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The Court’s unanimous decision in Texaco Inc. v. Dagher40 promises to reduce the error and decision costs associated with challenges to the business practices of competitor joint ventures. In 1998, gasoline companies Texaco and Shell formed a joint venture, Equilon Enterprises, that combined the companies’ downstream operations in the refining and marketing of gasoline in the western United States. The formation of Equilon, which was approved by the Federal Trade Commission and several state attorneys general, allowed Texaco and Shell to take advantage of numerous synergies and productive efficiencies. The gasoline Equilon developed was sold to downstream purchasers under the original Texaco and Shell brand names, but Equilon charged a uniform price for its gasoline (whether branded Texaco or Shell) within each geographic market. After Equilon had commenced operation, a class of Texaco and Shell service station owners sued Texaco and Shell, alleging that they had engaged in per se illegal horizontal price fixing by charging a single price for Equilon’s Texaco- and Shell-branded gasoline. Notably, the plaintiffs chose not to pursue a rule of reason claim against the gasoline companies.

The district court granted summary judgment in favor of Texaco and Shell. It concluded that the rule of reason must govern the claim asserted and that plaintiffs, by eschewing a rule of reason analysis, had failed to raise an issue for trial. The Ninth Circuit reversed. It contended that the defendants had not proven that Equilon’s uniform pricing of Shell- and Texaco-branded gasoline was an ancillary trade restraint, because they had not shown that such unified pricing was reasonably necessary to permit Equilon to achieve its legitimate ends. Absent such proof, the Ninth Circuit reasoned, there should be no exception to the generally applicable per se rule against horizontal price fixing.

The Supreme Court reversed, ruling that a lawfully constituted joint venture’s pricing of its own products is not per se illegal. As long as the joint venture is not a mere sham, the venture’s pricing decision cannot constitute horizontal price fixing (price fixing among competitors) for the simple reason that the coventurers are not competitors when it comes to the activity of their joint venture. Accordingly, the venture’s pricing must be challenged under the rule of reason, not under the per se rule applicable to horizontal price fixing. The Court clarified that the ancillary restraints doctrine (which holds that trade restraints that might otherwise be illegal may escape liability if they are reasonably necessary to achieve procompetitive integration) governs only “the validity of restrictions imposed ... on nonventure activities”; the doctrine has no applicability “where the business practice being challenged involves the core activity of the joint venture itself—namely, the pricing of the very goods produced and sold by [the joint venture].”

Had it been allowed to stand, the Ninth Circuit’s analysis would have generated substantial error costs. If a lawfully constituted joint venture’s pricing of its products—as “core” an activity of a business venture as one can conceive—were subject to the per se rule, then virtually every postformation decision of the venture would be subject to attack. Whenever the venture made a decision that could be construed as involving a reduction of some output, a setting of price, a judgment about where to market (or not market) the venture’s products, or a judgment about which features to include in (or exclude from) the venture’s product or service offerings, the venture participants would risk automatic antitrust liability. To avoid application of the per se rule—which applies to horizontal agreements to reduce output, fix price, divide markets, and refuse to compete on product features—the venturers would have to show that the decision at issue was necessary for the venture to accomplish its objective. Failure to do so would trigger liability and treble damages. Such an approach could not help but chill joint venture activity. And, because competitor joint ventures frequently benefit consumers by enabling participants to create new products; enhance productive efficiency by exploiting economies of scope and scale; achieve synergies through the pooling of complementary assets or skills; and lower transaction costs, such a chilling effect would be costly indeed. The Dagher Court’s holding and its clarification of the ancillary restraints doctrine therefore rein in a particularly costly species of Type I error.

In addition, Dagher is likely to reduce the decision costs associated with challenges to the conduct of competitor joint ventures. By insulating the core business decisions of a lawfully constituted joint venture, the decision forces consolidation of concerns about joint activity into the earlier proceeding on the joint venture’s legality. It avoids multiple proceedings every time the joint venture engages in some core activity that could be construed as unnecessary to the venture’s ultimate objective.

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