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 . STURGE S 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 consoli- dated 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 pro- competitive 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 ven- ture's pricing procedures are lawful . Background In 1998, Shell and Texaco formed two joint ventures for their down- stream 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 t donovan@king .co m . Ms . Shugars' practice concen- trates 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 . 79 5 "Reprinted from the January 2006 issue of the Journal Of Paymen! Systems Law "
� � JOURNAL OF PAYMENT SYSTEMS LA W 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 con- sumers 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 mar- ket . 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 with- in the competitive conditions of the specific affected market and weighs the agreement's anti-competitive consequences against any pro-competi- tive effects it may have . Only a small group of agreements among com- petitors, 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 plead - ed 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, find- ing that the joint venture produced sufficient savings and was sufficient- ly 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 79 6
JOINT VENTURES UNILATERAL PRICING DEICISIO N 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 prod- uct 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 dif- ferent chemical additives and noted that Texaco catered to a more blue- collar 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 ven- ture 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 mar- ket 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 ven- ture in which former competitors agreed to jointly research, produce, market, and sell a new product, or a joint venture in which competi- tors 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 797
JOURNAL OF PAYMENT SYSTEMS LA W 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 cate- gorized 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 prod- ucts," 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 recog- nized 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 ' 798
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