Opinion
Case No. CIV-02-202-F
January 29, 2003
MEMORANDUM OPINION
This matter comes before the court on the plaintiff's motion for a preliminary injunction.
I. Introduction
The plaintiff and the defendant Sam's East, Inc. are competitors in the retail gasoline business in central Oklahoma. The plaintiff asserts that Sam's East, Inc. has violated the Oklahoma Unfair Sales Act by selling gasoline below cost at its three central Oklahoma stores. Following the briefing of plaintiffs motion for a preliminary injunction, an evidentiary hearing was held on the motion. Accordingly, the court has the benefit of the excellent briefs of counsel and of the very helpful presentations at the evidentiary hearing.
Having carefully considered the briefs, the evidence presented at the hearing and the arguments of counsel, the court has concluded that plaintiff has made the showing necessary for entry of a preliminary injunction on the basis on the findings of fact and conclusions of law set forth below.
II. Findings of Fact
The plaintiff, Star Fuel Marts, LLC, is a limited liability company organized under the laws of the state of Kansas. Its members are residents of Oklahoma Kansas and Nevada.
Sam's East, Inc., is an Arkansas corporation having its principal place of business in the State of Arkansas. Sam's is a subsidiary of Wal-Mart Stores, Inc. Sam's does business as Sam's Club.
This memorandum opinion relates only to defendant Sam's East. It the court's understanding that an agreed resolution of this matter is pending as to defendant Murphy Oil USA, Inc.
There is complete diversity of citizenship between the plaintiff and the defendant. The amount in controversy exceeds the jurisdictional amount.
Plaintiff operates 28 retail gasoline and convenience store outlets in the Oklahoma City area. These outlets now operate as Shell gas stations; they were previously operated as Texaco stations. Plaintiff began operating the stations on March 1, 2001. The stations purchased and operated by plaintiff had been Texaco's company-operated locations in the Oklahoma City area.
Defendant operates three Sam's Club stores in the Oklahoma City area. They are located at the intersection of Pennsylvania Avenue and Memorial Road (Store No. 8117), on South MacArthur Blvd. near Interstate 40 (Store No. 8289), and in Midwest City (Store No. 8241), Sam's describes its Sam's Club stores as membership wholesale stores. Consumers and businesses pay annual membership fees for the right to purchase goods at the Sam's Clubs. The membership fee ranges from $30 to $100 per year, depending upon the type of membership Nationally, there are 517 Sam's Club stores and 187 Sam's gasoline sales operations.
In 2001, Sam's started selling gasoline at its three Sam's Club stores in central Oklahoma. The Sam's gasoline operations in central Oklahoma are all located on or directly adjacent to Sam's Club store premises. Gas sales started at the store at Pennsylvania Avenue and Memorial Road on June 5, 2001, slightly more than three months after plaintiff acquired and started operating its stations in the Oklahoma City area.
Plaintiff has a policy, consistent with the Oklahoma Unfair Sales Act, of marking its gasoline products up by at least six percent over laid-in cost. Laid-in cost is the cost of the product, plus freight and applicable taxes. After plaintiff started operating its stations in central Oklahoma, plaintiffs managers noticed that Sam's was becoming very aggressive in pricing its gasoline. This led plaintiff to investigate the possibility that Sam's was pricing its gasoline at a level below that permitted by the Unfair Sales Act.
Both parties agreed that the market for the sale of gasoline in the Oklahoma City metropolitan area is highly competitive and has been highly competitive for a number of years. It was competitive before Sam's entered the market with its gasoline operations at its three central Oklahoma stores, and the market continues to be highly competitive.
At the Memorial Road store, both members and non-members may purchase gasoline. Gasoline is sold to club members at the Memorial Road store at a five cent per gallon discount. At the other two stores, gasoline is sold to members only. At the Memorial Road store, purchases by members account for 90 percent of gasoline sales; non-members purchase only ten percent of the gasoline sold there.
The Sam's gasoline operations at its three central Oklahoma stores sell only unleaded and premium gasoline. Premium accounts for 15 percent, or less, of the gasoline sold. The balance is unleaded.
Notwithstanding Sam's assertions to the contrary, the evidence clearly establishes that the gasoline operations are integral to the operations of the store facilities where the gasoline facilities are located. More importantly for purposes of this case, it is equally clear that the gasoline selling operations at the three central Oklahoma stores play an important role in Sam's marketing strategy at those stores. As indicated by plaintiffs Exhibit 25, from Sam's Manager's Manual:
GAS IS A GREAT BENEFIT TO THE CLUB
• Gas increases membership. Our members recognize the value and convenience gas adds to the Club. Gas drives both new membership sign-ups and increases renewal rates.
• Gas increases frequency of shopping and total purchase by our Members. In addition to gas sales, the Members buying gas also shop in the Club more frequently and purchase more.
• Gas increases total box sales and profits in the Club. Sales and profits at the gas station go to Division 59, which rolls into total box results for the Club.
Plaintiff's Exhibit 25.
Significantly, the same exhibit also states that "our members understand gas prices. They will recognize the outstanding value we offer." This, in combination with the fact that "[t]he Sam's Gas Station is a highly visible extension of the Club," id., and viewed in light of the testimony of Sam's managers at the hearing, convinces the court that the gasoline operations at these stores are not only integral to the stores themselves, they make up an important component of Sam's strategy for projecting a low price image to the buying public.
Acting on its suspicion that Sam's might be pricing its gasoline below statutory costs, plaintiff undertook an investigation of Sam's gasoline pricing. It is relatively easy to ascertain, between very narrow upper and lower limits, the retail cost of premium and unleaded gasoline in the Oklahoma City market for any given day. This information is available in price information services to which gasoline retailers may subscribe. One such service is DTN FastRacks. Using the DTN FastRacks service, plaintiff compared the day to day wholesale cost of gasoline in the Oklahoma City market with Sam's day to day retail prices at the pump. Sam's retail prices at the pump were photographically documented.
Exhibit A to plaintiffs Exhibit I is a spreadsheet showing sales, cost and price information for the gasoline operation at Sam's Memorial Road store for the period beginning December 7, 2001 and ending July 31, 2002. During that period, there were 41 days on which the member price for unleaded gasoline at the Memorial Road store was below actual laid-in cost (i.e., the wholesale price of the product, plus applicable taxes and freight charges for getting the product delivered to the station).
For the month of December, 2001, Sam's had a negative gross profit (i.e., total sales minus cost of goods sold, ignoring operating expenses) on gasoline sold at the Memorial Road store. For the year to date through December 2001, after deducting operating expenses, Sam's lost in excess of $100,000 in its gasoline operation at the Memorial Road store (ignoring, for the moment, any issues with respect to accounting for membership fees, which will be discussed below). For the year to date through January, 2002 (an accounting period which would have begun in mid-2001 when Sam's started selling gasoline at the Memorial Road location), Sam's made a gross profit on gasoline sales, before deduction of operating expenses, of less than $10,000. The gross margin (gross profit as a percentage of net sales) was less than six tenths of one percent (which should not be confused with the six percent markup required by the Unfair Sales Act in the absence of proof of lower costs of operation). For the six months ending July 31, 2002, Sam's made a gross profit on gasoline sales at the Memorial Road store of less than $10,000. This again amounted to a margin of approximately six tenths of one percent. For the same period, the gasoline segment of Sam's business at the Memorial Road store posted a net operating loss in excess of $100,000.
The court will, in the main, refer only generally to dollar amounts and other quantitative matters, because much of this information is commercially sensitive and has been treated by the parties as being confidential.
Turning to the Sam's Club on Interstate 40, for the year to date through January, 2002 (which, again, would have begun in mid-2001 when gasoline sales started), Sam's gross profit on gasoline sales amounted to less than $100,000 (a margin of slightly over two percent), and the gasoline sales operation resulted in a net operating loss, after deduction of operating expenses, in mid-five figures. Plaintiffs Exhibit 14. For the six months ended July 31, 2002 at the same store, the gross profit percentage (again, without allowing for operating expenses) was less than two percent. After deduction of operating costs, the gasoline operation at the Interstate 40 store lost more than $20,000 for the year to date through July, 2002.
One of the matters in contest at the hearing was the appropriate approach to allocating operational costs to the gasoline operations at the three Sam's stores which are involved here. Plaintiff, at least for the most part (see, e.g., plaintiffs Exhibit 29), used Sam's internally reported operational costs. On the other hand, Sam's preferred to employ an approach to cost allocation which was adopted for the purpose of this litigation and which dramatically reduced the operational costs attributable to the gasoline business at the three stores. As is discussed in more detail below, the court, in most respects, rejects Sam's revisionist approach to allocation of operational costs.
Plaintiffs Exhibit 29 analyzes Sam's gasoline operation at the Memorial Road store for the period beginning December 7, 2001 and ending July 31, 2002, taking into account Sam's operational costs as internally reported, and not as revised by Sam's for litigation purposes. For that period, deducting Sam's cost of operations as internally reported, on a per gallon basis for unleaded gasoline, Sam's sold unleaded gasoline below statutory costs (i.e., laid-in costs plus actual cost of operation where that is less than six percent) 99 times, based on member prices, which accounted for approximately 90 percent of sales. Applying a six percent markup (rather than using actual internally reported operating costs), the product was sold below cost 149 times during the same period. See plaintiffs Exhibit 32.
Turning to the Midwest City store, and focusing on gasoline operations at that store for the fiscal year to date through January, 2002, Sam's gross profit on gasoline sales amounted to something in excess of $100,000, for a 2.2 percent markup, which resulted in a loss in excess of $10,000 after deduction of operating expenses and aside from issues as to allocation of membership fees.
Membership fees, which, of course, are an important aspect of Sam's approach to doing business, deserve special attention. Obviously, the fact that Sam's collects membership fees from consumers and businesses complicates the reckoning of the actual financial results of any aspect of store performance. For some purposes, Sam's has suggested that membership fees should be treated as a negative expense and attributed in part to the gasoline operation. However, as internally reported, the annual membership fees do not reduce Sam's cost of gasoline and do not reduce other costs such as the cost of electricity, rent, taxes and wages. Sam's members are not required to buy gasoline at Sam's, and Tom Skinner, Sam's director of operational finance support, acknowledged that it is very likely that some Sam's members buy none of their gas at Sam's. in those cases, none of the membership fee paid by the member should be allocated to gasoline sales. Tr. 277-78.
It is also certainly conceivable that a Sam's Club member could pay his or her thirty dollars and then do nothing with the membership other than purchase gasoline. This might have a significant effect on the member's per-gallon cost of gasoline and would logically, at least as to that member, suggest that Sam's should get the benefit of the membership fee in determining what it costs to sell gasoline to that member. However, as befits Sam's avowed purpose of operating the gasoline business as an extension of the store and for the purpose of conveying a pricing impression to the general public, it is clear to the court from the totality of the evidence that, on the whole, membership fees are paid for the privilege of shopping inside of the store as well as for the purpose of getting the five cent per gallon discount at the pump if the member so desires.
On the basis of the evidence before the court, the fairest conclusion to reach as to membership fees is that the fees certainly can, and, to some extent, should, make a difference in the court's evaluation of Sam's gasoline pricing practices. On the other hand, examination of the results of gasoline sales at the Memorial Road store makes it clear that even a generous allocation of membership fees to the gasoline operation will not make enough difference to avoid the conclusion that Sam's has repeatedly priced its gasoline below cost.
Analysis of the membership fees in the context of the overall results of operations at these three stores in late 2001 through July 2002 is facilitated by some of the income statements which were received in evidence at the hearing. Some of these statements (e.g., plaintiffs Exhibits 5, 12 and 19) cover the "total box" results of operations at these three stores for the six months ending July, 2002. Other exhibits isolate the results of the gasoline operations (Division 59) at these three stores. Plaintiffs Exhibit 6 shows the results of operations for December, 2001, plaintiffs Exhibit 7 shows the results of operations for January, 2002, and plaintiffs Exhibit 8 shows the results of operations for February through July, 2002, all as to the Memorial Road store. Plaintiffs Exhibits 13 through 15 and 20 through 22 contain the same information as to the Interstate 40 and Midwest City stores, respectively.
These exhibits show that, for the eight months ended July, 2002, gasoline operations at these three stores lost nearly $250,000. Looking at the Memorial Road store alone, for February through July, 2002, the net operating loss on gasoline sales, before allocation of membership fees, was nearly $170,000. Allocation of 14% of membership fee income attributable to the Memorial Road store for that period (a percentage suggested by Sam's as a fair indication of the contribution to gross revenues made by the gasoline operation) still leaves the gasoline operation at the Memorial Road store in a net operating loss position as a result of Sam's consistent below-cost sales of gasoline. Obviously, the effect of allocation of membership fees will vary depending upon the store involved, depending upon the period of operations being scrutinized, and depending upon the theory by which the percentage allocation is effected. One thing remains clear, however. As the experience at the Memorial Road store indicates, no rational allocation of membership fees is sufficient, as a mathematical proposition, to keep Sam's from having repeatedly sold gasoline below statutory cost.
The transcript reflects (Tr. 271) that Mr. Skinner acknowledged on cross examination that the net operating loss for the gasoline operations for this period for the three stations exceeded $300,000. The court's review of the exhibits suggests that the correct amount is slightly less than $250,000.
In attempting to justify their pricing behavior, Sam's managers referred during the hearing to rebates which are given to gasoline purchasers by some of Sam's competitors, either on a percent basis or on a cents-per-gallon basis. These competitors who have paid rebates include Citgo, Murphy Oil and Shell. This evidence is of limited relevance, because no cogent showing was made that would enable the court to find that the net (after rebate) prices charged by Sam's competitors provided a basis for a "meeting competition" defense. However, the Shell rebate perhaps deserves some additional attention. The Shell MasterCard rebate program does not reduce the price of the gasoline paid by the customer to the retailer. The customer pays the hill posted pump price for gasoline. Under this program, the customer gets no discount from the retailer. Instead, the Shell MasterCard rebate program is a co-branded credit card program between Shell and a financial institution which gives the customer a five percent rebate on future purchases of Shell gasoline if he or she uses the card to purchase Shell gasoline. The purchaser also can receive a one percent rebate on any other product which he or she might purchase with the co-branded MasterCard. For instance, the consumer could use his Shell MasterCard to purchase gasoline at Sam's, and would receive a one percent rebate. None of the rebate goes to the fuel retailer. This rebate program is not relevant to the issues in this case.
When Sam's sets its gasoline prices, as it does on a daily or nearly daily basis, it does not perform any calculations to determine whether a competitor's price is legal or illegal, although Richard Ezell, the operations manager for the fuel division of Sam's, acknowledged that Sam's has a general idea of whether a price is legal or illegal. Mr. Ezell also acknowledged that although he has no way to determine with certainty whether a competitor's price is legal, it is not difficult to get a general idea as to what a competitor's product cost would be. Sam's has not taken any steps to disclose to its members or to the general public that it has sold gasoline below cost. This was explained on the basis that Sam's does not feel that it has sold below cost. This proposition is persuasively contradicted by Sam's own evidence as well as the evidence presented by the plaintiff
At the hearing, Sam's attempted to meet the plaintiffs evidence (which was largely based upon Sam's own internal financial reporting) as to Sam's below cost sales of gasoline by preparing some revised financial reports which, if found to be persuasive, would cast a substantially more favorable light upon Sam's gasoline pricing activity. Sam's main exhibits portraying its proposed calculation of operating expenses for the gasoline operation were defendant's Exhibits 8, 9 and 10, which related, respectively, to the Memorial Road store, the Midwest City store and the Tnterstate 40 store. At the hearing, the questions related principally to defendant's Exhibit 8, relating to the Memorial Road store, as an exemplar. The format of Exhibits 9 and 10 is identical. These exhibits do not reflect Sam's routine internal reporting of the costs incurred with respect to the gasoline operations at these three stores. To the contrary, defendant's Exhibits 8, 9 and 10 are made-for-litigation exhibits.
On the basis of the allocation of expenses for the Memorial Road gasoline operation set forth in Defendant's Exhibit 8, Sam's comes out with a 3.53 percent (on the basis of cost of goods sold) expense ratio before allocation of membership income to the gasoline operation, and a 1.24 percent cost of operation after allocation of membership income. Mr. Skinner, Sam's director of operational finance support, offered defendant's Exhibits 8 through 10 as a reflection of the true cost of operations for each location with the exception of the management fee (not to be confused with membership fees), which he suggested was potentially overstated. Tr. 284.
The beginning point for evaluation of Sam's proposed allocation of operating costs to the gasoline operations is to look at the big picture. At the Memorial Road store, gasoline operations generated 14 percent of the revenues, but Sam's proposes to allocate only three percent of operating expenses to that source of revenue. Tr. 258.
Comparing the expense categories shown on plaintiffs Exhibit 2 — generated by Sam's — with the expenses actually allocated, regardless of how small the allocation might be, on defendant's Exhibits 8, 9 and 10, it is evident that, in allocating expenses to the gasoline operation, Sam's attributed no costs in the categories of managers' salaries, assistant manager wages, advertising, accident costs, security service, contributions and maintenance, to name only some of the more prominent items which are entirely absent from Sam's proposed allocation of operating costs. It is abundantly clear from the evidence, however, that managers and assistant managers do devote more than negligible amounts of time to their gasoline operations. Sam's approach to allocation of costs to the gasoline operation is perhaps best exemplified by its explanation of the reason for which it allocates no advertising cost to the gasoline operation. Mr. Skinner testified lamely that the "gas station itself doesn't perform any advertising functions." Tr. 235. He went on to explain that the gas station relies simply on word of mouth advertising, apparently presupposing that Sam's advertising benefits only the specific items advertised in any specific instance. Likewise, with respect to charitable contributions, none of which are attributed to the gasoline operation, Mr. Skinner explained, in a non sequitur, that the "gas station doesn't participate in any charitable fund raising or anything by itself, most of that is done inside the club." Tr. 241.
For December 2001 through July 2002, Sam's attributed approximately $2,500 per month in occupancy cost to the gasoline operation for the Memorial Road store. To his credit, Mr. Skinner declined to proffer that as a fair amount. Tr. 267. Using Sam's internal rate of return guidelines, Mr. Skinner acknowledged that a fair occupancy cost would be more like $6,500 per month. Tr. 268. Likewise, for litigation purposes, Sam's attributes only seven tenths of one percent of its property insurance (actually self-insurance) cost to the gasoline operation. Tr. 274. No credible substantiation for this minuscule allocation was offered. The court finds that Sam's proposed cost allocation is obviously contrived and equally untenable. In fact, as Mr. Skinner acknowledged at the hearing, Sam's operating expenses, as allocated internally, exceed the gross profit on the gasoline operations at these three stores. Tr. 271. Plaintiffs Exhibits 8, 15 and 22.
As shown by Sam's own internal profit and loss statements, even after allocating membership income to the gasoline operations by way of reduction of costs, Sam's still loses money on gasoline sales. Tr. 272. Gasoline sales are, as a matter of fact as well as in Sam's business plan and in Sam's internal profit and loss statements, an integral part of a unitary operation. As is stated above, one of the predominant purposes of the gasoline operation, at least at these three central Oklahoma stores, is to project a pricing image to the public (as per Sam's management manual discussed above). Despite having been given two chances to do so in response to questions from the court, Dr. Joseph Jadlow, Sam's expert witness, was unable to articulate an economic rationale for consistent pricing of unleaded gasoline at a level that results in consistent losses on gasoline sales. Tr. 223. The answer, of course, is evident. There would be no rationale for this course of conduct if the gasoline operation were a free standing business. The purpose of the gasoline business at these three stores is to pull customers in and to do so if need be by operating the gasoline facilities at a loss. This is not intrinsically immoral, but is illegal if it violates the Unfair Sales Act.
As is discussed on pp. 18-23, below, plaintiff has the benefit of a showing which amounts, as a matter of law, to prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition. The evidence also establishes this intent to injure as a factual matter. One of the very purposes of wholesome, lawful competition is to best (i.e. "injure") competitors in the marketplace. The intent to do that becomes intent to injure a competitor or competitors in the statutory sense when the means used are the means which are proscribed by statute. Given the volumes of gasoline sold by Sam's and the proximity of Sam's stations to plaintiff's stations in central Oklahoma, there is no room for doubt that plaintiff has in fact been "injured" by Sam's below-cost sales. As is discussed below, this analysis requires no consideration of Sam's overall market power, of whether Sam's has the power to drive plaintiff out of business, or of the extent to which competition has been lessened.
Sam's gasoline facilities at the three central Oklahoma stores are, by any standard, high volume operations. At the Memorial Road store, Sam's monthly volume of gasoline sold is several-fold the typical volume for a retail gasoline station in Oklahoma City. As has been noted, plaintiffs policy is to price its gasoline at or above the level required by the Unfair Sales Act. In fact, plaintiff's stations typically price their product toward the high end of the gasoline pricing spectrum in the Oklahoma City market. Customers have told plaintiff's personnel that, because of the pricing difference, they are going to buy their gasoline at Sam's rather than at plaintiffs stations. Given the very substantial volumes of gasoline sold by Sam's and the price gap between plaintiffs prices and Sam's prices, the court easily concludes that, as was suggested by Alan Wilkerson, plaintiffs chief operating officer, plaintiff has lost volume to Sam's. Obviously, the evidence does not disclose the extent of that loss of volume, much less what the loss of volume would have been if Sam's had always sold its product at a barely legal price. The most salient indicator provided by the evidence as to the impact of Sam's pricing is plaintiff's description of the difference in its volume before and after the inception of Sam's gasoline sales. Any effort at precise quantification is highly suspect. The evidence persuades the court, however, that Sam's entry into the market, with the approach to pricing which has been proven and is described above, has had a negative impact upon plaintiffs sales volume. The price gap leaves plaintiffs customers with the impression that plaintiff is gouging. As is discussed below, this pricing behavior is deceptive and, as such, is one of the alternative results of below-cost pricing which may be shown in order to establish a violation of the Unfair Sales Act. Sam's pricing behavior has, in turn, had a negative effect on the goodwill of plaintiffs customers. The loss in volume is not quantified by the evidence and may well be unquantifiable. Even more so, the impact of the loss of goodwill is not quantifiable.
III. Conclusions of Law
The granting of a preliminary injunction is a matter which lies within the sound discretion of the district court. Lundgrin v. Claytor, 619 F.2d 61 (10th Cir. 1980). The party seeking the preliminary injunction must show a substantial likelihood that it will prevail on the merits, that it will suffer irreparable injury without the preliminary injunction, that the threatened injury to the party seeking the injunction outweighs any damage which might be suffered by the opposing party, and that entry of the injunction would not be adverse to the public interest. Id.
The essential purpose of a preliminary injunction is to preserve the status quo. Atchison, Topeka and Santa Fe Railway Co. v. Lennen, 640 F.2d 255, 261 (10th Cir. 1981). The party seeking the injunction need not show conclusively that it will prevail on the merits. It is only necessary that the movant establish a reasonable probability of success on the merits. Id.
There is substantial authority for the proposition that, where the defendant is shown to have engaged in practices prohibited by a statute which provides for injunctive relief to prevent such violations, irreparable harm need not be shown. Atchison at 259. The court concludes that this rule is applicable in the case at bar and that irreparable injury need not be shown. However, the court also concludes that the harm which plaintiff has suffered as a result of Sam's approach to gasoline pricing is both irreparable and impossible to quantify with precision.
The two major purposes of the Unfair Sales Act are to prevent "loss leader selling" and to protect small merchants from large competitors capable of driving them out of business by below-cost sales. So-Lo Oil Co., Inc. v. Total Petroleum Inc., 832 P.2d 14, at 17 (Okla. 1992). The court, in So-Lo, defined loss leader selling as pricing featured items below cost to entice customers into a store where other merchandise prices are inflated. Although Sam's would not be in business long if the results of its operations inside the store were no better than the results of its gasoline operation, the evidence certainly does not establish — and plaintiff has not attempted to assert — that prices inside the store are inflated. However, the statute does not require a showing of inflated prices.
In a case directly involving the Oklahoma Unfair Sales Act, the United States Supreme Court has concluded that the selling of selected goods at a loss in order to lure customers is not only a destructive means of competition, it also plays on the gullibility of customers by leading them to expect what generally is not true, namely, that a store which offers such an amazing bargain is full of other such bargains. Safeway Stores. Inc. v. Oklahoma Retail Grocers Assoc., 360 U.S. 334, 340 (1959). In holding that the Unfair Sales Act does not apply where the defendant is the producer (i.e. manufacturer, or, with respect to gasoline, the refiner) as well as the seller of the goods, the Oklahoma Supreme Court has declared that, in determining the scope of the coverage of the Unfair Sales Act, the Act is to be strictly construed. So-Lo at 18-19. The case at bar presents no issue as to coverage; that is uncontested here.
The beginning point for determining "cost to the retailer" within the meaning of the Act is to determine the invoice cost of the goods and the replacement cost of the goods. 15 O.S. 2001 § 598.2[ 15-598.2](a). The replacement cost is the cost per unit at which the goods in question could have been bought by the seller at any time within 30 days before the date of sale. § 598.2(c). The beginning point is the lower of these two costs. To this cost, the statute requires that freight, taxes and markup be added, in order to determine the statutory minimum price. § 598.2(a). The markup is intended to "cover a proportionate part of the cost of doing business." Id. In the absence of proof of a lower cost of doing business, the statutory markup is six percent of the cost of the goods.
In the case at bar, there is little controversy as to the application of the cost and markup formula in § 598.2. The real controversy revolves around the construction and application of §§ 598.3 and 598.5(c). Section 598.3 provides, in its entirety, as follows:
It is hereby declared that any advertising, offer to sell, or sale of any merchandise, either by retailers or wholesalers, at less than cost as defined in this act with the intent and purpose of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor or otherwise injuring a competitor, impair and prevent fair competition, injure public welfare, are unfair competition and contrary to public policy and the policy of this act, where the result of such advertising, offer or sale is to tend to deceive any purchaser or prospective purchaser, or to substantially lessen competition, or to unreasonably restrain trade, or to tend to create a monopoly in any line of commerce.
15 O.S. 2001 § 598.3[ 15-598.3] (emphasis added).
Section 598.5(c) of Title 15 states, in its entirety, as follows:
(c) Evidence of advertisement, offer to sell, or sale of merchandise by any retailer or wholesaler at less than cost to him. shall be prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition.
Sam's has repeatedly sold unleaded gasoline below statutory costs, so plaintiff has the benefit of the statutory boost provided by § 598.3. Specifically, the evidence of the sales of gasoline below cost is to be treated as "prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition."
Surprisingly, the Oklahoma Supreme Court has not squarely specified the showing which must be made to satisfy the second, third and fourth of the four alternative "results" required by the final portion of § 598.3 (namely, substantial lessening of competition or unreasonable restraint of trade or tendency to create a monopoly in any line of commerce). Sam's has understandably urged that the relatively stringent concepts which are firmly embedded in federal antitrust law should be imported into § 598.3, so as to require a showing of the relevant market, market power, and an overall lessening of competition within the relevant market. To the extent that the decisions of the Oklahoma Supreme Court shed any light on these issues, they suggest a more relaxed approach to resolution of the issues as to lessening of competition, restrain of trade and creation of a monopoly. For that reason, and because the reasoning of the Honorable David L. Russell on similar issues is quite persuasive, the court disagrees with Sam's on these points.
Turning first to the guidance available from the Oklahoma Supreme Court, Diehl v. Magic Empire Grocers Ass'n, 399 P.2d 460 (Okla. 1964) andGlenn Smith Oil Co. v. Sheets, 704 P.2d 474 (Okla. 1985) are instructive.
In Diehl, the defendant grocer was clearly advertising (and presumably selling) popular grocery items below cost. Diehl at 462. The court quoted § 598.3 and § 598.5(c), both of which are quoted above. The court was thus cognizant of the requirements of those sections. After concluding that a pricing violation had occurred, at least by way of advertisement (and advertisement alone is sufficient under § 598.3), the court appears to have concluded that that was the end of the matter. Id. at 463. This approach, if it indeed was the approach employed by the court in Diehl, gives sweeping effect to the prima facie evidence provision of § 598.5.
Glenn Smith Oil v. Sheets arose from a "gas war" in Muskogee. Glenn Smith Oil, at 475. Plaintiffs gasoline station was located close to defendant's station. Defendant's station was clearly demonstrated to have been selling gasoline below cost. In granting an injunction, the trial judge stated that: "I have no trouble at all finding that Mr. Glenn Smith is financially damaged by his competitor selling gas eight cents cheaper, within a few blocks under similar sales circumstances." Id. at 476. Then, after quoting the prima facie evidence provision found in § 598.5(c), the Supreme Court stated that prima facie evidence "is such evidence as in the judgment of law is sufficient to establish a fact, and if not rebutted, remains sufficient to establish that fact." Id. at 478. The court held that the defendant had failed to adequately rebut the prima facie evidence of intent to injure competition. Id. at 478-79. The court's opinion includes no discussion at all of any market-wide effect of the defendant's pricing practices. Moreover, the opinion includes no discussion as to destruction or lessening of competition other than the quotation of the trial judge's comments. Thus, with respect to the "result" requirement found in the final portion of § 598.3, the Supreme Court's sole focus was on what might be called the micro economic effect of defendant's practices on plaintiffs business.
Entirely absent from Diehl, Glenn Smith or any other reported Oklahoma decision is any indication that the more complex and demanding requirements of federal antitrust law are to be imported into the court's construction and application of the final portion of § 598.3.
It is perhaps also noteworthy at this point that, in Oklahoma Retail Grocers Ass'n v. Wal-Mart Stores. Inc., 605 F.2d 1155, Wal-Mart stipulated that selling or offering to sell merchandise at less than cost "would destroy or lessen competition." Id. at 1157.
Judge Russell's reasoning, as expressed at length in Ranger Oil Company, Inc. v. Murphy Oil USA, Inc., case no. CIV-01-1297-R, USDC WD Okla. is entirely consistent with the Diehl and Glenn Smith decisions and fortifies the conclusion of the undersigned that a showing of "antitrust injury" as urged by Sam's is not required by the Oklahoma Unfair Sales Act. Reading § 598.3, Judge Russell succinctly analyzed the statutory language, as a point of departure for construction of § 598.5, as follows:
The Unfair Sales Act prohibits, inter alia, the sale of merchandise at less than cost as defined in the Act with an intent and purpose prescribed by the Act where the result is one of the results specified in the Act. Okla. Stat. Pt. 15, § 598.3. The proscribed intent and purpose is that of 1) inducing the purchase of other merchandise; or 2) otherwise injuring a competitor; or 3) impairing or preventing fair competition; or 4) injuring public welfare. Id. The prohibited result is 1) to tend to deceive any purchaser or prospective purchaser; or 2) to substantially lessen competition; 3) to unreasonably restrain trade; 4) to tend to create a monopoly. Id. Thus, in order to establish a violation or threatened violation of the Unfair Sales Act, see Okla. Stat. tit 15, § 598.5(a) a plaintiff must prove a below-cost sale, a prohibited intent and purpose and a prohibited result.
Order of Russell, J. in Ranger Oil, September 17, 2002.
It is arguable that the third and fourth items identified by Judge Russell as proscribed intents and purposes are actually legislative declarations of the effects of the first two proscribed intents and purposes. That possible variation in construction is immaterial on the facts of this case.
Having parsed § 598.3 as set forth above, Judge Russell then turned to § 598.5, and specifically to the question of the statutory boost set forth in § 598.5: Evidence of sales below cost "shall be prima fade evidence of intent to injure competitors and to destroy or substantially lessen competition." Because the court is entirely in agreement with Judge Russell's reasoning as to the effect of this provision, it is quoted at length:
The first part of this statute is clear. Evidence of below-cost sales is prima facie evidence of one of the prohibited intents (and purposes inasmuch as purposes is synonymous with intent) that of injuring one or more competitors. The second part of the statute is ambiguous. At first glance, it appears, that "intent" modifies the second phrase as well, i.e., evidence of below-cost sales is prima facie evidence of an intent to injure competitors and/or of an intent to destroy or substantially lessen competition. But "to substantially lessen competition" is one of the results that is prohibited by the Act, not one of the prohibited intents (and purposes). One might question why, if the Oklahoma Legislature had intended that proof of below-cost sales be prima facie evidence of an intent to injure competitors and of a result of destroying or substantially lessening competition, they did not use that language or words to that effect. On the other hand, the Oklahoma Legislature did not say that evidence of below-cost sales shall be prima facie evidence of intent to injure competitors or destroy or substantially less competition. Instead, it used the conjunctive "and" and repeated the word "to" as part of a new infinitive which would have been unnecessary had it intended that evidence of below costs sales be prima facie evidence of disjunctive or alternative intents, only one of which matches in language one of the statutorily proscribed intents. Thus, it seems most likely, on balance, that the Oklahoma Legislature intended that evidence of below-cost sales be prima facie evidence both of the intent to injure competitors and of the result of destroying or substantially lessening competition, as Plaintiff argued in its response to Defendant's reply brief.Id. at 4-5 (emphasis in original). Thus, Judge Russell rejected the assertion of the defendant in Ranger Oil to the effect that plaintiff must present evidence as to the relevant market, the competitors in that market, the defendant's market share, market power to drive out competitors, and related matters which may loosely and collectively be placed under the heading of "antitrust injury." Id. at 2.
The court accordingly concludes that, under § 598.3, the "intent and purpose" which must be shown is the intent and purpose (i) of inducing the purchase of other merchandise or (ii) of unfairly diverting trade from a competitor or otherwise injuring a competitor. (It may well be, under Judge Russell's construction, that impairing or preventing fair competition or injuring public welfare may also, alternatively, be shown.) The evidence clearly establishes and the court accordingly finds and concludes that Sam's consistent practice of pricing gasoline below cost did have the intent and purpose of inducing the purchase of other merchandise. This much is shown, if by no other evidence, than by Sam's internal management manual as discussed above. The court also concludes that this conduct had the intent of unfairly diverting trade from a competitor and that it did impair fair competition. The first portion of § 598.3 is easily satisfied in this case.
This brings the court to the "result" language which is set forth in the final portion of § 598.3. Regardless of what those four alternative provisions may mean when analyzed one by one (e.g. regardless of whether "antitrust injury" is required as to the second, third and fourth of the four alternative "result" provisions), it is clear that these provisions are enacted in the alternative and, accordingly, that a showing of only one of them is necessary. Thus, the "result" which must be shown is that the below cost sales:
1. Tend to deceive any purchaser or prospective purchaser, or
2. Substantially lessen competition, or
3. Unreasonably restrain trade, or
4. Tend to create a monopoly in any line of commerce.
As is discussed above, we do have in this case prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition, within the contemplation of § 598.5. The court has concluded, consistently with Judge Russell's conclusion, that the prima facie showing encompasses both intent to injure competitors and the result of destroying or substantially lessening competition, as discussed above. The complex and demanding requirements of federal antitrust law, none of which are intimated by any Oklahoma cases under the Unfair Sales Act, are thus pretermitted.
It is not necessary for the court to address the third and fourth alternatives with respect to "result" (unreasonable restraint of trade or tendency to create a monopoly). The first two "result" alternatives (tendency to deceive any purchaser or prospective purchaser and tendency to substantially lessen competition) have been established; the first by the evidence presented at the hearing and the second by way of an unrebutted prima facie showing under § 598.5(c).
As to deception, inherent in the below cost sale of one commodity among hundreds or thousands sold at the same establishment is the implication that the pricing of the item which is sold below cost is indicative of pricing generally at the same establishment. Safeway Stores. Inc. v. Oklahoma Retail Grocers Ass'n, j., 360 U.S. 334, at 340 (1959). That is the intent of Sam's in the case at bar, as shown by the totality of the evidence including particularly the manual which clearly demonstrates that the intent of the gasoline operation is to convey a pricing image to the general public. To the extent that this image is generated by below cost pricing of gasoline, that pricing practice does "tend to deceive any purchaser or prospective purchaser," and the court so concludes. 15 O.S. 2001 § 598.3[ 15-598.3]. See also, as to deceptive result, Harolds Stores, Inc. v. Dillard Department Stores, Inc., 82 F.3d 1533, at 1552 (10th Cir. 1996), cert. denied 519 U.S. 928 (1996).
The second of the four alternative statutory results, substantial lessening of competition, is, prima facie, established in this case. The prima facie showing stands unrebutted. That is the end of the matter on this point. Glenn Smith Oil Co. v. Sheets, 704 P.2d 474, at 478-79 (Okla. 1985).
The court accordingly holds for purposes of plaintiffs motion for a preliminary injunction that plaintiff has satisfied the prerequisites of the Oklahoma Unfair Sales Act. A consistent course of below-cost sales has been demonstrated. The intent of the sales was as required by the first portion of § 598.3, namely the intent to induce the purchase of other merchandise or to unfairly divert trade from a competitor or otherwise injure a competitor. The result requirement has likewise been satisfied, namely deception of any purchaser or prospective purchaser or substantial lessening of competition.
Returning to the Lundgrin v. Claytor formulation, the court concludes that plaintiff, as the party seeking the preliminary injunction, has demonstrated a substantial likelihood that it will prevail on the merits. Plaintiff has made a strong factual showing. To the extent that Sam's defenses are factual, they have been found wanting. For the most part, Sam's legal defenses amount to an attempt to engraft federal antitrust principles onto the Oklahoma Unfair Sales Act. This attempt is not supported by the statutory scheme and is without warrant in the Oklahoma cases. For that reason, as discussed above, the undersigned joins Judge Russell in rejecting those contentions.
Although the court has concluded, as discussed above, that the plaintiff, in enforcing this statutory claim, need not show irreparable injury, the court also finds that irreparable injury has been demonstrated. Specifically, plaintiff has persuaded the court that Sam's below cost sales of gasoline have had an inherently difficult to measure effect both on plaintiff's sales volume and on the good will plaintiff enjoys with the consuming public. Plaintiff has not shown, and need not show, that its business is about to be destroyed by Sam's violations. Where, as here, the evidence amply establishes a violation of the clear command of the statute, it is certainly sufficient that plaintiff show, as it has, ongoing commercial injury of a kind and to an extent which is difficult to quantify.
Plaintiff has likewise demonstrated that the injury it will suffer if injunctive relief is not granted outweighs the "injury," if any, which might be suffered by Sam's as a result of the court's grant of preliminary injunctive relief This is not a situation in which the grant of preliminary injunctive relief will preclude Sam's from undertaking a course of conduct which it would otherwise be free to pursue. To the contrary, the injunction will do no more than put the force of the court's processes behind the statutory command which Sam's is, in any event, bound to obey.
Finally, entry of the injunction will not be adverse to the public interest. To the contrary, for purposes of this diversity case, the Oklahoma legislature, by enacting the Unfair Sales Act, has defined the only relevant public interest.
The violation having been demonstrated, "the court shall enjoin and restrain or otherwise prohibit, such violation." 15 O.S. § 598.5[ 15-598.5](a).
CONCLUSION
Star Fuel Marts has clearly made its case, under the Oklahoma Unfair Sales Act, for entry of a preliminary injunction restraining Sam's from continuing to sell gasoline below cost at the three central Oklahoma Sam's Clubs. The parties are directed to collaborate upon the form of a preliminary injunction and to submit the form of an injunction, if one can be agreed upon, within 10 days from the date of this order. In the absence of agreement, the parties shall submit to the court, within 11 days from the date of this order, their respective proposed forms of preliminary injunction.
Plaintiffs Motion for Preliminary Injunction, docket entry no. 34, is accordingly GRANTED.