The antitrust treatment of joint ventures has long been a subject of confusion in the case law – so confused that the Ninth Circuit has recently twice condemned the joint pricing of a joint venture’s product as a per se violation of the antitrust laws. The core confusion was whether (and when) a joint venture – and the terms of the joint venture – should be treated (1) as a combination of businesses analogous to a merger, so that the key question would be how much competition would the venture face from other competitors; or (2) as an agreement between competitors, so that, if an agreement on price, the per se rule might apply – at least if the agreement was so egregious as to warrant being called a "naked restraint."
The U.S. Supreme Court has now clarified that the per se rule has no applicability to lawful joint ventures, the activities of which are to be judged under the rule of reason. Texaco Inc. v. Dagher, No. 04-805 (U.S. Feb. 28, 2006). In Dagher, the Supreme Court unanimously reversed the decision of a divided panel of the U.S. Court of Appeals for the Ninth Circuit, 369 F.2d 1108 (9th Cir. 2004), and affirmed the District Court’s grant of summary judgment. Plaintiff class had challenged as per se illegal the joint pricing by Texaco and Shell Oil Co. of gasoline sold by their joint venture, Equilon.
Under prior Supreme Court decisions, it was unclear when, if ever, an agreement between two competitors engaged in a joint venture would be subject to per se treatment. Older Supreme Court precedents had suggested that some activities by participants in a legitimate joint venture might nonetheless constitute per se violations. The Court has now made plain the appropriate analysis of joint ventures of competitors under the antitrust laws:
- Is the venture itself a sham? A joint venture among competitors could be deemed a sham if it lacks sufficient integration of assets, business operations or risk.
- If the joint venture is not a sham, the combination of competing businesses is analyzed under the same analysis applied to mergers: Define markets, measure shares and concentration, and consider entry, competitive effects and efficiencies.
- If the joint venture passes muster as a merger, the specific agreements between the venturers – whether regarding the venture’s own activities or the ancillary activities of the venturers – cannot be subject to per se condemnation.
This analysis, set forth in a concise six-page opinion, is simpler and clearer than the analysis articulated by the federal antitrust agencies in their Competitor Collaboration Guidelines – which reserved the possibility that the per se rule might be applied to agreements not "reasonably necessary" to achieving the purposes of a joint venture. That "reasonably necessary" standard, which the Court of Appeals had relied on in its earlier decision in Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133 (9th Cir. 2003), in Dagher led the court to question whether it was "reasonably necessary" for a joint venture’s partners to agree on the pricing of the joint venture’s products.
The Joint Ventures
The case arose out of the 1998 joint ventures in which Shell and Texaco combined their petroleum refining, distribution and marketing businesses in the western United States into a joint venture called Equilon. (Shell also combined its refining and marketing operations in the eastern United States with Star Enterprises, itself a joint venture between Texaco and Saudi Aramco, into Motiva.) The joint ventures would continue to sell gasoline under the "Shell" and "Texaco" trade names and did not specifically propose to develop any new products, but the venturers did maintain that the joint ventures would allow them to obtain substantial efficiencies.
The formation of Equilon and Motiva was the subject of a one-year investigation by the Federal Trade Commission and several state Attorneys General, which treated the ventures essentially as mergers and, in December 1998, allowed the ventures to proceed subject to a variety of structural remedies.1
Thereafter plaintiffs, Shell and Texaco gasoline dealers, challenged the Equilon joint venture as a per se violation of Section 1 of the Sherman Act, or alternatively as a violation of Section 1 under the "quick look" rule of reason. The gist of the alleged violation was that, in forming the joint ventures, Shell and Texaco agreed with each other that "Shell"-branded gasoline and "Texaco"-branded gasoline would be sold at the same price. Plaintiff did not attempt to prove that the venture itself would substantially lessen competition under Clayton Act § 7, and foreswore any effort to prove a market or show that Equilon had undue market power in any market. The district court rejected plaintiff’s claim and granted summary judgment to defendants.
The Ninth Circuit’s Majority Decision
A divided panel of the Ninth Circuit reversed. The majority framed the question thus: "The question we confront in this case . . . [is whether there is] an exception to the per se prohibition on price-fixing where two entities have established a joint venture that unifies their production and marketing functions, yet continue to sell their formerly competitive products as distinct brands." 369 F.3d at 1116. That of course routinely happens in mergers of consumer goods, where one competitor acquires the product line of the other and maintains it in the market; the only distinction might be that in some mergers (as compared to this joint venture) the acquired firm ceases to exist, whereas here Shell and Texaco continued to exist as separate firms – though not as competitors in the refining or marketing of petroleum products in the United States.
The majority recognized that "when two competing companies agree to merge and to combine their product lines, . . . they generally agree to adopt a uniform pricing scheme," 369 F.3d at 1117-18, and such an agreement is not illegal per se. Instead, according to the majority, "the issue with respect to legitimate joint ventures is whether the price fixing is ‘naked’ (in which case the restraint is illegal) or ‘ancillary’ (in which case it is not)." Id. at 1118.2 According to the majority, we must then decide whether the defendants’ conduct – setting one, unified price for both the Texaco and Shell brands of gasoline instead of setting each brand’s price independently on the basis of normal market factors – is reasonably necessary to further the legitimate aims of the joint venture." 369 F.3d at 1121.
The court of appeals recognized that it would be normal for a joint venture to consolidate pricing decisions. "[W]e find it significant that the defendants here did not simply consolidate the pricing decisions within the joint ventures – they unified the pricing of the two brands from the time the alliance was formed by designating one individual in each joint venture to set a single price for both brands." 369 F.3d at 1122 (emphasis in original). Moreover, "defendants have thus far failed to offer any explanation of how their unified pricing of the distinct Texaco and Shell brands of gasoline served to further the ventures’ legitimate efforts to produce better products or capitalize on efficiencies." Id.
The Ninth Circuit’s majority position thus adopted an extreme reading of the proposition that the agreement between competitors be "reasonably related" to the joint venture. It also collapsed the implicit distinction between the joint venture itself and its "ancillary" restraints, the agreements between the competitors regarding the conduct of their own business activities.3
While an extreme case, the Ninth Circuit’s decision reflects some of the limitations of prior Supreme Court cases. In NCAA, the Court had condemned as a "naked restraint," albeit under the rule of reason, the NCAA’s restrictions on college football broadcasts. The Court there suggested that, absent a demonstrated need for cooperation to produce the product (college football games), the per se rule would have been applied. Board of Regents v. National Collegiate Athletic Ass’n, 468 U.S. 85 (1984). In BMI, the Court had upheld (as immune from per se challenge) BMI’s and ASCAP’s blanket licenses – calling those products "new products" that would not have existed but for the ventures, and relying on both the fact that the ventures created new products and that (however impractically) consumers could negotiate individually with artists for rights. Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979). Both of those facts were absent in Dagher.
The Supreme Court’s Decision
The Supreme Court made short work of the Ninth Circuit’s analysis. Justice Thomas’s unanimous opinion (Justice Alito not participating) begins by noting that the rule of reason "presumptively applies," and under the rule of reason "plaintiffs must demonstrate that a particular contract or combination is in fact unreasonable and anticompetitive before it will be found unlawful." Slip op. at 3. The Court also "presume[d] for purposes of these cases that Equilon is a lawful joint venture. Its formation has been approved by federal and state regulators, and there is no contention here that it is a sham. . . . Had respondents challenged Equilon itself, they would have been required to show that its creation was anticompetitive under the rule of reason." Id. at 4 n.1 (emphasis added). Thus, in a footnote, the Court confirms the essential first step of the analysis – whether the venture itself is legitimate or a sham is judged under the rule of reason, in light of market definition, share, entry and other familiar factors (i.e., the analysis developed under Clayton Act § 7 and merger cases).
The "unified pricing" agreement that so troubled the Ninth Circuit "did not present" a horizontal price fixing agreement, "because Texaco and Shell Oil did not compete with one another in the relevant market . . . but instead participated in that market jointly through their investments in Equilon. In other words, 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 with respect to their competing products." Id. at 4.
Therefore, the per se rule against price fixing does not apply. Texaco had raised a further issue: Whether Section 1 of the Sherman Act applies at all. That section only applies to agreements, and under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), a single entity cannot violate Section 1 itself, since that section only applies to agreements between otherwise independent firms. Since the Dagher plaintiffs had not made a rule of reason claim, the Court was arguably not called on to decide whether defendants should prevail on rule-ofreason or Copperweld grounds, and did not clearly decide that question. While the opinion makes clear that the rule of reason would be the most stringent standard applied, it lends a sympathetic ear to the Copperweld argument: "When ‘persons who would otherwise be competitors pool their capital and share the risk of loss as well as the opportunities for profit . . . such joint ventures [are] regarded as a single firm competing with other sellers in the market.’ Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 356 (1982)." Slip op. at 4.4
The Court also rejected the proposition that the joint venture’s alleged pricing agreement should be allowed to go to the jury under a "quick look" rule of reason analysis, without the need to demonstrate an effect on competition. "To be sure, we have applied the quick look doctrine to business activities that are so plainly anticompetitive that courts need only undertake a cursory examination before imposing antitrust liability. But for the same reasons that per se liability is unwarranted here, we conclude that petitioners cannot invoke the quick look doctrine." Slip op. n. 2 (citation omitted).
The Supreme Court further held that, since the pricing of the venture’s gasoline products "involves the core activity of the joint venture," the ancillary restraints doctrine does not apply. Id. at 6. "That doctrine governs the validity of restrictions imposed by a legitimate business collaboration, such as a business association or joint venture, on nonventure activities." Id. at 5. The Court did not provide guidance on what distinguishes "core activity" from "nonventure activities," but did say that if an activity is a nonventure activity "courts must determine whether the nonventure restriction is a naked restraint on trade, and thus invalid, or one that is ancillary to the legitimate and competitive purposes of the business association, and thus valid." Id. at 6. Perhaps recognizing that it has both added a new distinction (core/nonventure) and invoked without clarifying an old one (naked/ancillary), the Court offered an alternative: "And 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.
Thus, the holding, as most narrowly construed: The per se rule does not apply to core functions of a lawful joint venture. Read more broadly, the case strongly suggests that the operation of a joint venture that passes merger-type scrutiny, and the reasonably-related arrangements by those competitors, will at most be analyzed under the rule of reason.5
The Next Case
Dagher itself was an easy case, and perhaps easy cases make good law. What remains are the harder cases: What is core vs. nonventure? What is naked vs. ancillary? Prior joint ventures presented more difficult fact patterns, and might not reach the same result today:
- The NCAA organizes collegiate athletics, specifying the length of the football field and much more – including the marketing of television rights to college football games. Is the marketing of college football games a core or nonventure activity, and if nonventure, is it a naked restraint or an ancillary restriction? The Supreme Court held it to be a naked restraint and condemned it under the rule of reason. NCAA.
- On almost identical facts – except that the players were pros rather than student athletes, and played basketball rather than football – the Seventh Circuit upheld broadcast restrictions, on the ground that the NBA was a single entity. Chicago Prof’l Sports LP v. National Basketball Ass’n, 95 F.3d 593 (7th Cir. 1996).
- Warner Music and Polygram form a joint venture to produce a recording of a "Three Tenors" concert, and agree that they will not discount their respective earlier "Three Tenors" recordings during a 10-week introductory period. The FTC condemns this agreement, under a quick look analysis, as unnecessary to achieve the purposes of the CD-producing venture. The FTC’s decision was upheld by the D.C. Circuit. Polygram Holding, Inc. v. FTC, 416 F.3d 29 (D.C. Cir. 2005).
- Eleven multiple listing services in San Diego County combine to provide a comprehensive MLS, which they will offer to real estate broker subscribers. The participants will provide "support services" to the venture, which will set the price of both the venture product and the support services – and, by agreement among the venturers, the price for support services will be uniform. The Ninth Circuit was comfortable with the joint pricing of the jointly produced product, but condemned as per se unlawful the joint pricing of the individually produced products even though they were sold to, and then resold by, the joint venture. Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1144-46 (9th Cir. 2003).
The Freeman case, at least, appears inconsistent with the Supreme Court’s decision in Dagher. In both cases the venture itself was deemed legitimate, and the products were sold by the venture. Even if the pricing of support services was not "core" but "nonventure," why was it "naked" rather than "ancillary"? If ancillary, it would be subject to the rule of reason.
Dagher makes clear that the rule of reason is the presumptive analysis for joint venture restraints, and it will be difficult for plaintiffs to avoid a full rule of reason. By mentioning "naked restraints" without explaining what that term means, the Court has left the door ajar for plaintiffs to argue that there is some scope of per se liability for joint venture participants. Most courts, however, should be reluctant to go through that door.
Footnotes
1. The FTC concluded that the formation of the ventures would substantially lessen competition in the refining and marketing of light petroleum products in the Pacific Northwest; the marketing of light petroleum products in Hawaii and in San Diego; the pipeline transportation of light petroleum products in the southeastern United States; and the pipeline transportation of heavy crude oil in California. These concerns were principally resolved through divestitures of overlapping assets. Shell Oil Co., 125 F.T.C. 769 (1998). The author supervised the FTC’s investigation of these joint ventures.
2. The majority did not clearly articulate what makes the alleged agreement on prices "naked" rather than "ancillary" to the joint venture, although it provided an example: "For example, if in reliance on the existence of a valid joint venture between Coca Cola and Pepsi designed to research new types of soda flavors, the two companies imposed a price floor on all soda sold nationwide, the price fixing would constitute an illegal, ‘naked restraint on trade.’" 369 F.3d at 1118.
3. The Ninth Circuit also relied on Citizens Pub. Co. v. U.S., 394 U.S. 131 (1969), which condemned a joint venture between the only two newspapers in town to combine their printing and advertising businesses but leave their editorial departments independent. That decision (essentially overruled by Congress, which passed the Newspaper Preservation Act in response) had language suggesting that the combination of advertising and subscription departments was illegal per se, i.e., would be illegal even if the combination of the production facilities was lawful. Although the Dagher plaintiffs relied heavily on Citizens Publishing in briefing and oral argument, the Court’s opinion does not cite it – even to distinguish it.
4. Arguably the Copperweld argument would still need to address the fact that plaintiffs were challenging an agreement between two firms, Shell and Texaco, rather than the operation of a single firm. The Supreme Court has held that mergers can be challenged under Sherman Act § 1 as agreements between competitors – and generally analyzed in the same manner as mergers under Clayton Act § 7. U.S. v. First Nat’l Bank, 376 U.S. 665 (1964).
5. These propositions should generally apply whether the joint venture is between two or more firms. The Motiva venture, combining refining and marketing in the eastern United States, involved three firms (two of which had already combined in a joint venture). Of course, if the joint venture involved all or substantially all firms in the market, the effect of combining most of the market into single joint venture would have to be examined – under the rule of reason.
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