Texaco Inc. v. Dagher (04-805); Shell Oil Co. v. Dagher (04-814)
Appealed from: United States Court of Appeals for the Ninth Circuit (June 1, 2004)
Oral argument: January 10, 2006
ANTI-TRUST, PRICE FIXING, SHERMAN ACT, 15 U.S.C. § 1, per se violation
Petitioners Texaco, Inc. and Shell Oil Company formed two joint ventures, Motiva and Equilon, to combine the refining and marketing of their gasoline products within the United States. Respondents, a class of 23,000 gas station owners, brought suit alleging that Texaco and Shell violated antitrust laws by agreeing that two different brands of gasoline would be sold at the same price. Respondents contended that the agreement constituted illegal price-fixing and was a per se violation of the Sherman Act, 15 U.S.C. § 1. The District Court granted summary judgment in favor of petitioners, concluding that the joint venture was not an anticompetitive sham, so it could set a joint venture price. Brief for Petitioner Texaco Inc. at 5. The Ninth Circuit Court of Appeals reversed, holding that Equilon’s decision to fix prices was per se illegal unless Texaco and Shell could show that the pricing decision was “reasonably necessary” to achieve the anticipated efficiencies that led to Equilon’s creation.
Texaco and Shell contend that the pricing scheme did not restrict any competition remaining after the joint ventures were formed. According to petitioners, the joint venture created a single firm and its subsequent conduct is governed by Section 2 of the Sherman Act, not Section 1. They contend that in making the pricing agreement, the two companies were acting exclusively as co-owners of a single business and therefore Section 1 does not apply to the joint venture’s pricing of its own products. However, Respondents contend that the pricing was not made by a single entity but separately by Texaco and Shell and that charging the same prices for the different brands neither resulted in efficiencies nor was reasonably necessary to achieve any legitimate purpose of the ventures. Brief for Respondent at 1.
Does the agreement between Texaco and Shell, to set equal wholesale prices for gasoline through their joint venture, constitute a per se violation of Section 1 of the Sherman Act, given the creation of Equilon as a single lawful entity?
In 1996, in response to heightened competition in the oil and gas industry, Shell approached Texaco about a potential corporate combination designed to enhance efficiency and reduce competition between the two companies with respect to their downstream operations (refining crude oil and marketing finished products). In 1998, the two former competitors formed a nationwide alliance through the formation of two separate joint ventures. One joint venture, Equilon, combined Shell’s and Texaco’s downstream operations in the western United States. The other venture, Motiva, combined the downstream operations of Texaco, Shell, and Saudi Refining Inc. (“SRI”) in the eastern United States. The Federal Trade Commission and several state antitrust regulators approved the formation of the joint ventures. The nationwide ventures effectively ended competition between Shell and Texaco with respect to downstream refining and marketing of gasoline. The two companies signed non-competition agreements, which prohibited the companies from competing with Equilon or Motiva. Texaco and Shell further established fixed ratios for profit sharing and for bearing risk of losses based on the assets each contributed to the ventures. Brief for the United States as Amicus Curiae Supporting Petitioners at 4. Texaco and Shell continued to compete with each other in their domestic upstream operations (exploration and production of crude oil), in their foreign operations, and in operations unrelated to refining and marketing gasoline.
In 1999, Respondents, service station dealers who had purchased gasoline from Texaco and Shell, filed suit under Section 1 of the Sherman Act, alleging that it was per se illegal price fixing for Equilon to charge the same price for the Shell brand as for the Texaco brand. Brief for Petitioner Texaco at 5. Respondents raised a similar claim against Motiva, but the District Court dismissed the claim because none of the plaintiffs had purchased from Motiva. Id. The District Court granted summary judgment in favor of Shell and Texaco, rejecting Respondents’ argument that Equilon’s setting wholesale prices for its own products could be condemned without regard to actual competitive effects in a particular, relevant market. Brief for Petitioner Shell Oil at 5. The court reasoned that adoption of Respondents’ theory would result in “a per se rule against joint ventures between companies that produce competing products.” Id. The Ninth Circuit Court of Appeals reversed the decision, holding that Equilon’s pricing policy was per se illegal unless Shell and Texaco showed that the decision to charge the same price for the two brands in a trade area was “reasonably necessary” to achieve the efficiencies that led to Equilon’s creation. Id. at 6.
The Supreme Court will decide whether an agreement between Texaco and Shell with respect to the pricing of Equilon’s gasoline may be treated as a per se violation of Section 1 of the Sherman Act. If the Supreme Court upholds the Ninth Circuit’s decision, it will confirm that the pricing agreement between Texaco and Shell is a per se violation of Section 1 of the Sherman Act. If the Court reverses the Court of Appeals’ decision, it will create precedent dictating that a joint venture’s pricing of its own products does not constitute a per se violation of Section 1 of the Sherman Act, but must be subject to a rule of reason inquiry based on the facts of the particular case.
The Supreme Court must decide whether to uphold the Ninth Circuit Court of Appeals’ decision that Equilon’s pricing policy was per se illegal absent some justification for the agreement. They will decide whether a joint venture can set prices as one corporate entity regardless of the nature of the principals or whether such pricing is a naked restraint on trade and, therefore, a per se violation of Section 1 of the Sherman Act. Respondents argue that the pricing agreement was a per se Sherman Act Section 1 violation, meaning that the agreement was illegal regardless of Texaco and Shell’s justifications for the agreement. The decision in this case will have a significant impact on the formation of joint ventures.
The Department of Justice and the Federal Trade Commission typically abide by the principle that per se condemnation should be reserved for conduct that is manifestly uncompetitive. They argue that the pricing agreement between Texaco and Shell does not qualify because that agreement did not eliminate any competition between petitioners in the actual sale of their gasoline. Brief for United States as Amicus Curiae Supporting Petitioners at 8. They further argue that the Court of Appeals’ decision threatens to chill joint ventures that tend to enhance efficiency, promote vigorous competition, and benefit consumers. Id. at 10.
If the Supreme Court upholds the Court of Appeals’ decision, the result could be inconsistent with the antitrust laws’ aims to promote competition. Expansion of per se liability to include agreements that are not manifestly uncompetitive threatens beneficial economic activity by creating the possibility of per se liability for uniting formerly competing products under common ownership and pricing control. Id. at 29. Courts, agencies, and the business community have an interest in assuring that the per se rule is applied only to conduct that is always anticompetitive because otherwise courts may be reluctant to apply the per se rule. Id. at 30.
Joint ventures are important in today’s economy. They are essential tools for many companies to effectively compete, expand into new markets, make costly investments, and engage in innovation. Brief of CCUSA and NAM as Amici Curiae in Support of Petitioners at 2. Joint ventures contribute to the health of the economy by creating jobs and increasing investment because they allow for the supply of products which may have been otherwise infeasible. See id. at 7. The decision in this case could have an impact on the overall health of the economy. If the Court of Appeals’ decision is upheld, it could create a business environment where joint ventures may be seen as an unfavorable business combination because of antitrust risk. Id. at 19. If the Court of Appeals’ decision is upheld, it could also encourage widespread antitrust lawsuits against existing joint ventures because of the possibility of treble damages.
On the other hand, if the Supreme Court reverses the Court of Appeals’ decision, both consumers and the economy at large could be denied the benefits of competition. Brief of Amicus Curiae American Antitrust Institute in Support of Respondents at 1.
The scope of this case is narrow. Even if the Supreme Court reverses the Court of Appeals decision, this joint venture and others could still be challenged using “rule of reason” analysis. The per se rule prohibits a business from defending its actions in court, whereas under rule of reason analysis the business justifications of a restraint on trade are weighed against its purported harms and the outcome is decided through the regular adjudicative process.
I. NINTH CIRCUIT DECISION
The Sherman Act prohibits “every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the Several States, or with foreign nations.” 15 U.S.C. § 1. The Supreme Court has not read this language literally, but has instead created a two-tiered mode of analysis. The first category includes agreements whose nature and effect are so plainly anticompetitive that no study of the industry is needed to establish their illegality – they are “illegal per se.” The second category includes agreements whose potential anti-competitive effect can only be evaluated by analyzing particular facts, the history of the “restraint,” and why it was imposed. Agreements in this second category are analyzed subject to the “rule of reason” test.
The Court has ruled that price fixing is the quintessential example of a per se violation of § 1 of the Sherman Act. However, there are some price fixing arrangements that violate the letter of the Sherman Act but are still legal. These price fixing agreements are made by joint ventures where entities that would often otherwise be competitors, share the risk of loss and opportunities for profit and are considered single firms competing with others in the market. Joint venture status does not, however, confer immunity from per se analysis under § 1 of the Sherman Act.
The Court explained that the lynchpin issue with respect to joint ventures is whether the price fixing is “naked,” in which case the restraint is illegal, or “ancillary,” in which case the restraint is legal. The “ancillary restraints” doctrine is relevant where the challenged conduct restricts competition that would otherwise continue to exist between the venture and one or more of the partners after the formation of the venture. Brief for Petitioner Shell Oil at 11. The court in the present case found that Respondents had produced sufficient evidence to create a triable issue of fact as to whether the defendants engaged in a naked restraint on trade, prohibited per se by the Sherman Act.
The Court held that the proper inquiry for a per se analysis of price fixing is not simply whether the joint venture is anticompetitive or whether the defendants intended to reduce competition. Rather, the inquiry must focus on whether the defendants’ conduct in setting a unified price for the Texaco and Shell brands of gasoline instead of setting each brands’ price independently was reasonably necessary to further the legitimate aims of the joint venture. The Court of Appeals ruled that in this case, Texaco and Shell failed to offer any explanation of how their unified pricing scheme served to further the ventures’ efforts to become more efficient. The absence of this evidence, along with a showing of anticompetitive effects, points to the applicability of the per se rule. The Court of Appeals therefore reversed the District Court’s award of summary judgment against Texaco and Shell and remanded the case for further proceedings.
II. PETITIONER’S ARGUMENT
Petitioners argue that the Court of Appeals decision is wrong because § 1 of the Sherman Act concerns only ‘concerted action’ between separate entities and does not reach the conduct of a single firm. Brief for Petitioner Texaco Inc. at 8. Further, Equilon’s legitimate and valid venture between Shell and Texaco effectively eliminated the competition between the two companies in the market for refining and marketing gasoline before the pricing agreement was made. Id. Therefore, Equilon’s business operation does not constitute the “sudden joining of independent sources of economic power” with which Section 1 is concerned. Id. Petitioners distinguish between the formation of a joint venture and the operation of a joint venture. They argue that the formation was a joining of independent sources to which Section 1 applied, but the joint venture was reviewed and approved by the FTC and state antitrust agencies. Id. Once the joint venture was formed, it was not subject to Section 1 scrutiny. Id.
Because of this complete merger of the relevant businesses of Shell and Texaco, the companies assert that the right of an integrated firm to set prices applies. Id. at 13. There was a complete “unity of interest” between the owners because the profits were divided based on the share of ownership of the business. Therefore, Equilon was entitled to set the price for its own product the way any other entity could. Id. Petitioners address the Ninth Circuit’s distinction between the setting of the price before the venture was formed and setting it after. They conclude that the timing of the decision is irrelevant because it has no competitive consequence. Id. at 23.
Petitioners also argue that, even if Section 1 were applicable, Equilon’s pricing of its own product should not be considered per se illegal. The rule of reason is the presumptive standard under Section 1 and only those restraints that have been repeatedly shown as plainly anticompetitive are exceptions to that standard. Id. at 9. Petitioners also contend that the formation of the venture itself had already ended all competition in the relevant market between Texaco and Shell, so there was no other competition that could have been restrained. Id. at 10.
Petitioners further argue that the Ninth Circuit’s requirement that Equilon prove that it was necessary to set one price for the gasoline instead of setting each brand’s price independently is not grounded in any antitrust principle. They urge instead that the proper inquiry in determining whether the per se rule applies is to consider whether the conduct always or nearly always tends to restrict competition and reduce output. Id. at 33.
III. RESPONDENT’S ARGUMENT
Respondents contend that, procedurally, the evidence must be viewed in the light most favorably to Respondents. They contend that Texaco and Shell’s price fixing scheme is illegal per se. They base this on the finding of per se illegality for price fixing under Citizen Publ’g Co. v. United States, 394 U.S. 131 (1969), where the circumstances were even less aggravated than those involving Texaco and Shell. Brief for Respondent at 19. Respondents contend that Citizen Pub’g was directly on point and that the result in this case should not be different. Respondents also argue that Petitioners’ restraint in this case would violate Section 1 of the Sherman Act under a “quick look” rule of reason, which permits a finding of illegality without the need to show market power where there has been a naked restraint or price or output and no justification has been shown. Id. at 20.
Respondents urge that Equilon should not be viewed as a single entity under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). The decision has never been extended to joint ventures. Brief for Respondent at 22. Respondents argue that the formation of the joint venture between Texaco and Shell did not end competition between the two companies, nor did it eliminate them as ‘independent centers of decisionmaking.’ Id. at 25. They contend that the restraint on competition was not the decision of a single company, but an agreement among independent decisionmakers that is therefore reachable under Section 1 of the Sherman Act. Id. at 27.
According to Respondents, Petitioners should not be exempt from antitrust scrutiny for price fixing because it constituted a direct restraint on trade. Further, Petitioners have offered no procompetitive justification or benefit to justify their price fixing. Respondents believe that the price-fixing agreement in this case was not necessary to market the gasoline. Id. at 36. This is evidenced by the fact that Equilon marketed gasoline for eight months before the agreement was made. Id. They urge the Court to continue its policy of requiring a showing of a procompetitive justification for the restraint in order to avoid per se or quick look liability. Id. at 37.
The Supreme Court will decide whether a price fixing agreement by a lawful joint venture can constitute a per se violation of Section 1 of the Sherman Act. If the Court reverses the Court of Appeals’ decision and rules that the rule of reason test must be applied, it will allow a deeper inquiry into cases where there is an apparent restraint on trade. The business community will support the result because it will safeguard joint ventures as legitimate business forms and will protect and encourage economic investment, efficiency, and economies of scale. If, on the other hand, the court upholds the Court of Appeals’ decision, it could signal the demise of the joint venture as a business form in the U.S. and could affect the economy in terms of reduced efficiency. However, a decision upholding the Court of Appeals could also serve to promote price competition and prevent businesses from charging higher prices, both of which help consumers.
Prepared by: Kelly McRobie
- Shaheen Pasha, Three To Watch Before the Supreme Court, at money.cnn.com (Oct. 3, 2005).