The Rule of Reason and the Per Se Rule of Antitrust Price-Fixing

Texaco Inc. v. Dagher

Texaco and Shell collaborated in a “joint venture,” where two or more companies decide to share profits and losses, to refine and sell gasoline, named Equilon, but continued to sell gasoline under separate names. A class of station owners claimed that Equilon engaged in unlawful price fixing, under the Sherman Antitrust Act, when it set a uniform price for both brands of gasoline.

The first section of the Sherman Antitrust Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states.” Since this covers almost every large contract in existence, this has been interpreted into a “per se” rule, and a “rule of reason” (limiting only “unreasonable restraints.”) The per se prohibition on price fixing applies to “those agreements that are ‘so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.’” Vertical price-fixing arrangement, the Court states, are subject to the rule of reason. Horizontal price-fixing arrangements, that is, arrangements between two or more competitors, are subject to the per se rule. Because the challengers admit that if the gasoline was sold under a single brand there would be no question of the legality of the scheme, and because joint ventures are not considered to be competitive within the venture, the per se rule is not applicable.

The lower court applied the doctrine of “ancillary restraints” which prohibits restrictions imposed by a legitimate business or corporation that are a naked restraint on trade, as opposed to those valid restraints which are ancillary to the legitimate and competitive purposes of the business association. The Court holds that the price-fixing in which Equilon engaged involved the core activity of the company, and that even if the ancillary restraints doctrine were applied, the price-fixing policy is clearly ancillary to the sale of Equilon’s own products.