In Re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation. State of Arizona v. Standard Oil Co. Of California Texaco, Inc. Union Oil Co. Of California Atlantic Richfield Co. Exxon Corp. Mobil Oil Corp. And Shell Oil Co., and Continental Oil Co. Gulf Oil Corp. Phillips Petroleum Co. Caribou Four Corners, Inc. And Powerine Oil Co., State of California v. Standard Oil Co. Of California Texaco, Inc. Union Oil Co. Of California Exxon Corp. Gulf Oil Corp. Mobil Oil Corp. And Shell Oil Co., and Atlantic Richfield Co. Getty Oil Co. And Phillips Petroleum Co., State of Oregon, on Behalf of Itself, Its Residents and All Political Subdivisions Within the State Similarly Situated v. Standard Oil Co. Of California Texaco, Inc. Union Oil Co. Of California Atlantic Richfield Co. Exxon Corp. Mobil Oil Corp. And Shell Oil Co., and Getty Oil Co. Gulf Oil Corp. And Phillips Petroleum Co., State of Washington, on Behalf of Itself and Its Public Entities and Residents v. Standard Oil Co. Of California Texaco, Inc. Union Oil Co. Of California Atlantic Richfield Co. Exxon Corp. Gulf Oil Corp. Mobil Oil Corp. Shell Oil Co., and Getty Oil Co. And Phillips Petroleum Co.

The States of Arizona, California, Oregon, and Washington appeal from the district court's grant of summary judgment to the defendants in these consolidated antitrust actions. For the reasons stated below, we reverse the judgment of the district court and remand for further proceedings.

Between June 1975 and August 1977, the plaintiffs filed their complaints in these actions, alleging several violations of the Sherman Act, 15 U.S.C. Sec. 1 et seq. As developed during the subsequent pretrial proceedings, the plaintiffs' allegations fall into three categories. First, the plaintiffs allege that the defendant oil companies conspired to raise or stabilize prices for refined oil products in violation of Sec. 1 of the Sherman Act, 15 U.S.C. Sec. 1. The plaintiffs assert that, in furtherance of this conspiracy, the defendants continually engaged in the mutual exchange of pricing and price-related information. Second, the plaintiffs allege that the defendants conspired to create, by various means, an artificial scarcity of crude oil and refined oil products in the western United States, in violation of Secs. 1 & 2 of the Sherman Act, 15 U.S.C. Secs. 1 & 2. Third, the plaintiffs allege that the defendants conspired not to compete in bidding on the plaintiffs' annual bulk sale petroleum supply contracts, in violation of Sec. 1 of the Sherman Act.

After several years of extensive discovery, the plaintiffs filed in January 1983 a three volume pretrial brief ("Plaintiffs' Initial Pretrial Brief" or "PIPB"), setting out their analysis of what the evidence would prove. The PIPB was supplemented on several occasions. In July 1983, the defendants moved for summary judgment, asserting that the evidence as summarized in the PIPB failed to raise a triable issue of antitrust conspiracy. After three days of oral argument on the summary judgment motions, the district court took the matter under submission. On November 25, 1986, the court filed an opinion and order granting the defendants' summary judgment motion in its entirety. In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 656 F.Supp. 1296 (C.D.Cal.1986) [hereinafter Petroleum Prods.]. The plaintiffs have timely appealed.

Before turning to an analysis of the proper summary judgment standards and their application in this case, we think it appropriate and useful first to outline certain background facts concerning the industry's structure as well as the nature of appellants' theory concerning the operation of the alleged conspiracy.

The appellees are major oil companies which, among other activities, produce crude oil, refine it into gasoline, and sell the gasoline to various distributors. During the time periods relevant to this appeal, these distributors fell into roughly four classes: (1) independent service station owners who operated franchises selling one particular brand of gasoline; (2) company-owned service stations run by company employees; (3) independent "jobbers" or brokers who resold gasoline to various service stations and other purchasers; and (4) governmental entities and others who purchased under bulk sales contracts. All parties agree that the lion's share of appellees' gasoline that was sold at retail was sold by independent franchised service stations.

As franchisees, these "independent" dealers were not free to purchase their supply of gasoline from any oil company at any time; as long as they remained franchisees they could only purchase from their particular franchisor. Each company sold gasoline to its franchised dealers at a price known as the "dealer tankwagon price." In actuality, the official tankwagon prices were only occasionally changed; fluctuations in the cost of gasoline to franchised dealers were more frequently reflected in changes to the applicable discounts from the tankwagon price. These discounts were variously known as "temporary dealer assistance," "dealer aid," or simply "discounts."

The appellants argue that, as a consequence of this market structure, each oil company was effectively able to control the retail price at which its gasoline was sold. That is, the appellants claim that, although individual dealers "showed varying degrees of independence," an oil company could essentially determine the retail price by setting the applicable discount from the tankwagon price at which it sold gasoline to its franchised dealers.

In the present actions, the appellants claim that the appellees have engaged in a conspiracy to raise and stabilize the retail price of gasoline at the pump. They do not claim, however, that the appellees engaged in a resale price maintenance scheme whereby each dealer was required to charge a predetermined price; indeed, they have expressly disavowed such a theory. Rather, the appellants claim that the appellees conspired to fix retail prices by coordinating dealer discounts from the tankwagon price.

The parties hotly contest on appeal whether the application of this theory is limited by the Supreme Court's decision in Illinois Brick v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), which held that indirect purchasers of goods whose price was fixed earlier in the stream of commerce may not maintain an antitrust damages action for overcharges passed on to them by those who purchase directly from the pricefixers. Although the district court had earlier ruled that Illinois Brick limited the relief available to the plaintiffs, see In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 497 F.Supp. 218, 225-27 (C.D.Cal.1980), aff'd on other grounds, 691 F.2d 1335 (9th Cir.1982), cert. denied, 464 U.S. 1068, 104 S.Ct. 972, 79 L.Ed.2d 211 (1984), it nonetheless recognized that Illinois Brick did not completely bar recovery. Accordingly, in ruling on the summary judgment motion, the district court recognized that, despite the ruling that Illinois Brick limited the relief that was available, the plaintiffs would still be able to receive some relief if they could establish that the defendants conspired to fix retail prices by fixing wholesale prices. See Petroleum Prods., 656 F.Supp. at 1299 (noting that plaintiffs' theory was that the defendants conspiratorily eliminated dealer discounts, thus "restoring" the official tankwagon prices, in order to fix retail prices). For purposes of this appeal, we operate with this same premise. Accordingly, we have no occasion to consider whether the district court was correct in its earlier ruling concerning the applicability of Illinois Brick.

We review de novo the district court's grant of summary judgment to the defendants. Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir.1987).

Determining whether the grant of summary judgment was proper in this case involves a careful application of the standards set down by the Supreme Court in Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Because the parties sharply disagree over the proper interpretation of Matsushita, and because the issue is crucial to a proper resolution of this case, we think it appropriate to review in some detail the nature of the standards established in Matsushita.

In Matsushita, plaintiffs Zenith and National Union Electric Corp. ("Zenith") sued several Japanese companies that manufacture consumer electronic products. Zenith alleged that the Japanese companies had engaged in a predatory pricing conspiracy aimed at driving American firms from the U.S. consumer electronic products market. After several years of discovery, the defendants moved for summary judgment. The district court granted the defendants' motion, concluding that any inference of conspiracy was unreasonable. Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 513 F.Supp. 1100 (E.D.Pa.1981). The Third Circuit reversed as to 21 of the 24 defendants, concluding that the plaintiffs had presented sufficient evidence to permit a reasonable factfinder to infer that the defendants had engaged in a predatory pricing conspiracy. In re Japanese Elec. Prods. Antitrust Litig., 723 F.2d 238, 304-11 (3d Cir.1983).

The Supreme Court reversed this decision because it concluded that the evidence proffered by the plaintiffs did not provide any basis for concluding that the alleged predatory pricing was rational; in the Court's words, the defendants simply "had no rational economic motive to conspire." Matsushita, 475 U.S. at 596, 106 S.Ct. at 1361. This fact, combined with the evidence that the defendants' conduct was "consistent with other, equally plausible [innocent] explanations" implied that the defendants' conduct could "not give rise to an inference of conspiracy." Id. at 596-97, 106 S.Ct. at 1361. Moreover, the Court stated that, even if the defendants had had a rational economic motive to conspire, summary judgment would still have been appropriate in light of the fact that "conduct that is as consistent with permissible competition as with illegal conspiracy does not, without more, support even an inference of conspiracy." Id. at 597 n. 21, 106 S.Ct. at 1362 n. 21 (citing Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 763-64, 104 S.Ct. 1464, 1470-71, 79 L.Ed.2d 775 (1984)). In such circumstances, the plaintiff must come forward with "sufficiently unambiguous" evidence " 'that tends to exclude the possibility' " that the defendants were acting lawfully. Id. 475 U.S. at 588, 597, 106 S.Ct. at 1356, 1362 (quoting Monsanto, 465 U.S. at 764, 104 S.Ct. at 1471).

We do not take these latter comments as suggesting that a district court may grant summary judgment to antitrust defendants whenever the court concludes that inferences of conspiracy and inferences of innocent conduct are equally plausible. Allowing the district court to make that decision would lead to a dramatic judicial encroachment on the province of the jury. To read Matsushita as requiring judges to ask whether the circumstantial evidence is more "consistent" with the defendants' theory than with the plaintiff's theory would imply that the jury should be permitted to choose an inference of conspiracy only if the judge has first decided that he would himself draw that inference. This approach would essentially convert the judge into a thirteenth juror, who must be persuaded before an antitrust violation may be found.

Indeed, under this interpretation of Matsushita, a trial judge would not even need to evaluate whether the inference of conspiracy meets a threshold standard of reasonableness, which is the usual standard for judging inferences on summary judgment. See Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1447 (9th Cir.1989). Since any inference that the trial judge thinks is more plausible than its alternatives must necessarily be a reasonable one, the trial judge would only need to ask whether he thinks the inference of conspiracy is the more plausible one. This cannot be what the Supreme Court meant when it stated that "antitrust law limits the range of permissible inferences from ambiguous evidence in a Sec. 1 case." Matsushita, 475 U.S. at 588, 106 S.Ct. at 1356. The Court purported to limit the application of the traditional summary judgment rules in the antitrust context; it did not intend to abolish them and replace them with an entirely different set, one which raises troubling seventh amendment concerns. Cf. Standard Oil v. Arizona, 738 F.2d 1021 (9th Cir.1984) (holding, in a prior appeal in this case, that the seventh amendment guarantees a right to jury trial in antitrust cases), cert. denied, 469 U.S. 1132, 105 S.Ct. 815, 83 L.Ed.2d 807 (1985). Indeed, the Court noted that, within the limits imposed by antitrust law, it remained true that " '[o]n summary judgment the inferences to be drawn from the underlying facts ... must be viewed in the light most favorable to the party opposing the motion.' " Matsushita, 475 U.S. at 587-88, 106 S.Ct. at 1356 (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)).

Nor do we think that Matsushita and Monsanto can be read as authorizing a court to award summary judgment to antitrust defendants whenever the evidence is plausibly consistent with both inferences of conspiracy and inferences of innocent conduct. Such an approach would imply that circumstantial evidence alone would rarely be sufficient to withstand summary judgment in an antitrust conspiracy case. After all, circumstantial evidence is nearly always evidence that is plausibly consistent with competing inferences. See United States v. Henderson, 693 F.2d 1028, 1031 (11th Cir.1982) ("[C]ircumstantial evidence is not testimony to the specific fact being asserted, but testimony to other facts and circumstances from which the jury may infer that the fact being asserted does or does not exist."). Thus, such an interpretation of Matsushita would seem to be tantamount to requiring direct evidence of conspiracy. This cannot be what the Court meant in Matsushita. Since direct evidence will rarely be available, such a reading would seriously undercut the effectiveness of the antitrust laws. Furthermore, Monsanto itself clearly indicates that circumstantial evidence may be sufficiently unambiguous to survive summary judgment. Monsanto, 465 U.S. at 764, 104 S.Ct. at 1471 (plaintiff must "present direct or circumstantial evidence" that reasonably tends to prove that the defendants were engaged in a conspiracy rather than acting independently) (emphasis added); see also Harkins Amusement Enterprises, Inc. v. General Cinema Corp., 850 F.2d 477, 485 (9th Cir.1988) (circumstantial evidence found to be sufficiently unambiguous under Monsanto ), cert. denied, 488 U.S. 1019, 109 S.Ct. 817, 102 L.Ed.2d 806 (1989).

We think that the key to the proper interpretation of Matsushita lies in the Court's emphasis on the dangers of permitting inferences from certain types of ambiguous evidence. In Matsushita, the Court was unwilling to permit an inference of predatory pricing in part because the Court was concerned about the inference's possible anticompetitive side-effects. The Court noted that the plaintiffs attempted to prove an antitrust conspiracy "through evidence of rebates and other price-cutting activities." 475 U.S. at 594, 106 S.Ct. at 1360. However, as the Court went on to observe,

"[C]utting prices in order to increase business often is the very essence of competition. Thus, mistaken inferences in cases such as this one are especially costly, because they chill the very conduct the anti-trust laws are designed to protect. See Monsanto, [465 U.S.] at 763-764 [104 S.Ct. at 1470-1471]. '[W]e must be concerned lest a rule or precedent that authorizes a search for a particular type of undesirable pricing behavior end up by discouraging legitimate price competition.' "

Id. (quoting Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 234 (1st Cir.1983)).

Thus, Matsushita establishes that a trial judge should not permit an inference of antitrust conspiracy from circumstantial evidence where to do so would have the effect of deterring significant procompetitive conduct. We emphasize, however, that an antitrust defendant is not entitled to summary judgment simply by virtue of the fact that the plaintiff's inference of conspiracy would have some deterrent effects; the effects must be significant. As the Court stated in Matsushita, the concern with avoiding deterrent effects "must be balanced against the desire that illegal conspiracies be identified and punished." 475 U.S. at 594, 106 S.Ct. at 1360. In short, the trial court must consider whether, on the evidence presented, the protection of innocent independent conduct outweighs the costs associated with the potential decrease in strict antitrust enforcement. If it does, then the plaintiff must come forward with additional, "sufficiently unambiguous" evidence that does not have these undesirable deterrent effects. Id. at 597-98 & n. 21, 106 S.Ct. at 1361-62 & n. 21.

This reading of Matsushita is further supported by examining the Court's decision in Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984), upon which the Matsushita Court relied heavily. In Monsanto, plaintiff Spray-Rite alleged that Monsanto had illegally conspired with its other distributors in deciding to terminate Spray-Rite's distributorship. Among the items of evidence introduced in support of this claim was the fact that Monsanto terminated Spray-Rite after receiving complaints from its other distributors about Spray-Rite's price cutting practices. Monsanto, on the other hand, contended that it had acted independently in deciding to terminate Spray-Rite. In analyzing the proper standard of proof for such a claim, the Supreme Court began by noting that, while it is per se illegal for a manufacturer to get together with its distributors and agree on prices, see Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 404-09, 31 S.Ct. 376, 383-85, 55 L.Ed. 502 (1911), it is nonetheless permissible for a manufacturer to announce its retail prices in advance and then to terminate those distributors who fail to comply, see United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465, 468, 63 L.Ed. 992 (1919). See Monsanto, 465 U.S. at 761, 104 S.Ct. at 1469. In light of these cases, the Court concluded that it could not permit an inference of conspiracy to be drawn from the mere fact that a distributor had been terminated after the manufacturer had received complaints from other distributors about price cutting. The Court reasoned that permitting such an inference would effectively preclude a manufacturer from exercising its independent termination rights under Colgate once it received any complaints from its distributors. In the Court's words:

Permitting an agreement to be inferred merely from the existence of complaints, or even from the fact that termination came about "in response to" complaints, could deter or penalize perfectly legitimate conduct.... To bar a manufacturer from acting solely because the information upon which it acts originated as a price complaint would create an irrational dislocation in the market. In sum, "[t]o permit the inference of concerted action on the basis of receiving complaints alone and thus to expose the defendant to treble damage liability would ... inhibit management's exercise of its independent business judgment...."

Monsanto, 465 U.S. at 763-64, 104 S.Ct. at 1470-71 (quoting Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 111 n. 2 (3d Cir.1980), cert. denied, 451 U.S. 911, 101 S.Ct. 1981, 68 L.Ed.2d 300 (1981)) (other citations omitted).

Monsanto thus clearly illustrates that courts should be careful not to permit inferences of antitrust conspiracy when to do so would create a significant irrational dislocation in the market or would result in significant anticompetitive effects.1

In summary, we conclude that where an antitrust plaintiff relies entirely upon circumstantial evidence of conspiracy, a defendant will be entitled to summary judgment if it can be shown that (1) the defendant's conduct is consistent with other plausible explanations, and (2) permitting an inference of conspiracy would pose a significant deterrent to beneficial procompetitive behavior. Once the defendant has made such a showing, the plaintiff must come forward with other evidence that is sufficiently unambiguous and tends to exclude the possibility that the defendant acted lawfully.

Before turning to the specific issues of this case, we must add one further comment with regard to the applicability of Matsushita. As the above analysis demonstrates, the concerns highlighted in Matsushita and Monsanto arise only in the context of whether to permit inferences from circumstantial evidence. Accordingly, the Matsushita standards do not apply when the plaintiff has offered direct evidence of conspiracy.

This important limitation on the applicability of Matsushita was emphasized in our decision in McLaughlin v. Liu, 849 F.2d 1205 (9th Cir.1988). In Liu, the Secretary of Labor argued that summary judgment was properly granted, under Matsushita, on the grounds that the defendant's sworn affidavit--which, if believed, would have provided a complete defense as to part of the Secretary's claim--was "implausible." Id. at 1207. We emphatically rejected this argument, noting that in Matsushita, "the Court was not speaking of direct evidence, but of circumstantial evidence." Id. We noted the important difference between circumstantial evidence, in which a party asks that certain "inferences be drawn in his favor" and direct evidence, where, in order to defeat a request for summary judgment, the nonmovant need only ask that his evidence "be taken as true." Id. at 1208. We emphasized that the cases of both the Supreme Court and this court "have honored the difference between weighing direct evidence and refusing to draw unreasonable inferences from circumstantial evidence." Id. We summarized our cases as indicating that Matsushita only applies "where the non-movant relie[s] on inferences from circumstantial evidence." Id. We then went on to quote extensively from T.W. Electrical Services, Inc. v. Pacific Electrical Contractors Assoc., 809 F.2d 626 (9th Cir.1987), highlighting that the Matsushita inquiry was appropriate only " '[w]here there is no direct evidence of a conspiracy.' " Id. at 1209 (quoting T.W. Elec., 809 F.2d at 632) (emphasis added by Liu). See also Christofferson Dairy, Inc. v. MMM Sales, Inc., 849 F.2d 1168, 1172 n. 4 (9th Cir.1988) (standards spelled out in T.W. Elec. apply only "[i]f there is no direct evidence of a conspiracy").

Thus, in applying Matsushita, a court must consider the nature of the evidence that the plaintiffs have offered with respect to each element of the cause of action. If the plaintiffs rely exclusively on circumstantial evidence in order to establish at least one element of their cause of action, then the court must proceed to analyze, under Matsushita, whether the inferences which the plaintiffs seek to draw from the indirect evidence are reasonable and permissible under the governing substantive law. T.W. Elec., 809 F.2d at 631; see also United Steelworkers of America v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 110 S.Ct. 51, 107 L.Ed.2d 20 (1989). In the antitrust field, this inquiry will be guided by the principles outlined earlier. If, however, the plaintiffs offer direct evidence to support each element, then summary judgment must be denied.

In their briefs to this court, the appellants have identified three classes of evidence that they claim create a genuine issue of material fact as to whether the appellees were engaged in a conspiracy to fix or stabilize prices. For purposes of analysis, we will first examine these classes of evidence successively; having done so, we will then be in a better position to evaluate the probative value of the entirety of the appellants' evidence.

The first set of evidence that the appellants claim indicates the existence of a conspiracy is a set of analyses of the appellees' pricing patterns.2 This analysis was performed by appellants' expert Keith Leffler. The raw data which Mr. Leffler analyzed were derived, in large measure, from pricing information collected by Lundberg Surveys, Inc. During the period from 1968 to 1973, the Lundberg firm collected, on a weekly basis, retail