FTC Cleared Valero Deal But California State AG Successfully Challenged It

On September 19, 2017, Valero Corporation (“Valero”) abandoned its acquisition of two northern California bulk petroleum terminals from Plains All American Pipeline (“Plains”) after the California state attorney general filed a lawsuit in the Northern District of California against Valero’s proposed acquisition.  The lawsuit was filed on July 8, 2017, a day after the FTC decided not to take any action against the transaction.

Background of Case 

Valero is a refiner and retailer of gas in California and through the acquisition, it was seeking to add Plain’s storage and distribution terminals in Richmond and Martinez, California.  California alleged that the transaction would allow Valero to control the last independently operated gathering line in the state with available capacity.  Part of the state’s argument was that the acquisition would eliminate Plains as a maverick competitor.  California alleged that Valero’s acquisition would permit the vertically integrated refiner to reduce competitor access to the distribution terminals, which would result in increased fuel prices at retail gas stations.  California alleged that Valero would be able to recoup lost terminal profits (after withholding access from competitors) through a downstream increase in gas prices.  California also alleged that once all the fuel terminals were vertically integrated, there would be a higher risk of coordination among Valero and other vertically integrated providers to similarly reduce supply into the terminal and increase prices at gas stations.

While the district court denied California’s motion for a temporary restraining order and preliminary injunction motion, the judge did not appear to be ruling entirely against the state.  Indeed, the district court stated that the order was unnecessary as it would not be difficult to restore the status quo for two reasons.  First, Plains’ long-term contracts prevented Valero from restricting terminal services from any existing customers during the course of the planned litigation.  Second, Valero and Plains provided a declaration detailing firewalls and other commitments to maintain separate businesses while the litigation progressed.

In the order, however, the district court expressed that California raised “serious questions” about the anticompetitive effect of the transaction as the judge was skeptical that Valero’s purchase of the storage terminals in Martinez and Richmond, California wouldn’t harm competition so the judge made it clear to Valero that defendants were proceeding at their own risk if they closed the transaction before the court ruled on the matter.  In other words, while Valero won at the TRO and preliminary injunction stages, there was a real risk that it could lose if it went forward with its acquisition plans.  Accordingly, the Valero and Plains decided to terminate the transaction rather than go through a lengthy trial that would have resulted in continued uncertainty.

Lessons Learned

This case demonstrates that state attorneys general can and will take action against transactions that raise local competitive concerns even if the federal antitrust agencies clear the transaction.  Valero’s early merger litigation victories demonstrate that while it is difficult for a plaintiff to win a TRO or preliminary injunction motion, those victories are not indicative of how the judge might ultimately rule on a permanent injunction.  Given the risks, costs and time associated with litigating a merger, parties must determine whether proceeding to litigation is a realistic approach.  Here, apparently, there was not a meeting of the minds between the transaction parties so the transaction was abandoned.  As a result, parties to transactions need to be proactive and consider state and local competition concerns when evaluating the risks of a transaction and address those competition concerns during the investigation.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com