• Ninth Circuit Finds That Joint Venture to Refine and Market Oil Products May be Illegal Due to Price-fixing
  • June 20, 2005 | Author: Martin J. Thompson
  • Law Firms: Manatt, Phelps & Phillips, LLP - Costa Mesa Office; Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • On June 1, 2004, the Ninth Circuit Court of Appeals held that a joint venture between the Texaco and Shell oil companies may constitute per se illegal price-fixing, reversing an earlier summary judgment and sending the case back for trial. (Dagher, et al. v. Saudi Refining Inc., et al., No. 02-56509 (9th Cir. June 1, 2004)).

    Under an earlier-formed alliance, Shell and Texaco entered into two joint ventures, which unified the two companies' gasoline refining and marketing functions. Shell and Texaco continued to sell their formerly competitive gasoline products as distinct brands. The alliance also coordinated the pricing of the Texaco and Shell brands. The net effect of the alliance was described by the court as eliminating competition between Shell and Texaco in the areas of downstream refining and marketing of gasoline. In response, a class of 23,000 service station owners filed suit, alleging that the joint ventures' price-setting component constituted naked price-fixing. Shell and Texaco countered that, like other joint ventures, their alliance could legally set the price of its products, contending that the price-fixing in this case was excusable as an ancillary restraint necessary to promote the pro-competitive effects of the joint ventures.

    The opinion of the court suggests that the parties had come to the conclusion that the price coordination was ancillary to pro-competitive activities too late in their joint venture process. The court pointed to admissions from the defendants' witnesses that the decision to unify pricing was made before the joint ventures existed, and was intended to eliminate competition and help gain market share. Moreover, the court found no evidence on the record that Shell and Texaco considered price coordination to be relevant to product improvement or efficiency gains. In the words of one oil company executive, pricing simply had "nothing to do" with the anticipated cost savings from forming the joint ventures. The continuation of Shell's and Texaco's distinct products in the same market, and the lack of evidence of a pro-competitive justification for the coordinated pricing of those products, led the court to conclude that the price-fixing feature of the joint ventures was not ancillary to a pro-competitive activity and therefore may be illegal.

    The Shell and Texaco situation serves as a reminder that joint venturers must assure, at the outset, that any restraints on competition resulting from their joint venture are truly ancillary to the intended efficiencies. Without such assurance, the joint venturers may well find themselves running on empty.