Thomas A. Piraino, Jr., the Antitrust Analysis of Joint Ventures After the Supreme Court's Daugher Decision

• Jurisdiction: United States,Federal
• Publication year: 2008
• Citation: Vol. 57 No. 4

EMORY LAW JOURNAL

Volume 57 2008 Number 4

ARTICLES

THE ANTITRUST ANALYSIS OF JOINT VENTURES AFTER THE SUPREME COURT'S DAGHER DECISION

Thomas A. Piraino, Jr.^*

INTRODUCTION

Joint ventures have become an increasingly popular means of collaboration among American businesses.¹Joint ventures are uniquely efficient and flexible arrangements, and they have allowed American firms to transform the way business is conducted in manufacturing, transportation, technology, and many other domestic industries.²By forming a joint venture, firms can access certain resources from their competitors in order to accomplish a specific purpose.³Once that purpose has been accomplished, the participants can easily disband the joint venture and use the fruits of its efforts in their own businesses. Research and development joint ventures, for example, allow rivals to access each other's complementary technologies for the development of a new product.⁴After the research phase is complete, each partner will be able to unilaterally commercialize the product on its own.

Despite the prevalence of joint ventures, the antitrust enforcement agencies and federal courts have been unable to formulate consistent standards for determining their legality.⁵The confusion in the federal courts and agencies has left business executives uncertain as to the type of joint ventures that they can form and the type of conduct in which they can engage as joint venture partners.⁶

Two potential antitrust issues arise in joint venture cases. The first is whether the joint venture itself is legal. Section 1 of the Sherman Act prohibits competitors from entering into any "contract, combination . . . or conspiracy, in restraint of trade."⁷The pooling of competitors' market power in a joint venture may have such a significant anticompetitive effect that the venture itself may constitute an illegal conspiracy under Section 1.⁸The second issue is whether, after the formation of the joint venture, either the venture itself or its partners have engaged in competitive conduct that is illegal under the Sherman Act. If the joint venture controls most of the relevant market, its conduct may be illegal under Section 2 of the Sherman Act, which prohibits monopolization or attempts to monopolize by individual firms.⁹When joint venture partners agree to restrict competition among themselves, their conduct may amount to an illegal conspiracy in restraint of trade under Section 1.

In 2005, the Supreme Court granted certiorari in the case of Dagher v. Saudi Refining Co.¹⁰in order to clarify the antitrust analysis of joint ventures. In Dagher, Shell and Texaco, who had been fierce competitors in refining oil and marketing gasoline,¹¹contributed all of their United States refining and marketing operations to a joint venture. A group of gasoline station owners alleged that Shell and Texaco violated Section 1 of the Sherman Act by unifying the pricing of Shell-branded and Texaco-branded gasoline sold by the joint venture.¹²The Ninth Circuit, citing this author,¹³concluded that the pricing arrangement was per se illegal because it was not necessary for the effective operation of the joint venture.¹⁴The Supreme Court reversed the Ninth Circuit, concluding that the per se rule should not apply to internal decisions of a legitimate joint venture, such as the gasoline pricing arrangement.¹⁵Instead, the Ninth Circuit should have evaluated the pricing arrangement under the "rule of reason," which requires a factfinder to consider all relevant market circumstances before finding a restraint illegal.¹⁶

The Supreme Court's decision in Dagher changed the judicial landscape for price fixing and other similar joint venture conduct. Prior to Dagher, the parties to a joint venture could have been found liable under the per se rule simply for entering into an agreement affecting the prices of joint venture products.¹⁷After Dagher, joint venture partners will be able to defend the reasonableness of such arrangements under the rule of reason. Dagher's influence, however, is likely to extend beyond its denial of a per se approach to joint venture price-fixing arrangements. The Dagher decision included broad dicta that may form the basis for an entirely new way of analyzing the legality of joint ventures themselves and of the various types of competitive conduct pursued by joint ventures and their partners.

This Article explains why a comprehensive new approach to joint ventures is necessary and proposes a means by which the federal courts and antitrust enforcement agencies can build on Dagher to implement such an approach.

I. DEFICIENCIES IN THE CURRENT APPROACH TO JOINT VENTURES

The courts' and agencies' current approach to joint ventures fails to provide clear guidance to American businesses on (1) the legality of joint ventures themselves; and (2) the legality of conduct pursued by a joint venture and its partners after the venture's formation. The courts' and agencies' analyses of conduct issues have been particularly confused, due to their inability to determine whether the relevant conduct is being undertaken by the joint venture itself or by the joint venture partners as independent entities. In the latter case, the courts and agencies have also found it difficult to determine the legality of agreements among joint venture partners that restrict competition outside the scope of a joint venture.

A. Unclear Standards of Legality for Joint Ventures

Unfortunately, joint ventures are not only the most common type of collaboration among competitors; they also are the most misunderstood. One commentator recently concluded that "for over one hundred years, antitrust joint venture law has been a morass of confusion and ambiguity."¹⁸The standards for judging cartels and mergers are clear, but the courts and enforcement agencies have been unable to articulate a consistent standard for analyzing joint ventures.¹⁹The courts have applied three conflicting types of analysis to joint ventures: (1) a merger-based approach that concentrates on factors such as the parties' market power and entry conditions in the relevant market;²⁰(2) a "per se" analysis that deems certain joint ventures illegal on their face;²¹and (3) a "rule of reason" approach requiring an inquiry into all the characteristics of the relevant market.²²

In recent years, the federal courts have predominantly adopted a rule of reason approach to joint ventures. In Dagher, for example, the Supreme Court held that the rule of reason, rather than the per se rule, should be used to analyze the pricing activities of the Shell-Texaco joint venture.²³Indeed, in the last thirty years, the rule of reason has become the presumptive approach to most types of antitrust conduct.²⁴However, most of the discussion of the rule of reason has occurred in the federal circuit courts, where the only issue has been whether the per se rule or the rule of reason should apply on remand.²⁵

The circuit courts have had little opportunity to define how the substantive rule of reason analysis should be carried out in trial courts. For their part, trial courts have had little experience with the rule of reason because plaintiffs are reluctant to bring rule of reason cases ab initio. Since it is used so infrequently at trial, the rule of reason has atrophied in the federal courts. Most courts' applications of the rule have not progressed beyond a "checklist" approach that requires the trier of fact to consider all the circumstances surrounding a restraint before condemning it.²⁶The courts simply quote "a long list of factors without any indication of priority or weight to be accorded each factor."²⁷Such a vague approach gives little guidance to litigants, judges, or juries.²⁸

Joint ventures are risky endeavors. In fact, approximately sixty percent of joint ventures ultimately fail.²⁹Business executives are less likely to assume the risks of failure when the rule of reason approach to joint ventures is so vague. Robert Pitofsky, a former Chairman of the FTC, has pointed out that "uncertainties in enforcement policy (and law) have almost certainly blocked, delayed, or raised the cost of legitimate [joint ventures]."³⁰Indeed, the legal consequences of entering into an illegal joint venture can be quite severe. Businesses and individuals are liable for criminal sanctions under the Sherman Act.³¹The Clayton Act also imposes liability for treble damages and attorneys' fees and authorizes divestiture and other injunctive relief.³²

Government contractors can lose their right to do business with the government.³³Even if a defendant is not ultimately found liable, the costs of defending a lawsuit can be prohibitive. As long as the courts continue to send out confusing signals on the standards of legality for joint ventures, American businesses may perceive the mere possibility of an antitrust challenge to a joint venture as a risk not worth taking.³⁴

B. Unclear Standards for Joint Venture Conduct

1. Distinguishing Between Single and Multiple Entity Conduct

The threshold question in any joint venture conduct case is whether the venture is acting as a single firm or as a collaboration of independent competitors engaged in a potential conspiracy in restraint of trade.³⁵The answer to that question will determine whether a joint venture is evaluated under Section 1 or under Section 2 of the Sherman Act. Conspiracies among independent firms are covered by Section 1 of the Sherman Act, while single firm conduct is subject to regulation under Section 2. There is a fundamental disagreement among the federal courts about whether joint ventures should be treated as single entities subject to regulation under Section 2 of the Sherman Act or as associations of independent competitors that can be scrutinized under

Section 1.³⁶

The distinction between Section 1 and Section 2 is critical, because Section

1 conduct is treated much more severely.³⁷Concerted conduct among independent firms can be per se illegal...