger. “This is just nonsense,” he said. “All the guesstimates about the oil market, which underlie the decision to challenge the merger, were wrong in every major respect. From what we know now, the assumption that this merger would seriously threaten the public interest seems silly.”
The case arose when Texaco paid $10.1 billion to acquire Los Angeles-based Getty, whose assets in California were valued at $6 billion. The acquisition made Texaco the third-largest petroleum company in the United States at the time, although it has recently been selling off assets. The largest merger was Chevron’s $13.2-billion acquisition of Gulf.
Van de Kamp, expressing concern that the acquisition would give Texaco excessive control over petroleum markets and force independents out of business, challenged the merger before the Federal Trade Commission.
Law’s Intent at Issue
The FTC approved the buyout but said Texaco must continue to continue to sell crude oil to Getty customers until April, 1989, when, it was assumed, there would be enough production in California’s offshore waters to avert any danger of an oil shortage.
The attorney general then filed suit in Superior Court in Sacramento under the Cartwright Act, seeking to force the sale of the Getty oil and pipeline holdings in California to independent companies.
But the trial court dismissed the suit, ruling that state antitrust law did not apply to mergers and that application of the state law would conflict with federal law and interstate commerce. A state Court of Appeal in Sacramento upheld the dismissal, agreeing that the FTC’s approval of the merger barred further action under state law.
In Thursday’s ruling, the justices affirmed the lower court rulings that the state law was not intended for use against mergers. The court did not decide the question of whether any such state action would be preempted by federal law.
The opinion was joined by Justices Edward A. Panelli, John A. Arguelles and David N. Eagleson.
At his news conference, Van de Kamp, explaining why he tried to move against the oil company merger in state court, noted that while federal courts will allow challenges to mergers, they have thus far declined to require companies in a merger to sell off holdings to protect competition. Had the state been permitted to proceed in state court, he said, the way would have been open to seek such divestiture.
Seek Redress Later
Also, he added, federal courts generally require a showing of actual harm from a merger, where state courts might have required evidence of only potential harm before acting against a merger.
Thursday’s ruling was based on state law, and thus could not be appealed to the U.S. Supreme Court, Van de Kamp said.
Meanwhile, he said, officials would await further effects of the Texaco-Getty merger and, if there is evidence of reduced competition and increasing prices, seek remedial action by a federal court. “At some later point, we could seek redress against anti-competitive effects,” he said.
Thursday’s decision also represented a victory for a corporate giant that has suffered a series of costly and widely publicized setbacks in its long court fight with Pennzoil over the Getty merger.
Texaco ultimately was forced to pay Pennzoil $3 billion to settle a damage suit resulting from the takeover. Texaco’s subsequent reorganization under the bankruptcy law was approved by a federal judge last March.