Can a Joint Venture's Unilateral Pricing
Decisions for Two of Its Own Products B e
Per Se Unlawful Under Section 1 of the
Sherman. Act?
THOMAS A . DONOVAN, JENNIFER F . SHUGARS, AND GREGORY T.
STURGES
The Supreme Court soon will determine the extent to which a joint ven ture's customers will be permitted to ask juries whether the joint ven- ture's pricing procedures are lawful .
This term, the U .S. Supreme Court will decide a significant case
regarding the antitrust liability of otherwise lawful joint ventures
formed by firms that were previously competitors . In Shell Oil Co.
v Dagher and Texaco, Inc . v Dagher, which will be heard in a consolidated appeal, the court will consider whether certain joint-venture pricing
decisions are per se illegal under Section 1 of the Sherman Antitrust Act'
or whether they should be subject to a rule of reason test in which procompetitive benefits are weighted against anti-competitive effects .
Dagher is important because it will determine the extent to which a joint
venture's customers will be permitted to ask juries whether the joint venture's pricing procedures are lawful .
Background
In 1998, Shell and Texaco formed two joint ventures for their downstream operations in the United States . These ventures, called Equilo n
Thomas A . Donovan is a partner in the Pittsburgh office of Kirkpatrick & Lockhart
Nicholson Graham LLP. Jennifer F. Shugars and Gregory T. Sturges are associates in
the same office . Mr. Donovan practices primarily in the areas of antitrust litigation and
counseling ; he can be reached at tdonovan@king .co m . Ms . Shugars' practice concentrates in litigation, with an emphasis on antitrust and insurance coverage cases ; she
can be reached at j shugars@king .co m . Mr. Sturges is a recent graduate of George
Washington University Law School and is focusing his practice on litigation ; he can be
reached at g sturges@king .co m .
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and Motiva, paired the refining and marketing operations of the two oil
giants in the United States, Equilon in the west and Motiva in the east .
The case before the Supreme Court concerns only Equilon . Although consumers still saw both the Shell and Texaco brand names at the pump, the
gasoline they were buying was 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 on the wholesale market. This combination saved the two companies $800 million a year.
Gas station owners filed a class action in California against Shell and
Texaco alleging that they fixed the nationwide prices for both brands of
gasoline, thereby violating Section 1 of the Sherman Antitrust Act. Most
agreements that allegedly have a restraining effect on competition are
judged by a rule of reason that assesses the impact of the agreement within the competitive conditions of the specific affected market and weighs
the agreement's anti-competitive consequences against any pro-competitive effects it may have . Only a small group of agreements among competitors, such as 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 Shell and Texaco, finding that the joint venture 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 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 .
CIRCUIT COURT RULIN G
In a 2-1 decision, the U .S. Court of Appeals for the Ninth Circuit
reversed, holding that the plaintiffs had presented enough evidence t o
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avoid summary judgment on their claim that the joint venture's pricing
was per se illegal .' The majority "recognize[d] that joint ventures may
price their products" but foimd "[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 .' The Ninth Circuit found that
the Shell and Texaco brands represented different product lines with different chemical additives and noted that Texaco catered to a more bluecollar and rural market, whereas Shell marketed to a more white-collar
and urban market . In addition, the court 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 . Under the Ninth Circuit's ruling, a jury would
be permitted to decide (i) whether the purpose of the unified pricing
scheme was to restrict competition, and (ii) whether the unified pricing is
reasonably necessary to further the legitimate aims of the joint venture.
Although the joint venture in the downstream operations created great
efficiencies, the Ninth Circuit noted that the joint venture had presented a
convenient excuse for the two brands to fix prices in the wholesale market at a time when oil suppliers were facing very low prices at the pump .
If Shell and Texaco had merely sold their downstream operations to a
third party and stepped out of the market, the Ninth Circuit may have
ruled differently :
Our analysis would have been different if we confronted a joint venture in which former competitors agreed to jointly research, produce,
market, and sell a new product, or a joint venture in which competitors agreed to merge their current product lines into one collective
brand. Nor would we necessarily reach the same result if defendants
had independently decided to charge the same price for Texaco and
Shell gasoline after conducting separate price analyses for each
brand, or had they come forward with persuasive evidence that th e
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setting of a single, fixed price was important to accomplishing the
legitimate aims of the joint venture '
In December 2004, Shell and Texaco petitioned the Supreme Court for a
writ of certiorari . The Supreme Court thereafter requested the opinion of
the U.S . solicitor general on the matter . The solicitor general urged the
court to take the case and reverse the Ninth Circuit. The Supreme Court
granted certiorari on June 27, 2005 . Shell and Texaco filed their briefs on
the merits on Sept. 12, 2005 .
THE ARGUMEN T
Shell and Texaco's argument is twofold : (i) Section 1 is not applicable
here because the joint venture represented a merger of all of Shell and
Texaco's downstream operations, and (ii) even if Section 1 does apply, the
nine of reason, not the per se rule, is applicable because admittedly bona
fide joint ventures producing substantial efficiencies have not been categorized by the Supreme Court as clearly anti-competitive and therefore
per se illegal. First, Shell and Texaco argue that the joint venture is one
entity and that a single entity cannot conspire with itself to fix prices .
Because the joint venture owns "all of the production, transportation,
research, storage, sales and distribution facilities for engaging in the
gasoline business," the joint venture is merely "pric[ing] its own products," an essential and perfectly legal business activity .
Shell and Texaco also argue that the application of the per se rule to
the pricing of a legitimate joint venture's products is erroneous . Relying
on cases like Broadcast Music, Inc. v Columbia Broadcasting System,
Inc.' and National Collegiate Athletic Association v. Board of Regents of
University of Oklahoma,'they argue that the Supreme Court has recognized the economic value of certain joint ventures, thus entitling them to
a full rule of reason analysis . Notably, the joint venture had been
approved by the Federal Trade Commission and several state attorneys
general, subject to conditions not shown to have been violated . The Ninth
Circuit's dissenting opinion in Dagher accepted these arguments and
found unacceptable the premise that, under the majority's ruling, a joint
venture that indisputably now owned and produced both of the owners '
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JOINT VENTURES UNILATERAL PRICING DEICISIO N
formerly competing brands :
may well be subject not merely to commination, but to outright denun ciation by the courts as per se violators of the antitrust laws .
It means that this entity must ask a separate judicial entity - for
example, Shell, which does not itself own any of the facilities or products - to decide what price should be charged by Equilon .. . . We
now have an exotic beast, no less strange than a manticore, roaming
the business world . This beast would otherwise be a true business, but
when it acts like a true business - sets prices for its own goods - it
subjects its otherwise insulated members to the severe sting of
antitrust liability. While it has the head of a business man and the
body of an entrepreneurial lion, it has the tail of a liability scorpion .'
Although the plaintiff gas station owners have not filed their response
briefs, as of this writing, it is likely that they will argue that the pricing
decision was not a necessary component of the joint venture and that its
effects were to reduce competition between Shell and Texaco stations,
thereby raising prices to consumers . One would expect that they will
closely follow the reasoning of the Ninth Circuit majority opinion .
CONCLUSION
Because this is the first time in many years that the Supreme Court has
taken a joint-venture case, the decision should provide antitrust practitioners and the business community with clarification regarding the appli cation of Section 1 of the Sherman Antitrust Act to joint ventures and any
limitations on the activities of joint ventures . In particular, one will see
whether the Ninth Circuit's apparent concerns about the former competitors' ability to terminate the joint venture in the future and the venture's
continuation of two rival brands of product under the former competitors'
names are sufficient circumstances to incur automatic, per se condemnation.
NOTES
'
15 U .S .C . § 1 .
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Dagher a Saudi Refining, Inc., 369 F .3d 1108 (9th Cir. 2004) .
The Ninth Circuit placed particular reliance on an admittedly dated Supreme
Court decision, Citizen Publishing Co. v United ,States, 394 U .S . 131 (1969) . In
that case, the only two newspapers in Tucson, Ariz ., formed a joint venture
whereby they merged all operations, except that each newspaper retained its sep arate news and editorial departments . Essentially, the content of the newspapers
would appear indistinguishable from prior products, but the newspapers were
produced, distributed, and sold by the same company . Most importantly, the
price of advertising was set jointly, the profits were pooled between the two com petitors, and all those associated with the two companies agreed not to create
competing newspaper entities in the same geographic market . The Supreme
Court found that this arrangement violated of Section 1 of the Sherman Antitrust
Act per se .
Dagher, 369 F.3d at 1124 .
5 441 U .S . 1 (1979) .
6 468 U .S . 85 (1984) .
Dagher, 369 F.3d at 1127 .
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