United States District Court

for the

Eastern District of Oklahoma

Case No. CIV 96-196 B

UNITED STATES OF AMERICA,

Plaintiff

v.

CITY OF STILWELL, OKLAHOMA, et al.,

Defendants

REPLY OF UNITED STATES TO DEFENDANTS'

RESPONSE	TO UNITED STATES' MOTION FOR

SUMMARY JUDGMENT

JOHN R. READ

MICHELE B. CANO

U.S. Department of Justice

Antitrust Division

325 7th Street, N.W., Suite 500

Washington, D.C. 20530-0001

Attorneys for the United States

Table of Contents

Table of Contents	i

Table of Authorities	ii

I.	DEFENDANTS' REFUSAL TO SELL UTILITY SERVICES INDIVIDUALLY TO SOME CUSTOMERS WAS A PER SE ILLEGAL TIE	2

A.	Defendants' Tying of Sewer, Water and Electricity Was Per Se Illegal	2

B.	Defendants' Claim of Possible Exceptions to the All-or-None Policy Is Not a Defense.	5

C.	There Is No Genuine Dispute That Defendants Conditioned the Sale of Sewer and Water on the Sale of Electricity at Skywood, Candle Ridge, and DHS.	8

D.	Each Part of the Per Se Test Is Undisputedly Met.	13

II.	DEFENDANTS HAVE MONOPOLIZED THE SALE OF ELECTRICITY IN THE ANNEXED AREAS.	13

A.	The Test for Monopolization, Like the Test for a Per Se Illegal Tie, Is Undisputed.	13

B.	Defendants Possess Monopoly Power In the Sale of Electricity in the Annexed Areas.	14

III.	JURISDICTION	17

IV.	CONCLUSION	19

Table of Authorities

Cases:

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)	3

Anesthesia Advantage, Inc. v. Metz Group, 912 F.2d 397 (10th Cir. 1990)	18

Catalano v. Target Sales, Inc., 446 U.S. 643, (1980)	9

Crane v. Intermountain Health Care, Inc., 637 F.2d 715 (10th Cir. 1980)

(en banc)	18

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984)	3

Detroit City Dairy, Inc. v. Kowalski Sausage Co.,

393 F. Supp. 453 (E.D. Mich. 1975)	6

Eastman Kodak Co. v. Image Technical Servs., Inc.,

504 U.S. 451 (1992)	3

Federal Trade Commission v. Superior Court Trial Lawyers Assoc.,

493 U.S. 411 (1990)	9

International Salt Co. v. United States, 332 U.S. 392 (1947)	2, 6

Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984)	2, 7

Little Ceaser Enterprises, Inc. v. Smith, 172 F.R.D. 236 (E.D. Mich. 1997)	10

Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal and

Professional Publications, Inc., 63 F.3d 1540 (1995), cert. denied,

116 S.Ct. 702 (1996);	3

Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958)	2, 3

Northeast Oklahoma Electric Cooperative Inc. v. Oklahoma,

808 P.2nd 680 (Ok. 1991)	12

Photovest Corp. v. Fotomat Corp., 606 F.2d 704 (7th Cir. 1979)

cert. denied, 445 U.S. 917 (1980)	10

Reazin v. Blue Cross & Blue Shield, 899 F.2d 951 (10th Cir.), cert. denied,

497 U.S. 1005 (1990)	14

Sharp v. Hall, 181 P.2d 972 (Ok. 1947)	9

Shoppin' Bag of Pueblo, Inc. v. Dillon Cos., 783 F.2d 159 (10th Cir. 1986)	14

Standard Oil Co. v. United States, 337 U.S. 293 (1949)	2

Systemcare, Inc. v. Wang Laboratories Corp.,

117 F.3d 1137 (10th Cir. 1997) (en banc)	3

United States v. Grinnell Corp., 384 U.S. 563 (1966)	13

United States v. Trenton Potteries Co., 273 U.S. 392 (1927)	9

Universal Money Centers, Inc. v. American Telephone & Telegraph, 22 F.3d 1527

(10th Cir.), cert. denied, 115 S. Ct. 655 (1994)	3

Warriner Hermetics, Inc. v. Copeland Refrigeration Corp.

463 F.2d 1002 (5th Cir.) cert. denied, 409 U.S. 1086 (1972)	3

Statutes & Treatises:

Sherman Act, 15 U.S.C. §§ 1 & 2 (1982)	passim

Oklahoma Rural Electric Cooperative Act, as amended, Okla. Stat. Ann.,

tit. 18 § 437.2(k) (West 1986 & Supp. 1996)	15

Okla. Stat. Ann., tit. 11 § 21-121 (West 1986 & Supp. 1996)	8, 12

Retail Electric Supplier Certified Territory Act, tit 17 § 158.25 & 28 (West 1986)	15

An Analysis of Antitrust Principles and Their Application, Areeda, Hovenkamp,

and Elhauge, Antitrust Law, Vol. X, (Little, Brown & Co. 1996)	11

United States District Court

for the

Eastern District of Oklahoma

UNITED STATES OF AMERICA,	)

)

Plaintiff,	)

)

v.	)	Case No. CIV 96-196 B

)

CITY OF STILWELL, OKLAHOMA	)

et al.,	)

)

Defendants.	)

REPLY OF THE UNITED STATES TO

DEFENDANTS' RESPONSE TO UNITED

STATES' MOTION FOR SUMMARY JUDGMENT

The United States' dispositive summary judgment motion ultimately turns on whether there is a genuine dispute that the defendants (City of Stilwell and the Stilwell Area Development Authority ("ADA")) in fact did what the United States claims they did: refused to sell sewer or water services unless a customer agreed to purchase their electricity services. There is clearly no genuine dispute as to the remaining facts that establish per se liability -- (1) sewer, water and electricity services are separate products; (2) defendants have sufficient power in the sale of sewer and water services (with market shares above 90%); and (3) the volume of electricity at issue is not de minimis. Thus, if defendants did condition the sale of sewer and water on the sale of electricity, the per se rule applies and the United States is entitled to enjoin such conduct in the future.

As shown below, defendants cannot and do not genuinely deny that they have engaged in such conduct. Rather they offer various excuses for their conduct, (e.g., one of the apartment complexes harmed by the conduct is filled with "dysfunctional" families), but such excuses are immaterial to the applicability of the per se rule. Thus, summary judgment is appropriate and will permit the Court to avoid an unnecessary trial.

I.	DEFENDANTS' REFUSAL TO SELL UTILITY SERVICES INDIVIDUALLY TO SOME CUSTOMERS WAS A PER SE ILLEGAL TIE

A.	Defendants' Tying of Sewer, Water and Electricity Was Per Se Illegal

The law is clear. Congress has outlawed tying arrangements -- selling one product only on the condition that the consumer also buys another separate product. This often forces consumers into buying a product they do not want or buying the product from a supplier that they would not otherwise choose. As a result, the Supreme Court has declared such tying arrangements illegal per se, making the quantum of harm caused by the arrangement, the putative benefits of the arrangement, the justifications for the arrangement, and the price charged for the bundled products all irrelevant.

To avoid summary judgment, defendants must come forward with admissible evidence that could cause a reasonable fact-finder to decide an outcome determinative (or material) fact in favor of defendants. The defendants have not done so. Instead, they have made only irrelevant and unsupported assertions.

The applicable legal test has four parts and simply asks whether defendants (1) sold separate products or services, (2) conditioned the sale of one product or service on the sale of another, (3) had sufficient economic power in the sale of the tying services (i.e., sewer and water), and (4) conditioned more than a de minimis volume of commerce in the tied service (electricity).

Defendants admit prong one of the test: that sewer, water, and electric services are separate products. Defendants do not deny the facts establishing prong three -- that they have sufficient economic power in sewer and water services. For example, they do not dispute that the provision of sewer and water is necessary, that they have market shares above 90% for those services, and that self-service (e.g., drilling a well or installing a septic tank) is usually not an economically attractive option (even where it is legally or logistically available).

As to prong four, defendants do not dispute that $10,000 of commerce is not de minimus and is sufficient to meet this part of the test. Thus, if defendants tied at all, then the fourth prong is satisfied since each separate example of tying cited by the United States (Skywood, Candle Ridge, and Oklahoma Department of Human Services ("DHS")) involves more than $10,000 per year of commerce in electric power.

As three of the four prongs are not genuinely disputed by defendants, summary judgment turns on prong two -- did the defendants refuse to sell their utilities separately? Defendants do not dispute that they did so. Instead, they offer factual assertions which, even if true, would at most offer rationalizations for their conduct or attempt to reduce its impact -- precisely the sort of evidence the per se rule deems irrelevant.

B.	Defendants' Claim of Possible Exceptions to the All-or-None Policy Is Not a Defense.

The United States provided with its summary judgment motion conclusive admissible evidence that defendants conditioned the sale of sewer and water services on the sale of electrical services. See SOF at ¶¶ 33-34 (citing and attaching defendants' Answer to the Complaint, defendants' own documents, their interrogatory responses, and the testimony of their utility superintendent). Defendants now claim, for the first time, that the policy was limited to the unannexed parts of the City. In support they cite the April 1994 vote of the utility boards which put the following language in its building permits -- "No service will be provided, unless all services are used" -- followed by a statement that the only "exceptions" that may be made are "in the case of annexed areas" or where the defendants cannot feasibly extend water or sewer lines. See Exh. 14 to SOF. The existence of exceptions, however, does not save defendants' conduct. In fact, by asserting that they made "exceptions," the defendants impliedly concede that in general they refused to sell sewer and water services unless the customer agreed to purchase electricity from them.

The statement regarding "exceptions" does not mean (as defendants would apparently have the Court assume) that defendants never tied the separate utilities in the annexed areas. To the contrary, defendants admitted in their own interrogatory responses that they applied the all-or-none policy to the Skywood and DHS complexes, both of which are located in annexed areas.

As Scottie Adair, the superintendent of utilities, testified, the "exception" language adopted in the April 1994 vote was meant only to indicate that the defendants would not tie sewer and water to electricity in those instances where Oklahoma law barred the City from selling electricity. As defendants explain in their brief, under Oklahoma law, once a customer takes power from an electric provider for one facility, it cannot change the provider to that facility without the permission of the original electric provider. When the City would annex a new area, long-time residents of that area often had already purchased power from Ozarks Rural Electric Cooperative Corporation ("Ozarks") because, until that time, only Ozarks served the area.

Thus, under Oklahoma law, the City could not sell electricity to those residents without Ozarks' consent; and the City had to make an exception to its policy so that it could sell water or sewer services to those customers that were committed by Oklahoma law to Ozarks. The exception referenced annexed areas, because such customers resided only in those areas. Significantly, Mr. Adair conceded that, whenever someone new moved into an annexed area -- whose electric service was "up for grabs" -- the defendants would tie the service of sewer and water to the service of electricity in order to secure the new electric account. Adair Dep. at 54 (attached as Exh. 1). There were no exceptions to the tie-in policy for the customers who were "up for grabs."

C.	There Is No Genuine Dispute That Defendants Conditioned the Sale of Sewer and Water on the Sale of Electricity at Skywood, Candle Ridge, and DHS.

Defendants spend a great deal of time challenging the three tying examples (Skywood, Candle Ridge and DHS) established by the United States. In the end, however, defendants never dispute the dispositive facts -- (1) that in each instance the customer was told that he could not just buy one or two utilities, but had to buy all three, if he wanted any; (2) that the customer could not viably get sewer and water services from anyone besides defendants; and (3) that the customer's optimal choice was to purchase one or two, but not all three, of the City's services.

Rather than challenge the above facts, defendants simply make four irrelevant or unsupported claims. Defendants' first claim is that each of these consumers agreed to take all three utilities in exchange for something (i.e., an easement, a plat amendment, or annexation into the city). See Defs. Response to SOF at ¶¶ 41-46. But, at most, such exchanges may change the effective total "price" that the consumer paid for all three utilities. The per se rule was specifically designed to avoid an inquiry into the reasonableness of the price or exchange. Further, defendants' refusal to amend a plat or grant a customary easement unless the customer agreed to take all three utilities does not negate the coercive effect of refusing to sell sewer and water services unless the customer agreed to also buy electricity. Rather it simply proves the United States' contention that the defendants discriminated against those who would not purchase all of their utilities from them and that the defendants "put some teeth" into their all-or-none policy.

Second, astoundingly, defendants appear to argue as to one of the examples -- Skywood -- that the customer deserved to be deprived of competition because the apartment complex houses low-income dysfunctional families that require extra police protection. That claim is wholly irrelevant under the controlling four-part per se test. Courts are not to determine which customers deserve to be protected by the antitrust laws and which do not. The antitrust laws protect the right of all Stilwell customers to choose their electric supplier -- a right they were entitled to exercise without fear of losing vital water or sewer services.

Third, defendants claim that many people chose to buy electricity from the City because its rates were lower and its service better than Ozarks. That again is not a consideration under the four-part per se test. Courts do not try to determine what mix of price, terms and service is "best" for each customer -- the policy of the antitrust laws is that each customer is entitled to make that choice itself, without being limited by the illegal conduct of sellers. All that matters here is that some customers may have preferred Ozarks (perhaps they wanted its discounts and free placement of wires underground, see U.S. Reply to SOF at ¶ 32) and were deprived of their choice. If they purchased Ozarks' power, they lost sewer and water services. The case authority is clear that, under the per se rule, the reasonableness of the price charged is irrelevant. See, supra at 9, n. 18. If defendants believed their price/service mix was clearly superior, they should have been willing to test that mix in the marketplace, not impose an illegal tie.

Finally, defendants try to dismiss two of the three specific examples by claiming that Ozarks could not have legally served the entity. Defendants do not say what impact this assertion has on the analysis (i.e., whether it excuses the all-or-none policy). That silence is understandable. The assertion is not relevant to any portion of the four-part per se test.

The claim is also false; Ozarks was not barred from serving DHS. Defendants simply assert the argument without citing any supporting authority. See Defs. Brief at 13. While the City of Stilwell filed a complaint against Ozarks seeking, among other things, to enjoin Ozarks from serving additional customers in the annexed areas, such as DHS, the Court never issued the requested injunction and the City eventually dropped the matter. See Crozier Dep. at 65 (attached as Exh. 3).

Defendants also claim that Ozarks could not provide power to the last set of Skywood buildings because the City had provided electricity to the first two sets of buildings. Oklahoma law, however, permits a customer to chose a separate electric supplier for each separate "facility" that it owns. The final apartment buildings in Skywood were clearly separate "facilities" from those Skywood buildings that had been built earlier. The three separate Skywood complexes had different owners, were built in different years with separate federal grants, were architecturally different, needed different building permits, and did not receive their electricity from the same meter. See Affidavit of Steve Rucker (attached as Exh. 2).

If defendants are persuaded Ozarks could not serve the Skywood complexes, they could have taken the claim to court. But that claim and the DHS claim, regardless of their merits, gave defendants no right to resort to illegal self-help by tying the sale of sewer and water to electricity.

D.	Each Part of the Per Se Test Is Undisputedly Met.

In conclusion, as to the four-part per se tying test, defendants admitted to prong one -- that sewer, water and electricity are separate products. For prong two, defendants admitted that, for at least some customers, they only offered the utility services as a package. For prong three, defendants do not dispute that they are the dominant (indeed legal monopoly) provider of sewer and water. And for prong four, there is no dispute that the volume of electricity at issue for either Skywood, Candle Ridge, or DHS totals more than $10,000 per year and therefore is not de minimis. Thus, the defendants' all-or-none utility policy is per se illegal.

II.	DEFENDANTS HAVE MONOPOLIZED THE SALE OF ELECTRICITY IN THE ANNEXED AREAS.

A.	The Test for Monopolization, Like the Test for a Per Se Illegal Tie, Is Undisputed.

Defendants also violated section 2 of the Sherman Act, 15 U.S.C. § 2, by monopolizing electric service to new retail customers in the annexed areas of Stilwell. Defendants acknowledge that the two elements required to prove monopolization are:

(1) the possession of monopoly power in the relevant market and (2) wilful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

With regard to the second element, defendants do not dispute that conditioning the sale of sewer and water upon the sale of electricity is conduct that satisfies the second element of monopolization -- "wilful acquisition or maintenance of [monopoly] power." As discussed at pages 5-12 supra, there is no genuine dispute that defendants refused to sell sewer or water service.

With regard to the first element, defendants do not dispute that here the "relevant market" is the provision of retail electric service to new customers in the post-1961 annexed territory of the City of Stilwell. See Defs. Brief at 11-12. Thus, the only issue for section 2 monopolization is whether the City has monopoly power in that relevant market. As shown below, possession of such power is clear.

B.	Defendants Possess Monopoly Power In the Sale of Electricity in the Annexed Areas.

Defendants do not dispute that, if they can control prices and exclude competition in the target electricity market, they possess monopoly power. The City's power to control prices is unquestioned. Defendants admit in their brief that the City has power to set its own rates without any regulatory approval. See Defs. Brief at 12. Further, defendants make no claim that the electricity rates they charged were in any way affected by competitive pressure from Ozarks when they tied the sale of sewer, water and electricity. Indeed, given the customers' need for sewer and water, the City's electric rates were set without any regard or reference to what Ozarks was charging.

Similarly, defendants' power to exclude competition is also undisputed. Oklahoma law prohibits everyone except the City and Ozarks from providing electric power in the annexed areas. And, through the all-or-none policy, the City acquired the ability to prevent Ozarks, its only competitor, from gaining new customers. Indeed, the City cannot point to a single customer that was willing or able to forego sewer and water from the City in order to get electricity from Ozarks.

In their response, defendants assert that Ozarks won three customers in the annexed areas -- Cherokee Nation Industries, the Maryetta School additions, and the Petit-Jean poultry plant (now known as Tyson Foods). But, examination of these examples underscores the United States' point -- that the City had the power through the all-or-none policy to exclude Ozarks as a viable competitive threat. Ozarks won Cherokee Nations' business in 1971, thirteen years before the City began its all-or-none policy. The Maryetta School was a long-time customer of Ozarks, and the City never solicited its business because the City's power lines were located far from the school when the additions were built.

Finally, Ozarks served the poultry plant because the City, in this one instance, preferred to secure 600 new jobs and avoid paying a large debt to the federal government, more than it wanted to enforce its all-or-none policy. William Langley and Charles Crozier both testified that the Tyson situation was unique and that the City would actually have been worse off if it had enforced the all-or-none policy and not "allowed" Ozarks to serve the plant. See Langley Dep. at 69-80 (attached as Exh. 4); Crozier Dep. at 18-24 (attached as Exh. 3). In the late 1980's, the City lined up Hudson Foods to build a poultry processing plant near the City. See Langley Dep. at 69 (attached as Exh. 4); Crozier Dep. at 18 (attached as Exh. 3). Based on the number of new jobs anticipated from the plant, the City received an Urban Development Action Grant from the federal government. See Crozier Dep. at 18-19 (attached as Exh. 3); Langley Dep. at 69 (attached as Exh. 4). However, when there was a downturn in the poultry industry, Hudson canceled its plans to build the plant. See Langley Dep. at 69 (attached as Exh. 4); Crozier Dep. at 18 (attached as Exh. 3).

Stilwell then had to secure a new company to avoid paying the federal grant loan back. Crozier Dep. at 18-19 (attached as Exh. 3). Consequently, several Stilwell citizens solicited Petit Jean to build a poultry processing plant on the Hudson Food site. Langley Dep. at 4 (attached as Exh. 4); Crozier Dep. at 18-20 (attached as Exh. 3). Petit Jean asked for a special industrial electric rate to locate in the Stilwell area. Since Ozarks was able to offer its customers a special economic development rate that was one-third of the City's electrical rate, the group of citizens recommended that the City Council let Ozarks serve Petit Jean. The City Council then passed a resolution to "allow" Ozarks to serve Petit Jean which got Stilwell off the hook for the federal grant and created over 600 jobs for the City of Stilwell.

Given that these are the only examples of Ozarks' "competitive" success that defendants can provide to the Court, they confirm rather than negate the evidence that the City possesses monopoly power in the relevant market. That power was unquestionably enhanced by the all-or-none utility policy. Thus, summary judgment is appropriate for the United States' claim under Section 2 of the Sherman Antitrust Act.

III.	JURISDICTION

Defendants assert that their challenged activity did not substantially affect interstate commerce because Ozarks' and ERC's transactions were local, and each of the out-of- state items defendants purchased was provided within Stilwell's corporate limits. These assertions misstate the legal test for interstate commerce and are irrelevant. The effect on interstate commerce does not turn on the "site" of any discreet transaction; rather the test is whether defendants' challenged activity substantially affected interstate commerce even if the activity occurred on a "purely local level." The United States has submitted ample uncontested facts that meet the test, while defendants have offered only the legally irrelevant "transaction site" argument in response.

Defendants also appear to argue that the Tenth Circuit, in Crane v. Intermountain Health Care, Inc., 637 F.2d 715 (10th Cir. 1980) (en banc), requires a showing that the "probable effect of the alleged act is to reduce the flow of goods in interstate commerce." Defs. Brief at 14. This is clearly wrong. As set forth in the United States' SJ Brief at 22, the law does not require that the flow of interstate commerce be actually diminished; it is sufficient to show that such commerce is affected in more than a de minimus way. The United States has submitted ample evidence showing the effect on interstate commerce, see n. 33, supra, and is therefore entitled to summary judgment on this issue.

IV.	CONCLUSION

For the foregoing reasons, the Court should find on summary judgment that defendants have violated sections 1 and 2 of the Sherman Act.

Respectfully submitted,

JOHN R. READ

MICHELE B. CANO

U.S. Department of Justice

Antitrust Division

325 7th Street, N.W., Suite 500

Washington, D.C. 20530-0001

(202) 307-0468

January 8, 1998