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The Supreme Court’s decision today in Texaco, Inc. v. Dagher (No. 04-805) clarifies the application of the antitrust laws to joint ventures, and narrows the scope of potential liability for these types of business combinations. 

Background

The case involves a joint venture between Texaco and Shell Oil that consolidated the companies’ west coast refining operations as well as the marketing and sale of gasoline to downstream purchasers such as service stations.  Although the joint venture, known as Equilon, fully consolidated the refining and sales functions of its parents, the venture continued to market its refined gasoline products under both the Texaco and Shell Oil brands.  Texaco and Shell Oil, through their joint control over the venture, agreed that Equilon would market and sell both brands of gasoline at the same price.  After the joint venture began operations, service station owners brought suit alleging that Texaco and Shell Oil violated the Sherman Act’s per se rule against price fixing by agreeing that the Equilon joint venture would sell Texaco and Shell Oil brands of gasoline at the same price. 

Supreme Court’s Opinion

The Supreme Court reversed the Ninth Circuit’s holding that the joint venture’s pricing conduct was potentially subject to per se liability:  

• The Court emphasized that it "presumptively applies rule of reason analysis" to any alleged violation of the Sherman Act, and that the per se rule of antitrust liability applies only to narrow classes of conduct that "are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality."  
• The Court observed that Equilon is a legitimate joint venture in which Shell and Texaco pooled their resources and shared the risks and profits from the joint venture’s activities.  It held that "the pricing policy challenged here amounts to little more than price setting by a single entity," and that while this conduct "may be price fixing in a literal sense, it is not price fixing in the antitrust sense."  
• The Court rejected the Ninth Circuit’s application of the "ancillary restraints doctrine," explaining that this doctrine applies only to competitive restraints on "nonventure activities."  The doctrine has no application where the business practice being challenged "involves the core activity of the joint venture itself," in this case the pricing of the goods sold by the venture. 

Key Implications

The Supreme Court’s decision has the following principal implications:  

• The opinion provides parties to joint ventures with increased confidence that per se antitrust liability will apply only in rare cases – e.g., when the venture itself is a "sham" for unlawful price-fixing or market division.  
• The opinion provides parties to joint ventures with increased confidence that antitrust liability under the "ancillary restraints doctrine" will apply only to non-venture activities, not to core activities of the venture itself.