Antitrust - Texaco Inc. v. Dagher, Nos. 04-805, 04-814, 547 U.S. -- (Feb. 28, 2006)
Introduction
On February 28, 2006, the Supreme Court reversed the judgment of the United States Court of Appeals for the Ninth Circuit and held that it was not per se illegal under Section 1 of the Sherman Act, 15 U.S.C. §1, for an
otherwise lawful joint venture to set the prices at which it sells its products. Texaco Inc. v. Dagher, Nos. 04-805, 04-814, 547 U.S. -- (Feb. 28, 2006). In reaching its conclusion, the Court also held that the ancillary
restraints doctrine, relied on by the Ninth Circuit in finding a per se violation, did not apply to cases in which the challenged conduct was the "core activity" of the joint venture, as opposed to a joint venture’s
restrictions imposed on non-venture conduct.
Alleged Antitrust Behavior
The plaintiffs in Dagher are a class of Texaco Inc. ("Texaco") and Shell Oil Co. ("Shell") service station owners. They sued Texaco and Shell alleging that Equilon Enterprises ("Equilon"), a joint
venture the two companies formed in 1998, fixed prices for gasoline that Equilon refined and sold in the western United States under both the Texaco and the Shell brand names. In forming Equilon, Texaco and Shell combined their operations
in the western United States. They agreed to consolidate their resources and to share in Equilon’s risks and profits. The formation of the joint venture was approved by consent decree by the Federal Trade Commission and by
the California, Hawaii, Oregon and Washington attorneys general.
The respondents filed suit in district court and alleged that, through Equilon, former competitors Texaco and Shell engaged in per se illegal price fixing because the joint venture sold Texaco and Shell brand gasoline for
the same price. The district court ruled that the rule of reason applied, not a per se rule or the "quick look" doctrine. Because the respondents had failed to raise a rule of reason claim, the district court dismissed
the suit. On appeal, the Ninth Circuit reversed. It found that Texaco and Shell were improperly attempting to obtain an "‘exception to the per se prohibition on price fixing.’" Id. slip op.
at 3 (citing Dagher v. Saudi Ref., Inc., 369 F.3d 1108, 1116 (9th Cir. 2004)). The Supreme Court then agreed to review the decision on petition from Texaco and Shell.
The Supreme Court Decision
The Supreme Court reversed in an 8-0 decision written by Justice Thomas (Justice Alito did not participate). Judge Thomas began the decision with a general summary of the per se rule. The Court reaffirmed that horizontal price-fixing
agreements are per se illegal. However, the Court found that Texaco and Shell’s joint venture agreement was not a horizontal price-fixing agreement because Texaco and Shell "did not compete with one another in
the relevant market … but instead participated in that market jointly through their investments in Equilon." Id. slip op. at 4. According to the Court, the conduct challenged as price fixing was merely price
setting by a single entity, not a pricing agreement between competitors as to their competing products.
The Court then reasoned that, assuming the joint venture were otherwise lawful, it is not a per se violation to have the joint venture set prices on products it sells. The Court noted that, during argument, the gas station
orders had conceded that there would be no per se liability as Equilon had sold its gasoline under a single brand and the Court concluded that "[a]s a single entity, a joint venture, like any other firm, must have the
discretion to determine the prices of the products that it sells, including the discretion to sell a product under two different brands at a single, unified price." Id. slip op. at 5.
Although Texaco and Shell succeeded on reversing the Ninth Circuit decision, they did not obtain a favorable ruling on all of their arguments. In briefing, they had maintained that Section 1 of the Sherman Act did not apply to joint
ventures. The Court, however, refused to rule on the point, and implied that it would reject it. Instead, the Court noted that: "If Equilon’s price unification policy is anticompetitive, then respondents should have challenged
it pursuant to the rule of reason." Id.
Conclusion
Although obviously, every Supreme Court antitrust decision is important to the development of the law, the unanimous Dagher decision falls into the category of nibbling around the edges. Among lawyers who watch the Court,
very few expected the Supreme Court to uphold the Ninth Circuit’s decision that a joint venture that is otherwise lawful can be prevented from pricing its products. As the Court noted, it is difficult to see a meaningful distinction
from the standpoint of competition between having a joint venture take Shell and Texaco gasoline, and sell them both as Shellaco (Texell?) and having the joint venture maintain separate names that obviously benefit from expensive
branding.
In fact, the case may prove more important for what it did not decide on the way to reaching this holding than for what it did decide. In recent years there has been substantial pressure to limit the category of cases that
would be viewed as per se violations, and to create a dizzying array of permutations between "rule of reason" and per se (such as the quick look doctrine that the Court discusses in a footnote). At the
extremes, at least, the distinction between the two really does matter. If a pure "per se" rule is a declaration of defendants’ liability, the "rule of reason" has been described (perhaps uncharitably,
but not entirely inaccurately) as an approach that requires the parties to engage in a nearly unlimited about of time and expense before deciding that the plaintiffs lose.
In the process of ruling for the defendants here (Texaco and Shell), the Supreme Court reaffirmed that there still is a per se rule and that it applies to horizontal price fixing agreements (even if not to this arrangement). It also rejected a "joint venture" defense to the antitrust laws, even as it applied a rule of reason to this particular pricing. This is a case that may end up cited as much by plaintiffs as defendants.