United States: Are Your Lawful Joint Venture’s Pricing Decisions Putting You at Risk of a "Per Se" Price-Fixing Claim?

On January 10, 2006, the Supreme Court heard argument in two consolidated cases — Texaco v. Dagher and Shell Oil v. Dagher — to decide the following question: whether an agreement between owners of a lawful joint venture as to the price that the joint venture sells products in markets in which the owners do not compete is subject to per se condemnation under Section 1 of the Sherman Act. In the decision below, the United States Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the joint ventures owners — Texaco and Shell — holding that the joint ventures owners’ decision that the ventures should sell Texaco and Shell brands of gasoline at the same price could constitute per se illegal price fixing under Section 1 of the Sherman Act.¹ In reaching this result, the Ninth Circuit viewed the joint ventures owners’ pricing decision as subject to the "ancillary restraints doctrine" requiring a showing that "setting one, unified price for both the Texaco and Shell brands of gasoline" was "reasonably necessary to further the legitimate aims of the joint venture."² In the words of the United States urging that the Supreme Court grant the petitions for a writ of certiorari, the Ninth Circuit’s decision "upsets the previously settled understanding of the scope of per se liability and the lawful operation of joint ventures."³

In 1998, Texaco Inc. ("Texaco") and Shell Oil Co. ("Shell"), combined their downstream refining and marketing of gasoline and formed two separate joint ventures — Equilon Enterprises ("Equilon") and Motiva Enterprises ("Motiva"); as a result of the formation of these ventures, Texaco and Shell ceased competing with respect to gasoline refining and marketing.⁴ The Federal Trade Commission and several state attorneys general reviewed and approved the formation of each joint venture, subject to certain modifications.⁵ At some point in time, however, "‘a decision was made’" that each joint venture would sell Texaco branded and Shell branded gasoline at the "‘same price in the same market areas.’"⁶ Even though the pricing of each brand of gasoline was "consolidated" such that a single individual at each joint venture set a "coordinated price for the two brands," Texaco and Shell "maintained each brand as a distinct product—each brand [having] its own unique chemical composition (the gasoline is differentiated by separate packages of ‘additives’), trademark, [and] marketing strategy."⁷

In 1999, the plaintiffs filed suit on behalf of themselves and approximately 23,000 Texaco and Shell service station owners, alleging that Texaco and Shell engaged in a price-fixing scheme to raise and fix gas prices through the joint ventures.⁸ Significantly, the plaintiffs did not challenge the legitimacy of the joint ventures or the right of each joint venture to produce and sell gasoline. Instead, the plaintiffs alleged that it was per se unlawful pricefixing for the joint ventures to charge the same price for Texaco and Shell branded gasoline. The district court rejected the plaintiffs’ pricing-fixing claim, granting summary judgment to Texaco and Shell, concluding that, because every legitimate joint venture "‘must, at some point, set prices for the products they sell’ (citation omitted), a theory which made it illegal for a joint venture to fix prices of its various brands would ‘act as a per se rule against joint In the words of the United States urging that the Supreme Court grant the petitions for a writ of certiorari, the Ninth Circuit’s decision "upsets the previously settled understanding of the scope of per se liability and the lawful operation of joint ventures." ventures between companies that produce competing products.’" ⁹

In a divided opinion, the Ninth Circuit reversed the district court’s grant of summary judgment to Texaco and Shell rejecting the argument "that an application of the per se rule here would mean that joint ventures could not set prices for their products."¹⁰ In doing so, the Ninth Circuit assumed that Texaco and Shell reached an agreement to unify the prices of their brands when forming the joint ventures.¹¹ The Ninth Circuit viewed that supposed pricing decision as one subject to the "ancillary restraints doctrine" requiring a showing that "setting one, unified price for both the Texaco and Shell brands of gasoline" was "reasonably necessary to further the legitimate aims of the joint venture."¹² It has been held that, "[t]o be ancillary, and hence exempt from the per se rule, an agreement eliminating competition must be subordinate and collateral to a separate legitimate transaction. The ancillary restraint is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose."¹³ With respect to the formation and operation of efficiency-enhancing joint ventures, courts applying the doctrine have required joint venture participants to show the reasonable necessity of restrictions on their own conduct outside of the joint venture. ¹⁴

In reaching the decision to apply the ancillary restraints doctrine, the Ninth Circuit ignored several well-established principles of modern joint venture analysis: (1) that a fully integrated joint venture like the Texaco/Shell joint ventures that eliminate competition between the owners is, in substance, a merger,¹⁵ and (2) that "[o]nce a venture is judged to have been lawful at its inception and currently, decisions that do not affect the behavior of the participants in their nonventure business should generally be regarded as those of a single entity rather than the parents’ daily conspiracy."¹⁶ The Ninth Circuit’s requirement that Texaco and Shell produce evidence "demonstrating that their [supposed] pricing fixing scheme was ancillary rather than naked" ignores both of these principles.¹⁷

As acknowledged by the Ninth Circuit, the Texaco/Shell joint ventures "ended competition between Shell and Texaco throughout the nation in the areas of downstream refining and marketing of gasoline."¹⁸ When it reviewed the creation of the joint ventures, the Federal Trade Commission applied standard merger analysis.¹⁹ In its decision, the Ninth Circuit acknowledged this fact, noting that the Federal Trade Commission "approved the formation of the joint ventures."²⁰ The Ninth Circuit’s conclusion, however, is completed at odds with these facts. By applying the ancillary restraints doctrine, the Ninth Circuit focused on an agreement that was fundamental to the very operation of a joint venture — the pricing of its own products — not an agreement that was "subordinate and collateral to a separate legitimate transaction" between two companies that would continue to compete.²¹

The Ninth Circuit’s decision threatens to significantly broaden the scope of per se analysis and, the threat of treble damages, while potentially hindering the formation of efficiency-enhancing joint ventures. The Supreme Court’s decision to review the Ninth Circuit’s decision is an oppor- tunity for the Court to provide needed clarification and certainty in this area of the law. By Jonathan Lewis (Chicago)

Endnotes

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