The United States Supreme Court this week held in Texaco, Inc. v. Dagher that (1) it is not per se unlawful under Section 1 of the Sherman Act for a legitimate, economically-integrated joint venture to set the prices at which it sells its separately branded products; and (2) certain "core" activities of a legitimate joint venture, such as the venture’s setting of its own prices, may be held lawful even without resort to an ancillary restraints analysis. Texaco, Inc. v. Dagher, Nos. 04-805 and 04-814, slip op. at 3-6 (February 28, 2006). The Court’s decision is likely to reduce uncertainty caused by the Ninth Circuit’s application of the per se rule to joint venture pricing determinations. In its unanimous rejection of the lower court’s analysis, the Supreme Court (with Justice Alito not participating) reaffirmed that legitimate joint ventures are not subject to heightened antitrust scrutiny.
Dagher involved a joint venture, Equilon Enterprises, between Texaco, Inc. and Shell Oil Co. to refine and sell gasoline in the western United States under the two companies’ respective brand names. Id. at 2. Under the terms of the Equilon venture, Texaco and Shell agreed to consolidate their gasoline refining and marketing operations in the western United States and to pool their resources and share the risks and profits of Equilon’s activities. Id. Equilon set a single price for gasoline that was sold to downstream purchasers under the Texaco and Shell brand names. Id.
A class of Texaco and Shell service station owners challenged the venture on the grounds that, among other things, Shell and Texaco engaged in unlawful price fixing under Section 1 of the Sherman Act. Id. at 1-2. Specifically, the class alleged that as a result of Equilon’s decision to sell Texaco and Shell brands of gasoline at the same price, Equilon, and its owners, Texaco and Shell, had committed per se unlawful price fixing. Id. The district court granted summary judgment in favor of Texaco and Shell and concluded that the rule of reason, rather than the per se rule or quick look doctrine, applied to the station owners’ claims. Id. at 2-3. The Ninth Circuit reversed, holding that there existed a triable issue of fact as to whether Equilon’s unified pricing scheme was a per se Sherman Act violation. Id. at 3.
The Supreme Court disagreed. In a decision written by Justice Thomas, it concluded that Equilon’s setting of a unified price for gasoline that it sold to downstream purchasers under separate brand names did not amount to per se unlawful price fixing. Id. at 3-5. The Court reasoned that, because Texaco and Shell did not compete with one another in the relevant market but instead participated in that market jointly through Equilon, there was no horizontal agreement among competitors – a prerequisite of the type of per se claim the class asserted. Id. The Court emphasized that a legitimate, economically-integrated joint venture – one in which competitors pool their capital and share the risks of loss as well as the opportunities for profit – is regarded as a single firm for Sherman Act purposes. Id. at 4- 5. Because the Sherman Act does not regulate unilateral pricing decisions by a single firm, Equilon’s unified pricing of Texaco and Shell brands of gasoline did not offend the Act. Id.
In rejecting the per se theory advanced by the class, the Court clarified that the internal pricing decisions of a legitimate joint venture do not fall within the narrow category of activities that are so plainly anticompetitive as to be deemed automatically unlawful without regard to whether the activities have pro-competitive justifications. Id. at 5. The Court also declined to apply the quick look doctrine because the arrangement was not so plainly anticompetitive that a court need undertake only a cursory examination before imposing antitrust liability. Id. at 5 n.3. Instead, the Court explained that, to the extent the class claimed that the joint venture’s unified pricing arrangement was anticompetitive, it should have challenged the arrangement pursuant to the rule of reason. Id. at 5.
The Supreme Court additionally held that the ancillary restraints doctrine did not apply to Equilon’s unified pricing of Texaco and Shell brands of gasoline. Id. at 5-6. Under the ancillary restraints doctrine, a court must determine whether a restriction imposed by a legitimate joint venture on non-venture activities is a naked restraint on trade, and thus invalid, or one that is ancillary to the legitimate purposes of the venture, and thus valid. Id. at 6. The Supreme Court concluded that the ancillary restraints doctrine has no application to the core business activities of a legitimate, economically-integrated joint venture, and the pricing of the very goods produced and sold by the venture is among those core business activities. Id. Finally, the Court removed all doubt of the joint venture’s ability to lawfully set the prices of its products by adding, "even if we were to invoke the [ancillary restraints] doctrine in these cases, Equilon’s pricing policy is clearly ancillary to the sale of its own products." Id.
This second antitrust decision of the Roberts Court provides further indication that the Court remains committed to the fundamental principles that have guided antitrust analyses over the course of the last twenty-five years, including:
- "’Per se’ liability is reserved for only those agreements that are so ‘plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.’" Id. at 3.
- Price fixing agreements among competitors is per se illegal.
- The conduct of persons who pool their resources and share the risk of loss to form a joint venture for pro-competitive reasons is not subject to the per se rule, but is analyzed under the rule of reason and the ancillary restraints doctrine.
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