Resource Joint Ventures Australia (2010)

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A MISSED OPPORTUNITY – TPA CARTEL CONDUCT
AMENDMENT FAILS TO PROVIDE COMMERCIAL CERTAINTY
FOR RESOURCE JOINT VENTURES
BY MICHAEL FILIPPICH
I INTRODUCTION
For many years the Trade Practices Act 1974 (Cth) (‘the TPA’) has struggled to
provide the necessary legal framework to distinguish between legitimate, pro-competitive
joint ventures and anti-competitive cartels. The Trade Practices Amendment (Cartel
Conduct and Other Measures) Bill 2008 (Cth) (‘the Bill’) is the Government’s most
recent attempt to address this issue and was subject to widespread criticism in the
academic and business communities for failing to provide legal and commercial certainty
to companies involved in joint venture operations. This paper outlines the changes made
to the Trade Practices Act 1974 (Cth) by the Cartel Conduct and Other Measures Bill
2008 and the impact of these changes on resource joint ventures operating within
Australia. The paper also investigates the treatment of joint ventures in the United States
where, subject to the ‘rule of reason’, they are exempt from the strict per se liability
which exists for cartel conduct under antitrust legislation. It is argued that the US
approach of evaluating a joint venture by its conduct rather than its contract is the more
effective method of identifying cartel behavior.

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II CHANGES MADE BY THE CARTEL CONDUCT AND OTHER MEASURES BILL 2008
The Cartel Conduct and Other Measures Bill 2008 was introduced to establish
civil and criminal penalties for cartel conduct. It also granted wider investigative powers
to the Australian Competition and Consumer Commission (ACCC) and the
Commonwealth Director of Public Prosecutions (CDPP) by enabling telecommunications
surveillance to be used to collect evidence against cartel offences. The Bill was based on
the Organisation for Economic Co-operation and Development (OECD)
Recommendation of the Council Concerning Effective Action Against Hard Core Cartels
which defined serious cartel conduct as anticompetitive arrangements by competitors to
fix prices, rig bids, establish output restrictions or share or divide markets.1
The OECD
called upon its member countries to ensure that legislation was in place to adequately
prohibit hard core cartels and provide for effective sanctions, enforcement procedures and
investigative tools to combat them.2
Section 45 of the previous version of the TPA prohibited arrangements that have
the purpose or likely effect of substantially lessening competition. Section 45A went on
to deem price fixing as having the purpose or likely effect of substantially lessening
competition. The Cartel Conduct and Other Measures Bill 2008 repealed the per se
prohibition on price fixing in s 45A and replaced it with new civil and criminal
prohibitions against cartel conduct which prohibit a corporation or individual from
making or giving effect to a Contract, Arrangement or Understanding (‘CAU’) that
contains a cartel provision. A cartel provision is defined in ss 44ZZRD of the TPA as a
provision relating to:
1
Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill
2008 (Cth).
2
Ibid.

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• price-fixing; or
• restricting outputs in the production and supply chain; or
• allocating customers, suppliers or territories; or
• bid-rigging
by parties that are, or would otherwise be, in competition with each other.
A CAU includes both formal and informal arrangements between competitors
which may or may not be in writing. The element that distinguishes the cartel offence
from the civil prohibition in the TPA is the need to establish certain fault elements under
the criminal code.3
In order to be charged with making or giving effect to a cartel
provision it would be necessary to establish that the individual or corporation knew or
believed that the contract, arrangement or understanding contained a cartel provision and
that they intended to give effect to this provision. A criminal cartel offence must be
proven beyond a reasonable doubt whereas a civil offence need only be proven on the
balance of probabilities.4
The maximum criminal penalty for an individual engaging in
cartel conduct is 10 years jail and or a fine of $220,000. For a corporation, the maximum
criminal penalty is 10 million dollars or three times the value of the benefit obtained from
the breach. If the value of the benefit cannot be determined a company can be fined up to
10% of its annual turn over. The amendments operate retrospectively to apply to cartel
provisions which were in place before the Bill was passed.
3
See above n 1.
4
Ibid.

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III JOINT VENTURE EXCEPTIONS
Joint ventures between competitors play an important role in Australian and
international business, particularly in the resource and construction industries. The term
joint venture does not have a settled Common Law meaning but is defined in s 4J of the
TPA as:
a reference to an activity in trade or commerce:
(i) carried on jointly by two or more persons, whether or not in partnership; or
(ii) carried on by a body corporate formed by two or more persons for the purpose
of enabling those persons to carry on that activity jointly by means of their
joint control, or by means of their ownership of shares in the capital, of that
body corporate;
Joint ventures typically involve a level of integration between participants which is less
than that of a merger or partnership and as such are treated differently for taxation and
legal purposes.
It is well established that joint ventures, including those between competitors, can
have pro-competitive benefits for consumers which could not be achieved if participants
acted independently.5
Joint ventures allow companies to share risk, combine capital,
technology and other assets as well as increase output and improve efficiency through
greater economies of scale. The commercial benefits of joint ventures were recognized
by the 2003 Review of the Competition Provisions of the Trade Practices Act chaired by
Sir Daryl Dawson (‘The Dawson Review’) which recommend that the scope of the joint
5
Bill Grant, Law Council of Australia Submission to the Inquiry into the Trade Practices Amendment
(Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia
<http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub10.pdf>
at 20 August 2010.

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venture exemptions in the TPA be broadened.6
In 2007 s 76C and s 76D were added to
the Act to provide a defence for exclusionary agreements and price fixing which were for
the purpose of a joint venture and did not have the purpose, effect or likely effect of
substantially lessening competition.
The Cartel Conduct and Other Measures Bill 2008 repealed the joint venture
defence in s 76D and inserted ss 44ZZRO and ss 44ZZRP which provide exceptions for
joint ventures from civil and criminal penalties relating to cartel conduct. Both of these
exceptions require the following elements to be met:
• the cartel provision is contained in a contract;
• the cartel provision is for the purposes of a joint venture;
• the joint venture is for the production and/or supply of goods or services; and
• the joint venture is carried on jointly by the parties to the contract, or by means of
joint ownership or control of a body corporate formed by the parties to carry on
the activity of the joint venture.
The drafting of these joint venture exceptions was the focus of much of the criticism
directed at the Bill.7
The most significant areas of concern were the requirement for
cartel provisions to be contained within a contract, the removal of the competition test for
joint venture arrangements and the limiting of the exceptions to joint ventures for the
production and/or supply of goods or services.
6
Ibid.
7
Brett Fisse, The Contract Requirement For The Joint Venture Exceptions Under Sections 44ZZRO AND
44ZZRP of the TRADE PRACTICES ACT (2009) Brent Fisse
<http://www.brentfisse.com/images/Fisse_The_Contract_Requirement_for_the_Joint_Venture_Exceptions
_under_ss_44ZZRO_and_44ZZRP.pdf> at 20 August 2010.

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IV PROBLEMS WITH LIMITING JV EXCEPTIONS TO CARTEL PROVISIONS CONTAINED
WITHIN CONTRACTS
The requirement in ss 44ZZRO and ss 44ZZRP that a cartel provision be
contained within a contract seems at odds with the definition of a cartel provision in ss
44ZZRD which includes arrangements and understandings in addition to contracts.8
Most joint ventures are established through a series of written and verbal agreements that
may or may not be legally binding. Often non-compete or other cartel like provisions are
discussed and agreed in relation to the joint venture during negotiations. The execution
of a formal joint venture agreement between participants may not occur until well into the
project or not at all. It is unclear whether or not joint venture participants could be
exposed to civil or criminal penalties for cartel provisions that existed prior to the
formation of a formal contract.9
The joint venture exceptions make no reference to
Memorandums of Understanding or Heads of Agreements which are commonly used by
business people during the establishment phase of a joint venture to capture the essential
elements of a deal. In order to rely on the joint venture exceptions with respect to cartel
provisions contained within a Memorandum of Understanding or Heads of Agreement it
will be necessary for the joint venture participants to establish that this agreement was in
fact a contract and that they intended it to be legally binding until the execution of a more
formal agreement, which is often not the case.
8
Brett Fisse, Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other
Measures) Bill 2008 (2009) Parliament of Australia
at 20 August 2010.
9
Ibid.

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The Government attempted to resolve this issue by modifying the Bill during the
consultation period to include the ‘contract proxy provisions’ in ss 44ZZRO(1A)(1B) and
ss 44ZZRP(1A)(1B). These amendments extended the joint venture exceptions to cartel
provisions contained within an arrangement or understanding provided that:
(b) when the arrangement was made, or the understanding was arrived at, each
party to the arrangement or understanding:
(i) intended the arrangement or understanding to be a contract; and
(ii) reasonably believed that the arrangement or understanding was a contract;
These modifications are ineffective for a number of reasons. Business people rarely
intend for arrangements and understandings to be legally binding contracts particularly
during the negotiation phase of a deal. The exceptions also fail to address the
retrospective application of the TPA to cartel provisions which existed prior to the
establishment of a formal joint venture agreement or contract. This could be especially
problematic for existing joint ventures that were operating without a formal contract prior
to the cartel amendments coming into effect. It is also likely that a defence against cartel
conduct based on ss 44ZZRO(1A)(1B) and ss 44ZZRP(1A)(1B) would be extremely
complex, time consuming and costly as the respondent would not only need to establish
their own intention and belief but also the intention and belief of every other joint venture
participant who was a party to the arrangement or understanding.

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Another major concern raised by joint venture participants was whether or not
joint venture contracts would need to be continually updated to reflect day to day
operational decisions which may be interpreted as containing a cartel provision.10
Often
the joint venture agreement will establish an operating committee which is responsible
for addressing a wide range of operational issues which may include setting production
levels and prices for the output of the joint venture. It is unclear from the drafting of the
Bill whether or not any cartel provisions which may arise from these operational
arrangements are covered by the joint venture exceptions. The issue is further
complicated in situations where the operator is a separate contractor and not a party to the
joint venture agreement, as it would appear that they are not covered by the joint venture
exceptions. It is also unclear whether or not the joint venture exceptions would apply to a
farmee who enters into or gives effect to a cartel provision in a farmout agreement which
is separate from the joint venture contract.
The Government attempted to address these concerns in the Supplementary
Explanatory Memorandum to the Bill by stating that:
If a board or committee is established under the joint venture contract to regulate or
manage the joint venture and the activities of that board or committee are
contemplated and regulated by the joint venture contract, then the exceptions would
appear to apply in relation to those activities.
The Explanatory Memorandum went on to provide the example of two or more parties
entering into a joint venture to construct a shopping centre. If the joint venture contract
provided for the establishment of a management committee to decide the rent and charges
for the shopping centre, then the process of making or giving effect to those decisions
10
Supplemental Explanatory Memorandum, The Trade Practices Amendment (Cartel
Conduct and Other Measures) Bill 2008 (Cth).

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would appear to be covered by the joint venture exceptions. The Explanatory
Memorandum is not a legal document and does not provide any legal guidance to support
this conclusion. The issue of how cartel provisions arising from day to day operational
decision will be treated by the TPA remains an area of commercial and legal uncertainty.
It is unlikely that amending a joint venture contract to include provisions that deem any
subsequent cartel provisions made by the operating committee as automatically being a
cartel provisions contained within the contract would be effective as this would most
likely be interpreted as an attempt to contract out of the TPA.11
The legislative intent for requiring that cartel provisions be contained within a
joint venture contract remains unclear. If the Government’s intention was to prevent
hardcore cartelists from using the joint venture exceptions, then they have put legitimate
joint ventures at risk unnecessarily because there is nothing in that TPA to prevent
cartelists from drafting a contract which covers their cartel arrangements. On this basis it
is proposed that there is no reason that the scope of the joint venture exceptions cannot be
extended to include understandings and arrangements which are not necessarily intended
to be legally binding contracts. This will ensure consistency with the rest of the TPA
and provide greater certainty to legitimate joint ventures without providing camouflage to
cartelists. The ‘contract proxy provisions’ in ss 44ZZRO(1A)(1B) and ss
44ZZRP(1A)(1B) should be repealed on the basis that they are ineffective and
impractical. The joint venture exceptions should also be extended to cover third parties
with contractual arrangements with the joint venture, provided that their activities are
specifically related to and contemplated by the joint venture agreement.
11
Fisse, above n 8.

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V REMOVAL OF THE COMPETITION TEST FROM THE JV EXCEPTIONS
The most effective method of distinguishing between a legitimate joint venture
and a cartel is not to require that cartel provisions be contained within a contract, but
rather to examine whether or not the cartel provisions are reasonably necessary to achieve
a pro-competitive benefit for the consumer. The removal of the joint venture exception
and associated competition defence for price fixing under s 76D in the previous version
of the TPA resulted in widespread criticism from both joint ventures and consumer
groups. According to DomGas, a business alliance formed to reduce prices and improve
supply of natural gas in Western Australia, the removal of s 76D from the TPA means
that it will no longer be relevant whether a cartel provision substantially lessens
competition so long as it is contained within a contract.12
Similarly, joint venture
participants have raised concerns that their inability to put forward a defence based on the
pro-competitive benefits of a cartel like provision means that they will be forced to seek
ACCC authorisation for any arrangements that could potentially be challenged as anti-
competitive. The ACCC authorisation process is both costly and time consuming.
In their submission to the Government regarding the Bill, the ACCC supported
the removal of the competition test on the basis that it would have complicated jury
trials.13
The ACCC argued that if s 76D remained in force the accused would only need
to establish that their conduct did not substantially lessen competition to the standard of
12
Stuart Hohnen, DomGas Alliance Submission to the Inquiry into the Trade Practices Amendment (Cartel
Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia
<http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub03.pdf >
at 20 August 2010.
13
Brian Cassidy, Australian Competition and Consumer Commission Submission to the Inquiry into the
Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia
at 20 August 2010.

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the ‘balance of probabilities’ whereas the prosecution would be required to establish
‘beyond a reasonable doubt’ that competition was adversely affected. This would require
extensive market evidence and expert economic analysis to be presented to a jury which
would complicate the trial process and potentially diminish the deterrent effect of the
criminal prohibitions.14
The concern expressed by the Government and the ACCC about applying a
competition test to civil and criminal cases highlights the fact that the criminal sanctions
for cartel conduct are not confined to conduct that should be treated as illegal per se. The
Bill failed to distinguish between conduct that is serious enough to justify a criminal
offence and conduct that is less objectionable and should only be subject to a civil
penalty. This is contrary to the recommendations of the Dawson Review and the OECD
who only advocated criminal sanctions for serious or hardcore cartel activity. Instead the
cartel offences are broadly defined and only limited by the discretion of the ACCC and
CDPP.15
This discretion is covered by a Memorandum of Understanding between the
ACCC and CDPP which identifies the following factors for consideration when deciding
whether or not a cartel violation should be prosecuted:
• The conduct was longstanding or had or could have had a significant impact on
the market in which the conduct occurred.
• The conduct caused or could cause significant detriment to the public.
• The conduct caused or could cause significant loss or damage to one or more of
the participant’s customers.
• One or more of the alleged participants had previously been found by a court to
have participated in cartel conduct.
• The value of affected commerce exceeded or would exceed $1,000,000 within a
12 month period.
• In the case of bid rigging the value of the bid or series of bids exceeded
$1,000,000 within a 12 month period.16
14
Ibid.
15
Grant, above n 5.
16
See above n 1.

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According to the Law Council of Australia, the Memorandum of Understanding provides
insufficient guidance to the business community and its advisers as to when a matter is
likely to be pursued as a cartel offence.17
For example, it is unclear whether the above
factors act as a definitive threshold for when cartel conduct would becomes criminal or
whether they are merely indications for when the conduct should be assessed for
significance.
Greater legal certainty could be achieved by following the lead of overseas
jurisdictions and restricting criminal prosecution to serious, intentional cartel
arrangements where clear per se liability exists. These are typically agreements with no
other purpose than to raise prices or reduce outputs. Once identified such agreements are
considered to be illegal per se without inquiring into their claimed business purpose,
anticompetitive harms, pro-competitive benefits or overall competitive effects. In these
situations there is no need to complicate a jury trial with a detailed market analysis or a
competition test. Civil sanctions should be applied for more complicated or less serious
cartel arrangements and defendants should be entitled to rely on a competition defence
similar to that in s 76D of the previous version of the TPA. There is no reason that a
competition test could not be retained for civil cases as these are tried by a judge and not
a jury.
17
Grant, above n 5.

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VI PROBLEMS WITH LIMITING JV EXCEPTIONS TO THE PRODUCTION AND/OR SUPPLY
OF GOODS AND SERVICES
Another major concern with the drafting of the joint venture exceptions is that
they are restricted to joint ventures for the production and or supply of goods of services.
This drafting is highly prescriptive and contrary to the broader definition of a joint
venture in s 4J of the TPA which does not attempt to prescribe the activity in trade and
commerce that a legitimate joint venture can pursue.18
Joint ventures are often involved
in the collective acquisition of goods or services by pooling resources for major capital
expenditure or obtaining more favourable terms of trade with a supplier or contractor.
These activities are not covered by the joint venture exceptions in ss 44ZZRO and ss
44ZZRP. According to the Supplementary Explanatory Memorandum, the joint venture
exceptions can be extended to apply to the acquisition of goods or services by including
these activities in the joint venture contract.19
The Government offered no explanation as
to why the provisions could not be modified to include the production, supply and or
acquisition of goods and services. Instead it will be left to drafters of joint venture
contracts to resolve this statutory deficiency.
Two other types of joint ventures that may not be covered by the joint venture
exceptions are those formed for research and development and minerals and petroleum
exploration. In response to criticism raised during the consultation period, explanatory
notes were added to the Bill to clarify that a research and development joint venture that
proceeds to produce and supply the ‘fruits of the research and development’, may be
18
Grant, above n 5.
19
See above n 10.

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providing a service as defined under s 4 of the TPA and therefore qualify for a joint
venture exception. No formal definition is provided for the term ‘fruits of the research
and development’ and it remains unclear whether the exceptions would still apply to an
unsuccessful research and development joint venture which fails to produce any
meaningful results. Although the explanatory notes did not include exploration joint
ventures, it is likely that they would be treated in a similar manner.
VII IMPACT OF THE NEW CARTEL PROHIBITIONS ON THE JOINT MARKETING
AND SALE OF JV PRODUCTION
For joint ventures that are involved in the production and or supply of goods or
services it is unclear whether the joint venture exceptions extend to the joint marketing
and sale of production. Joint marketing is a common feature of many Australian resource
projects, particularly in the petroleum industry. This typically involves the joint venture
participants engaging in a coordinated marketing effort and agreeing identical terms,
conditions and prices with a common buyer or group of buyers.20
Each joint venture
partner then agrees to sell severally its participating share in the joint venture output
under the same terms and price. Separate sales contracts are usually established between
each seller and buyer to maintain the distinction between the unincorporated joint venture
and a partnership for tax and other purposes.21
Although this reasoning has not been
tested by the courts it is generally considered that the performance by each joint venture
producer severally and individually of its sales agreement with the common buyer or
group of buyers involves giving effect to the sales agreement but not the agreement to
20
Rose P, ‘Joint Marketing of Natural Gas: Competition Law Issues’ (2006) 06 AMPLA Year Book 392.
21
Ibid.

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jointly market the product. The agreement to jointly market production ceases at the end
of the negotiation process but may be revived if the sales agreement provides for periodic
price reviews. At the end of negotiations a horizontal relationship remains for production
and other matters whereas it is a question of fact whether a horizontal relationship still
exists in relation to the joint marketing and sales agreement.22
It should be no surprise that this approach could expose joint ventures to liability
under then new cartel provisions in the TPA. As discussed earlier in Section IV of this
paper, the Supplementary Explanatory Memorandum for the Bill indicates that joint
marketing would appear to be acceptable so long as it is contemplated by the terms of the
joint venture contract. Prior to the passing of the Cartel Conduct and Other Measures
Bill, terms related to joint marketing and sales were typically kept out of the joint venture
contract to support the position that the unincorporated joint venture is not a partnership.
Inserting marketing and sales terms into the joint venture contract may avoid liability
under the cartel provisions of the TPA but could potentially result in the joint venture
being challenged as a partnership.
To avoid uncertainty many joint ventures seek authorization from the ACCC prior
to commencing joint marketing activities. Section 93AB of the TPA enables a
corporation to lodge a collective bargaining notice setting out the particulars of a
contract, arrangement or understanding that contains a provision relating to price fixing,
restricting outputs or allocating customers, suppliers or territories but not in relation to
bid rigging. The ACCC is then able to authorise this contract, arrangement or
22
Ibid.

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understanding in accordance with s 88 of the TPA. Section 90 of the TPA requires that
the ACCC only authorise a corporation to make or give effect to a cartel provision if it is
satisfied that this provision will result in or be likely to result in a net public benefit.
Once ACCC authorisation has been obtained, s 45 (8A) provides an exception to criminal
prosecution and civil liability for any cartel provisions contained within the collective
bargaining notice.
Since the introduction of the Trade Practices Act 1974 (Cth) numerous
authorisations for joint marketing and sales have been granted by the ACCC to resource
joint ventures. The domestic sale of natural gas is one area in particular where the pro-
competitive benefits of joint marketing have long been recognised.23
Petroleum
ownership typically passes from the Crown to the title holder at the wellhead at which
point the interest of each joint venture partner is that of a tenant in common in undivided
shares.24
Some difficulty exists for joint venture participants who wish to sell their share
of the natural gas separately because each joint venture partner effectively has an
undivided interest in every molecule of petroleum which is extracted from the reservoir.
Due to the physical properties of natural gas these molecules are intermingled in a single
stream and cannot be separated or stock piled in the same way as minerals or liquid
petroleum products. The continuous flow of natural gas from the wellhead and lack of
storage capacity in pipelines and underground storage reservoirs also creates practical
23
ACCC, Determination of application in respect of the joint marketing and sale of natural gas from the
Gorgon Gas Project for supply in Western Australia (2009) ACCC Website
<http://www.accc.gov.au/content/trimFile.phtml?trimFileName=D09+180600.pdf&trimFileTitle=D09+180
600.pdf&trimFileFromVersionId=901112> at 20 August 2010.
24
Rose, see above n 20.

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constraints for joint selling and marketing. For these reasons it is often much simpler for
gas to flow directly to end use customers in a commingled and co-owned stream.25
In addition to the practical and proprietary issues that arise with the separate
marketing and sale of joint venture products there are also a number of commercial
disadvantages. Resource projects often involve large capital investments and high risks.
In order to secure financial backing for these projects it is often necessary to establish
long term supply contracts to underpin the investment. These contracts are easier to
obtain when joint venture participants take a coordinated approach to the marketing and
sale of production. Forcing joint venture partners to market their share of production
separately can result in project delays, increased risk, production inefficiencies and
higher financing and transactional costs which ultimately lead to higher prices for the
consumer. It can also be argued that forcing joint ventures to separately market their
product does not dilute their market power or lead to greater competition because they are
still able to determine the quantity of their output. In essence a joint venture’s market
power is derived from the exploration and production leases that they control.26
The joint
marketing of production is just one of the many ways that this power can be exercised. It
is unlikely that a single joint venture partner could unilaterally decide to increase output
as the production levels are typically set by a joint operating committee and each
participant would be allocated their share of the additional production. Some companies
have attempted to facilitate separate marketing by inserting ‘borrow and loan’ or
25
Ibid.
26
Ibid.

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production balancing provisions into their joint venture contracts however these
arrangements also require a high degree of coordination between joint venture partners.
The pro-competitive benefits of joint marketing and sales for large resource
projects have been confirmed in recent ACCC authorisations for the North West Shelf
Producers, Gorgon Gas Project and the now cancelled Papua New Guinea Gas Project.
In each of these authorisations the ACCC considered that allowing joint marketing in the
short term would create the necessary infrastructure and gas volumes required to establish
a fully competitive domestic gas market in the near future. In recognition of the pro-
competitive benefits of joint marketing and sales by legitimate joint ventures, the price
fixing provisions in s 45(2) of the TPA were amended in 2007 to provide joint ventures
with a competition defence for the prohibition on price fixing. The competition defence
in s 76D was subsequently removed by the Cartel Conduct and Other Measures Bill 2008
and replaced with the joint venture exceptions in ss 44ZZRO and ss 44ZZRP.
It is interesting to note that following the introduction of the competition test in
2007, the North West Shelf Partners in Western Australia requested that their 1977
ACCC authorisation to discuss and agree common terms and conditions including price
for the supply of domestic natural gas be revoked on the basis that this conduct no longer
breached the TPA.27
In their submission to the ACCC, the North West Shelf Partners
stated that the original request was made a time when it was unclear how the TPA would
be applied to joint venture activity and to avoid uncertainty regarding the application of
the then new law. The joint venture partners went on to state that it had always been their
view that joint marketing did not contravene the TPA.
27
Bob Baxt, North West Shelf Gas Pty Ltd - Applicant Initiated Revocation - A18492 (2007) ACCC
<http://www.accc.gov.au/content/index.phtml/itemId/807158/fromItemId/401858/display/application>
at 20 August 2010.

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In what is perhaps a poor reflection on the Cartel Conduct and Other Measures
Bill 2008, the North West Shelf joint venture partners submitted an application to the
ACCC to reinstate their authorisation to engage in joint marketing activities after the Bill
was passed.28
The application was approved on similar grounds to the authorisations for
the PNG Gas Project and Gorgon Joint Venture. Critics of the Cartel Conduct and Other
Measures Bill 2008 claim that the ACCC authorisation process should not be seen as a
remedy for poorly drafted and misconceived statutory provisions.29
The inability of the
new joint venture exceptions to adequately address the issue of joint marketing is yet
another reason for introducing a competition test for civil prohibitions against cartel
conduct.
VIII JV EXCEPTIONS UNDER US ANTITRUST LEGISLATION
The United States is an example of a jurisdiction where joint ventures are exempt
from the strict per se liability that exists for cartel conduct subject to a competition test
known as the ‘rule of reason’. Section 1 of the Sherman Act, 15 U.S.C. § 1 – 7 (1890)
(‘the Sherman Act’) prohibits any agreement among competitors that unreasonably limits
competition. Price fixing, bid rigging and market allocation are all considered to be
violations of S1 and are generally prosecuted criminally by the US Department of Justice.
These activities are considered to be per se illegal because they have been shown to
defraud customers, raise prices and restrict output without creating any plausible benefits
28
ACCC, Determination of application in respect of the joint marketing activities for the sale of domgas in
Western Australia from the North West Shelf Project and to administer existing gas supply contracts (2010)
ACCC Website <http://www.accc.gov.au/content/index.phtml/itemId/922104/fromItemId/401858> at 20
August 2010.
29
Grant, above n 5.

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to the consumer.30
Once identified the US courts conclusively presume such agreements
to be illegal without inquiring into their claimed business purposes, anticompetitive
harms, pro-competitive benefits or overall competitive effect. These agreements have
been proven through considerable judicial experience to be so likely to harm competition
that they do not warrant the time and expense of further investigation.
The pro-competitive benefits of joint ventures have long been recognized in the
United States. According to the U.S. Department of Justice, Antitrust Primer For
Federal Law Enforcement Personnel (2005), efficiencies generated through joint
ventures can enhance the ability of participants to compete resulting in lower prices,
improved quality, enhanced service or new production. 31
Joint ventures often allow
resources to be developed faster and cheaper than if participants acted alone. Over the
last twenty years relatively few US joint ventures have been found to be per se illegal.32
Most suspect joint ventures are instead analysed under the ‘rule of reason’ approach to
determine their overall competitive effect. This involves an assessment of whether
arrangements which would otherwise be considered per se illegal are reasonably related
to and necessary to achieve pro-competitive benefits.
30
U.S. Department of Justice, An Antitrust Primer For Federal Law Enforcement Personnel (2005) U.S.
Department of Justice <http://www.justice.gov/atr/public/guidelines/209114.htm > at 20 August 2010.
31
Ibid.
32
Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines
for Collaborations Among Competitors (2000) U.S. Federal Trade Commission
<http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf> at 20 August 2010.

M Filippich - 21 - 1/12/2010
When evaluating a suspect joint venture, the US courts will often take a ‘quick
look’ at an arrangement that does not appear to be per se illegal to assess whether the
arrangement harms or is likely to harm competition.33
The purpose of a ‘quick look’
assessment is to determine whether the suspect practice of a joint venture resembles
another practice that is already considered to be per se illegal. This approach works well
when the anticompetitive effects are easily recognisable. If the anticompetitive effects
are not immediately obvious then the courts and agencies evaluate the overall competitive
effect of the agreement by applying a ‘rule of reason’ analysis. This takes into
consideration a number of factors including the:
• Nature of the agreement and its specific business purpose.
• Market in which the agreement operates.
• Market power of each of the participants.
• Level of integration of the joint venture participants and the extent to
which they are likely to continue to compete against each other outside of
the joint venture.
• Extent to which participants retain independent control of assets necessary
to compete.
• Control each participant has over decision making.
• Likelihood of anticompetitive information sharing.
• Duration of the collaboration.34
If the examination of these factors indicates limited potential for anticompetitive harm
then the joint venture will be considered legal.
33
Ibid.
34
See above n 30.

M Filippich - 22 - 1/12/2010
US courts will typically assess the nature and business purpose of a suspect joint
venture by applying the ‘doctrine of ancillary restraint’ outlined by Taft J in US v
Addyston Pipe & Steel Co, 85 Fed 271 (1898). Under this doctrine the court examines
the purpose behind an agreement which contains an alleged anticompetitive restraint. If
the agreement has a lawful business purpose then the restraint is considered to be
ancillary. The court then examines whether the ancillary restraint is reasonably necessary
(but not necessarily essential) to achieve the legitimate business outcome. If it is, the
court will conclude that the agreement is legal.
Another factor evaluated by the US courts as part of a ‘rule of reason’ analysis is
the level of integration between joint venture participants. This inquiry is often referred
to as the ‘single entity determination’ and is based on the following line of reasoning:
• Is the joint venture acting as a single entity or as a collaboration of
independent competitors engaged in a potential conspiracy in restraint of
trade?
• If the joint venture is acting as a collaboration of independent competitors is
its conduct of a type that always or almost always tends to raise prices or
reduce output?
• If not, then is the JV causing or likely to cause anti-competitive harm?
• If so, then is the overall competitive effect of the JV such that its overriding
pro-competitive benefits outweigh its anticompetitive harms?35
The answers to the previous questions determine whether the joint venture is subject to
S1 of the Sherman Act which prohibits cartel conduct or S2 of the Sherman Act which
prohibits monopolisation of the market place. If the joint venture is operating as a single
entity then it will more than likely be subject to S2 of the Sherman Act and will therefore
only be illegal if the joint venture possesses or threatens to possess monopoly power
35
See above n 32.

M Filippich - 23 - 1/12/2010
which is defined as more than two thirds of the market share. If a court treats a joint
venture as a single entity rather than as a collaboration of multiple entities then it is more
likely to escape liability under antitrust laws.
A number of other factors are examined by the US courts when assessing a joint
venture arrangement using a ‘rule of reason’ analysis. Courts will inquire as to whether
or not the arrangement allows competitors to share information on pricing, output, costs
or strategic planning that could potentially affect competition beyond the joint venture’s
area of operation. For example a joint venture partner may be able use commercially
sensitive information learnt through the joint venture to their advantage when
participating in other joint ventures or competing in a separate market. Access to current
joint venture information is more likely to raise competition concerns than access to
historic information. Another consideration for the Courts is the effect the agreement
will have on market share and concentration. In the US a ‘Safe Harbour’ exists for joint
venture’s where the market share of participants accounts for no more than 20% of the
relevant market in which competition may be affected. Under this ‘Safe Harbour’ joint
ventures with less the 20% market share are presumably lawful as long as their main
purpose is not per se illegal. For joint ventures with greater than 20% market share the
Courts will investigate the extent to which the participants have the ability to manipulate
the market by raising prices and reducing output. The Courts will also consider to what
extent the participants are able to compete against each other outside of the JV and how
much autonomy participants have in relation to decision making and the control of joint
venture assets. The more freedom joint venture partners have to compete outside of the
joint venture and to make independent decisions within the joint venture the less likely

M Filippich - 24 - 1/12/2010
competition will be affected. The final factor considered by the US Courts is the
duration of the collaboration. It is generally considered that the shorter the duration of
the collaboration the less likely it is to harm competition.
IX TEXACO INC. V DAGHER
The leading case in the US on the antitrust treatment of joint ventures is the
Supreme Court decision in Texaco Inc. v. Dagher, 547 U.S. 1 (2006). In this case the
Supreme Court unanimously held that a legitimate joint venture’s decision to set the price
of joint venture production is not subject to per se liability under S1 of the Sherman Act.
The joint venture in question was called Equilon and was formed by Shell and Texaco in
1998 to enhance efficiency and compete more effectively in the downstream refining and
marketing of gasoline on the west coast of the United States. Shell and Texaco
consolidated their downstream assets and signed a non-competition agreement preventing
them from competing with Equilon in the gasoline market. The joint venture was
approved by the US Federal Trade Commission and a number of state antitrust regulators
through consent decrees that did not place any restrictions on Equilon’s marketing
activities. Shell and Texaco established fixed ratios for profit sharing and for bearing the
risk of losses based on the assets that each party contributed to the joint venture.
Equilons formation effectively ended competition between Shell and Texaco in the west
coast gasoline market. The two companies continued to compete in domestic upstream
exploration and production as well as in foreign operations and operations unrelated to
refining and gasoline marketing. Gasoline produced by Equilon was sold separately
under the Shell and Texaco brands at a single price set by the joint venture.

M Filippich - 25 - 1/12/2010
In 1999 23,000 service station owners filed a class action lawsuit against Shell
and Texaco alleging that the decision to sell gasoline under separate brands at the same
price was a per se violation of the Sherman Act that resulted in them being overcharged
between 25 to 50 cents a gallon. In order to simplify proceedings the plaintiff’s did not
challenge the arrangement under a ‘rule of reason’ analysis. At first instance the District
Court found in favour of Shell and Texaco and concluded that a ‘rule of reason’ and not
per se standard should be applied when evaluating the joint venture’s price fixing
arrangement. The Court concluded that by not including a ‘rule of reason’ analysis in
their petition, the plaintiffs had failed to raise a triable issue.36
This decision was
reversed by the 9th
Circuit Court of Appeal which applied the ‘doctrine of ancillary
restraint’ to conclude that the price fixing policy was per se illegal. According to the 9th
Circuit Court the price fixing arrangement was ancillary to the joint venture’s business
purpose and was not reasonably necessary to achieve the efficiencies that led to Equilon’s
creation.37
This decision was appealed to the Supreme Court which unanimously held that
the ‘doctrine of ancillary restraint’ did not apply because the practice of pricing the goods
produced and sold by Equilon was not ancillary to the joint venture but rather a core
activity. The court went on to state that the pricing decisions of legitimate joint ventures
did not fall within the narrow category of activity that is per se illegal under S1 of the
Sherman Act. In reaching this conclusion the court evaluated the level of integration
36
Kelly McRobie, Texaco Inc. v. Dagher (04-805); Shell Oil Co. v. Dagher (04-814) (2009) Cornell Legal
Information Institute <http://topics.law.cornell.edu/supct/cert/04-805> at 20 August 2010.
37
Ibid.

M Filippich - 26 - 1/12/2010
between Shell and Texaco in the Equilon joint venture and concluded that the joint
venture effectively operated as a single entity. According to Justice Clarence Thomas:
The pricing policy challenged here amounts to little more than a 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.38
The fact that the joint venture product was sold under two separate brands did not have
any antitrust implications as Shell and Texaco effectively ended competition between
these brands with the formation of Equilon. The Supreme Court’s judgment was based
on the fact that Equilon represented a ‘true economic integration of the parties
competitive operations’.39
The decision in Texaco Inc. v Dagher40
did not go so far as to
conclude that S1 of the Sherman Act did not apply to all joint ventures but rather
emphasised that the presumptive rule of analysis in antitrust cases involving joint
ventures is the ‘rule of reason’. This echoed the decision of the District Court Judge who
was reluctant to expand the reach of per se illegality for fear that it would have a ‘chilling
effect on pro-competitive conduct’.41
The decision in Texaco Inc. v Dagher illustrates the emphasis that US courts place
on evaluating a joint venture by its business purpose and conduct rather than the label it
assigns to its activities. As the US Court of Appeals for the 1st
Circuit observed in
Engine Specialties Inc. v. Bombardier Ltd., 605 F 2d (1st Cir. 1979), merely labeling an
arrangement as a joint venture will not save it from per se illegality. Through the
application of the ‘rule of reason’ and the ‘doctrine of ancillary restraint', the US courts
38
Texaco Inc. v. Dagher, 547 U.S. 1 (2006).
39
Ibid.
40
547 U.S. 1 (2006).
41
McRobie, above n 36.

M Filippich - 27 - 1/12/2010
are able to effectively weigh the business purpose of a cartel provision against its
potential harm to competition. It is argued that by focusing solely on a joint venture’s
contract rather than its conduct, the Trade Practices Amendment (Cartel Conduct and
Other Measures Bill) 2008 (Cth) fails to achieve an equivalent outcome. Australian
legislators should consider applying a similar approach to the US whereby per se
condemnation and criminal prosecution is reserved only for conduct that is manifestly
anti-competitive. All other conduct should be assessed by evaluating the particular facts
of the arrangement and its overall competitive effect. It is interesting to note that the
factors assessed by the US Courts under a ‘rule of reason’ analysis are similar to those
considered by the ACCC as part of the authorisation process. The key difference
between these two approaches being that the ‘rule of reason’ is a judicial process whereas
the ACCC authorisation process is an administrative one. If a competition test similar to
the ‘rule of reason’ was introduced into the TPA joint venture exceptions, legitimate joint
ventures would be able to mount a defence against claims of cartel conduct if their
arrangements were challenged rather than having to go through the time and expense of
seeking ACCC authorisation from the very beginning.
X CONCLUSION
In order to compete in modern markets competitors often need to collaborate.42
Joint ventures enable companies to expand into new territories, make costly investments
and engage in innovation. A mature competition law must be able to distinguish between
joint ventures formed for a legitimate, pro-competitive business purposes and a cartel
42
See above n 30.

M Filippich - 28 - 1/12/2010
which simply raises prices and harms competition. This paper has highlighted a number
of deficiencies in the treatment of joint ventures by the Trade Practices Amendment
(Cartel Conduct and Other Measures Bill) 2008 (Cth), most significantly the requirement
for cartel provisions to be captured in a contract and the removal of the competition
defence for joint ventures under s 76d of the previous version of the TPA. Although
criminal sanctions against cartel conduct are a necessary part of Australian law, their
introduction has come at the expense of commercial certainty for joint ventures.
Australia’s cartel laws are now amongst the toughest in the world.43
As the resources
boom regains pace it will no doubt be necessary for legislators to review the drafting of
the cartel provisions in the TPA in order to restore the balance between the needs of
industry and the rights of the consumer.
43
Michael Corrigan and Lina Fischer, Infrastructure joint ventures as cartels? (2009) Clayton Utz
<http://www.claytonutz.com/publications/newsletters/projects_insights/20090916/infrastructure_joint_vent
ures_as_cartels.page> at 20 August 2010.

M Filippich - 29 - 1/12/2010
BIBLIOGRAPHY
1. Articles / Books / Reports
Rose P, ‘Joint Marketing of Natural Gas: Competition Law Issues’ (2006) 06 AMPLA
Year Book, 392.
2. Case Law
Engine Specialties Inc. v. Bombardier Ltd., 605 F 2d (1st Cir. 1979).
Texaco Inc. v. Dagher, 547 U.S. 1 (2006).
US v Addyston Pipe & Steel Co, 85 Fed 271 (1898).
3. Legislation
Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other
Measures) Bill 2008 (Cth).
Trade Practices Act 1974 (Cth)
The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth).
Supplemental Explanatory Memorandum, The Trade Practices Amendment (Cartel
Conduct and Other Measures) Bill 2008 (Cth).
Sherman Act, 15 U.S.C. § 1 – 7 (1890).
4. Other Sources
ACCC, Cartel conduct (ss. 44ZZRF, 44ZZRG, 44ZZRJ and 44ZZRK) (2010) ACCC
Website <http://www.accc.gov.au/content/index.phtml/itemId/883986> at 20 August 2010.
ACCC, Determination of application in respect of the joint marketing and sale of
natural gas from the Gorgon Gas Project for supply in Western Australia (2009) ACCC
Website
<http://www.accc.gov.au/content/trimFile.phtml?trimFileName=D09+180600.pdf&trimFileTitle=D09+180
600.pdf&trimFileFromVersionId=901112> at 20 August 2010.
ACCC, Determination of application in respect of the joint marketing activities for the
sale of domgas in Western Australia from the North West Shelf Project and to administer
existing gas supply contracts (2010) ACCC Website
<http://www.accc.gov.au/content/index.phtml/itemId/922104/fromItemId/401858> at 20 August 2010.

M Filippich - 30 - 1/12/2010
Bill Grant, Law Council of Australia Submission to the Inquiry into the Trade Practices
Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of
Australia
at 20 August 2010.
Bob Baxt, North West Shelf Gas Pty Ltd - Applicant Initiated Revocation - A18492
(2007) ACCC
<http://www.accc.gov.au/content/index.phtml/itemId/807158/fromItemId/401858/display/application>
at 20 August 2010.
Bob Baxt, Submission to the Inquiry into the Trade Practices Amendment (Cartel
at 20 August 2010.
Brett Fisse, Submission to the Inquiry into the Trade Practices Amendment (Cartel
at 20 August 2010.
Brett Fisse, The Contract Requirement For The Joint Venture Exceptions Under Sections
44ZZRO AND 44ZZRP of the TRADE PRACTICES ACT (2009) Brent Fisse
<http://www.brentfisse.com/images/Fisse_The_Contract_Requirement_for_the_Joint_Venture_Exceptions
_under_ss_44ZZRO_and_44ZZRP.pdf> at 20 August 2010.
Brian Cassidy, Australian Competition and Consumer Commission Submission to the
Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill
2008 (2009) Parliament of Australia
at 20 August 2010.
Chris Jose, New cartel laws – getting the joint venture right (2009) Freehills
<http://www.freehills.com.au/5349.aspx> at 20 August 2010.
Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines
for Collaborations Among Competitors (2000) U.S. Federal Trade Commission
<http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf> at 20 August 2010.

M Filippich - 31 - 1/12/2010
Frank Zumbo, Submission to the Inquiry into the Trade Practices Amendment (Cartel
at 20 August 2010.
Graham Finlayson, Ergon Energy Submission to the Inquiry into the Trade Practices
Australia
at 20 August 2010.
Kelly McRobie, Texaco Inc. v. Dagher (04-805); Shell Oil Co. v. Dagher (04-814)
(2009) Cornell Legal Information Institute <http://topics.law.cornell.edu/supct/cert/04-805>
at 20 August 2010.
Lauren E. Schrero & Ryan Marth, Antitrust Treatment of Joint Ventures: Analyzing
Competitor Collaborations (2009) Robins, Kaplan, Miller & Ciresi LLP <
http://www.rkmc.com/Antitrust-Treatment-of-Joint-Ventures-Analyzing-Competitor-Collaborations.htm>
at 20 August 2010.
Michael Corrigan and Lina Fischer, Infrastructure joint ventures as cartels? (2009)
Clayton Utz
<http://www.claytonutz.com/publications/newsletters/projects_insights/20090916/infrastructure_joint_vent
ures_as_cartels.page> at 20 August 2010.
Stuart Hohnen, DomGas Alliance Submission to the Inquiry into the Trade Practices
Australia
<http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub03.pdf >
at 20 August 2010.
U.S. Department of Justice, An Antitrust Primer For Federal Law Enforcement
Personnel (2005) U.S. Department of Justice
<http://www.justice.gov/atr/public/guidelines/209114.htm > at 20 August 2010.

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