Cascade Nat. Gas Corp. v. El Paso Nat. Gas Co.Annotate this Case
386 U.S. 129 (1967)
U.S. Supreme Court
Cascade Nat. Gas Corp. v. El Paso Nat. Gas Co., 386 U.S. 129 (1967)
Cascade Natural Gas Corp. v. El Paso Natural Gas Co.
Argued January 12, 1967
Decided February 27, 1967
386 U.S. 129
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
Almost three years ago, this Court directed the District Court to order "without delay" that appellee El Paso Natural Gas Co. divest itself of the Pacific Northwest Pipeline Corp., whose acquisition by El Paso was found to have violated § 7 of the Clayton Act. United States v. El Paso Natural Gas Co.,376 U. S. 651, 376 U. S. 662. Following remand, leave was unsuccessfully sought under Rule 24(a) of the Federal Rules of Civil Procedure to intervene in the divestiture proceedings by various parties, including appellants, the State of California, where El Paso sells most of its gas; Southern California Edison, a large industrial natural gas user in California, and Cascade Natural Gas, a distributor in Oregon and Washington, whose sole supplier of natural gas was Pacific Northwest. Rule 24(a)(3) then provided for intervention of right when the applicant is "so situated" as to be "adversely affected by . . . disposition of property" under court control. Amended Rule 24(a)(2), which became effective after the intervention motions were denied, provides for intervention of right
"when the applicant claims an interest relating to the property . . . and he is so situated that the disposition of the action may, as a practical matter, impair or impede his ability to protect that interest"
unless it is adequately represented by existing parties. The District Court thereafter approved a divestiture plan whereby a New Company would be formed by El Paso to receive the properties and assets which El Paso received from Pacific Northwest. Appellants, claiming that the conditions under which the New Company would be established would fail to create a competitive pipeline in keeping with this Court's mandate, appealed from the District Court's denial of their motions to intervene.
1. The District Court erred in denying appellants the right to intervene in the divestiture proceedings. Pp. 386 U. S. 133-136.
(a) The category under old Rule 24(a)(3) of "so situated" as to be "adversely affected," by disposition of property was not limited exclusively to those with an interest in property. Pp. 386 U. S. 133-135.
(b) Protection of California interests in a competitive system was "at the heart of our mandate" directing divestiture (cf. Missouri-Kansas Pipe Line Co. v. United States,312 U. S. 502, 312 U. S. 506). Both the State of California and Southern California Edison qualified as intervenors of right under old Rule 24(a)(3). P. 386 U. S. 135.
(c) Since the entire merits of the case must be reopened to give those parties an opportunity to be heard as of right as intervenors, the new Rule 24(a)(2), which is applicable to "further proceedings" in pending actions, is broad enough to include Cascade as an intervenor as of right, since it has "an interest," not otherwise adequately represented, in the "transaction which is the subject of this action." Pp. 386 U. S. 135-136.
2. Though the Attorney General has the right to settle litigation, such "settlement" cannot circumscribe the execution of this Court's mandate. P. 386 U. S. 136.
3. The following guidelines are suggested for the new decree:
(a) The New Company's gas reserves must not be proportionately less to the existing reserves than those which Pacific Northwest had when it was independent, and reserves developed after the merger must, after thorough hearings, be equitably divided between El Paso and the New Company. Pp. 386 U. S. 136-137.
(b) The terms of gas acquisition contracts should be negotiated by the New Company, after full opportunity to evaluate their advisability, under such restrictions as the Natural Gas Act may impose. Pp. 386 U. S. 137-138.
(c) The competitive position of the New Company and its financial viability must be comparable to that which Pacific Northwest enjoyed before the illegal merger obliterated it. P. 386 U. S. 138.
(d) The severance of the illegal combination, whether by sale to outside interests or otherwise, must be swiftly made, and effected in such a manner as to ensure that the New Company's stock does not end up under control of El Paso interests. Pp. 386 U. S. 138-142.
4. A District Judge different from the one who heard the case before shall be assigned to hear the case on remand. Pp. 386 U. S. 142-143.
Reversed and remanded.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
When this case was here the last time, [Footnote 1] we held that the acquisition of Pacific Northwest Pipeline Corporation by El Paso Natural Gas Company violated § 7 of the Clayton Act, and we directed the District Court "to order divestiture without delay." United States v. El Paso Natural Gas Co.,376 U. S. 651, 376 U. S. 662. That was on April 6, 1964. It is now nearly three years later, and, as we shall see, no divestiture in any meaningful sense has been directed. The United States, now an appellee, maintains that the issues respecting divestiture are not
before us. The threshold question does indeed involve another matter. Appellants were denied intervention by the District Court, and came here by way of appeal, 32 Stat. 823, 15 U.S.C. § 29. We noted probable jurisdiction. 382 U.S. 970.
The initial question concerning intervention turns on a construction of Rule 24(a) of the Federal Rules of Civil Procedure, entitled "Intervention of Right." At the time the District Court ruled on the motions, that Rule provided, in relevant part,
"Upon timely application anyone shall be permitted to intervene in an action . . . (3) when the applicant is so situated as to be adversely affected by . . . disposition of property which is in the custody or subject to the control or disposition of the court or an officer thereof."
As amended effective July 1, 1966, subsequent to the time these motions to intervene were denied, Rule 24(a)(2) provides that there may be intervention of right
"when the applicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may, as a practical matter, impair or impede his ability to protect that interest, unless the applicant's interest is adequately represented by existing parties."
California, one of the appellants, is a State where El Paso sells most of its gas, and its purpose in intervening was to assure that Pacific Northwest, illegally merged with El Paso, or its successor, would be restored as an effective competitor in California. As we noted in the prior opinion, Pacific Northwest had been "a substantial factor in the California market at the time it was acquired by El Paso." 376 U.S. at 376 U. S. 658. It was to restore that "competitive factor" that divestiture was ordered. Id. at 376 U. S. 658-662. Southern California Edison, another
appellant, is a large industrial user of natural gas purchasing from El Paso sources and desirous of retaining competition in California. Cascade Natural Gas is a distributor in Oregon and Washington, and its sole supplier of natural gas was Pacific Northwest, and will be the New Company created under the divestiture plan. Cascade maintains that there has been a grossly unfair division of gas reserves between El Paso and the New Company, particularly in the southwest field known as the San Juan Basin. Moreover, the District Court approved contracts between El Paso and the New Company for delivery of gas both from Canada and from the San Juan Basin, and allowed El Paso, unilaterally and without application to the Federal Power Commission, to saddle new and allegedly onerous prices and other conditions on the New Company. Moreover, the stock of West Coast Transmission Co., Ltd., was ordered sold for the benefit of El Paso. Pacific Northwest had owned about a fourth of West Coast Transmission's stock, and that ownership gave Pacific Northwest, it is said, special insight into and access to the Canadian gas supply. These factors, implicating the ability of Pacific Northwest to perform in the future, give Cascade, it is argued, standing to intervene.
Under old Rule 24(a)(3), those "adversely affected" by a disposition of property would usually be those who have an interest in the property. [Footnote 2] But we cannot read it to mean exclusively that group.
Rule 24(a)(3) was not merely a restatement of existing federal practice at law and in equity. If it had been, there would be force in the argument that the rigidity of the older cases remains unaltered, restricting intervention as of right very narrowly, as, for example, where there is a fund in court to which a third party asserts
a right that would be lost absent intervention. Credits Commutation Co. v. United States,177 U. S. 311, 177 U. S. 316; Central Trust Co. v. Chicago, R.I. & P. R. Co., 218 F. 336, 339. But the Advisory Committee stated that Rule 24 "amplifies and restates the present federal practice at law and in equity." We therefore know that some elasticity was injected, [Footnote 3] and the question is, how much. As stated by the Court of Appeals for the Second Circuit in the Central Trust Co. case, "It is not always easy to draw the line." Ibid.
In Missouri-Kansas Pipe Line Co. v. United States,312 U. S. 502, a consent decree was entered in an antitrust suit, designed to protect Panhandle from Columbia which had acquired domination of the former to stifle
its competition. The decree sought to assure opportunities for competition by Panhandle. A security holder of Panhandle sought to intervene on Panhandle's behalf when the consent decree was reopened, and was denied that right. We reversed, noting at the outset that
"the circumstances under which interested outsiders should be allowed to become participants in a litigation is, barring very special circumstances, a matter for the nisi prius court. But where the enforcement of a public law also demands distinct safeguarding of private interests by giving them a formal status in the decree, the power to enforce rights thus sanctioned is not left to the public authorities nor put in the keeping of the district court's discretion."
Id. at 312 U. S. 506.
We noted that Panhandle's economic independence was "at the heart of the controversy." Ibid. In the present case, protection of California interests in a competitive system was at the heart of our mandate directing divestiture. For it was the absorption of Pacific Northwest by El Paso that stifled that competition and disadvantaged the California interests. It was indeed their interests, as part of the public interest in a competitive system, that our mandate was designed to protect. In that sense, the present case is very close to Pipe Line Co. Apart from that, but in the spirit of Pipe Line Co., we think that California and Southern California Edison qualify as intervenors under Rule 24(a)(3). Certainly these two appellants are "so situated" geographically as to be "adversely affected" within the meaning of Rule 24(a)(3) by a merger that reduces the competitive factor in natural gas available to Californians. We conclude that it was error to deny them intervention. We need not decide whether Cascade could have intervened as of right under that Rule. For there is now in effect a new version of Rule 24(a) which, in subsection (2), recognizes as a proper element in intervention "an interest" in the "transaction which is the subject of the action." This Rule applies to
"further proceedings" in pending actions. 383 U.S. 1031. Since the entire merits of the case must be reopened to give California and Southern California Edison an opportunity to be heard as of right as intervenors, we conclude that the new Rule 24(a)(2) is broad enough to include Cascade also, and, as we shall see, the "existing parties" have fallen far short of representing its interests. We therefore reverse the District Court in each of these appeals, and remand with directions to allow each appellant to intervene as of right to vacate the order of divestiture and to have de novo hearings on the type of divestiture we envisioned and made plain in our opinion in 376 U. S. 376 U.S. 651.
The necessity for new hearings needs a word of explanation.
The United States on oral argument stated that the decree to which it agreed and which it urges us to approve was made in "settlement" of the litigation. We do not question the authority of the Attorney General to settle suits after, as well as before, they reach here. The Department of Justice, however, by stipulation or otherwise has no authority to circumscribe the power of the courts to see that our mandate is carried out. No one except this Court has authority to alter or modify our mandate. United States v. du Pont & Co.,366 U. S. 316, 366 U. S. 325. Our direction was that the District Court provide for "divestiture without delay." That mandate, in the context of the opinion, plainly meant that Pacific Northwest or a new company be at once restored to a position where it could compete with El Paso in the California market.
We do not undertake to write the decree. But we do suggest guidelines that should be followed:
(1) Gas Reserves. The gas reserves granted the New Company must be no less in relation to present existing
reserves than Pacific Northwest had when it was independent, and the new gas reserves developed since the merger must be equitably divided between El Paso and the New Company. We are told by the intervenors that El Paso gets the new reserves in the San Juan Basin -- which, due to their geographical propinquity to California, are critical to competition in that market. But the merged company, which discovered them, represented the interests both of El Paso and of Pacific Northwest. We do not know what an equitable division would require. Hearings are necessary, followed by meticulous findings made in light of the competitive requirements to which we have adverted.
As already indicated, the proposed decree provides the terms of contracts [Footnote 4] imposed on the New Company respecting the purchase and gathering of gas from various sources. It is urged that these contracts are onerous, detrimental to the New Company, and partial to El Paso interests. We do not pass upon the wisdom or desirability of the proposed contracts. It is enough to note that they were proposed by El Paso, that the changes, reluctantly acceded to by the Government, will redound to the substantial benefit of El Paso, and that the New Company has had no opportunity to evaluate the advisability of the terms or to negotiate for better terms. Nor has the Federal Power Commission had the opportunity to pass
upon the contracts. The terms of these contracts should be negotiated by the New Company under such restrictions as the Natural Gas Act may impose.
(2) Financial Aspects. As noted, El Paso is allowed to sell the stock of West Coast Transmission Co., Ltd., brought into the merger by Pacific Northwest, and keep the proceeds, which, if stock prices at the time of the proposed divestiture are considered, might result, it is alleged, in a profit of $10,000,000 or more, while the New Company gets the stock of Northwest Production Co., which, from 1960-1963, showed heavy losses. It is charged that, by the proposed decree, El Paso is saving the cream for itself and foisting the "cats and dogs" on the New Company. It is also earnestly argued that the New Company will sorely need the valuable and fairly liquid stock of West Coast Transmission if it is to have the working capital necessary to restore the competitive balance that the merger destroyed. These are highly relevant arguments. Certainly a plan of divestiture of the kind we envisaged must establish a New Company in the same or comparable competitive position that Pacific Northwest was in when the illegal merger obliterated it.
It is also pointed out that some $53,000,000 of taxable losses which Pacific Northwest had were utilized by El Paso during the years following the ill-starred merger. It is argued that, since these tax loss carry-overs were, in a real sense, an asset of Pacific Northwest utilized by El Paso, the New Company should receive other assets or a reduction in debt of equivalent value. These allegations, if proven, require remuneration of some kind to the New Company. For it must be a viable, healthy unit, as able to compete as Pacific Northwest was when it was acquired by El Paso.
(3) Control of El Paso. The divestiture decree provides that El Paso is to cause the formation of the New Company, whose chief executive shall be approved by
El Paso, the Government, and the court. The new company is to file an application with the Federal Power Commission "at the earliest practicable date" requesting the issuance of a certificate of public convenience and necessity authorizing it to acquire, own, and operate the properties to be received from El Paso. [Footnote 5] When the necessary certificates, authorizations, and orders are obtained from the FPC, El Paso is to transfer to the New Company the properties and assets set forth in the plan of divestiture, generally those which El Paso received from Pacific Northwest. In return, the New Company is to assume certain of El Paso's indebtedness and issue to El Paso all its common stock. El Paso is to transfer the New Company stock to the New Company's chief executive, as voting trustee. The New Company's chief executive shall release the stock only in accordance with the plan for divestment of El Paso's interest in the stock. Under the plan, El Paso is ordered completely to divest itself of all interest in the New Company stock within three years after the transfer of the assets to the New Company. Alternate methods of divestment are provided. (1) El Paso may, within 18 months of the transfer, distribute at least 80% of the shares to holders of El Paso common stock who are willing to exchange their El Paso shares for New Company shares, and who shall own no other El Paso shares immediately after the exchange. The remainder of New Company stock would be disposed of by a public offering. (2) If El Paso does not dispose of the New Company stock under the first alternative, it is to dispose of the New Company stock "by one or more sales to the public." At such public offering, no El Paso officer or director and no owner of El Paso's capital stock,
in excess of one-half of one percent of the total shares outstanding, shall be permitted to purchase New Company stock. [Footnote 6]
Thus, the El Paso-Pacific Northwest combination will not begin to be severed until the regulatory approvals have been obtained. Complete divestiture is not required until three years after the transfer of assets. An earlier divestiture is permissible, but divestiture is mandatory only after three years. During the interregnum between the entry of the decree and the regulatory approvals and between the transfer of assets and El Paso's eventual disposition of the New Company stock, El Paso will continue to reap the benefits of the illegal combination. Moreover, prior to the eventual disposition of the New Company stock, all the stock is to be voted by the New Company's chief executive. The chief executive is to be approved by El Paso, and El Paso is the beneficial owner of the stock to be voted by him. Even though the chief executive is subject to the ultimate control and supervision of the District Court, there is danger that he may vote the New Company stock in a manner calculated to perpetuate the very conditions which led us to order severance of the illegal combination.
Even after the mandatory disposition of the new company stock, there is considerable danger that El Paso interests may end up controlling the New Company. The decree, to be sure, provides that neither El Paso officers and directors nor owners of more than one-half of one percent of El Paso stock shall purchase New Company stock at a public offering. But the decree does not prohibit
members of the families of such prohibited purchasers from obtaining New Company stock. Further, under the terms of the decree, it would be possible for a group of El Paso stockholders, each with less than one-half of one percent of El Paso stock, to acquire at the initial public offering enough New Company stock substantially to influence or even to dominate the New Company. Or such a group could combine with the families of prohibited purchasers in order to control the New Company. After the exchange or public offering, there is no restriction on the number of New Company shares El Paso shareholders may acquire. Thus, there is a danger that major El Paso stockholders may, subsequent to the exchange or public offering, purchase large blocks of New Company stock and obtain effective control. Thus, there has been no studied attempt to ensure the swift severance of the illegal combination or to make sure that the New Company's stock does not end up controlled by El Paso interests. Disposition of all of the stock with all convenient speed is necessary, and conditions must be imposed to make sure that El Paso interests do not acquire a controlling interest. For if they do, the New Company might well be only El Paso under the masquerade of a beard.
The proposed decree bypasses completely the prospect of an outright purchase of the assets of the New Company or its stock by outside interests. Two purchasers apparently are anxious and eager, and before the United States knuckled under to El Paso and "settled" this litigation, it represented to the District Court that a "sale to a third party is both a desirable and possible alternative to the El Paso plan." No alternative of that kind was chosen. El Paso carried the day, obtained a decree that promises to perpetuate, rather than terminate, this unlawful merger, and that threatens to turn loose on the
public a New Company unable to maintain the competitive role that Pacific Northwest filled before this illegal transaction took place.
The convenience of El Paso would be the easier choice. The enforcement of our mandate and § 7 of the Clayton Act is the harder one; but that is the criterion we follow.
The evil with which the proposed decree is permeated reflects the attitude or philosophy of the District Court which was frankly stated after our remand as follows:
"The Court: You see, what this plan proposes is a division of the country, a division of the market, a division of the reserves, one area to New Company and another area to El Paso. That's what the root of this plan is."
"Now, if you're going to get New Company down here in competition in Southern California from the San Juan Basin, you'd upset the whole scheme. To even that situation up, you're going to have to put El Paso up in the Northwest in competition there, and that's a kind of ridiculous thing -- long pipelines from these various sources."
"It seems to me to make a lot of sense that New Company operating in the Northwest from very much closer Canadian reserves, and Northwest reserves, and El Paso down in the Southwest, with reserves in the San Juan Basin, serving the Southern California area, among some other areas. That seems to me to make a lot of sense."
The proposed decree in its various ramifications does precisely that. It therefore does the opposite of what our prior opinion and mandate commanded. Once more, and nearly three years after we first spoke, we reverse and remand, with directions that there be divestiture without delay and that the Chief Judge of the Circuit or the Judicial Council of the Circuit (28 U.S.C. § 332)
assign a different District Judge to hear the case. Cf. United States v. Hatahley, 257 F.2d 920, 926, and its sequel, United States v. Ritter, 273 F.2d 30, 32; Occidental Petroleum Corp. v. Chandler, 303 F.2d 55, 57; Texaco, Inc. v. Chandler, 354 F.2d 655, 657.
MR. JUSTICE WHITE and MR. JUSTICE FORTAS took no part in the consideration or decision of these cases.
* Together with No. 5, California v. El Paso Natural Gas Co. et al., and No. 24, Southern California Edison Co. v. El Paso Natural Gas Co. et al., also on appeal from the same court.
California v. Federal Power Commission,369 U. S. 482, involved another aspect of the same merger, and we held that the Commission should not have approved it until the District Court decided whether it violated § 7 of the Clayton Act, 38 Stat. 731, 15 U.S.C. § 18.
See Board of Comm'rs v. Bernardin, 74 F.2d 809, 816; Dowdy v. Hawfield, 88 U.S.App.D.C. 241, 242, 189 F.2d 637, 638.
In 1966, the Advisory Committee, when making a revision of Rule 24(a), said:
"Rule 24(a)(3), as amended in 1948, provided for intervention of right where the applicant established that he would be adversely affected by the distribution or disposition of property involved in an action to which he had not been made a party. Significantly, some decided cases virtually disregarded the language of this provision. Thus, Professor Moore states: 'The concept of a fund has been applied so loosely that it is possible for a court to find a fund in almost any in personam action.' 4 Moore's Federal Practice
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