US Supreme Court Antitrust Cases Impact Canadian Business 


April 2006 - (Competition & Antitrust Brief)

Competition & Antitrust Brief
Dagher: The Lawful Use of Joint Ventures
On February 28, 2006, the U.S. Supreme Court issued its much anticipated decision in Texaco, Inc. v. Dagher.

In Dagher, Texaco and Shell collaborated to form a joint venture (called Equilon) to refine and sell gasoline in the western United States, with both companies' brands (which continued to be promoted separately to the public) being sold at the same price. The joint venture effectively ended competition between the two companies in the domestic refining and marketing of gasoline. Under the joint venture agreement, Texaco and Shell agreed to pool their resources and share the risks and profits of Equilon's activities, with both companies having representation on Equilon's board of directors.

After the joint venture began to operate, service station owners that purchased gasoline from the Equilon joint venture commenced a lawsuit alleging that Texaco and Shell had violated the Sherman Act's per se rule against price fixing. The Supreme Court unanimously rejected that claim and made a number of other rulings to bolster the legitimacy and rights of joint ventures.

The following are some of the highlights from the Dagher decision:
  • The Court held that it is not per se illegal under section 1 of the Sherman Act for a "lawful, economically integrated joint venture to set the prices at which the joint venture sells its products" (i.e., such activity will not be found automatically illegal, but will be judged on a more flexible "rule of reason" standard that considers the market effects of the conduct). That is, it will be evaluated essentially as would be a merger between the parties, which in essence it is.
  • While the Court confirmed the long standing principle that price fixing agreements between competitors are per se illegal, it held that the joint venture was a single entity and that, as a result of its formation, Texaco and Shell did not compete in the relevant market. The Court reasoned that while the joint venture's "pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense," as the policy was "little more than price setting by a single entity – albeit within the context of a joint venture – and not a pricing agreement between competing entities with respect to their competing products."
  • As part of its decision, the Court cited its earlier decision in Arizona v. Maricopa County Medical Society, in which it held that where "persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit, such ventures are regarded as a single firm competing with other sellers in the market."
  • Finally, the Court overturned the application by the Court of Appeals of the "ancillary restraints" doctrine, which governs the validity of restrictions imposed by a legitimate joint venture on non-venture activities. The ancillary restraints doctrine essentially provides that if activities are necessary for the joint venture they will be examined under the rule of reason, but if they go beyond what is necessary for the functioning of the joint venture they may be challenged as per se unlawful agreements amongst competitors, depending on the nature of the agreement in issue. It held that the doctrine does not apply where the practice being challenged is the core activity of the joint venture itself (in this case, the pricing of the joint venture product).
The Dagher decision may have significant positive implications for some joint ventures in which Canadian businesses are involved (e.g., Canadian joint ventures operating in or selling goods or services in the United States or Canadian joint venture partners of international joint ventures selling into the United States). These implications include:
  • Joint venture partners may, depending on the structure of the joint venture, jointly control the pricing and marketing of their joint venture products.
  • U.S. courts likely will apply a more flexible "rule of reason" approach to antitrust challenges of joint ventures, rather than finding certain joint venture activities per se illegal.
  • U.S. courts likely will only apply the "ancillary restraints" doctrine to non-joint venture activities, not the core activities of a joint venture.
  • Confirmation of joint ventures as legitimate business vehicles that are deemed to operate as a single entity, which will mean lower risks for such ventures.
The Dagher decision is a strong indication that U.S. courts recognize joint ventures as legitimate business vehicles. The decision also makes it clear that U.S. courts are willing to apply a flexible standard to antitrust challenges of joint venture conduct.

It remains to be seen what impact the Dagher decision will have in Canada and, in particular, whether the Competition Bureau and Canadian courts will be willing to recognize sufficiently integrated joint ventures as single entities and immune from the application of the criminal conspiracy provisions of the Competition Act.

In Canada's Strategic Alliances Information Bulletin, the Competition Bureau states that most strategic alliances do not raise issues under the Competition Act, and should generally lead to positive innovation and efficiency gains without accompanying negative effects on competition. The Bureau cautions, however, that there may be instances where strategic alliances raise serious competition issues (e.g., where an alliance results in market power and the parties' behaviour results in a significant prevention or lessening of competition). The Dagher case may move the Canadian enforcement perspective in the direction of treating joint ventures as a single firm for antitrust purposes, and addressing concerns related to their creation and operation as merger, not conspiracy, issues.

Independent Ink: The Antitrust/Patent Law Frontier
On March 1, 2006, the U.S. Supreme Court delivered its second important antitrust decision in as many days, in this case addressing the interface between intellectual property and antitrust law. More specifically, it dealt with the question of whether one should presume that a holder of a patent "monopoly" also enjoys an antitrust law or economic "monopoly," or the power to price products without close regard to the activities of competitors.

The facts in Illinois Tool Works Inc. v. Independent Ink, Inc. were relatively straightforward and commercially common. Illinois Tool Works patented a print-head and ink container for computer printers. It had no patent for ink – but manufactured a specially formulated ink for use in its containers. Illinois Tool Works' customers were Original Equipment Manufactures (OEMs) of printers. As a condition of selling its patented products to the OEMs, Illinois Tool Works required that OEMs agree that neither they nor their customers would refill these patented containers. As a result, Illinois Tool Works was, by contract, the only supplier of ink for the machines in which its patented products were used, but the ink itself was not patented.

Independent Ink developed an identically formulated ink to that which Illinois Tool Works sold, and sold this ink to users of printers employing Illinois Tool Works' patented ink containers. Illinois Tool Works sued Independent Ink for patent infringement. That claim was dismissed. Independent Ink counterclaimed, alleging that Illinois Tool Works' conduct had invalidated its patents, on the basis that Illinois Tool Works had tied the sale of the unpatented ink to the patented print-head and container.
Independent Ink argued that this was an unlawful tied sale because, while an unlawful tying arrangement typically requires that the supplier enjoy market power (in essence, some monopoly power, or power to price above the competitive level) in respect of the tying product – that is, the product withheld unless the customer also buys the second product – when the tying product is covered by a patent the law will imply that market power.

The Court of Appeals for the Federal Circuit found, based on pre-existing Supreme Court jurisprudence, that Independent Ink was correct. Since Illinois Tool Works had patents on the tying product(s), it found that the court must presume that Illinois Tool Works had market power. Assuming that, the tied sale of the ink to the print-head and ink container was illegal. It was a per se violation of U.S. antitrust law.
This presumption of market power in the patented product was the issue for decision in the Supreme Court.

The question of whether a patent gives the holder of the patent market power, or monopoly power in the antitrust sense, has long been a important question in antitrust law. It is, essentially, the question of whether a patent monopoly (that is, the sole right to make, use and sell a particular invention) is equivalent to a competition law or economic monopoly (that is, the power to profitably raise price above or reduce output below the competitive level). The view held by the antitrust agencies has been, for some considerable period of time, that patent monopolies and antitrust or competition law monopolies are quite different things, and one should not be presumed to have an economic monopoly just because one has a patent.1 That is, the sole right to make a particular ink container and print-head may, if that is the only efficient design for such products, also constitute an economic monopoly. On the other hand, it may be simply one of literally hundreds of ways to deliver ink to paper, and therefore confer virtually no market power or antitrust monopoly whatsoever, even though there is still a "monopoly" over the particular device or invention, in the patent law sense. This leads to the conclusion that presumptions of market power being associated with patents are inappropriate. It depends on the facts in each case.
Justice Stevens, writing for a unanimous U.S. Supreme Court, concluded the case as follows:

"…the vast majority of academic literature recognizes that a patent does not necessarily confer market power. … Similarly, while price discrimination may provide evidence of market power, particularly if buttressed by evidence that the patentee has charged an above-market price for the tied package, … it is generally recognized that it also occurs in fully competitive markets … We are not persuaded that the combination of these two factors should give rise to a presumption of market power when neither is sufficient to do so standing alone. Rather, the lesson to be learned from International Salt and the academic commentary is the same: Many tying arrangements, even those involving patents and requirements ties, are fully consistent which a free, competitive market.

"It is no doubt the virtual consensus among economists that has persuaded the enforcement agencies to reject the position that the Government took when its supported the per se rule that the Court adopted in the 1940's …

"Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer the market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product."

This case is important in that it lays to rest, in fairly clear and vigorous prose, the longstanding confusion between patent monopolies and economic or antitrust monopolies. While the Competition Bureau, in the Canadian Intellectual Property Enforcement Guidelines, clearly takes the position that the two are not the same, Canadian courts have continued to struggle with the issue as recently as the last couple of years.2 For this reason, a clear decision on the point from the U.S. Supreme Court is, in our view, likely to have a salutary effect on the law in the United States and likely much of the world, including Canada, on this important issue. It also reduces risks for Canadian businesses marketing patented products in the United States.

1 See Intellectual Enforcement Guidelines, Ottawa, Competition Bureau, 2000 Section 4.1; Antitrust Guidelines for the Licensing of Intellectual Property, April 6, 1995, U.S. Department of Justice and the Federal Trade Commission, 2.0.

2 See Eli Lilly and Co. v. Apotex Inc. (2003), 28 C.P.R. (4th) 37 (F.C.T.D.); (2004) 32 C.P.R. (4th) 195 (F.C.A.); (2004) 35 C.P.R. (4th) 155 (F.C.T.D.); [2005] F.C.J. No. 1818 (F.C.A.) and J. Musgrove and D. Edmondstone, "Apotex v. Lilly – Skirmishes Along the IP/Competition Law Frontier," Fall 2004, 22 Canadian Competition Record.