Plaintiffs Pay Stiff Price in Chevron Case
Revenge is the sort of motivating force that makes even strong men hesitate. Thus Hamlet, agonizing over the human implications of his impulse to avenge his father’s murder, could scarcely bring himself to act at the moment of truth, with his uncle’s unguarded back inviting the plunging knife.
Big corporations like ChevronTexaco Corp., however, aren’t so constrained by human sensitivity. Otherwise the giant San Ramon-based oil company might not be mustering its vast wealth to pursue 22 Southern California service station operators to the very edge of financial ruin -- and in some cases beyond.
The dealers’ offense was to sue Chevron over what they contended were inequities in its distribution contracts. (The action in San Diego state court preceded the October 2001 merger of Chevron Corp. and Texaco Inc.) Chevron’s control over both their service station leases and the wholesale price of gas, they maintained, allowed it to squeeze their profit margins while maximizing its own. Arguably, this process also kept consumer prices unreasonably high.
But the plaintiffs’ big mistake was to lose the case. Three years after a jury found for the dealers on five of nine causes of action in 1995, awarding them $3.4 million in damages, an appeals court overturned the judgment. Chevron was handed a total victory.
That made the dealers liable for Chevron’s trial expenses and attorney fees, which the company initially set at $8.6 million. A trial judge reduced the total to about $4.2 million on the grounds that most of the dealers’ claims involved issues of public policy, on which a defending corporation, even if victorious, can’t recover attorney fees.
But ChevronTexaco has appealed to restore about $3 million of that reduction, and has filed liens against the individual plaintiffs all over the state. That means many of them have been unable to finance new businesses, buy homes or save for their retirements. According to James Macdonald, a Redlands dealer who was one of the lead plaintiffs, four have already filed for bankruptcy.
“I’m in economic hell,” says Marty Supple, 49, a leader of the dealers’ group, who acquired a Chevron service station at the corner of Alondra and Studebaker boulevards in Norwalk, where he was raised, in 1985. “They’ve destroyed my credit, eliminated all my capital, ruined me financially,” he says. “And I was fighting for the public.”
ChevronTexaco, for its part, has defended its decision to appeal by citing “the large amounts of money involved,” as a corporate executive wrote to Macdonald in August.
Of course, in high finance, as in all else, these things are relative. Macdonald, who owned three Chevron stations and is on the hook for $400,000 of the potential Chevron claim, is himself close to declaring bankruptcy. By contrast, ChevronTexaco (according to its latest quarterly report) collects revenue equivalent to the $3 million under appeal every time the clock ticks off 12 1/2minutes.
The company also contends that there are important moral and ethical issues at stake. It says it’s deeply offended that the plaintiffs dragged into the case not only the company but also several individual executives, accusing them all of fraud.
“That is a very serious charge,” a ChevronTexaco spokeswoman, Bonnie Chaikind, told me last week. “We truly believe we acted with the highest business and ethical standards.”
The company also notes that the plaintiffs were demanding as much as $100 million in damages, as though to suggest that this whole affair was nothing but a stickup. Yet that figure sounds like the kind of legal boilerplate employed to brighten a trial docket, as when a prosecutor announces that an accused murderer faces 12 life sentences. The dealers say their real goal was to loosen Chevron’s garrote around their financial windpipes.
In that sense, the service station operators were illuminating a system that afflicts many in their line of work, to say nothing of their customers. These people may appear to be independent businessmen, but in truth they labor as firmly under the thumb of their parent companies as McDonald’s franchisees.
The oil companies exercise control by two means: through rent (for they are typically the retailers’ landlords) and through the wholesale price of gasoline.
Often this control is mingled. The oil company may offer to give a retailer a break on the rent if his location sells a certain minimum volume of gasoline each month. But that volume is itself somewhat under the oil company’s control because it’s affected by the wholesale price it charges the dealer and thus the retail price he charges his clientele. It’s not unusual to hear dealers complain about a sort of shell game wherein an oil company reduces the monthly rent on a location at the same time it jacks up the wholesale price of a gallon.
The root of the Chevron lawsuit can be found in the mid-1980s, when the oil companies imposed another control mechanism, known as “zone pricing.” Under this system, a gas station’s wholesale price would vary according its location and the oil company’s opinion of its competitive status.
Two dealers serviced from the same tanker on the same route might be charged wholesale rates that diverged by several cents a gallon. “I owned three stations and could pay three different prices from the same truck and the same driver,” Macdonald recalls.
Supple says that he and his fellow Chevron dealers didn’t fully understand the cost of these arrangements until the 1991 Gulf War, when sales volume plummeted and monthly rents soared accordingly. “The dealers started to talk to each other,” he says. “We got our invoices together and realized that the screwing was worse than we thought.”
They also realized that the wholesale price of gas fluctuated among the Chevron terminals. At any given time, for instance, it might be 10 to 15 cents a gallon lower at Bakersfield than at El Segundo, or vice versa. Sometimes, the difference was so great that it would make sense to pay the cost of shipping gas from a cheaper terminal hundreds of miles away.
By filing their lawsuit in 1992, the dealers aimed to acquire the right to buy gas from any Chevron terminal, not just the one Chevron assigned to them. Had the lawsuit succeeded, it might well have shaken the rental and marketing structure of Chevron and every other oil company in the state. It might also have brought unprecedented equilibrium to the wholesale gas market, lowering oil company margins across the board.
It’s not surprising, therefore, that Chevron was determined to win at all costs. By the final
appellate stage, the company had spent nearly $9 million on attorneys and expert witnesses. The dealers had spent $1.5 million.
In the wake of Chevron’s appellate victory, Marty Supple believes he was the first dealer from whom the company collected trial costs.
In 1998, even before the final appeal, it offered to buy out his lease in Norwalk. He accepted, figuring the deal would leave him with enough capital to jump-start the auto repair business, known as Marty World, that he had already launched a few blocks down the road from his Chevron station.
Instead, Supple says, Chevron claimed $65,000 of the payoff to cover his share of its trial costs and demanded that another $164,000 remain in escrow. “That wiped out the entire sale” of the lease back to Chevron, he says. Then it filed liens against him in all 60 counties in the state, evidently to cover interest on the pending amount.
ChevronTexaco isn’t wrong when it contends that by appealing to restore its grant of attorney fees, in Chaikind’s words, “we are doing no more than what the plaintiffs chose to do -- exercise our legal rights.”
Perhaps it’s only a coincidence that ChevronTexaco’s actions also send a message to any other dealer who might harbor the dream of besting the company -- or any other oil company -- in a courtroom.
That element of intimidation is certain to come in handy as the oil industry pursues what dealers perceive as the goal of bringing more retail service stations under their corporate umbrellas. The industry is also looking to maximize profits by shutting down repair bays and replacing them with convenience stores, which are much cheaper to operate.
“You pay a mechanic $35 an hour, and a cashier $10,” says Dennis DeCota, executive director of the California Service Station and Automotive Repair Assn. “The repair business is minuscule compared to what it was 10 years ago.”
If the public is counting on the independent dealers to resist this trend, forget it.
“People would tell me, you never should have gone up against Big Oil, they have more money than you,” Supple says. “It’s true. Small business can’t afford due process. Time is not on our side.”
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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at
