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Oil Giants Take on Gas Station Owners in Supreme Court

Posted on: Wednesday, 6 July 2005, 12:01 CDT

Jul. 6--WASHINGTON -- The Supreme Court will hear a price-fixing case that has pitted big oil companies against the owners of gas stations and could have an effect on some of the biggest names in American business.

The issue is whether a joint venture created by Texaco and Shell Oil Co. can sell gasoline at the same price to all distributors under laws designed to preserve competition.

Antitrust experts say the case, which was accepted at the end of the court's recent term, is likely to be one of the more significant business issues it considers when it goes back to work in October.

The case comes from the San Francisco-based 9th U.S. Circuit Court of Appeals, which ruled in favor of the gas station owners.

Big names on the side of the oil companies include the U.S. government, Visa USA, Coca-Cola Co. and Microsoft Corp.

"Beyond the implications for these very major industry players, the 9th Circuit's decision has far-reaching implications for all kinds of joint ventures," said David Price, an attorney with the Washington Legal Foundation, who filed a brief in favor of the oil companies. "It would create potential for antitrust liability when a joint venture makes routine decisions, like pricing."

The class action lawsuit filed on behalf of 23,000 service station owners argued that the joint venture violated antitrust laws making it illegal to limit competition by setting a common price for a product made by competing companies.

The creation of two refining and marketing joint ventures in 1998 allowed Texaco and Shell to continue to sell their brands separately but save an estimated $800 million each year by sharing refining capacity and the cost of selling the fuels. At the pump, consumers saw Texaco and Shell as two different brands of gas, but the gas was sold at the same wholesale price by the joint venture.

The joint venture at the heart of the lawsuit, Equilon, operated in the western United States. Texaco and Shell were partners with Saudi Refining in a similar joint venture called Motiva that operated in the eastern U.S.

The oil companies argue that setting a price for gas produced under Equilon was a necessary part of doing business, even if it was sold under two brand names.

According to the 9th Circuit Court, the companies that joined to create Equilon sharply increased the price of their gasoline in some West Coast cities, including Los Angeles, at a time when oil prices were at near-historic lows of $10 to $12 per barrel. Additional costs were passed by distributors to consumers.

Texaco's stake in the joint venture was sold to Shell Oil Co. after Texaco was taken over by ChevronTexaco Corp.

Daniel Shulman, an attorney for the plaintiffs, called the move price-fixing and said it falls under the "per se" rule of antitrust law, which makes it illegal regardless of the circumstances.

"The Supreme Court has said for 50 years that joint ventures are not entitled to any type of special protection," Shulman said.

But those backing the oil company argue the situation should be judged according to the "rule of reason," which allows joint ventures to set prices if they are efficient. The idea is that such combinations may produce new products, made less expensively or more plentiful for consumers.

In a brief, the U.S. government urged the high court to overturn what it saw as an error by the appeals court and treat Equilon as a separate company created to refine and sell fuel more efficiently, which it said should exempt it from price-fixing rules.

The appeals court's decision poses a threat to the proper enforcement, both private and public, of the antitrust laws, wrote Paul Clement, acting solicitor general.

Shulman countered that Equilon should not qualify as efficient because it did not create a product that was different from what Texaco and Shell produced independently.

The American Antitrust Institute, a nonprofit group that aims to increase competition among businesses, has not yet taken a stance on the issue. But its president, Bert Foer, said a reversal by the high court has the potential to set a precedent that could hurt consumers.

Instead of doing a joint venture to create something new, Texaco and Shell "are doing a joint venture to eliminate the competition that previously existed between them," Foer said.

The last time the high court ruled on a similar antitrust case was in 1979, in Broadcast Music v. CBS. Justices declared price-fixing is allowed only if the joint venture can prove its efficiency.

The two cases, which will be combined for argument before the court, are Texaco v. Dagher and Shell Oil Co. v. Dagher.

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Source: Houston Chronicle

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