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Archived updates for Friday, March 31, 2006

Price Fixing in Multi-Branded Joint Venture Not Illegal Per Se


In Texaco, Inc. v. Dagher, Slip Op. No. 04–805. (S.Ct., February 28, 2006), the U.S. Supreme Court unanimously held that an economically integrated joint venture may set a single price for its own products, even when those products are sold under the separate brand names of the venture’s members.

In 1998, Texaco and Shell Oil formed a joint venture, Equilon, to consolidate their operations in the western United States, thereby ending competition between the two companies in the domestic refining and marketing of gasoline. Under the joint venture agreement, Texaco and Shell Oil agreed to pool their resources and share the risksof and profits from Equilon’s activities. Equilon gasoline was sold to downstream purchasers under the original Texaco and Shell Oil brand names at fixed prices. The Ninth Circuit rejected the joint venture's position as a request for an "exception to the per se prohibition on price fixing."

However, according to the Supreme Court opinion by Justice Thomas,

Price-fixing agreements between two or more competitors, otherwise known as
horizontal price-fixing agreements, fall into the category of arrangements that are per se unlawful. See, e.g., Catalano, supra, at 647. These cases do not present such an agreement, however, becauseTexaco and Shell Oil did not compete with one another in the relevant market—namely, the sale of gasoline to service stations in the western United States—but instead participated in that market jointly through their investments in Equilon.1 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. Throughout Equilon’s existence, Texaco and Shell Oil shared in the profits of Equilon’s activities in their role asinvestors, not competitors. When "persons who would otherwise be competitors pool their capital and share the risks 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). As such, though Equilon’s
pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U. S. 1, 9 (1979) ("When two partners set the price of their goods or services they are literally ‘price fixing,’ but they are not per se in violation of the Sherman Act").

This conclusion is confirmed by respondents’ apparent concession that there would be no per se liability hadEquilon simply chosen to sell its gasoline under a single brand. See Tr. of Oral Arg. 34. We see no reason to treat Equilon differently just because it chose to sell gasoline under two distinct brands at a single price. As a single entity, a joint venture, like any other firm, must have the discretion to determine the prices of the products that it sells, including the discretion to sell a product under two different brands at a single, unified price. If Equilon’sprice unification policy is anticompetitive, then respondents should have challenged it pursuant to the rule of reason. But it would be inconsistent with this Court’s antitrust precedents to condemn the internal pricing decisions of a legitimate joint venture as per se unlawful.

. . . Because the pricing decisions of a legitimate joint venture do not fall within the narrow category of activity that is per se unlawful under §1 of the Sherman Act, respondents’ antitrust claim cannot prevail. Accordingly, the judgment of the Court of Appeals is reversed.

Nonetheless, as pointed out by James R. McGibbon, "Nothing in the Dagher opinion should be understood to immunize the formation or conduct of joint ventures from antitrust scrutiny. It is important to note that the Supreme Court left open the possibility that Equilon’s pricing strategy could be subject to a rule of reason challenge."
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