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Fifth Circuit Holds That Market Rivals Can Enter Vertical Agreements That Survive Per Se and Rule Of Reason Review
09/01/2026On August 18, 2026, Judge King of the United States Court of Appeals for the Fifth Circuit, affirmed that a transaction between companies that may be rivals in one market can nevertheless be vertical in a specific supplier-customer relationship, making it ineligible for per se condemnation. The contract also survived the rule of reason analysis. Quadvest, L.P. v. San Jacinto River Authority, No. 25-20415 (5th Cir. Aug. 18, 2026).
The dispute arose after a conservation mandate required large users to reduce groundwater usage by 30 percent. The governing program allowed for collective compliance—some participants would shift more heavily to an alternative input while others shifted less, so long as the group as a whole met the reduction target. To implement the approach, approximately 80 utilities each signed substantially identical individual contracts with the San Jacinto River Authority (“defendant”), an authority that provided compliance-related services.
Quadvest, L.P. (“plaintiff”), signed one such contract. After the underlying mandate was declared invalid, it sued to invalidate its contract under Sections 1 and 2 of the Sherman Act, alleging price-fixing, market-allocation, tying, and attempted monopolization. The District Court rejected those claims. Plaintiff timely appealed the price-fixing and market-allocation claims, with the Fifth Circuit reviewing the district court’s findings of fact for clear error and its legal conclusions de novo.
Two provisions drove the antitrust challenge. First, a cost equalization provision used parallel fees so the cheaper and more expensive means of compliance largely offset one another. Participants who switched to the costlier option were not penalized and those who used the cheaper option could not free-ride others’ efforts. Second, a mandatory connection provision gave defendant discretion to require plaintiff to take the more expensive supply, ensuring that enough participants made the switch on which the plan depended.
Plaintiff alleged that these two provisions constituted an illegal restraint of trade under Section 1 of the Sherman Act. Two standards generally govern Section 1 claims: (i) per se for agreements so plainly anticompetitive that they are presumptively unlawful; and (ii) the rule of reason, which weighs the restraint’s facts, history, procompetitive/anticompetitive effects, and rationale to determine lawfulness. Courts tend to be reluctant to expand the per se standard beyond horizontal restraints between competitors.
In assessing whether the per se standard was appropriate for review, the Fifth Circuit rejected the argument that offering the same type of service in the same region necessarily makes two companies competitors. Here, high transportation costs made the market intensely local, so the parties did not actually serve, or realistically compete for, the same customers. However, in an industry where customers can readily switch suppliers or the product easily travels, companies with overlapping offerings are more likely to be treated as competitors. The Fifth Circuit noted that even if the parties were considered competitors, the agreement would still be vertical because defendant supplied plaintiff with services to help it comply with the groundwater reduction mandate, making plaintiff a customer of defendant.
The Fifth Circuit next explained that even if the contract were a horizontal agreement, it constituted neither price fixing nor market allocation. The Court rejected plaintiff’s argument that impacting production costs showed an intent to manipulate market prices. Its reasoning turned on a distinction between cost and price. Because defendant neither knew nor controlled what plaintiff charged, the Court treated the price effect as an incidental byproduct of a legitimate cost equalization mechanism rather than evidence of price fixing.
Additionally, illegal market allocation targets agreements between competitors not to compete, typically by dividing territories or customers so each is shielded from the other. The contract’s mandatory connection provision applied only to plaintiff, not its customers, allowing defendant to sell plaintiff surface water, but not control plaintiff’s customers or divide the market. The mandatory connection provision only bound plaintiff to take a certain type of supply, so it did not allocate the market and the contract was not subject to the per se standard.
Accordingly, the Fifth Circuit reviewed the at-issue contract under the rule of reason. The rule of reason applies a three-step, burden-shifting framework in which the plaintiff bears the initial burden to prove a substantial anticompetitive effect that harms consumers in a properly defined relevant market. If a plaintiff meets that burden, the defendant must show a procompetitive justification. In turn, the plaintiff must show that the same benefits could reasonably be achieved through less harmful means.
Here, plaintiff never satisfied the first step because it failed to prove a relevant market at trial and did not challenge the district court’s findings on appeal. Therefore, it forfeited the point. Having failed to show the contract was per se unlawful or an unreasonable restraint under the rule of reason, plaintiff could not prevail. The Fifth Circuit affirmed without deciding whether plaintiff suffered an antitrust injury.
The decision highlights two practical points. First, whether an agreement is horizontal or vertical is a fact-specific determination that depends on the specific transaction at the time an agreement is made. A company may be a rival in one market yet a supplier or customer in a particular transaction. Second, a claim outside a per se category carries the full burden under the rule of reason. A claimant must thoughtfully define the relevant market and show harm to competition. Preserving challenges to lower court findings of fact can be critical in surviving rule of reason review.
Antitrust Litigation