United States: U.S. FTC Challenges Restraint In Joint Venture As Unlawful Price-Fixing

The U.S. Federal Trade Commission on Tuesday July 31 issued a complaint against Polygram Holding, Inc. and other subsidiaries of Vivendi Universal S.A. and simultaneously announced a settlement with Warner Communications charging the firms with "fixing prices" in connection with a joint venture between the music companies. The action has important implications for analysis of restraints arguably ancillary to procompetitive joint ventures.

The FTC alleges that Warner and PolyGram formed a joint venture in 1997 to distribute recordings of a 1998 performance of The Three Tenors (renowned opera singers Luciano Pavarotti, Placido Domingo and Jose Carreras). In 1998, in an effort to shield the new products from competition, the firms agreed not to discount and not to advertise existing recordings by the three singers for a period of time around the introduction of the new recording. The FTC complaint alleged that this "moratorium" agreement was "not reasonably necessary to the formation or the efficient operation of the joint venture" between Warner and PolyGram and therefore violated the antitrust laws.

It is noteworthy that this new matter challenges the agreement not to promote existing recordings as a per se unlawful naked restraint. The Commission's Analysis to Aid Public Comment, issued with the consent order, emphasized that the Antitrust Guidelines for Collaborations Among Competitors issued by the FTC and Department of Justice should not be read to suggest that all agreements "related to" a joint venture will be analyzed under the full rule of reason.

While recognizing that participation in a joint venture is "often pro-competitive," the Analysis to Aid Public Comment makes clear that "is not a blanket excuse for price fixing or other serious restraints on competition." The agency's press release announcing the action quotes the new Bush Bureau of Competition Director as stating "participation in a joint venture is not a license to fix prices on products outside of the joint venture."

The FTC's analysis explains that "of critical importance" is the allegation that the parties' restrictions on competitive activity were not limited to "jointly produced products" but that Warner and PolyGram agreed to fix the prices of pre-existing music releases that were "separately produced and separately distributed." The Commission's analysis emphasizes that "restraints that operate on products outside of a joint venture will be scrutinized by the Commission with great care, particularly if the restraints are directed at price."

The FTC took pains to analyze whether the moratorium agreement was reasonably necessary in order to address a free-rider problem, insofar as advertising of the new recording might benefit the existing recordings sold at a lower price. The two recording companies, however, had agreed to share advertising costs, and the Commission noted that "when payment is possible, free-riding is not a problem because the 'ride; is not free," quoting a Seventh Circuit decision. More generally, the Commission explained, "when faced with a potential free-rider problem, firms should consider whether there are practical, less-restrictive alternatives than price-fixing."

This action appears to be a broad endorsement of the Clinton Administration Antitrust Guidelines for Collaborations Among Competitors by the Bush Administration, and reminds firms that ancillary restraints in joint ventures must be "reasonably related" and "reasonably necessary" to the efficient aspects of a joint venture. Some would have liked the Bush Administration to walk away from the Guidelines, at least insofar as they contemplate challenges to ancillary restraints to efficient joint ventures as per se unlawful. The Bush Administration is making clear to observers that it will vigorously enforce the antitrust laws at least against horizontal restraints.