K&LNG
MARCH 2006
Alert
Antitrust & Competition
Supreme Court Holds That Pricing Decisions of a Bona Fide
Efficiency-Enhancing Joint Venture are not Per Se
Unlawful Price-Fixing
In Texaco, Inc. v. Dagher, the United States
Supreme Court ruled by a vote of 8-0 on February
28, 2006 that the pricing decisions made by a bona
fide joint venture which generates substantial
efficiencies regarding the pricing of its own products
cannot, as a matter of law, constitute per se unlawful
price-fixing. When two competitors agree on the
prices they will charge their customers for their
respective products, that agreement is a violation of
Section 1 of the Sherman Act (“Section 1”).1 Under
the long standing per se rule against price-fixing,
such an agreement among competitors is held
unlawful without the necessity for considering what
the market shares of the participating competitors are
or whether the participants have sufficient market
power to impose a significant price increase on the
market as a whole. However, when the two
competitors form a joint venture in order to increase
the efficiency of their operation, to make available to
customers a product which neither of the joint
venturers could produce by themselves or to
otherwise benefit their customers, the Court declared
that per se rule cannot be applied to the joint
venture’s pricing decisions, even where the venture
continues to sell its products under the distinct brand
names of the respective joint venturers.
In 1998, Texaco and Shell formed two joint ventures
for their downstream operations in the United States.
These ventures, called Equilon and Motiva, paired
the refining and marketing operations of the two oil
companies into two jointly owned enterprises,
Equilon in the West and Motiva in the East. The
case before the Supreme Court concerned only
Equilon. Although Equilon marketed both the
Texaco and Shell brand names, both brands of
gasoline were produced at the same refineries,
shipped through the same pipelines, marketed by the
same entity, and most importantly, sold to gas
stations at the same price. This combination reduced
the two companies’ costs by $800,000,000 a year.
Gas station owners filed a class action in California
against Shell and Texaco, alleging that the oil
companies fixed the prices for the two brands of
gasoline, thereby violating Section 1. Most
agreements that allegedly have a restraining effect
on competition are judged by a rule of reason, which
assesses the impact of the agreement within the
competitive conditions of the specific affected
market and weighs the agreement’s anticompetitive
consequences against any pro-competitive effects it
may have. Only a small group of agreements among
competitors (like price-fixing, bid-rigging and
customer allocations) are considered so uniformly to
have a net adverse effect on consumers that they are
considered always, or per se, unlawful. Here, the
plaintiffs pleaded their case only under the per se
rule, rather than under a rule of reason analysis,
foregoing any attempt to show that specific
conditions in the gasoline market caused the joint
pricing of the Shell and Texaco brands to injure
consumers.
The U.S. District Court for the Central District of
California granted summary judgment in favor of
Texaco and Shell, finding that the joint venture
1 Section 1, 15 U.S.C. § 1, prohibits conspiracies, contracts and combinations in restraint of trade.
Kirkpatrick & Lockhart Nicholson Graham LLP
produced sufficient savings and was sufficiently
integrated to constitute an indisputably legitimate
joint venture. Reasoning that a joint venture must
decide the price at which it will sell its products, the
District Court concluded that application of the
per se rule against price-fixing in such
circumstances would act as a per se rule against
joint ventures between competitors. Therefore, the
court held, the defendants’ conduct should be
evaluated under the rule of reason, not the per se
rule.
In a 2-1 decision, the U.S. Court of Appeals for the
Ninth Circuit reversed, holding that the plaintiffs
had presented enough evidence to avoid summary
judgment on their claim that the joint venture’s
pricing was per se illegal. Dagher v. Saudi Refining,
Inc., 369 F.3d 1108 (9th Cir. 2004). The majority
“recognize[d] that joint ventures may price their
products” but found “[t]he question is whether two
former (and potentially future) competitors may
create a joint venture in which they unify the
pricing, and thereby fix the prices, of two of their
distinct product brands.” The maintenance of the
separate Shell and Texaco brands after inception of
the joint venture and the sale of those different
brands at identical prices were critical for the Court
of Appeals’ majority. In addition, the majority
seems to have been troubled by the circumstances (i)
that the former competitors continue to own the
brand names and only license them to the joint
venture and (ii) that the joint venture agreement
permits either owner to terminate the joint venture a
few years down the road and presumably return
Shell and Texaco to the status of competitors.
The Supreme Court reversed, reasoning that the
per se rule was not applicable to this case because
Texas and Shell, after the formation of the joint
venture, no longer competed with one another in the
gasoline market. Rather, they participated in that
market only jointly, through a joint venture which
2
operated substantially more efficiently than the
companies’ separate operations had. “In other
words,” the Court explained, “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.” “We see no reason,”
the Court continued, “to treat Equilon differently
just because it chose to sell gasoline under two
district brands at a single price.”
The plaintiff admittedly did not even attempt to
make a case under the rule of reason by showing that
the defendants had sufficient market share to affect
adversely the market price of gasoline. Therefore,
the Court declined to rule on the defendants’
alternative argument that Section 1 was inapplicable
even under the rule of reason. Section 1 requires an
agreement between two persons, and defendants
argued that the joint venture which made the
challenged pricing decisions was a single entity
which was, therefore, legally incapable of making an
agreement with itself.
The Supreme Court’s decision confirms the
principle, which was widely accepted before the
Court of Appeals’ decision in Dagher, that the procompetitive effects of agreements between
competitors which benefit consumers by
significantly increasing efficiency or by making new
products available to customers must be
distinguished from hard-core violations like pricefixing and market allocations, to which the rule of
per se illegality is applied. Agreements between
competitors offering benefits to consumers through
integration of the competitors’ operations must be
judged only after weighing the specific procompetitive against the anticompetitive effects.
Thomas A. Donovan
tdonovan@klng.com
412.355.6466
Kirkpatrick & Lockhart Nicholson Graham
LLP
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MARCH 2006
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