Bumpy road ahead for joint ventures?
The high court will decide if 2 companies may be guilty of price fixing through their joint venture.
By Shaheen Pasha, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Corporations may soon have to think twice before forming a joint venture with a competitor.

At least that's the concern among business executives as the Supreme Court gets set to hear opening arguments in its first antitrust case of the new year, Texaco and Shell Oil v. Dagher, a class action suit pitting 23,000 gas-station owners against the two oil giants.

The case, which will be argued Tuesday, will determine whether Texaco -- now a part of Chevron (Research) -- and Shell Oil (Research) violated the Sherman Act by setting one price for the products that their gas marketing joint venture, Equilon, sold to the gas stations.

The issue boils down to price fixing. The high court must decide if a joint venture can set prices as one corporate entity or if the two companies, Texaco and Shell, which each market gasoline products through the joint venture, must offer their gas station owners different prices to create a more competitive market.

Widespread implications for JVs

It's a potentially explosive case for the business world, since joint ventures have become so popular in recent years. According to M&A tracking firm Dealogic, there have been 226 joint ventures in the United States since 2000. That's up from 60 joint ventures between 1995 and 1999.

But all that could change if the high court decides that even within a joint venture, two companies would have to set competing prices.

Legal observers say that if the court finds in favor of the gas station owners, companies would be hesitant to create joint ventures for fear of civil lawsuits or criminal liability down the road.

"There is concern that you would see fewer formations of legitimate joint ventures, which are generally viewed as good economic vehicles to enhance efficiencies," said Robert Hayes, chair of the antitrust practice group at Cozen O'Connor. "If you have more efficiencies, you have a lower cost structure and you could charge less to consumers."

The Washington Legal Foundation, which submitted a friend-of-the-court brief in favor of Texaco and Shell, said the case could open the door for a rash of lawsuits against joint ventures and their managers.

"People can and do go to jail for pricefixing," said David Price, an attorney at the Washington Legal Foundation.

A federal district court in California originally threw out the case against the oil companies, saying that Equilon is one entity that is allowed to charge one price. But that ruling was overturned by the 9th Circuit Court of Appeals in San Francisco in June 2004. Texaco and Shell, two of the nation's biggest oil companies, appealed to the Supreme Court.

Jeffrey Lamken at the law firm Baker Botts said that if the Supreme Court were to uphold the appellate court's decision, it would change the fundamental nature of joint ventures.

"You'd have to wind up merging [entire] firms as opposed to merging just one portion of them," he said. "If the Supreme Court were to say that you can get into joint ventures but you have to charge different prices, that's just not a workable rule in practice."

Fears exaggerated?

Advocates for the gas station owners said precedent is on their side, citing the 1969 Supreme Court case Citizen Publishing Co. v. U.S., in which the high court determined that a joint venture between two newspapers couldn't be exempt from antitrust scrutiny.

Albert Foer, president of the American Antitrust Institute which filed an amicus brief in favor of the gas station owners, said that fears that the joint venture system will be toppled are exaggerated.

"We're not asking to change the law," he said. "We're just trying to keep the law where it has been."

If the Supreme Court overturns the ruling of the appeals court, it would "in effect provide a road map for price fixing for all kinds of businesses," said Daniel Schulman, an attorney who represents the gas station owners in the suit.

Schulman said while a joint venture, by definition, is an agreement by two or more parties to work together on a specific project, in this case the entity wasn't independent from its parent oil companies in its decision-making process. He said the decision to set one price wasn't made by the joint venture but by people designated by the parent companies when the alliance was formed.

He said both Texaco and Shell signed non-competition agreements, prohibiting them from competing with Equilon, but they continued to sell their brands of gasoline independently, controlled their individual brands and retained their own trademarks.

"This isn't what a fully integrated joint venture should be," he said.

The 9th Circuit Court of Appeals agreed and concluded that while Equilon was a legitimate joint business enterprise, it failed to demonstrate that the unified price was necessary to further the goals of the joint venture.

Supreme Court may reverse appellate court

But observers expect that the Supreme Court, which granted review to the case on the final day of its 2004-2005 session, may have accepted it in order to overturn the lower court's decision.

Cozen O'Connor's Hayes points out that the FTC determined that Equilon was a legitimate joint venture when it approved the proposed JV.

"The FTC concluded that combining distribution facilities makes them more efficient and they could compete better," he said. "If you assume its a legitimate joint venture, then you have to treat it as a single entity and allow it to set its own prices."


The Supreme Court has a number of antitrust cases on its docket. Find out more here.

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