Of the antitrust cases before the Supreme Court this term, Dagher v. Saudi Refining has probably the most wide-ranging real-world implications. At issue is, whether an agreement between the owners of a bona fide joint venture (JV) about the pricing of the JV’s products is per se illegal under §1 of the Sherman Act, where the JV’s owners do not compete (anymore) in the market for those products. Here are the facts in a nutshell.

Shell (S), Texaco (T), and Saudi Refining (SRI) created two JVs, Motiva (owned by S, T, and SRI) and Equilon (owned by S, T), to which S and T contributed all of their 12 U.S. refineries, 23 lubricant plants, 22,000 service stations, 24,000 miles of pipeline, 107 terminals, 24,000 employees, and licenses to the S and T brands. The JV was estimated to generate cost savings of about $800 million/year. S and T exited the U.S. market for gasoline refining and distribution, but remained competitors in the upstream markets (exploration, crude refining) and abroad. S and T agreed that the JV would sell S- and T- branded gasoline at the exact same price in the same market areas. Plaintiffs alleged that S and T fixed prices for gasoline. The district court granted summary judgement for defendants, holding that a bona fide JV comes under the rule of reason and that the agreement was reasonable, because “every JV must, at some point, set prices for the products they sell.” The 9th Circuit court of appeals reversed and remanded, classifying the agreement on price as a “naked restraint,” subject to per se condemnation. The chart illustrates the relationships between the parties.

The circuit court applied a traditional ancillary restraint analysis to the agreement on price and asked whether the agreement on price is reasonably necessary to achieve the cost savings, to which the answer is no. (You can save costs by combining refineries without selling the output at the same price.) Thus, the court classified the agreement on price as a “naked restraint”, which is per se illegal under §1 of the Sherman Act. Judge Fernandez, in his dissent, didn’t buy into the majority’s premise and framed the issue differently. In his view, the JV was simply setting the prices for its own products. Therefore, it was wrong to even look at S and T as competitors agreeing on the price of their products, as both of them had left the market.

In my view, the Dagher decision is clearly wrong and upholding it would call the legality of hundreds of efficiency-enhancing, bona fide joint ventures into question. Stripped of all non-essential details, the case is about whether non-competing shareholders can set the prices for products made by their joint venture. To that, the answer must be yes. (Of course, exceptions might apply where, for example, an upstream venture helps to coordinate downstream activities, but that’s not the issue here.) The Supreme Court should endorse judge Fernandez’ dissenting view. The ancillary restraints doctrine, as the Department of Justice correctly argues in its amicus brief, only applies to conduct (i) by competitors; (ii) outside the scope of the JV. Neither prong is fulfilled in the Dagher case, because S and T no longer compete in the U.S. market for refining and distributing gasoline, and the agreement on price relates to the very products that the JV sells, not to any products that S and T sell. Moreover, a remedial order compelling the JV to price the two brands differently would not create any meaningful competition between the two brands, because they would still be owned by the same company (the JV). AntitrustProfs Blog has a writeup. A detailed discussion with links to the briefs can be found at SCOTUS Blog.

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