Industrial Organization in Context: Updates and discussion topics, 2010.

February 2006 Dagher, May 2010 American Needle

This material might usefully be presented in connection with the discussion in Chapter 20 of Rothery Storage.
A frequent observation in the early years of U.S. antitrust was that Section 2 of the Sherman Act permitted firms to reach, by merger, collusive outcomes that were forbidden under Section 1. The 2006 Dagher decision raised the spectre that firms could collude with impunity, provided they formed a joint venture to do so.  The 2010 American Needle decision suggests instead that joint ventures will be judged under the rule of reason (slip opinion at 11):

The question is whether the agreement joins together "independent centers of decisionmaking." Id., at 769. If it does, the entities are capable of conspiring under [Section] 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one.  


Questions to consider: did the Dagher joint ventures join together independent centers of decisionmaking? To what extent should courts presume that formation of a joint venture will permit efficiency gains? (An answer to this question might consider the cautious attitude toward efficiency gains embodied in the April 2010 proposed revisions of the Horizontal Merger Guidelines.)

The 2006 Dagher decision,1 involved horizontal cooperation effected by means of a joint venture. Two major oil companies, competitors on all vertical levels of the world petroleum industry, formed a joint venture2 "to consolidate their operations in the western United States, thereby ending competition between the two companies in the domestic refining and marketing of gasoline." The Supreme Court affirmed a District Court refusal to find the arrangement in violation of the Sherman Act:3

Price-fixing agreements between two or more competitors, otherwise known as horizontal price-fixing agreements, fall into the category of arrangements that are per se unlawful. ...These cases do not present such an agreement, however, because Texaco and Shell Oil did not compete with one another in the relevant market---namely, the sale of gasoline to service stations in the western United States---but instead participated in that market jointly through their investments in [the joint venture].
With Dagher, what had been a prohibition of "Any combination which tampers with price structures is engaged in an unlawful activity" has become4 "the narrow category of activity that is per se unlawful under [Section] 1 of the Sherman Act." While it remained possible to challenge the formation of anticompetitive joint ventures.5, it seemed legitimate to ask if the Dagher rule would have permitted the colluding firms of 6 to avoid per se condemnation simply by forming a "lawful joint venture."

American Needle7 dealt with the application of Section 1 to joint ventures that amount to partial rather than full integration.  The issue here was an exclusive contract granted by National Football League Properties (NFLP), a joint venture formed by the 32 football teams that make up the U.S. National Football League, to Reebok International Ltd. to produce souvenir headgear bearing trademarked team logos. The exclusive contract meant the end of arrangements worked out by individual teams. American Needle, one of the companies excluded by the exclusive contract, filed a private antitrust suit a per se violation of Section 1 of the Sherman Act. The NFL responded that the exclusive contract was a decision of a single entity, NFLP, and therefore outside the scope of Section 1. District and Appeals Courts accepted the NFL's argument. When the case reached the Supreme Court, the question was the impact of the formation of the joint venture on the applicability of Section 1. Justice Stevens, writing for a unanimous Court, came down on the side of substance over form:

We have long held that concerted action under [Section] 1 does not turn simply on whether the parties involved are legally distinct entities. Instead, we have eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.
The Court disavowed the single entity doctrine as a focus of inquiry:
Because the inquiry is one of competitive reality, it is not determinative that two parties to an alleged [Section] 1 violation are legally distinct entities. Nor, however, is it determinative that two legally distinct entities have organized themselves under a single umbrella or into a structured joint venture. The question is whether the agreement joins together "independent centers of decisionmaking." ...If it does, the entities are capable of conspiring under [Section] 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one.
On the merits, the Court noted in footnote 7 that
Although two teams are needed to play a football game, not all aspects of elaborate interleague cooperation are necessary to produce a game. Moreover, even if league wide agreements are necessary to produce football, it does not follow that concerted activity in marketing intellectual property is necessary to produce football.
Having concluded that the joint awarding of an exclusive contract was collective action, the Court, citing Justice Brandeis in Chicago Board of Trade,8
returned the case to lower courts for evaluation under the rule of reason.

The Dagher rule remains undisturbed; the Court wrote that there was9 "no need to pass upon" the argument that Section 1 did not apply to fully-integrated joint ventures, since, functionally, NFLP was not such a venture.  Taking Dagher and American Needle together, the state of play calls for extreme caution in permitting the formation of joint ventures that, functionally, would accomplish collusive ends.

http://www.oyez.org/cases/2000-2009/2005/2005_04_805

Dagher slip opinion; Dagher material at www.oyez.org.

American Needle slip opinion; American Needle material at www.oyez.org.

http://www.supremecourt.gov/opinions/05pdf/04-805.pdf

http://www.supremecourt.gov/opinions/09pdf/08-661.pdf



1. Texaco Inc. v. Dagher, 547 U.S. 1 (2006).

Back to text at footnote 1.

2. 547 U.S. 1 at 4.

Back to text at footnote 2.

3. 547 U.S. 1 at 5-6.

Back to text at footnote 3.

4. 547 U.S, 1 at 8.

Back to text at footnote 4.

5. 547 U.S, 1 at 7.

Back to text at footnote 5.

6. 175 U.S. 211 (1899).

Back to text at footnote 6.

7. American Needle, Inc. v. National Football League et al. 24 May 2010 560 U. S. ____ (2010).

Back to text at footnote 7.

8. 246 U. S. 231 at 238, given on page 663 of IOIC.

Back to text at footnote 8.

9. 560 U. S. ____ (2010), footnote 9.

Back to text at footnote 9.