On February 28, 2006, the U.S. Supreme Court issued an important decision for joint ventures and companies that form and invest in joint ventures. In Texaco Inc. v. Dagher et al./Shell Oil Company v. Dagher et al. the court unanimously held that it is not per se illegal under Section 1 of the Sherman Act for an economically integrated joint venture to set the prices at which it sells its products. By ruling that joint venture pricing decisions do not amount to price fixing in an antitrust sense, the court provided much needed certainty to the business community that legitimate joint venture activity will not be paralyzed by the specter of per se illegality.
The case involved Equilon, a joint venture formed by Texaco and Shell. Through Equilon, Texaco and Shell consolidated their refining, marketing, wholesaling and retail operations in the United States. Among other things, Equilon was responsible for pricing the products it manufactured and owned—i.e., Shell and Texaco gasoline products. Texaco and Shell agreed that, following its formation, Equilon would market and sell Shell and Texaco gasoline at the same price.
Significantly, the formation of Equilon was approved by federal and state antitrust enforcement authorities after a thorough review. As the district court, U.S. Court of Appeals for the Ninth Circuit and Supreme Court all acknowledged, the economic justifications for creating the joint ventures were demonstrated by a “voluminous record.”
Notwithstanding the fact that the venture’s formation had been cleared by the antitrust enforcement authorities, 23,000 service station owners in the western United States subsequently alleged that the joint venture’s pricing policy violated Section 1’s prohibition on price fixing agreements. The service station owners insisted the pricing program was automatically illegal under the per se rule. They explicitly eschewed the “rule of reason” analysis—presumptively applied in antitrust cases—which would have required the court to consider the pricing program’s economic justifications and overall competitive effects. The district court threw out the service station owners’ case, holding that since joint venture activities are governed by rule of reason analysis, the plaintiffs’ per se claim raised no triable issue of material fact.
The plaintiffs appealed, and the Ninth Circuit found in favor of the service station owners, reversing the district court. A divided Ninth Circuit panel concluded that under Section 1 of the Sherman Act, Equilon’s conduct could be deemed a facially anticompetitive price fixing scheme and conclusively presumed to be illegal without further analysis.
The Supreme Court reversed the Ninth Circuit’s holding that the joint venture’s pricing conduct was potentially subject to per se liability. The court’s decision is significant in several respects:
- The court explained a legitimate, economically integrated joint venture does not engage in price fixing in an antitrust sense when it prices its products—whether it sells one brand of products or multiple lines. In other words, while “price fixing” may literally occur, it is not price fixing in an antitrust sense.
- The court also observed that the pricing decisions of a legitimate, economically integrated joint venture are the decisions of a single entity for antitrust purposes. Justice Clarence Thomas wrote, “the pricing policy challenged here amounts to little more than a 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.” The court, however, stopped short
of concluding that Section 1 of the Sherman Act—prohibiting anticompetitive agreements—did not apply to joint ventures. Rather, Justice Thomas noted that any such challenge must be made under a rule of reason analysis.
- The court reiterated that the presumptive rule of analysis in antitrust cases is the rule of reason, echoing the admonitions contained in earlier decisions against expanding the reach of the restrictive per se rule, a result that would have a chilling effect on procompetitive conduct.
- Finally, the court also found that pricing is a core activity of a joint venture, thus making the “ancillary restraints doctrine” invoked by the Ninth Circuit inapplicable.
Key Implications for the Business Community
This decision is significant for the business community, as it provides clearer guidance on how antitrust laws apply to joint ventures. Some of the key implications for businesses include
- Joint ventures, and the businesses that form them, will not face the potential risk that their pricing practices will be summarily condemned as illegal price fixing under Section 1 of the Sherman Act.
- Furthermore, there is less risk that pricing will be viewed as an “ancillary restraint” to the joint venture as the court clearly indicated such conduct is a core function of a joint venture.
- The Supreme Court’s decision should not, however, be read to suggest that competitive collaborations are immune from antitrust scrutiny. First, the court’s analysis in Dagher was predicated on the fact that Equilon represented a true economic integration of the parties’ competitive operations. Absent such economic integration, collaborative activities may continue to face the potential liability under the per se rule. As the U.S. Court of Appeals for the First Circuit observed in Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 2, 22 (1st Cir. 1979), merely labeling an arrangement as a “joint venture” will not save it from per se illegality: “The talisman of ‘joint venture’ cannot save an agreement otherwise inherently illegal.”
- Moreover, the court emphasized that joint venture activities are subject to review under the rule of reason analysis.
As a result, ventures must be prepared to demonstrate that the procompetitive benefits of their collaboration outweigh any potential anticompetitive effects to pass muster under the antitrust laws.