“Fatal shortcomings” of Economist’s Expert Report Demolish Kentucky’s Case
“Fatal shortcomings” in a report prepared by an economics expert witness, the plaintiff's only expert witness, led to the report being excluded and summary judgment being granted to the defendants.
In the Commonwealth of Kentucky vs. Marathon Petroleum Company LP et al., Kentucky claimed that Marathon's market share “has allowed [Marathon] to illegally manipulate and attempt to manipulate the market for RFG in … Louisville and [Northern Kentucky],” violating the Sherman Antitrust Act and the Clayton Act.
Kentucky claimed that Marathon monopolized the wholesale market for Summer RFG, a special type of gasoline that gas stations must sell during the summer in certain parts of Kentucky1. RFG is made using reformulated blendstock for oxygenate blending (RBOB), which cannot practically be shipped in its final state but instead is blended with ethanol at terminals to create RFG. Kentucky argued that Marathon, having the sole refinery in Kentucky, controlled the influx of RBOB, allowing it to monopolize the market for the sale of retail RFG to gas stations.
Marathon at first moved to dismiss the case for lack of personal jurisdiction and failure to state a claim. When those motions were denied, it moved to exclude the opinions of Kentucky's economics expert witness, Dr. Michael Sattinger, who holds a Ph.D. in economics from Carnegie-Mellon University and is a professor in the Department of Economics at Albany State University.
Kentucky, as an antitrust plaintiff, bore the burden to “define the relevant market within which the alleged anticompetitive effects of the defendant's actions occur.” Sattinger's expert report defined the geographic market to consist solely of terminals in Kentucky that blend RBOB to produce and then sell Summer RFG, without explaining his methodology, in the district court's view. While Sattinger acknowledged that the hypothetical-monopolist test methodology generally used by economists “provides a guide” to defining a relevant market, the court found that he did not use it, and that he failed to explain his methodology for defining the relevant market.
Even if Sattinger had used a reliable method, the district court found that it would have rejected his opinion anyway because “his proposed market does not reflect the economic realities of the wholesale RFG market.” Marathon and its competitors must ship RBOB from refineries into Kentucky terminals. Sattinger's proposed geographic market fails to consider where Marathon's competitors could “practicably turn for [RBOB],” according to the court.
Marathon supported its argument against Sattinger's definition of the relevant market with evidence demonstrating that both Kroger and Marathon had in the past trucked supplemental sources of RBOB from terminals in the Chicago and St. Louis areas. In his own report, Sattinger noted that Valero, Marathon's only competitor for RFG, “received RBOB [at its Louisville terminal] from its Memphis, St. Charles, and Meraux refineries by barge on the Mississippi and Ohio Rivers,” but in his rebuttal report dismissed it as “anecdotal,” without explanation.
The district court found that Sattinger defined a geographic market without relying on an established methodology and without explaining the exclusion of sourcers of supply already used by Marathon's competitor. Sattinger defined a geographic market that is “connected to existing data only by the ipse dixit of the expert,” the court found, excluding his geographic market opinion as unreliable under Daubert.
Sattinger's opinion on antitrust injury and his calculation of damages, $173.6 million, met the same fate. The district court found that Sattinger merely compared the geographic market he had defined to Baltimore and St. Louis, subtracted the discounts given by Marathon to its retailers, and then concluded that the difference in price must be attributable to anticompetitive conduct. While the court acknowledged that the yardstick approach used by Sattinger can be used to calculate damages, it noted that the approach requires the analysis of “the differences in the price of the product at issue among meaningfully comparable markets, firms, or locations,” and that Sattinger failed to control for major differences among the cities that could impact the market price for RFG. Sattinger testified that he made no comparisons of the populations of the Baltimore market vs Kentucky, the characteristic demand for Summer RFG or the traffic of vehicles using gasoline in the two markets. When asked why he selected Baltimore and St. Louis, he testified that the markets had been selected for him (presumably by Kentucky).
Marathon argued that the methodology Sattinger used to reach his conclusions on the relevant market, antitrust injury and damages was “technically deficient and renders his opinion unreliable, irrelevant, and inadmissible.” The district court agreed, granting Marathon's motion for summary judgment.
Of note, former Kentucky Attorney General Jack Conway filed the antitrust lawsuit in May 2015 as he was preparing an unsuccessful run for governor.