SCOTUS Slays the "Exotic Beast"

Cite this Article
Joshua D. Wright, SCOTUS Slays the "Exotic Beast", Truth on the Market (February 28, 2006),

SCOTUS’ Dagher opinion is indeed good news. For those unfamiliar with the case, the Ninth Circuit held that the pricing policy of two joint ventures between Shell and Texaco were per se illegal under the Sherman Act. As it stood, the Ninth Circuit’s analysis threatened per se antitrust liability for joint ventures engaging in the unremarkable practice of setting prices for their own practices. Judge Fernandez’ dissent describes the ruling more creatively, arguing that it created a “exotic beast, no less strange than a manticore, roaming the business world.” After SCOTUS’ 8-0 reversal, the exotic beast roams no longer.

Previously, I wrote that the Ninth Circuit’s Dagher opinion erred by misapplying the ancillary restraints doctrine (pricing the products of the venture are not ancillary to the venture!) and by applying per se analysis to an agreement that did not eliminate competition in any relevant sense. With respect to the misapplication of the ancillary restraints doctrine, I wrote:

“[T]he ancillary restraints doctrine has no application here. That particular doctrine protects those restraints that restrict joint venture partners’ conduct outside the venture, but promote pro-competitive purposes of the integration, where the agreement might otherwise be construed as per se illegal. Here, the challenged restraint applies only to the joint venture’s actions in the market. In other words, the pricing decision is simply not “ancillaryâ€? to the venture.”

Justice Thomas agreed, writing that:

“We agree with the petitioners that the ancillary restraints doctrine has no application here, where the business practice challenged involves the core activity of the joint venture itself — namely, the pricing of the very goods produced and sold by Equilon.”

The crux of the Court’s analysis, however, was that per se analysis was not appropriately applied because the pricing policy simply did not eliminate competition:

“[t]he 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.”

This was the path of least resistance, and the route urged by the United States as Amici. Both of these points are pretty straightforward applications of longstanding antitrust doctrine, as evidenced by the 8-0 vote. Nonetheless, an error here would have been quite costly. As I wrote before the decision:

“Joint venturers would face the burden of proving that each post-formation decision is reasonably necessary to achieve some pro-competitive purpose of the joint venture or else face per se illegality. The Section 1 suit would become a favorite weapon of inefficient competitors seeking to stay afloat.”

There is still one more antitrust decision with important ramifications — Independent Ink — to come this term. Stay tuned.

UPDATE: Hanno Kaiser adds his thoughts at Antitrust Review.