Can two competitors form a joint venture and sell products under their two competing product brands through the joint venture at a single agreed-upon price? The Supreme Court recently considered this question in Texaco, Inc. v. Dagher, ruling in a unanimous (8-0) decision issued on February 28, 2006, that it was not per se illegal under the Sherman Antitrust Act for true joint venturers to enter into such a product pricing agreement.
In Dagher the defendants, Texaco and Shell Oil, ceased competing as individuals in the market and entered into a joint venture to refine and sell gasoline in the western United States under the two companies' original brand names. Prior to its formation, the joint venture was approved via consent decree by the Federal Trade Commission as well as several state attorneys general of western states. The joint venture then set a single price for the gas sold by both brands. Service station owners of the two brands sued, contending that the arrangement was per se illegal price fixing by competitors under the Sherman Act, which prohibits "[e]very contract, combination . . . or conspiracy . . . in restraint of trade."
Noting that per se illegality was reserved only for "plainly anticompetitive" agreements restraining trade such as price-fixing agreements among competitors, the Court concluded that the case did not present such an agreement because Shell Oil and Texaco had ceased to compete against each other in the relevant market - gasoline sales to western U.S. service stations - and instead participated in that market jointly through their joint venture. According to the Court, "the pricing policy challenged here amounts to little more than price setting by a single entity" because when companies that "otherwise would be competitors pool their capital and share the risks of loss and opportunities for profit, such joint ventures are regarded as a single firm competing . . . in the market."
The Court also noted that any challenge to the formation of the joint venture itself would have been subject to "rule of reason" analysis (under which evidence must be presented that the combination caused or would cause harm to competition), suggesting that the Court believed it would be anomalous to review pricing decisions by such a joint venture under the higher "per se" standard (under which harm to competition need not be proved, but rather is presumed).
The Court further observed that the "ancillary restraints doctrine," which governs the validity of restrictions imposed by joint ventures on nonventure activities (and on which the Court of Appeal had relied to find the joint venture pricing scheme unlawful), was inapplicable because the challenged conduct - the pricing of the products produced by the joint venture - involved "the core activity of the joint venture itself."
In Dagher, the Court has clarified the level of antitrust review applicable to actions by "true" joint ventures, ruling that such decisions are not per se illegal, even when they relate to the highly sensitive subject of pricing. The decision may present opportunities for companies to enter into novel and creative arrangements with competitors with minimal exposure under the Sherman Act. However, the Dagher decision is by no means a "free pass" to competitors who might seek to avoid prohibitions on restrictions to competition under the cloak of a joint venture.
The Court makes clear that the rule of reason analysis would not apply to sham joint ventures, nor would rule of reason analysis apply to restraints on nonventure activities arising out of a joint venture, unless they are justified under the ancillary restraints doctrine. Finally, it must be remembered that the fact that the rule of reason analysis applies to core activities of joint ventures does not mean that such activities are per se legal. Rather, it simply means that in order to prevail on a Sherman Act claim, a prospective plaintiff would have to affirmatively prove that those activities resulted in harm to competition.
For more information about this Alert, please contact Manly Parks, Wayne Mack or Edward G. Biester of the Duane Morris Antitrust and Competition Practice Group.
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