United States: Joint Venture Did Not Engage in per se Illegal Price Fixing When it Set Prices for its Own Products.

Texaco, Inc. v. Dagher, 547 U.S. ___ (2006).

In Texaco, Inc. v. Dagher, decided on February 28, 2006, the Supreme Court unanimously held that an economically integrated joint venture may set a single price for its own products sold under the separate brand names of the venture’s members without thereby engaging in unlawful price fixing.

Texaco and Shell Oil, traditional competitors, "formed a joint venture, Equilon, to consolidate their operations in the western United States, thereby ending competition between the two companies in the domestic refining and marketing of gasoline." Slip Op. at 2. The joint venture agreement called for the pooling of the parties’ resources and the sharing of profits and liabilities. The Equilon gasoline was sold and separately marketed to "down-stream purchasers" under the original Texaco and Shell Oil brand names, and Equilon set a unified gasoline price for the two brands. A class of Texaco and Shell Oil service station owners brought suit alleging that the unified pricing of the gasoline constituted per se illegal price fixing in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.

Generally, allegations of anticompetitive conduct are considered under a rule of reason analysis, pursuant to which the plaintiff must demonstrate that conduct is anticompetitive in effect. However, in some cases, conduct may be held per se unlawful, where it is "so plainly anticompetitive that no elaborate study of the industry is needed to establish [its] illegality." National Soc. of Prof’l Eng’rs v. United States, 435 U. S. 679, 692 (1978). With limited exceptions, price fixing agreements between horizontal competitors are treated as per se unlawful. See, e.g., Catalano, Inc. v. Target Sales, Inc., 446 U. S. 643, 647 (1980) (per curiam). In Dagher, the plaintiffs relied solely on a per se theory, declining to undertake the effort of showing that the defendants’ conduct in forming Equilon and pricing its products had any actual anticompetitive effects.

The district court awarded summary judgment to Texaco and Shell Oil, finding that the rule of reason, rather than the per se rule, governed the plaintiffs’ claim. The U.S. Court of Appeals for the Ninth Circuit reversed, however, refusing to "find an exception to the per se prohibition on price-fixing where two entities have established a joint venture that unifies their production and marketing functions, yet continue to sell their formerly competitive products as distinct brands." See Dagher v. Saudi Refining, Inc., 369 F.3d 1108, 1116 (9th Cir. 2005).

In a relatively short and pithy opinion, the Supreme Court unanimously reversed the Ninth Circuit, holding that while "Equilon’s pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense." Slip Op. at 4. The Court explained that because of the joint venture in Equilon, Texaco and Shell Oil no longer competed with one another in the relevant market and, therefore, did not enter into an illegal horizontal price fixing agreement. Id. at 3. "In other words, the pricing policy challenged here amounts to little more than price setting by a single entity—albeit within the context of a joint venture—and not a pricing agreement between competing entities with respect to their competing products." Id.

The Supreme Court went on to reject the Ninth Circuit’s application of the "ancillary restraints doctrine," which involves an inquiry into whether the restriction is a "naked restraint on trade, and thus invalid, or one that is ancillary to the legitimate and competitive purposes of the business association, and thus valid." Id. at 6. Application of the doctrine was inappropriate in the case because "the practice being challenged involves the core activity of the joint venture itself—namely, the pricing of the very goods produced and sold by Equilon." Id. Further, even if the doctrine were applied, explained the Court, Equilon’s pricing policy clearly would be ancillary to the sale of its own products. Id. Since the pricing provisions did not give rise to a "great likelihood of anticompetitive effects [that] can easily be ascertained," California Dental Ass’n v. F.T.C., 526 U.S. 756, 770 (1999), the Court also rejected application of a "quick look" analysis, which would have shifted the burden to the defendants to establish that the restraint has countervailing pro-competitive effects. Slip Op. at 5 n.3.

The Supreme Court’s opinion confirms that the independent conduct of an otherwise legally established joint venture will be subjected to the same, rather than some higher level, of antitrust scrutiny as any other market participant. The Court’s opinion is not surprising, but it is significant in eliminating an appellate holding that could have had substantial adverse effects on the formation and operation of pro-competitive joint ventures.

Nothing in the Dagher opinion should be understood to immunize the formation or conduct of joint ventures from antitrust scrutiny.¹ In particular, the Court was not called upon to address the legality, under the rule of reason, of the creation of the Equilon joint venture and the resulting elimination of competition between Texaco and Shell as former competitors. In all likelihood, it was this absence of price competition between the original two parties that troubled the Ninth Circuit. The identical pricing by the venture once formed is probably best viewed simply as a necessary consequence of the original loss of competition and not the basis for an independent, per se violation.

The factual history of the Dagher case illustrates that the antitrust laws must be carefully considered both at the point of creation of a joint venture and during its lifecycle. Initially, the Equilon joint venture was subjected to intense federal review by the Federal Trade Commission and allowed to commence only after certain "divestments and other modifications," entry of an FTC consent decree, and the consent of four state attorneys general. Slip Op. at 2; see also In re Shell Oil Co., 125 F.T.C. 769 (1998). Moreover, the receipt of this federal and state approval did not immunize the venture from subsequent challenge by private parties many years after it had been formed, as illustrated by the Dagher case itself.

In general, joint ventures are analyzed under the "Antitrust Guidelines for Collaborations Among Competitors" (April 2000) (the "Guidelines"), which were jointly issued by the FTC and Antitrust Division of the U.S. Department of Justice. Most joint ventures and other collaborative agreements between competitors will have the effect of removing or hindering some aspect of competition from the market. Under the Guidelines, if a collaboration is nothing more than a naked agreement to restrain trade, it will be held per se unlawful. However, assuming the joint venture involves true integration of resources and provides at least some pro-competitive efficiencies, it will be analyzed under the rule of reason. In essence, the anticompetitive effects will be weighed against the pro-competitive efficiencies to determine whether the venture should be allowed to proceed or continue in operation.²

The inquiry into whether any given competitor collaboration will survive antitrust scrutiny is highly fact-specific. Accordingly, every "joint venture," "alliance," or other new collaborative arrangement between competitors should be subjected to an individualized antitrust risk assessment.

1. In this regard, it is important to note that the Supreme Court left open the possibility that Equilon’s pricing strategy could be subject to a rule of reason challenge. Slip Op. at 5 & n.2.

2. The anticompetitive effects of a venture "are assessed as of the time of possible harm to competition," rather than just at the time of formation. Guidelines § 2.24.

© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.