The opinion of the court was delivered by: BROTMAN
This case concerns commercial relationships in the natural gas industry, an industry whose character has changed drastically in the past decade due to volatile market forces and federal regulation. In an earlier decision, this court dismissed anti-trust claims against an interstate pipeline company by investors in production companies which drill for natural gas and sell it to the pipeline. Garshman v. Universal Resources Holding, Inc., 625 F. Supp. 737 (D.N.J. 1986)("Garshman I"). In October 1985, before the court dismissed the complaint as to defendant Columbia Gas Transmission Corporation ("Transmission"), defendant Universal Resources Holding, Inc. ("Universal") filed a cross-claim against Transmission and its parent, The Columbia Gas System, Inc. ("System"), a public utility holding company. The crossclaim alleges that Transmission and System violated Sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1, 2, and states additional state law claims sounding in duress, breach of contract, tortious interference with contractual relations, and indemnification. The court's jurisdiction over the crossclaim is ancillary to its federal question jurisdiction over the main action.
Several issues are now before the court. First, System moves to dismiss Universal's crossclaim for improper venue, Fed. R. Civ. P. 12(b)(3), for lack of personal jurisdiction, Fed. R. Civ. P. 12(b)(2), and for failure to state a claim on which relief can be granted, Fed. R. Civ. P. 12(b)(6). In addition, System moves to dismiss the amended complaint in the main action on identical grounds. Second, Transmission moves to dismiss the crossclaim for failure to state a claim. Finally, Universal seeks injunctive relief against Transmission and System with respect to additional contracts for gas wells in the region.
Understanding the crossclaims' allegations requires understanding the economic history of the natural gas industry over the last decade. During the mid-1970's, there was a severe undersupply of natural gas and pipeline companies like Transmission could not satisfy their customers' demands. In response, Congress enacted the Emergency Natural Gas Act of 1977, Pub. L. 95-2, 91 Stat. 4-10, February 2, 1977, and the subsequent Natural Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. § 3301 et seq. NGPA was enacted as part of a comprehensive legislative scheme designed to curtail national energy consumption. See House Conference Report No. 95-1752, U.S. Cong. & Admin. News, 95th Cong., 2d Sess., pp. 8983 et seq. (1978). In particular, NGPA sought to ameliorate the shortage of natural gas through partial decontrol of prices. See Garshman I, supra, 625 F. Supp. at 739.
Higher prices prompted new exploration and development of natural gas wells, so the available supply increased steadily into the 1980's. In the meantime, several factors combined to deflate demand beneath projected levels. Among those factors were heightened energy conservation efforts, a steep decline in the price of oil, increased competition from alternate fuels, and the 1981-82 recession. Within five years after Congress intervened, there was a nationwide oversupply of natural gas.
In the 1970's, Transmission could not purchase enough gas to supply its customers. In the wake of NGPA, Transmission met 100 percent of that demand in 1979. Id. at 740. Transmission then proceeded to secure supply contracts to cover estimated future demand. Transmission entered into a five-year contract with Universal in 1981 under which Transmission leased to Universal a tract of land in western New York. Universal was obligated to deliver all of the natural gas produced on the land to Transmission, which agreed to take or pay for at least 75 percent of the wells' estimated yearly output. Such "take or pay" contracts are common in the industry. Transmission agreed to pay the "maximum lawful price applicable" under federal law. Id. Transmission's obligations under this contract and numerous others like it approached $2 billion when the market turned down. In its earlier opinion, the court described Transmission's dilemma and solution:
Faced with this dramatic shift in the market, and saddled with overwhelming contractual obligations through 1986, [Transmission] sought to renegotiate the prices it paid to producers like Universal in order to bring those prices in line with market levels. [Transmission] allegedly coerced producers into renegotiating price terms by threatening that it would not assign leases for future exploration to producers who did not renegotiate existing contracts. [Transmission] also allegedly threatened to curtail the amount of gas it took from those producers by cutting production allocation and manipulating pressure in the pipeline. In other words, [Transmission] allegedly threatened to refuse to deal in the future with producers who failed to comply with its present demands.
Universal eventually capitulated and a new price clause was incorporated into its contract with [Transmission] by an agreement dated August 29, 1984. [Transmission] has purchased gas under that contract pursuant to its terms since that time.
Garshman I, supra, 625 F. Supp. at 740. See also American Exploration Company v. Columbia Gas Transmission Co., 779 F.2d 310 (6th Cir. 1985).
II. Personal Jurisdiction and Venue as to Defendant System
A. Universal's Crossclaim
The court now turns to System's motions to dismiss the crossclaim. Universal bears the burden of pleading and proving facts which support the court's exercise of personal jurisdiction over System and establish that venue is proper in this district. Gehling v. St. George's School of Medicine, 773 F.2d 539, 542 (3d Cir. 1985). The threshold inquiry is venue, and the applicable standard in a private antitrust case is Section 12 of the Clayton Act, 15 U.S.C. § 22:
Any suit, action or proceeding under the antitrust laws against a corporation may be brought not only in the judicial district whereof it is an inhabitant, but also in any district wherein it may be found or transacts business; and all process in such cases may be served in the district of which it is an inhabitant, or wherever it may be found.
The analyses of venue and personal jurisdiction are "virtually congruent," since both are controlled by general due process principles. Sportmart, Inc. v. Frisch, 537 F. Supp. 1254, 1257 (N.D. Ill. 1982). See also United States v. Scophony Corporation, 333 U.S. 795, 92 L. Ed. 1091, 68 S. Ct. 855 (1948); Smokey's of Tulsa, Inc. v. American Honda Motor Co., 453 F. Supp. 1265, 1267 (E.D. Okla. 1978). If venue is established, the court may obtain personal jurisdiction over the defendant through extra-territorial service of process. If venue is improperly laid in this district, the personal jurisdiction issue becomes moot. Sportmart, supra, 537 F. Supp. at 1257.
System is neither an "inhabitant" of nor "found" in New Jersey. To be "found" in a district, "a corporation must have duly authorized 'officers and agents carrying on the business of the corporation' within the district and 'the nature and character of its business must be such as to warrant the inference that it is engaged in continuous local activity' there." Athletes Foot of Del., Inc. v. Ralph Libonati Co., 445 F. Supp. 35, 42 (D. Del. 1977), citing Eastman Kodak Co. of New York v. Southern Photo Materials Co., 273 U.S. 359, 371, 71 L. Ed. 684, 47 S. Ct. 400 (1927). System is a Delaware corporation with its headquarters and sole place of business in Delaware. Affidavit of Hart T. Mankin, para. 2. System is not and has never been licensed, registered or qualified to conduct or transact business in New Jersey. Id., para. 4. System owns no real property in New Jersey, has no officer, agent or employee acting on its behalf here, and has no office, postal address, telephone or other physical manifestation in the state. Id., para. 5. Therefore, only if System "transacts business" in New Jersey is venue appropriate in this jurisdiction. Call Carl, Inc. v. BP Oil Corporation, 391 F. Supp. 367 (D. Md. 1975).
Transmission, System's wholly-owned subsidiary, does "transact business" in New Jersey by supplying gas to Elizabethtown Gas Company in Elizabeth, New Jersey. Exhibit A to Universal's brief in Opposition to System's Motion. Universal contends that because the subsidiary has contacts with New Jersey that are sufficient for venue as to it, and because System owns 100 percent of Transmission's stock, venue should therefore lie as to the parent.
A parent corporation "transacts business" in a forum only if it actually controls the activities of the subsidiary which transacts business in the forum and allegedly violated the antitrust laws. Caribe Trailer Systems v. Puerto Rico Maritime Shipping Authority, 475 F. Supp. 711, 717-18 (D.D.C. 1979), aff'd No. 79-1658 (D.C. Cir. 1980)(per curiam), cert. denied 450 U.S. 914, 67 L. Ed. 2d 339, 101 S. Ct. 1355 (1981). While the court must consider the "totality of the relationship" between the parent and the subsidiary, Call Carl, supra, 391 F. Supp. at 371, the "essential element" is whether the parent exercised control over the specific conduct which allegedly violated the antitrust laws. Caribe Trailer, supra, 475 F. Supp. at 717-18. Stated differently, the "key factor" in determining venue "is the ability of the parent to influence major decisions of the subsidiary which lead or could lead to violations of the antitrust laws." Call Carl, supra, 391 F. Supp. at 371, citing Flank Oil Co. v. Continental Oil Co., 277 F. Supp. 357, 365 (D. Colo. 1967).
Universal relies on several factors which purportedly evince System's influence over Transmission. First, Universal argues that System is Transmission's sole stockholder. One hundred percent ownership of a subsidiary's stock does not alone establish venue over the parent. King v. Johnson Wax Associates, 565 F. Supp. 711, 718 (D. Md. 1983); Scophony, supra, 333 U.S. at 814.
Second, Universal contends that System "lends money, holds debt, finances through bond debentures the resources needed. . . . and directs the allocation of these resources." Universal's Brief at 11.*In support of these contentions, Universal cites excerpts from System's 1984 annual report and first 1985 quarterly report to shareholders. Id. at 12, 11. Most telling, according to Universal, is an "admission" in a letter to shareholders from John H. Croom, System's chairman and chief executive officer, that System's directors "have closely monitored the Transmission subsidiary's development of the settlement with the customers and the development of its producer proposal. . . . At my recommendation, a special committee of directors was appointed by the Board in December to dig into every aspect of the work under way." Id. at 11.
This argument relies on superficial semantic choices. By dissecting System's public, published statements, Universal presumes to divine System's operational structure and relationship with its subsidiaries. Language in an annual or quarterly report, initially selected by a public relations director or an in-house corporate communicator and later approved by an officer or director, proves nothing about the corporation's underlying structural dynamic. Universal attaches undue significance to the use of phrases like "our operations," "our customers," and "our prices" in System's 1984 annual report. Taken in context, these phrases refer to System and all of its subsidiaries. In other passages, which Universal omits from its selected excerpts, the annual report describes Transmission's independent business operations.
In King, supra, the plaintiffs tried to argue that a telex from the parent to the subsidiary that referred to "how we manage the business" indicated that the parent controlled the subsidiary. In response, the court noted that plaintiffs had overlooked or ignored contrary language in the same telex, such as a reference to "the strategic direction for your company." Explaining that the telex should be "viewed . . . as a whole" rather than "dissected . . . word for word," the court concluded that the telex was "not enough to evince control" of the subsidiary by the parent. 565 F. Supp. at 718.
Viewed as a whole, the reports proffered by Universal suggest at most that System has some general input into Transmission's decision-making process. But as long as the subsidiary ultimately makes its own business decisions, the parent's general input is irrelevant. "A subsidiary need not spurn or disregard the corporate policy of its parent . . . to maintain inviolate the separate existence of the two corporations . . . but its policies may not be guided solely in consequence of the corporate policy and management decisions of its parent." Call Carl, 391 F. Supp. at 374.
A parent may monitor or review its subsidiary's policies and business decisions "without destroying its corporate separateness for jurisdictional purposes." Sportmart, supra, 537 F. Supp. at 1258 n. 7. For example, in King, the parent asked its wholly owned subsidiary "for information regarding its . . . long-range financial and marketing plans." 565 F. Supp. at 718. The court held that the request was not evidence of the parent's control, because "all major stockholders share an interest in being informed of their companies' long-term goals." Id. Similarly, in Smokey's of Tulsa, supra, the court held that the parent's review of the "general business policies" and "important actions" of its wholly owned subsidiary "enjoyed independent responsibility for the management of its business." 453 F. Supp. at 1271.
Transmission is not a shell created to shield System from liability. System itself is a public utility holding company, a creature of the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79 et seq. Ordinary corporations may create or acquire subsidiaries to manage a discrete phase of their operations -- sales, for example, or services. E.g. Smokey's of Tulsa, supra, 453 F. Supp. 1265 (subsidiary was exclusive U.S. distributor of Japanese parent's motorcycle products). A public utility holding company, on the other hand, conducts no independent business. It acts merely as a conduit for federal regulation of the utility industry. Congress enacted the public utility legislation in 1935 to protect the public, investors, and consumers from manipulation of advertisements and sales of utility securities. As a public utility holding company, System engages in no commercial activity other than holding the voting stock and debt of its wholly owned subsidiary.
Universal's final argument is that System controls Transmission because System's operating company, Columbia Gas System Service Corporation ("Service") furnishes professional services at cost to the parent company and to operating company affiliates. Universal notes that System and Service have overlapping directorates, but never explains what System's close relationship to Service has to do with System's purported control over Transmission. The court sees no significant connection.
Since Universal has failed to satisfy its burden of showing that System "transacts business" in New Jersey, the court concludes that venue as to System is not appropriate in this district. Universal submits that should the court reach this conclusion, the court should grant Universal leave to conduct jurisdictional discovery in order to obtain further information with regard to the interconnection between System and Transmission. The court will not order such discovery.
Admittedly, Universal has not had an opportunity to conduct discovery on the issues of venue and jurisdiction. Plaintiffs, however, did submit documents to the court in opposition to a motion by System to dismiss the complaint for lack of personal jurisdiction. (That motion was withdrawn without prejudice by agreement of the parties when plaintiffs indicated their intention to file an amended complaint.) Universal had access to and relied on the documents submitted by plaintiffs. The Third Circuit does require that a trial court permit jurisdictional discovery unless the plaintiff's claim is "clearly frivolous." Nehemiah v. The Athletics Congress, 765 F.2d 42, 28 (3d Cir. 1985), citing Compagnie des Bauxites de Guinee v. L'Union Atlantique S.A. D'Assurances, 723 F.2d 357, 362 (3d Cir. 1983). In light of System's status as a regulated holding company and the utter absence of any hint that System controls Transmission's operations, this court must categorize Universal's contention that System "transacts business" in this district as clearly frivolous. Venue as against System will not lie in this district. Without proper venue, the court need not reach the issue of personal jurisdiction, even though the Section 12 test for venue in private antitrust actions is nearly identical to standard due process analysis for personal jurisdiction.
Accordingly, the court will grant defendant System's motion to dismiss the crossclaim for improper venue. Its motions to dismiss for lack of personal jurisdiction and on the merits are rendered moot.
B. System's Motion to Dismiss Plaintiffs' Amended Complaint
Also before the court at this time is System's motion to dismiss plaintiffs' amended complaint in the main action. For the reasons just stated, the court will grant System's motion on the grounds that venue against it is improper in this district.