Supreme Court Reverses in Texaco v. Dagher

February 28, 2006. The Supreme Court issued its opinion [9 pages in PDF] in Texaco v. Dagher, an antitrust case, reversing the judgment of the U.S. Court of Appeals (9thCir). While this is an antitrust case involving joint ventures in the oil industry, the holding impacts many other industry sectors, including communications and information technology, where there are also lawful joint venture agreements.

The Supreme Court held that it is not per se illegal under Section 1 of the Sherman Act for a lawful, economically integrated joint venture to set the prices at which the joint venture sells its products. It reversed the Court of Appeals. See, June 1, 2004, divided opinion [34 pages in PDF], which is also reported at 369 F.3d 1108.

The Supreme Court's opinion is short, and directed to the specific facts of the joint venture at issue in this case. Texaco and Shell collaborated in a joint venture, Equilon Enterprises, to refine and sell gasoline in the western US. The joint venture was approved in a Federal Trade Commission (FTC) consent decree.

Dagher, and a class of Texaco and Shell service station owners, asserted that Texaco and Shell engaged in unlawful price fixing when Equilon set a single price for both Texaco and Shell brand gasoline.

Dagher filed a complaint in U.S. District Court (CDCal). The District Court held for Texaco and Shell. The Court of Appeals reversed.

Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1, provides that "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, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."

The Supreme Court noted that "This Court has not taken a literal approach to this language". Rather, it generally construes Section 1 to prohibit only "unreasonable" restraints. It usually applies "rule of reason" analysis. However, the Court added, "Per se liability is reserved for only those agreements that are ``so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.´´" (Citing National Soc. of Professional Engineers v. United States, 435 U.S. 679 (1978).)

The Court noted that "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." But, the Court concluded that this is not a case of price fixing by competitors.

It wrote that "These cases do not present such an agreement, however, because Texaco 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. 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."

The Supreme Court concluded that "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". And since there was a legitimate joint venture, there was no per se violation, and the Court of Appeals must be reversed.

This case is Texaco, Inc. v. Fouad N. Dagher, et al., Sup. Ct. No. 04-805, and Shell Oil Company v. Fouad N. Dagher, et al., No. 04-814, petitions for writ of certiorari to the U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 02-56509. The Court of Appeals heard an appeal from the U.S. District Court (CDCal), D.C. No. CV-99-06114-GHK.

Judge Stephen Reinhardt wrote the opinion of the Court of Appeals, in which Judge Johnnie Rawlinson joined. Judge Ferdinand Fernandez dissented.

Justice Clarence Thomas wrote the opinion for a unanimous Supreme Court. Justice Sam Alito, who just recently joined the Court, did not participate.

Thomas praised and quoted from the dissenting opinion of Judge Fernandez. Back during the administration of the elder President Bush, advisors to the President placed Fernandez on a short list of candidates for appointment to the Supreme Court. However, Justices Souter and Thomas received the appointments for the two open seats in that administration.

Numerous entities filed amicus curiae briefs urging reversal of the Court of Appeals, including the Office of the Solicitor General (OSG), Verizon, Visa USA, and the U.S. Chamber of Commerce.

Verizon stated in its amicus brief [37 pages in PDF] that joint venture agreements are common in the telecommunications industry, for such things as large high risk projects such as laying transoceanic fiber optic cable, research and development projects, and standard setting.

It wrote that "Verizon and other telecommunications companies rely on many forms of cooperative arrangements to bring new services to the market and to reduce the cost and improve the quality of existing services. In this respect, Verizon's interest in appropriate antitrust rules for restraints ancillary to legitimate productive cooperation is similar in kind to the interest of countless other businesses in all sectors of the economy. Verizon's interest differs in degree, however, because productive cooperation is especially common and useful in the telecommunications industry."

Verizon continued in its brief that "high-risk investments that require large amounts of capital are often undertaken through joint ventures or other cooperative arrangements. Cooperation between potential competitors played a major role in the deployment of transoceanic fiber optic cables to carry telephone and internet traffic between the United States and Europe, Asia, South America, and other parts of the world."

Verizon stated that "Cooperative arrangements are also commonly used for research and development projects, where they allow the partners to share costs and risks, and also bring together the partners’ complementary skills and knowledge. Consumers of telecommunications services often have communications needs that extend beyond the boundaries of any single carrier’s network. Joint ventures and other cooperative arrangements have been a valuable mechanism for serving such customers. For example, MCI partnered with British Telecom to provide complex services to multinational corporations with facilities throughout the world."

Finally, Verizon argued that "The importance of coordination and standard setting motivated the creation of another joint venture, Bellcore, in connection with the breakup of AT&T pursuant to an antitrust decree. That joint venture, financed and controlled by the seven regional Bell companies, was created to ``perform the coordination for national defense and other emergency purposes that is vital to the nation’s security´´ and to ``set the standards which will permit telecommunications to continue to operate in an engineering sense as one national network.´´ ... The decree court explained, ``It seems beyond debate that uniform standards are necessary to ensure high quality in the telephone system, indeed its very survival as a nationwide network. Nor are such standards incompatible with competition.´´"

See also, story titled "Verizon Seeks Reversal in Texaco v. Dagher" in TLJ Daily E-Mail Alert No. 1,232, October 12, 2005.