Tomorrow’s Argument in Texaco, Inc.v. Dagher et al. (04-805) and Shell Oil Co. v. Dagher et al. (04-814)

On Tuesday the Court will hear oral arguments in a consolidated appeal in Texaco Inc. and Shell Oil Co. v. Fouad N. Dagher, Nos. 04-805 and 04-814. At issue in the case is whether economically integrated joint ventures between two oil companies, which unified their refining and marketing operations, constitute per se violations of Section 1 of the Sherman Antitrust Act, which deems illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of commerce among the several states, or with foreign nations.”

Glen D. Nager of Jones Day will argue for 20 minutes for petitioner Texaco. Jeffrey P. Minear, Assistant to the Solicitor General, will argue for ten minutes as amicus curae supporting petitioners. Joseph M. Alioto of Alioto Law Firm will argue the case for the respondents.

The question presented and the grant of certiorari can be found here.

The brief for petitioner Texaco, Inc., can be found here.

The brief for petitioner Shell Oil Co. can be found here.

The brief for respondent Fouad Dagher can be found here.

The reply brief for petitioners can be found here.

The case began as a suit by service station operators against Texaco, Shell, and the joint ventures formed by those companies. The suit alleged that the companies conspired to create a nationwide gasoline price-fixing scheme in violation of Section 1 of the Sherman Act. According to the record in the case, shortly before or after the creation of the joint ventures, “a decision was made that the Shell and Texaco brands would have the same price in the same market areas.”

As interpreted by the courts, Section 1 of the Act provides for three levels of review: a per se rule, under which certain conduct is definitively illegal under the act; a “quick look” rule-of-reason rule, which applies to conduct the anticompetitive nature of which can be recognized even by observers with rudimentary economic knowledge; and the full rule-of-reason test, which requires a sophisticated balancing of the anti- and pro-competitive effects of the restraint.

The station operators argued that, when Texaco and Shell combined their downstream (refining and marketing) operations in the western and eastern United States into two separate joint ventures, which then charged the same price for petroleum from either company, the companies violated § 1 of the Sherman Act under both the per se and “quick look” analyses. The district court disagreed and granted summary judgment to the companies, holding that because the agreements were narrow, because the companies still competed with several other oil companies, because the plaintiffs failed to adduce sufficient evidence of price-fixing intent, and because the agreements did not join the only two competitors in the oil market, the agreements did not constitute violations of the Sherman Act.

A divided panel of the Ninth Circuit, speaking through Judge Reinhardt, reversed. Applying two Supreme Court cases — Citizen Publishing Co. v. United States and FTC v. Superior Court Trial Lawyers Association— the court of appeals began by holding that a joint operating agreement can be a per se violation of the Sherman Act, regardless of the narrowness of the agreement. The court proceeded to note that the Supreme Court had only upheld such ventures “when it appeared plain to the Court that the restraints undertaken by the joint ventures were necessary to the legitimate aims of the joint ventures.” The court then held that the companies’ pre-agreement decision to unify their pricing structures and the absence of a “procompetitive justification for initiating the price-fixing scheme” triggered the per se rule of § 1 of the Sherman Act. Because it found that the companies’ conduct fell within the per se rule, the court of appeals did not address whether the conduct would be illegal within a “quick look” analysis, which would have required a more strenuous factual showing of anticompetitive effect by the plaintiffs.

Texaco and Shell both sought certiorari, which the Supreme Court granted on June 27, 2005. In their briefs, the petitioners dispute the Ninth Circuit’s characterization of the joint venture. Relying on Copperweld Corp. v. Independence Tube Corp., in which the Supreme Court held that a parent and its wholly owned subsidiary are considered one entity for antitrust purposes and cannot be sued for collusion, the defendants argue that here too the joint venture’s conduct was not that of two competitors, but instead the conduct of a single firm, the formation of which had been specifically approved by the FTC. Thus, because § 1 of the Sherman Act “does not reach the conduct of a single firm,” the venture’s conduct was beyond the scope of that Section. The oil companies also argue that, should the Court find that their conduct lies within § 1, their conduct falls within the more exacting “rule of reason” analysis that the Ninth Circuit did not apply.

To counter petitioners’ assertions, respondents make several arguments. They first argue that the favorable standard of review applicable to the nonmovant on summary judgment mandates that all reasonable factual inferences be drawn in their favor. Second, they argue that the Supreme Court’s decision in Citizen Publishing controls the question in this case and warrants a holding that the companies’ conduct falls within the per se rule.

Third, they argue that petitioners’ reliance on Copperweld is misplaced because the decision was narrow and inapplicable in this situation. Instead, respondents claim that the proper analysis asks whether the trade restraints were reasonably necessary to achieve a venture’s procompetitive purposes. Unreasonable restraints are “naked” and require only per se or “quick look” analysis; reasonable restraints are only “ancillary” and require full rule-of-reason analysis. Respondents claim that petitioners’ restraints were clearly of the “naked” variety, that petitioners’ proposed extension of Copperweld would destabilize antitrust law by creating a previously unrecognized shield from § 1 for joint ventures, and that the Copperweld argument was in any event waived because it was not raised in the court of appeals.

Fourth, they contend that, even if petitioners’ conduct falls outside the per se rule, “there can be no doubt of [its] illegality under the quick look” rule. Respondents argue that the court of appeals’ holding, while not overtly based on “quick look,” conducted what amounted to a “quick look” analysis by analyzing the integration of the joint ventures, their competitive justifications, and their anticompetitive effects. Accordingly, “although the court of appeals termed the restraint per se illegal and declined to reach the quick look, the result would have been exactly the same under the quick look.”