ARTICLE
16 December 2010

Are the Competitor Collaboration Guidelines Ripe for Revision?

This year marks the tenth anniversary of the release of the Department of Justice and Federal Trade Commission Antitrust Guidelines for Collaborations Among Competitors (Collaboration Guidelines).
United States Antitrust/Competition Law

This year marks the tenth anniversary of the release of the Department of Justice and Federal Trade Commission Antitrust Guidelines for Collaborations Among Competitors (Collaboration Guidelines).1 The Collaboration Guidelines have provided thoughtful guidance for countless legal and business advisors in their planning for joint venture transactions of many kinds throughout the past decade. But much has happened during this period that warrants consideration of whether some aspects of these Guidelines need updating. Key developments include two Supreme Court decisions that address joint venture standards—Texaco Inc. v. Dagher 2 and American Needle, Inc. v. National Football League 3—and the Agencies' new Horizontal Merger Guidelines4 that invite fresh thinking on relationships between joint venture and merger standards.

The Collaboration Guidelines address both (a) how particular agreements and restraints associated with joint venture arrangements of various kinds should be analyzed and (b) when the initial formation of a joint venture arrangement should be subject to the Horizontal Merger Guidelines. As discussed below, recent developments suggest that (a) agreements and restraints that are "reasonably related" but not "necessary" to bona fide joint ventures warrant more permissive treatment than provided by the current Collaboration Guidelines; and (b) the range of joint ventures that should be subject to the Horizontal Merger Guidelines at the formation stage should be broader than specified by the current Collaboration Guidelines. But there is also a third dimension to this story: the new Horizontal Merger Guidelines introduce new concepts, and their application to merger- like joint ventures is unclear; so some clarifications in that regard could be a desirable part of a Collaboration Guidelines update initiative.

The Standard for Application of Per Se Liability

A central feature of the Collaboration Guidelines is strict application of the "reasonable necessity" requirement to joint ventures to avoid per se illegality for certain restraints in a wide array of joint venture transactions. More specifically, the Guidelines call for per se condemnation of price and output agreements, noncompete agreements, and related provisions of the sort commonly included in joint venture agreements unless the parties can satisfy the Agencies that the restraint at issue is not only "reasonably related" to an "efficiency enhancing integration of economic activity" but also "reasonably necessary to achieve its procompetitive benefits . . . ."5 And, "if the participants could achieve an equivalent or comparable efficiency-enhancing integration through practical, significantly less restrictive means," the Agencies "conclude that the agreement is not reasonably necessary" and thereupon deem the restraint to be per se illegal.6 Comments on the draft of the Guidelines submitted to the Agencies in 1999 and commentary published after their final issuance sharply criticized this feature as an overly broad invocation of the ancillary restraints doctrine.7 Recent developments raise the question of whether a restraint that is reasonably related to a bona fide joint venture should be subject to more permissive treatment without regard to whether the restraint is also reasonably necessary to the formation or efficient operation of the joint venture.

The Supreme Court applied a standard of virtual per se legality to a restraint within a joint venture in its 2006 Dagher decision. Dagher involved a joint venture combiningTexaco's and Shell's refining and marketing assets into a new entity called Equilon to refine and sell gasoline under both of their brands. A group of affected gas station owners challenged as per se illegal price fixing the joint venture's decision to sell both brands of gasoline at the same price. The district court dismissed the claim on the ground that the per se rule should not apply to the pricing decision at issue;8 the Ninth Circuit reversed, upholding application of the per se rule in reliance upon the ancillary restraints doctrine.9 The Supreme Court in turn reversed the Ninth Circuit decision, holding that the challenged conduct amounted to "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."10 In short, "the internal pricing decisions of a legitimate joint venture" should not be treated "as per se unlawful."11 Put another way, "though Equilon's pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense."12 The Court more specifically rejected the Ninth Circuit's reliance upon the ancillary restraints doctrine as inapplicable to the joint venture conduct at issue:

That doctrine governs the validity of restrictions imposed by a legitimate business collaboration, such as a business association or joint venture, on nonventure activities. . . . [It] has no application here, where the business practice being challenged involves the core activity of the joint venture itself—namely, the pricing of the very goods produced and sold by Equilon.13

Commentators have disagreed over the extent to which Dagher is relevant to restraints in joint ventures beyond the kind at issue in that case.14 Under one view, however, Dagher "may preclude Section 1 scrutiny of the 'internal' restraints of all legitimate joint ventures, whether structural or contractual." 15

Prominent recent appellate decisions reflect conflicting views on what the standard now is or should be for joint venture restraints of various kinds. In the Second Circuit's 2008 decision in Major League Baseball Properties, Inc. v. Salvino, Inc.,16 for example, the panel majority flatly rejected any "quick look" in favor of full rule of reason analysis of restraints applicable to baseball team trademark licenses, the products within the contractual joint venture there at issue.17 Then- Judge Sotomayor filed a concurring opinion arguing for application of the ancillary restraints doctrine, including application of the "reasonable necessity" requirement to avoid per se illegality.18 In the Federal Circuit's 2010 en banc decision in Princo Corp. v. ITC,19 addressing allegations of patent misuse, the majority insisted upon full rule of reason treatment for an alleged noncompete agreement in connection with a technology joint venture.20 Two judges filed a dissenting opinion arguing the restraint at issue was "inherently suspect" and thus should be deemed "presumptively" illegal under the quick-look approach advocated by the FTC in its amicus brief to the en banc panel.21

Most recently, the Supreme Court's 2010 American Needle decision, while rejecting a "single entity" defense for restraints applicable to football team trademark licenses within the contractual joint venture there at issue, strongly suggests relatively lenient rule of reason treatment when those restraints are further considered on remand to the courts below. Indeed, the Court cited with approval the "classic" open-ended Chicago Board of Trade rule of reason standard,22 suggested that this standard "may not require a detailed analysis" and "can sometimes be applied in the twinkling of an eye,"23 and observed that the NFL's "interest in maintaining a competitive balance" among its teams is "unquestionably an interest that may well justify a variety of collective decisions made by the teams."24 As James Keyte argues, "American Needle also should open up a whole new role for the rule of reason—a 'quick look' for defendants." He adds: "American Needle suggests yet further evolution of the analytical framework for assessing the restraints of legitimate joint ventures, which may be its most lasting legacy."25

In short, both Dagher and American Needle suggest a trend away from application of per se rules to restraints related to joint ventures. This trend warrants reassessment of the Collaboration Guidelines' heavy reliance upon per se treatment under the ancillary restraints doctrine.While per se treatment surely remains appropriate for restraints not shown to be "reasonably related" to joint venture efficiencies, rule of reason treatment (or something close to it) is now more appropriate for restraints shown to be so related even if not shown to be "necessary" to the efficiencies story.

When a Joint Venture Should Be Treated Like a Merger

The Collaboration Guidelines expressly provide that the Agencies apply the Horizontal Merger Guidelines to a joint venture when "(a) the participants are competitors in [the] relevant market; (b) the formation of the collaboration involves an efficiency-enhancing integration of economic activity in the relevant market; (c) the integration eliminates all competition among the participants in the relevant market; and (d) the collaboration does not terminate within a sufficiently limited period by its own specific and express terms."26 With regard to the duration, the Agencies generally "use ten years as a term indicating sufficient permanence to justify treatment of a competitor collaboration as analogous to a merger."27 The new Horizontal Merger Guidelines will, therefore, presumably apply to joint ventures meeting those characteristics. A key question is whether recent developments warrant expansion of the category of joint ventures receiving merger-like treatment.

Treating a joint venture "like" a merger means not only applying merger standards to its formation but also forgoing anything approaching "strict" scrutiny of many kinds of post-formation decisions and conduct relating to the collaboration. As discussed above, the Supreme Court's Dagher decision highlights this point in a manner that appears to be applicable to any legitimate or non-sham kind of joint venture.28 The Court applied a single entity analysis to a joint venture entailing (a) less than complete integration and (b) a duration of only four years.29 American Needle, on the other hand, addressed more squarely, and easily rejected, a single-entity argument in defense of restraints within a joint venture entailing considerably less integration than that at issue in Dagher : the essence of its holding is that "[d]ecisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that 'depriv[e] the marketplace of independent centers of decision making' . . . and therefore of actual or potential competition." Accordingly, those decisions are concerted actions that are subject to Section 1 of the Sherman Act.30

Perhaps the best insight into current DOJ/FTC thinking on when a joint venture should be treated like a merger comes from the proposed single-entity standard set forth in the Agencies' American Needle amicus brief.31 Under that standard, single-entity treatment is appropriate if two conditions are satisfied: first, if the parties to the venture "have effectively merged the relevant aspect of their operations, thereby eliminating actual and potential competition among" them "in that operational sphere"; and second, if "the challenged restraint [does] not significantly affect actual or potential competition . . . outside their merged operations."32 The Court deemed it unnecessary to consider the Agencies' proposed standard mainly because the separate NFL teams "still own their own trademarks and are free to market those trademarks as they see fit . . . ."33 It is nonetheless worth some parsing of the proposed standard for what it suggests about the Agencies' current thinking in this area and its consistency or inconsistency with the Collaboration Guidelines' criteria for when a joint venture should be analyzed as a merger.

Two observations are in order. First, unlike the Collaboration Guidelines' requirement for merger treatment of "sufficient" duration34—generally ten years—the Agencies' proposed standard for single-entity treatment includes no duration test at all. Second, in contrast to the Collaboration Guidelines' requirement of integration sufficient to eliminate "all competition among the participants in the relevant market," 35 the proposed standard for single-entity treatment requires only elimination of competition in a "relevant aspect" of the parties' operations or in a relevant "operational sphere."36 Do these differences mean that the Agencies now believe a venture that eliminates competition among the participants for less than ten years and only with respect to one "aspect" or "operational sphere" but leaves the parties in continued competition in other aspects of the relevant market should be given single-entity status and, accordingly, merger- like treatment under the Collaboration Guidelines?

The DOJ's explanation of its February 2010 clearance of the Microsoft-Yahoo! search agreement suggests that integration of a limited "operational sphere" is sufficient for merger treatment. Under the approved "Search Alliance," there will be integration under Microsoft's control of the parties' respective "algorithmic and paid search platforms" and Yahoo! will become "the exclusive relationship sales force for both companies' premium search advertisers globally"; the parties will otherwise continue to compete "to create different, compelling and evolving experiences, competing for audience, engagement and clicks."37 The DOJ explained its clearance decision in Section 7 terms: "the division has determined that the proposed transaction is not likely to substantially lessen competition in the United States, and therefore is not likely to harm the users of Internet search, paid search advertisers, Internet publishers, or distributors of search and paid search advertising technology."38

How New Aspects of the New Merger Guidelines Apply to Joint Ventures

The overarching principles and standards set forth in the Collaboration Guidelines, as applied to joint ventures of all kinds, come from the 1992 Horizontal Merger Guidelines: whether the venture may create or increase market power or facilitate its exercise; whether it may increase the ability or incentive to raise price, reduce output or quality, or reduce innovation; the role and treatment of market definition and market shares; and the assessment of effects, entry and efficiency considerations.39 But the revised 2010Merger Guidelines include new approaches to ascertaining when a proposed merger may have "unilateral" market power effects. It is far from clear how these new aspects apply or should apply to the evaluation of various kinds of joint ventures under the Collaboration Guidelines.

Thus, for example, the new Merger Guidelines highlight the significance of high margins as an indicium of market power: "if a firm sets price well above incremental cost, that normally indicates either that the firm believes its customers are not highly sensitive to price . . . or that the firm and its rivals are engaged in coordinated interaction . . . ."40 For transactions involving differentiated products, the new Merger Guidelines invite inferences that high margins together with an estimate of a high "diversion ratio" between the merging parties will trigger anticompetitive "upward pricing pressure," all without need for market definition.41 How might these concepts apply to the assessment of joint ventures under the Collaboration Guidelines? The fact that a full merger between the same parties would or might trigger the new Merger Guidelines' upward pricing pressure concern does not mean a joint venture between them should also do so. Whether it is reasonable to predict a price-increasing incentive may depend on the planned duration of the joint venture or, in particular, whether it will eliminate all competition between them throughout the affected market or only within a distinct and limited "operational sphere" within the affected market.

The new Merger Guidelines delineate five distinct situations for evaluation of whether a merger may bring about unilateral anticompetitive effects from the elimination of competition between the merging parties: markets with differentiated products; markets where sellers negotiate with buyers or prices are determined through auctions; reductions in output or capacity in markets for relatively homogeneous products; situations involving diminished innovation or reduced product variety; and mergers that enable exclusionary conduct.42 How might these concepts apply to the assessment of joint ventures under the Collaboration Guidelines? Again, the fact that a full merger between two parties may trigger concern with respect to one or more of those five situations does not mean that a "limited" joint venture between them would or should do so as well. An easy example is a venture limited to joint construction, operation and use of new production facilities, where the parties remain free to compete upstream (R&D) and downstream (sales and marketing). Incorporation of appropriate firewalls, separation of governance, and inclusion of related safeguards in the operative agreements may be sufficient to address any concern over adverse affects on output or capacity.

The "Antitrust Safety Zone" section of the Collaboration Guidelines provides comfort for joint ventures involving collective market shares not exceeding 20 percent of "each relevant market in which competition may be affected."43 It is unclear whether that comfort zone survives in any meaningful form for many joint ventures in light of the plethora of circumstances in which the new Merger Guidelines invite findings of unilateral effects even when market shares are below that level, or indeed when shares are irrelevant because no market has been defined. The answer may be that the safety zone in the Collaboration Guidelines is now inapplicable to any venture that is sufficiently merger-like to warrant application of the new Merger Guidelines and that may give rise to unilateral power effects in any of the five situations mentioned in the preceding paragraph.

Finally, the new Merger Guidelines include a new section on "Partial Acquisitions," identifying three potential concerns with a minority holding even if the acquiring company does not obtain control of the target company: ability of the acquiring firm to influence the competitive conduct of the target firm; reduction of the acquiring firm's incentive to compete against the target firm; and the acquiring firm's access to competitively sensitive information of the target firm.44 Partial acquisitions that present one or more of these concerns often may be part of planned joint ventures between two firms. But, in that context, these concerns may be either mitigated or exacerbated by other aspects of the joint venture. For this reason, it would be useful to see a more robust treatment of this subject within a new version of the Collaboration Guidelines.

The new Merger Guidelines' partial acquisitions section highlights the point that the "details of the post-acquisition relationship between the parties, and how those details are likely to affect competition, can be important" to the analysis. 45 Decisions on those details during the joint venture planning stage might, therefore, ameliorate one or more of the above-specified concerns. For example, concern about influence over the target firm's conduct may be obviated by precluding the acquiring firm from Board representation, limiting voting rights, and precluding participation in certain activities. Concern about diminution of the acquiring firm's incentive to compete against the target firm may be resolved by limiting the percentage of ownership to an amount below that which would give rise to upward pricing pressure as that concept is presented in the new Merger Guidelines' section on unilateral effects.46 (One may presume, for example, that the acquiring firm's benefit from a price-increase-inducing diversion of sales to the target firm when ownership is only 20 percent is only one-fifth of the benefit in a full merger scenario, holding margins and diversion ratios to be the same in both cases.) Concerns about access to competitively sensitive information can be addressed by implementation of appropriate firewalls and related procedures. More guidance from the Agencies on the extent to which these or similar steps suffice in the context of joint ventures involving partial acquisitions would be desirable.

Trade-Offs to Consider

The potential effects on the Collaboration Guidelines of Dagher, American Needle, the new Merger Guidelines, and related developments can be summarized in the following three propositions:

  1. Agreements and restraints related to joint ventures that entail significant degrees of "merger-like" integration warrant more permissive treatment than implied by the current Collaboration Guidelines.
  2. A broader range of joint ventures should be deemed subject to the HorizontalMerger Guidelines than are now so treated in the current Collaboration Guidelines.
  3. The new Merger Guidelines introduce new concepts that may increase the scope and intensity of Agency scrutiny of transactions subject to them, including joint ventures of various kinds.

These propositions highlight the trade-off to be considered in any exercise to update or refine the Collaboration Guidelines. Joint venture parties may benefit from revisions that promise more lenient treatment of various restraints related to their ventures; conversely, they may dislike revisions that call for more ventures to be subject to the new Merger Guidelines. Fundamentally, however, the two changes are closely related and should be considered in conjunction with each other.The more a joint venture resembles a merger, the more merger-like should be its scrutiny at the formation stage. On the other hand, the more intensively that a joint venture is scrutinized at the time of its formation, the more warranted is a general presumption of reasonableness with respect to agreements and restraints related to it that may be reviewed at a later time.

The Supreme Court declared thirty-six years ago that, "[o]verall, the same considerations apply to joint ventures as to mergers, for in each instance we are but expounding a national policy enunciated by the Congress to preserve and promote a free competitive economy."47 Were it only that simple.The application of both Section 1 of the Sherman Act and Section 7 of the Clayton Act to various aspects of competitor collaborations has become complex, controversial, and even a bit muddled, particularly in light of developments over the ten years since issuance of the Agencies' Collaboration Guidelines. So now, in the wake of the Agencies' thoughtful updating of their HorizontalMerger Guidelines, would seem to be a good time to consider updating the Collaboration Guidelines.

Footnotes

1 U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines for Collaborations Among Competitors (2000) [hereinafter Collaboration Guidelines], available at http://www.ftc.gov/os/2000/04/ftcdojguide lines.pdf.

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

3 American Needle, Inc. v. NFL, 130 S. Ct. 2204 (2010).

4 U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines (2010) [hereinafter 2010 Merger Guidelines], available atwww. justice.gov/atr/public/guidelines/hmg-2010.html.

5 Collaboration Guidelines § 3.2.

6 Id.

7 See, e.g., Comments on Draft Antitrust Guidelines for Collaboration Among Competitors from the Association of the Bar of the City of New York (Feb. 23, 2000); Comments of the Section of Antitrust Law of the American Bar Association on the 'Antitrust Guidelines for Collaborations Among Competitors' Issued in Draft on October 1, 1999 (Feb. 18, 2000); Comments on the Draft Antitrust Guidelines For Collaborations Among Competitors, Wilmer, Cutler & Pickering on behalf of Eastman Kodak Company (Feb. 4, 2000); Draft Guidelines for Collaborations Among Competitors— Submission of Views, Chamber of Commerce of the United States (Feb. 1, 2000); see generally Thomas A. Piraino, Jr., A Proposed Antitrust Approach to Collaborations Among Competitors, 86 IOWA L. REV. 1137 (2001).

8 Dagher, 547 U.S. at 4.

9 Id. at 4–5.

10 Id. at 6.

11 Id. at 7.

12 Id. at 6.

13 Id. at 7–8.

14 Compare James A. Keyte, Dagher and 'Inside' Joint Venture Restraints, ANTITRUST, Summer 2006, at 44–50, with Jeffrey L. Kessler, David G. Feher & Robin L. Moore, The Supreme Court's Decision in Dagher: Canary in a Coal Mine or Antitrust Business as Usual?, ANTITRUST, Fall 2006, at 40–44.

15 Keyte, supra note 14, at 44.

16 542 F.3d 290 (2d Cir. 2008).

17 Id. at 315–34.

18 Id. at 334–41 (Sotomayor, J., concurring).

19 616 F.3d 1318 (Fed. Cir. 2010) (en banc).

20 Id. at 1334–40. The main holding of the Princo decision was that the restraint at issue was not subject to the patent misuse doctrine, id. at 1326–34; in that light, the portion of the majority's opinion discussing antitrust standards might be considered dictum.

21 Id. at 1351–57 (Dyk, J., dissenting).

22 American Needle, 130 S. Ct. at 2216 n.10 (citing Bd. of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918)).

23 Id. at 2217.

24 Id.

25 James A. Keyte, American Needle: A New Quick Look for Joint Ventures, ANTITRUST, Fall 2010, at 48, 48.

26 Collaboration Guidelines § 1.3.

27 Id. § 1.3 n.10.

28 Dagher, 547 U.S. at 6–7 ("[T]he pricing policy challenged here amounts to 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 . . . ."; when parties "'who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit . . . such joint ventures [are] regarded as a single firm . . . .'" (quoting Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 356 (1982)); "[a]s a single entity, a joint venture, like any other firm, must have the discretion to determine the prices of the products that it sells, including the discretion to sell a product under two different brands at a single, unified price").

29 See id. at 3 (joint venture operated "[f]rom 1998 until 2002"); Dagher v. Saudi Ref. Inc., 369 F.3d 1108, 1112 (9th Cir. 2004) (each party "retained its own trademarks and kept control over its own brands pursuant to separate Brand Management Protocols"). The Agencies appear to have anticipated the Dagher situation as one warranting merger treatment despite its ultimate short duration. See Collaboration Guidelines app. ex. 1 ("Two oil companies agree to integrate all of their refining and refined product marketing operations. Under terms of the agreement, the collaboration will expire after twelve years; prior to that expiration date, it may be terminated by either participant on six months' prior notice . . . . The participants' entitlement to terminate the collaboration at any time after giving prior notice is not termination by the collaboration's 'own specific and express terms.' Based on the facts presented, the evaluating Agency likely would analyze the collaboration under the Horizontal Merger Guidelines . . . ." (quoting Collaboration Guidelines § 1.3)).

30 American Needle, 130 S. Ct. at 2213.

31 Brief for the United States as Amicus Curiae Supporting Petitioner, American Needle, Inc. v. National Football League, 130 S. Ct. 2204 (2010) (No. 08- 661) [hereinafter Amicus Brief of the United States in Dagher ], available athttp://www.abanet.org/publiced/preview/briefs/pdfs/07-08/08-661_ PetitionerAmCuUSA.pdf.

32 Id. at 17.

33 American Needle, 130 S. Ct. at 2216 n.9.

34 Collaboration Guidelines § 1.3.

35 Id.

36 Amicus Brief of the United States in American Needle, supra note 31, at 17.

37 Press Release, Yahoo! Inc. and Microsoft Corp., Yahoo! and Microsoft to Implement Search Alliance (Feb. 18, 2010), available at http://www.search alliance.com/yahoo-and-microsoft-to-implement-search-alliance.

38 Press Release, U.S. Dep't of Justice, Antitrust Division, Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of the Internet Search and Paid Search Advertising Between Microsoft Corporation and Yahoo! Inc. (Feb. 18, 2010), available at http://www.justice. gov/atr/public/press_releases/2010/255377.htm.

39 Collaboration Guidelines §§ 1.2, 2.2, 3.3, 3.35, 3.36–37.

40 2010 Merger Guidelines § 2.2.1.

41 Id. § 6.1.

42 Id. §§ 6, 6.1–6.4.

43 Collaboration Guidelines § 4.2.

44 2010 Merger Guidelines § 13.

45 Id.

46 Id. § 6.1.

47 United States v. Penn-Olin Chem. Co., 378 U.S. 158, 170 (1964).

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