IN THE COURT OF COMMON PLEAS

LUZERNE COUNTY, PENNSYLVANIA

CIVIL TRIAL DIVISION

CONSOLIDATED INNS, : CIVIL ACTION LAW

INC., and HAR-CON :

INNS, INC. :

vs. :

THOMAS J. LYONS, :

ET AL. : no. 446-C-1992



REPORT OF JAMES M. PATTERSON

Professional Background

1. I am professor emeritus of marketing in the Kelley School of Business at Indiana University, Bloomington. My academic research, study and writing for more than 30 years has focused on the marketing practices of the petroleum industry.

2. I presently reside on Bangs Shore Road, Orr's Island, Maine 04066-0224. Since 1960, I have been assistant professor, associate professor, or professor of marketing at the Kelley School of Business at Indiana University. From 1994-1997, I was director of the Indiana University Institute for Advanced Study. Prior to 1960 I was an instructor at Northwestern University and a lecturer at Cornell University. and for one semester, a lecturer at the University of Chicago's Center for Governmental Programs. I have a Ph.D. and M.B.A. from Cornell University and a B.S. from the United States Merchant Marine Academy.

3. My principal area of academic research and scholarship is the mass marketing of gasoline and other petroleum products in the United States. I have written extensively on petroleum marketing, including the following books and publications: (with Fred C. Allvine), Competition Ltd. The Marketing of Gasoline, Bloomington, Indiana University Press, 1972; ( also with Fred C. Allvine), Highway Robbery: An Analysis of the Gasoline Crisis, Bloomington, Indiana University Press, 1974; "Vertical Integration, Product Shortages and the Marketing of Gasoline," in John W. Wilson (ed.), Proceedings of the British Columbia Energy Conference, University of Victoria, Institute of Policy Analysis, 1974; "Strategy and Structure in the Gasoline Industry," in Hans B. Thorelli (ed.), Strategy + Structure = Performance: The Strategic Planning Imperative, Bloomington, Indiana University Press (1977); "Changes in Gasoline Marketing: An Evaluation," in Norman Kangun and Lee Richardson (eds.), Consumerism: New Challenges for Marketing, Chicago, American Marketing Association (1978); "Gasoline Marketing During the 1980s," Association of Petroleum Industry Marketing Attorneys, Alexandria, Virginia, (1980); "Should Vertical Price-Fixing be a Rule-of-Reason Offense?" and "Vertical Price-Fixing Agreements and Refusals to Deal: Should the "Colgate Doctrine' be Changed?" Association of Oil Marketing Lawyers (1986).

4. I have also taught university courses and seminars on various subjects related to mass marketing of petroleum products in the United States and the competitive practices of the major oil companies. I have presented statements on petroleum marketing before the U.S. Senate Committee on the Judiciary,

Subcommittee on Antitrust and Monopoly (July 31, 1975 and August 6-9, 1975); the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Antitrust and Monopoly (July 31, 1975); and the U.S. Senate Committee on Interior and Insular Affairs (1974). I have also served as a consultant on petroleum marketing to the Maryland Attorney General on petroleum industry divorcement litigation (1975); the Federal Trade Commission Bureau of Competition on oil industry litigation (1977-1981); the Ohio Attorney General on the Mobil Oil Company-Marathon Oil Company merger (1981); and the Canadian Office of Consumer and Corporate Affairs Petroleum Industry Task Force (1982-1983).

5. The opinions expressed in this report are based on my personal research and investigation into the American petroleum industry and the marketing of gasoline and other petroleum products by the major oil companies, as well as on the research and investigation of numerous government agencies and individuals. They are also based on the documents, exhibits and depositions generated by this case and other cases in which I have been involved.

6. I have testified as an expert witness in 12 lawsuits involving gasoline marketing and given depositions in numerous others. I have testified on behalf of major oil companies such as Sun Oil Company, and on behalf of dealers and jobbers such as North Penn Oil, Mid-State Oil, Simmons Oil, Texas Discount Gas, and Five Star Gasoline Company. I have also testified on behalf of the State of Maryland in connection with a challenge of their retail divorcement legislation, and against the State of Maryland in connection with their anti-conversion statute.





The Marketing of Gasoline


7. Because gasoline is initially a fungible commodity differing only in technical specifications which are largely impossible for the consuming public to assess, even after consumption, it has come to be marketed in a unique way. In 1990, gasoline was sold to the motoring public through more than 200,000 specialized, single-brand retail gasoline facilities. Moreover, because it is not packaged in containers, but dispensed from a pump, it poses special marketing challenges for the refiner who would differentiate his gasoline from that of other refiners in order to capture a price premium. This desired product differentiation is achieved through the development of a carefully conceived brand/company image by means of sophisticated advertising and by a carefully articulated retail presentation consistent with the desired brand/company image. Detailed control of cleanliness, service, professionalism, architectural appearance, lighting, layout, signage, logos, color, and other aesthetic features is essential for the development and management of this image. Everyone in the marketing system must conform to the programmed marketing plan if the strategy is to succeed.

8. Major oil companies sometimes claim that as petroleum product makes its way from the refinery to the bulk storage facility to the corner gasoline station, the product passes through separate autonomous and independent entities. This alleged independence is a fiction. Major oil companies in the United States are the architects of an elaborate distribution scheme that enables them to manipulate and directly or indirectly control these so-called "independent" marketers, jobbers and dealers, and others involved in the chain of petroleum product distribution. Petroleum marketing is characterized, perhaps above all other factors, by the lack of independence of dealers and jobbers, that is, by interdependence.

9. At one time, company-operated stations were typical at major oil companies. But by the 1940s and 1950s, major oil companies had pulled back to rely mainly on branded jobbers and branded dealers to market their products. The presence of "independent" jobbers and jobber-served dealers serves the interests of the large oil companies in part because it enables the large companies to increase market share without requiring enormous capital expenditures to build or acquire additional wholesale and retail facilities. Moreover returns on investment in retailing and wholesaling are typically lower than at the production and refining levels of integration. This is especially true in thinner non-urban markets. The use of jobbers and branded dealers also takes advantage of the entrepreneurial energy of many small businessmen selling gasoline. Another important reason for marketing petroleum through jobber and branded dealers is to attempt to insulate the major oil companies as much as possible from the risks and liabilities associated with gasoline retail sales, including unionization and environmental and other tort liability.

10. Currently, major oil companies heavily rely on jobbers to reach a large population of gasoline stations. While major oil companies own a large number of lessee dealer stations and even operate some company stores, jobbers make up an important part of a major oil company's distribution system. The majority of the retail stations through which the defendant refiners market gasoline are served by jobbers.

11. While the defendant-refiners would have us believe that more than half of their retail service stations were allegedly beyond their marketing and safety control, free to operate as they wished and responsible for their own safety measures. This is counter to their marketing strategy and to the facts. Major oil companies must and do exert extensive control over their jobbers and jobber-served stations if they are to effectively implement their strategy of product differentiation.

12. Written agreements are one source of this control. Typically the jobber contract asserts the power to control what the jobber sells. It requires the jobber to purchase a minimum and maximum amount of specific branded products. In some cases the contract controls where the jobber sells by creating a geographic selling area--the so-called "area of primary responsibility.". The typical contract also gives the refiner extensive control over how the jobber and jobber-stations are operated, requiring the jobber to comply with federal, state and local laws and regulations ; requiring the jobber to promote, develop and maintain the refiner's branded product acceptance and to provide courteous and efficient service and fair and honest selling techniques and requiring the jobber and the jobber-stations to comply with policies and restrictions regarding credit card sales. The jobber agreement acknowledges that consumer complaints will be sent to the refiner and that the refiner may terminate the jobber for failing to take prompt action to cure the basis for the complaints . In some cases, even the service work done at jobber stations is regulated by the agreement as is the parking of vehicles at the outlet.

13. Major oil companies are also able to control the operations of "independent" jobbers and dealers by controlling the use and display of the major oil company's trade and service marks. Oil companies devote substantial resources to brand image advertising and to developing consumer confidence in and loyalty to their particular brand of gasoline. The market's perception of distinctive favorable qualities associated with the brand is exceedingly valuable. Jobbers and dealers who display the oil company brand name can usually charge premium retail prices amounting to several pennies per gallon as compared to prices at unbranded stations. In a typical product supply contract, the major oil company explicitly retains the right to curtail the marketer's display and use of the brand name unless the jobber and all its retail outlets uphold the major company's standards . As previously noted, these standards usually include such items as station cleanliness, overall cosmetic appearance and layout of the retail outlet, along with credit card acceptance, product stocking, and even dress codes for the marketing firm's employees. Maintenance of the brand image and appearance of the retail outlet is essential to protecting public acceptance and loyalty to the brand. If a jobber-served retailer fails to maintain any of the oil company standards or conditions, the oil company can require its jobber to withdraw all trade and service marks from the deficient retail site, or it can terminate the product supply contract altogether. The threat of cancellation of product supplies -- the marketer's lifeline -- is a significant reason for so-called "independent" dealers and jobbers to comply with the oil company's operational terms and conditions.

14. The ultimate purpose of this control is to have the station operate as a well-articulated component of the major oil company's vertical marketing system and to implement its strategy of product differentiation and brand image development.



Gasoline Marketing in the Consolidated Inns Case

15. The defendant refiner-suppliers in this case argue that their jobbers and their jobbers' dealers are independent businesses, making their own decisions and completely responsible for their own operations. They argue that the relationship is a simple, straight-forward, arms-length, buy-sell relationship and that the refiner merely sells its branded motor fuel, distillates, and lubricants to its franchised distributors who in turn are permitted to use the supplier's trademarks etc. merely as evidence of the source of the product and nothing more. They argue that their jobbers are not to be regarded as licensees or agents.(1) This of course is a legal fiction which is completely counter to the way this vertical marketing system, or for that matter, any effective vertical marketing system actually operates. The purpose of all contractual vertical marketing systems (including the system here) is to achieve the same regularities, economies and efficiencies as are realized by

integrated marketing systems.(2)

It would be self-defeating to allow arms-length behavior to prevail, and of course, as the various documents which govern the relationship between these refiners and their distributors show, cooperation rather than independence is the order of the day. They must and do exercise substantial control over their distributors for their strategy of product differentiation to work.

16. Specific evidence of this close-knit, cooperative relationship and of the efforts of the refiner to manage and otherwise control and regulate the vertical marketing system abound in the documents that form the basis for this franchise relationship. For example, Amoco notes that:

"the uniform appearance of Amoco-branded retail outlets is an important part of Amoco's marketing policies. The uniform standard of appearance has many benefits to dealers, jobbers, and to Amoco. Not the least of these benefits is the increased sales that result from loyal customers who choose Amoco, not only because of the high quality of Amoco's products, but also because they can easily identify an Amoco station and are confident that Amoco stations are uniformly attractive and clean."

Hence Amoco conditions its jobber's right to use Amoco's trademarks upon compliance with Amoco's policies and guidelines for the appearance of service stations as set forth in Amoco's Jobber Image manuals.(3) Thus, when it comes to station appearance, Amoco jobbers and Amoco jobber dealers are not exactly free to act as independent businesses, unless of course they wish to withdraw from the Amoco marketing system.

17. In the Exxon Distributor Agreement, the Exxon jobber and Exxon jobber-dealers are required to offer "appropriate, prompt, efficient, and courteous service, and to provide suitably qualified and neatly dressed attendants (uniformed as appropriate)" They are also required to keep clean restrooms, maintain reasonable hours.(4)

18. This management of these vertical marketing system doesn't stop with regulating appearance and image. All of the refiners specify where, and under what conditions the branded product is to be received by the franchised distributor, including transport vehicle specs, driver qualifications, and proof of insurance and notice requirements. Monthly amounts to be lifted are specified and in some cases forecasts and systematic planning is required.

19. The way consumer complaints are to be handled as well as detailed credit card rules and procedures are also specified, including the requirement to regularly submit audited or certified financial statements. Amoco even requires their jobbers to operate one or more bulk storage plants and operate a "sufficient number of trucks to serve its customers."(5) Exxon requires that their jobbers and jobber-dealers offer at least two grades of Exxon motor fuel.(6)

20. The rules and regulations for the use of the refiner's trade-marks, trade dress, signs and other brand identifications are especially detailed. Most are directed at preventing misbranding, adulteration and commingling of the refiner's branded motor fuel. Others are designed to regulate the appearance of the facility and to protect the integrity of the trade-mark.(7)

21. For example, Section 11 of the Exxon agreement allows Exxon to enter the premises of the jobber dealer to examine the contents of tanks to check for commingling, which if discovered become grounds for termination. The agreement even allows for Exxon to sue the jobber-dealer in the Exxon jobber's name (Section 11). Section VII of the Amoco Jobber Contract specifically gives Amoco the right to inspect the products and records of the Amoco jobber or of that jobber's dealers to determine that there has been no mixing, blending, dilution, or adulteration of a product supplied by Amoco.

22. The agreements also spell out in detail the procedures for handling other brands or unbranded motor fuel. In the case of an Exxon jobber, if equipment or tanks are to be re-branded, specific flushing requirements are set and the jobber is obliged to provide the Exxon Business Counselor with a sample of the resulting motor fuel for testing.

23. Since EPA regulations hold the major oil companies "vicariously liable" for the sale of lead-contaminated gasoline at their so-called independent stations(8)

, in the case of unleaded products, the control is especially tight. For example CITGO specifically requires its jobbers and their jobber-dealers to regularly and frequently test their transportation means and all storage tanks so as to insure that the lead content of unleaded gasoline at no time exceeds the legal [0.05 grams/gal] limits and that if at any time the lead content of such gasoline exceeds 0.04 grams /gal, they will immediately notify CITGO and follow CITGO's instructions.(9)

24. In the case of Exxon, they provide their jobbers with a copy of their Quality Control Procedures for Exxon Unleaded Gasoline Distribution and make that document part of the Distributor Agreement. This obligates their distributors to comply with its procedures for handling, selling and dispensing unleaded gasoline. Further Exxon reserves the right to engage the services of an outside contract firm to perform sampling, testing and reporting in the event the distributor or distributor-dealers fail to comply with the procedures-- the cost to be borne by the buyer.(10)

25. Amoco merely requires its distributors and distributor-dealers to comply at all times with Amoco's established procedures for controlling the quality of Amoco's branded lead-free products.(11)

26. Except for the handling, storage and distribution of unleaded and reformulated gasoline (where the EPA rules specifically hold the refiner vicariously responsible for contamination) the jobber contract is curiously vague on the handling and storage of branded petroleum products at jobber and jobber-dealer locations. This, in spite of refiners' widespread understanding that a substantial portion of all

underground storage tanks in place were already leaking or soon would be given their age, composition and the corrosivity of the surrounding soil.

27. By the late 1970's and early 1980's, most major refiners were putting into place tank monitoring and protection and replacement programs at their investment (owned) locations. These initiatives emphasized leak prevention rather than merely responding to leaks as they were detected. The Texaco program described in the Campbell deposition is typical of this heightened concern by refiners for potential

UST leaks at their investment properties and their proactive response to this potentially massive liability.(12)

28. Tank surveys and tests were undertaken on a large scale and systematic tank monitoring and inventory reconciliation programs were put into place. Leaking tanks were quickly replaced by non-corrosive fiberglass or corrosion resistant steel tanks and cathodic protection systems and monitoring wells were installed in those situations where the risk of immediate leaks were somewhat lower. Detailed procedures were also developed for handling leaks and put into place and corporate training programs for company personnel and lessee-dealers were instituted. A strict chain of corporate accountability was developed and detailed forms and check-lists were developed; but this was only for in-house use at investment locations. For the larger part of their distribution system, little or nothing was done by the defendant refiners. They merely admonished their jobbers and jobber-dealers to obey the law.(13)

No information was shared and no counsel was given and no monitoring of compliance undertaken.(14)

29. Moreover, while jobber dealer locations were evaluated on the basis of their market potential and suitability, and were monitored for evidence of misbranding and commingling, no effort was ever made to evaluate the suitability or integrity of the storage or distribution facilities. The concern was with signs and pumps and canopies and curb painting and washrooms and proper labels. In the case of tanks and piping it was a policy of "don't ask and don't tell." The refiner would be involved if water leaked into the tank but not if gasoline leaked out.

30. This was regrettable since the level of technical sophistication declines significantly as one moves down the channel of distribution. The major refiners have the engineering and technical expertise to understand the risks and to deal with the problem of leaking underground tanks. Their personnel staffed the technical committees of the American Petroleum Institute (API) which developed the technical bulletins related to the problem. They also served on various governmental advisory committees and worked with groups such as ANSI, NFPA and NACE. They employ full-time professionals devoted to the problems of health, safety and environmental protection. Jobbers and jobber-dealers seldom have such expertise. They clearly need help in assessing the risks and in dealing with the problem of potential leaks. No help was given and no checking was done to see that the branded products of the refiners were being delivered to and stored in safe and sound storage tanks and dispensed in ways that protected the health and safety of the public and of the environment. The refiners argue that this was not their responsibility and that they had no right to intrude into the operating decisions of their independent distributors. But, of course, the foregoing review of the refiner-distributor relationship shows that refiner/suppliers so structure their distribution contracts as to significantly influence the marketing decisions of these channel members They merely decided not to do so with respect to health, safety and environmental matters. They clearly could have done so(15)

, and by virtue of their role and position in the channel, should have done so. The distribution agreements already have sections requiring the distributor to obey the law. The refiners should have checked to see that their distributors and their dealers were complying with these laws and rules. At the very least, they should not have allowed their banded products to be delivered into leaking or high-risk tanks and they should have required the channel member to prove that the storage and distribution system was safe and sound before this dangerous unpackaged product was unloaded. This would be no more intrusive that requiring distributors to regularly attest to their financial soundness and credit worthiness or for the distributors to be required to show that their tank trucks were safe and being operated by qualified drivers and to offer proof of insurance before they were allowed to take product from the designated terminal. In fact, recently, Exxon has decided to "intrude" to the extent that they are now requiring their distributors and dealers to show that their storage facilities meet the new federal standards before they will allow gasoline to be delivered to these storage facilities.(16) The refiners provided jobber training and support on marketing and financial management, but not on inventory reconciliation or environmental protection. They checked on commingling and misbranding, but not on the safety and integrity of the storage and distribution system through which they market their branded product.



I affirm, under the penalties for perjury, that the representations contained in this report are true.

James M. Patterson

Dated: 8/26/99

1. 1For example, in the Exxon Distributor Agreement, Section 11 says: Buyer is permitted to display Seller's trademarks solely to designate the origin of said products...Buyer is not a licensee of Seller's trademarks... (Cooper 2, Sect. 11)

2. 2The traditional marketing channel is a "provisional coalition of independently owned and managed institutions," each of which follows its own interests with little concern about what goes on before or after it in the distributive sequence. It is a fragmented network in which loosely aligned manufacturers, wholesalers and retailers bargain with each other at arms length, negotiate aggressively over terms of sale, and otherwise behave autonomously.

One consequence of the autonomy of these operating units, is that conventional marketing channels often exhibit wasteful duplication, scheduling inefficiencies, and high intra-channel selling costs. In addition, the fragmentation of the system into coalitions of small self-sufficient firms frequently results in the sacrifice of potential scale economies that could be achieved by the realignment of the activities within the network. Consequently, it is not at all surprising that centrally planned vertical marketing systems have rapidly displaced conventional marketing channels as the dominant mode of distribution.

These vertical marketing systems seek to overcome the inherent disadvantages of autonomy. They are centrally programmed to achieve both operating efficiencies and maximum market impact. In addition, the entire system is carefully rationalized to achieve managerial and promotional economies through the integration and coordination of system-wide marketing activities.

Channel members are coordinated in detail; suboptimization is checked; and entry is rigorously controlled. In the case of contractual systems, membership loyalty is assured through the use of specific agreements, and in the case of corporate systems, by the authority of ownership. As a result, the vertical networks tend to be relatively stable. Marketing functions and tasks are routinized. Detailed negotiations are radically reduced and are treated as part of a long range plan. Movement of goods is automatic. Activities are standardized, and service and sales quality is carefully controlled. In short the modern distribution channel is now centrally managed as a whole.

Obviously, the comparative advantage of the modern vertical marketing system lies in its ability to capitalize on centrally programmed operations and scale economies in both logistical operations and marketing. While the traditional channel has the advantage of adopting to heterogeneous market opportunity, the cost advantages work in favor of the centrally programmed vertical marketing system. And where uniformity is preferred, or at least not undesirable, the standardized level of performance and heightened impact achieved within vertical marketing systems is rarely achieved in conventional channels.

Corporate systems are often the byproduct of a general policy of vertical integration followed by many firms who are trying to free themselves from the limitations and uncertainties of their environment. Here, integrated marketing is merely part of a broad program of vertical and horizontal integration and control. Most major oil refiners, for example, develop and protect their key retail markets by integrating and controlling retail marketing, just as they protect and develop their sources of supply by integrating and controlling production.

On the other hand, corporate systems are not always the best answer to the problem of coordination and control. Various independent marketing intermediaries, through their experience, their specialization, their contacts, and their scale, can often offer other channel members more than they can achieve on their own. In such cases, the channel decision is a "make-or-buy" decision. Should the firm do its own distribution or should it sacrifice some control in order to realize these efficiencies? This is the trade-off: cost versus control.

This "make or buy" decision is never completely resolved. The fact is that there seems to be a continuous process of divesting and reintegrating marketing functions by manufacturers or other channel leaders.

Because integration through common ownership is not always the best way to achieve coordination and control, independent firms at different levels often seek to integrate their programs on a contractual basis in order to realize the systemic economies and increased market impact enjoyed by corporate systems. Contractual integration occurs where the various stages of distribution are independently owned, but where the relationships between vertically adjacent firms are covered by a contractual arrangement.

Contractual integration is by far the most important form of integration. In many lines of business it is the dominant form of channel organization.

Contractual integration takes a variety of forms: voluntary groups, cooperative groups, franchise systems, etc. To a significant extent, channel members in such systems are willing to trade-off some degree of autonomy in order to gain scale economies and other efficiencies, and to increase market impact.

While the overhead control that can be exercised over channel members is somewhat reduced, there are many offsetting advantages to the contractual system. The financing advantage is of course obvious. In many lines of business, the investment at the distributive level equals or exceeds that at the manufacturing level. In addition, the initiative that individual owners at different levels are likely to exercise can be especially important where the sale is complex as in the case of life insurance, or where the sale involves a trade-in as in the case of an automobile. In other cases, the escape from union labor or chain store taxes can be an incentive to utilize locally owned channel members. In still other cases, channel members are willing to work much longer hours and for less return when they are in business for themselves, than when they are merely employees.

3. 3Gagnon deposition, Exhibit 5.

4. 4 Section 12 Cooper, Exhibit 2

5. 5Amoco Jobber Contract, Section XVIII. Gagnon Exhibit 3

6. 6Cooper, Bates No.0009

7. 7Amoco: "Trademarks and trade names: Buyer may use Seller's trade names, trademarks, brand names, and color scheme ("Seller's Marks") only in connection with the advertising, distribution, and sale of products supplied by seller under said respective Seller's Marks, and in accordance with the standards, procedures and requirements issued by Seller from time to time." (Amoco Jobber Contract, Section VII, Gagnon, Amoco Exhibit 3.)

Exxon: "Buyer is permitted to display Seller's trademarks solely to designate the origin of said products and Buyer agrees that petroleum products of others will not be sold by Buyer under any trade name, trademark, brand name label, insignia, symbol, or imprint owned by Seller or use by Seller in its business." (Exxon Distributor Agreement, Section 11, Cooper, Exhibit 2.)

CITGO: "CITGO hereby grants to FRANCHISEE, for the term of this Agreement, the right to use CITGO"s applicable brand names, trademarks and other forms of CITGO's identification, in the manner established by CITGO from time to time in connection with the resale by FRANCHISEE of products acquired under CITGO's brand names, subject to the following" [conditions listed under sub paragraphs a,b & c dealing with such topics as product quality, product alteration, sale of non-CITGO source product and the erection and installation of CITGO signs, poles and identifications]. (CITGO Distributor Franchise Agreement, Section 7, Evans, exhibit CITGO 1.)

8. 8 In 1973, the U.S. Environmental Protection Agency promulgated regulations prohibiting retailers from introducing leaded gasoline into automobiles equipped with a catalytic converter. 40 C.F.R. '80.22(a). The offense gave rise to a mandatory civil penalty of $10,000 per day. 40 C.F.R. '80.5. In this instance, the EPA refused to accept the fiction of the so-called independent distributor. Rather, the regulations held the major oil companies vicariously liable for the sale of leaded gasoline at their so-called independent stations. The regulations provided:

Where the corporate, trade, or brand name of a gasoline refiner or any of its marketing subsidiaries appears on the pump stand or is displayed at the retail outlet or wholesale purchaser-consumer facility from which the gasoline was sold, dispensed, or offered for sale, the . . . gasoline refiner shall be deemed in violation. 40 C.F.R. '80.23.

In this instance the major oil companies had little difficulty forcing their so-called independent stations to follow the regulations. In fact, the major oil companies did not even complain that enforcement of the regulations would be unusually difficult. For example, in Amoco Oil Co. v. Environmental Protection Agency, 501 F.2d 722 (1974), the oil companies (Amoco,

Ashland and Clark) involved in a suit challenging the regulations on many grounds acknowledged that while refiners do not own or directly lease or hire all of the facilities making up the distribution network for their branded gasoline, refiners can exert considerable control over the other facilities through contractual agreements providing for regular inspections and for stiff damages upon contamination of the branded product. To this extent petitioners do not challenge the Statement's findings "that the contamination of unleaded gasoline associated with the transportation of the product can best be prevented by the major refiners who have control or the ability to control their distribution networks." Id. at 748.

Removing lead at the so-called independent dealers' stations entailed significant intrusion by the major oil companies. Years of producing and delivering only leaded (Continued on next page) gasoline had left deposits of lead in the USTs, pipes and delivery vehicles. Portions of this distribution network at the so-called "open" (non-owned) dealers' stations had to be cleaned and prepared under the supervision of the major oil companies. This experience with leaded gasoline shows that the major oil companies could very easily have used their control over their so-called open stations to discover, prevent and remediate contamination from leaking USTs through technology and training, just as they did at their company-owned stations. Instead, they chose to disclaim all responsibility for leaks at stations operated by their so-called independent open dealers and jobbers, and to withhold their technical knowledge and experience from the greater part of their distribution system.

9. 9CITGO Distributor Franchise Agreement, Section 12, Evans, CITGO Exhibit 1.

10. 10Exxon Distributor Agreement, Cooper 2, Section 26.

11. 11Amoco Jobber Contract, Section XII, Gagnon, Amoco 3.

12. 12Memo from J. M. Seamans to J. W. Kinnear, 4/28/82: " A ten year program has been formulated to test and replace, as necessary, underground tanks at our investment type stations. The program is essential not only to maintain the stations to e retained but to minimize short term environmental risks and, over the life of the program, virtually eliminate environmental risks from tank leakage. Those steel tanks tested and judged to have remaining economical life will be provided with cathodic protection. Leaking tanks and lines will be replaced with fiberglass systems. Corrosion surveys have been made in the New York Division and are to be made elsewhere to establish priority area corrosivity environments. Our efforts will be directed toward the areas of greatest need. The New York Division testing has thus far identified an appreciable percentage of leaking tanks which were previously unidentified.....(Campbell, Exhibit 2.)

13. 13Amoco Jobber Contract: XI.-Compliance with Laws: Buyer shall comply fully with all applicable laws and regulations of any governmental authority and with all safety and quality control directives of Seller regarding the receipt, handling, storage, dispensing packaging, labeling, applying, advertising and promotion of the products purchased hereunder. Without limiting the foregoing, buyer shall comply and require buyer's dealers and customers to comply with all requirements of occupational, health and safety agencies and of environmental protection agencies concerning the receipt, storage and dispensing of motor fuels, the disposal of waste materials, and other activities, including particularly those governing recovery of vapors, segregated storage for unleaded gasoline, nozzle sizes for unleaded gasolines, and the like. Buyer shall indemnify Seller and save Seller harmless from any and all penalties, losses or liabilities of every nature whatever resulting from Buyer's failure to comply with the above provisions of this Paragraph XI. (Gagnon deposition, Amoco Exhibit 3)

CITGO Distributor Franchise Agreement: 12. HANDLING OF PRODUCTS. FRANCHISEE acknowledges that the petroleum products being sold under this franchise by their nature, require special precautions in handling and that FRANCHISEE, its employees and agents are fully informed as to governmental regulations and approved procedures relating thereto. FRANCHISEE agrees to comply with all such regulations and procedures and to defend, indemnify and hold CITGO harmless from any and all claims, demands, suits, actions, judgements, and recoveries for or on account of damage or injury to any property or person caused by or due to FRANCHISEE'S handling of products purchased hereunder, including, but not limited to FRANCHISEE'S storage, transportation, distribution, dispensing and disposal of such products. FRANCHISEE will carry insurance covering the liability assumed hereunder. (Evans deposition, CITGO, Exhibit 1.)

Exxon Distributor Agreement: 16 LAWS: (Aa) Buyer agrees that in receiving, storing handling, offering for sale, selling, delivering for use or using itself products purchased from Seller under this agreement, BUYER will comply, and instruct his employees with respect to same, with all applicable federal, state and local laws, ordinances, regulations, rules, orders, and permits, including, but not limited to, those governing pollution, the maximum sulfur content of fuel, the lead content of motor fuel, and the posting of notices of required information or pump stands and dispensers of motor fuel, the use and labeling of product containers, and OSHA underground tank gauging requirements.

(B) BUYER WILL INDEMNIFY AND HOLD SELLER, ITS SUCCESSORS AND ASSIGNS, HARMLESS AGINST ALL LOSSES,CLAIMS,CAUSES OF ACTION, PENALTIES AND LIABILITIES ARISING OUT OF BUYER'S FAILURE TO COMPLY WITH SECTION 16(a), and such failure by BUYER to comply shall also entitle Seller to terminate this agreement. (Cooper deposition, Exhibit Cooper 2)

14. 14Exxon:

Q: What, if anything to your knowledge, does Exxon do to insure that these distributors are complying with paragraph 19?

A: With--we basically as a company as said before, we really leave it up to the independent businessmen in the distributorship to be sure they do comply with all local, state and federal laws. I mean, it's really the state and the federal government who Exxon is looking to be sure the distributor complies with everything as it relates to the sale of gasoline. So, unless the state or the federal government would notify Exxon that the distributor is out of compliance, we are making the assumption that the distributor is compliant with all applicable state and federal laws. (Cooper deposition, 63:4-20.)

CITGO:

Q: Does Citgo do any monitoring to see whether or not tanks at stations bearing the Citgo insignias and trade dress are capable of holding retail quantities of gasoline?

A: No. (Evans deposition, 45:4-8)

and then several pages later:

Q: If that premises had a history of leaking storage systems, was that grounds upon which you could reject the station as becoming a Citgo-branded station?

MR. JANSSEN: Objection, It's extremely hypothetical. You may respond.

THE WITNESS: That would not be our concern. We have no involvement with the tanks or their equipment, only the appearance and the viability of the business. (Evans deposition, 50:8-17)

Amoco:

Q: Does the ability of the premises to safely store and sell gasoline enter into that quality concern?

A: It's the jobber's responsibility to see that they comply by any laws appropriate, and it would get done that way. (Gagnon deposition, 94:6-13.)

15. 15 The experience with leaded gasoline shows that the major oil companies could very easily have used their control over their so-called open stations to discover, prevent and remediate contamination from leaking USTs through technology and training, just as they did at their company-owned stations.

16. Exxon implements tank compliance policy--Exxon is taking a stand against non-compliant tank owners. In a recent letter to tank owners, Exxon said it will not deliver fuel into any UST not upgraded after Dec. 22, 1998--the deadline for federal underground tank upgrade compliance.

After the compliance deadline, tank owners must first provide the oil giant with solid proof that their tanks have been fully upgraded, according to Exxon. This proof includes a copy of the UST registration certificate and written certification that the tank meets all state and federal regulatory requirements.

"Solid proof of compliance is required, including certification and registration with individual states," says Bob Davis, spokesman for Exxon. "We recommend that distributors adhere to the same policy."

Exxon is reacting to a recent Indiana court decision that held Shell Oil liable as an "operator" for UST contamination from a tank it supplied but did not own. Though that court decision is limited to Indiana, Exxon is concerned other states may follow suit. Twenty-six states have enacted laws that prohibit suppliers from delivering fuel to non-upgraded tanks after Dec. 22. Exxon says that it will implement its no delivery policy in the 24 states that do not restrict supplies to non-upgraded USTs.

There are no immediate signs that other oil companies are following Exxon's example. Pressure on branded independent suppliers to adopt the no-delivery policy is on the increase. As deadlines loom, EPA has said repeatedly there will be no extension offered. However, enforcement will largely be left up to state UST program officials and should vary from state to state.

( NPN-National Petroleum News, August, 1998 )