Texaco Oil and Shell Oil formed a brief joint venture, Equilon Enterprises, to sell certain oil products in the U.S.  Equilon was designed to terminate after 5 years of existence.  The companies pooled assets and management while sharing profits and loss.  Equilon sought anti-trust approval from the FTC prior to forming.  The FTC reviewed the proposed venture, and after making several modifications, approved the formation.  Gas stations owners sued the new entity claiming, Equilon’s decision to sell the products at the same price, constitute illegal anti-trust activity.  The owners lost in District Court but prevailed on appeal to the Ninth Circuit.  However, the Supreme Court, reversing the Ninth District, ruled in Equilon’s favor.

Brief Facts

Texaco Oil and Shell Oil formed a brief joint venture, Equilon Enterprises, to sell certain oil products in the U.S.  Equilon was designed to terminate after 5 years of existence.  The companies pooled assets and management while sharing profits and loss.  Equilon sought anti-trust approval from the FTC prior to forming.  The FTC reviewed the proposed venture, and after making several modifications, approved the formation.  Gas stations owners sued the new entity claiming, Equilon’s decision to sell the products at the same price, constitute illegal anti-trust activity.  The owners lost in District Court but prevailed on appeal to the Ninth Circuit.  However, the Supreme Court, reversing the Ninth District, ruled in Equilon’s favor.
 

Joint Ventures
 

The Court ruled that Equilon is a legitimate joint venture after relying heavily on the Federal trade Commission prior approval of the formation.  The FTC’s consent decrees imposed no restriction upon Equilon’s ability to price the gasoline.  The Court also noted that Equilon had the following justifying qualifications even though the resulting entity reduced competition: 

1. Consolidation of the companies’ operations
    
2. The managing board comprised of representatives from both companies
    
3. The joining companies did not compete with each other in the relevant market (selling gasoline to gas station on the U.S. west coast.)
    
4. Pooled capital
    
5. Shared risks of loss and profit
    

For those reasons, the Court ruled that Equilon is a single entity, legally incapable of violating Section 1 of the Sherman Act. 

Price Fixing Restrains
 

This opinion is unique because it adds a new step in the anti-trust analysis, at least for joint ventures.  The Court sought to correct the Ninth Circuit’s application of the naked vs. ancillary restraint analysis.  Historically, a court had discretion to determine whether a company’s actions constituted a naked restraint upon competition (per se violation of the Act) or ancillary restraint (reasonably related to the venture’s purpose).  However, this Court ruled that once a venture is deemed legal, it is free to price its products as it sees fit. 

In short, prior to applying the naked vs. ancillary restraint analysis to a lawful joint venture’s actions, a court must determine if the act involves core activities or nonventure activities.  Id. at 7.  If the agreement involves core or venture-related activities, a court cannot reach the naked vs. ancillary analysis.  As dicta, the Court also noted that even if it were to invoke the naked vs. ancillary doctrine, Equilon’s pricing policy is ancillary to “the sale of its own products”.  The Court reasoned that an agreement on pricing is necessary to market the venture’s product.