United States: Antitrust Analysis Of Joint Ventures: Structural Considerations

Last Updated: April 24 2017
Article by Antitrust Watch

Article by Howard Ullman

In the first post in this series, we introduced the concept of joint ventures ("JVs"), outlined why antitrust law applies to their formation and operation, identified the major antitrust issues raised by JVs, and discussed why you should care about these issues. In this installment, we will unpack some of the major antitrust issues surrounding the threshold question of whether or not a JV is a legitimate collaboration.  In particular, we will first try to separate the analyses of, on the one hand, JV formation, and on the other, JV operation and structure.  Then we will consider whether a JV (i) constitutes a "naked" agreement between or among competitors which is per se unlawful, (ii) presents no significant antitrust issue because there is only a single, integrated entity performing the JV functions, or (iii) involves restraints within the scope of a legitimate collaboration that are virtually per se lawful.

Analysis of JV Formation vs. JV Operation and Structure

Like a merger, a JV can raise antitrust questions upon its formation. That is especially true if the JV is so tightly integrated that it looks substantially like a merger. See Antitrust Guidelines for Collaborations Among Competitors ("Collaboration Guidelines") § 1.3.[1]  These questions predominantly relate to the issue of whether the JV could, due to its size and market position, exercise market power. See, e.g., Texaco Inc. v. Dagher, 547 U.S. 1, 4 (2006) (FTC consent decree regarding formation of JV and requiring divestment of certain assets).  Formation analysis takes into account the likely efficiencies and potential anticompetitive effects of the JV. See United States v. Penn-Olin Chem. Co., 378 U.S. 158, 175-76 (1964) (evaluating a JV based on probability that parties might have independently entered market or remained as significant potential competitors).  To streamline this analysis, the Collaboration Guidelines provide a "safety zone," specifying that the Agencies will not, absent extraordinary circumstances, challenge a competitor collaboration where the market shares of the collaboration and its participants collectively account for no more than 20% of each relevant market in which competition may be affected. See id. § 4.2.[2]

The issues at JV formation, however, are not necessarily the same as those raised by the operation and structure of a JV. For example, in Dagher, a case we will discuss throughout this series, the Supreme Court resolved a challenge to the operation and structure of a JV to refine and sell gasoline after the FTC had evaluated and cleared the formation of the JV. See In re Shell Oil Co., 125 F.T.C. 769 (1998).  "Had respondents challenged [the formation of the JV] itself, they would have been required to show that its creation was anticompetitive under the rule of reason." Dagher, 547 U.S. at 6 n.1.

Some courts and commentators, as well as the Collaboration Guidelines, state that it is appropriate to consider whether a JV is a mere "sham." But the question of whether a JV is a "sham" really goes to its operation and structure, because if the JV doesn't actually do anything yet, it makes little sense to ask whether the mere fact of its formation is a "sham."  In other words, it is more logical and consistent to assume a proper structure when evaluating JV formation issues, and then to consider operational/structural issues when considering challenges to JV operations and structure.

That said, and while clarity is a laudable goal, it may not always be possible to entirely separate the analytical strands. For example, whether a JV structure contributes to potentially problematic information sharing between or among the JV parents may affect the formation analysis assessment of potential anticompetitive effects.  Similarly, anticompetitive formation effects may be lessened if the JV is only a marketing JV with no price-setting function or authority.  Nevertheless, in most cases, we can to a large extent separate the formation and operation/structure inquiries.

Does the JV Constitute a "Naked" Competitor Agreement?

Long ago, the Supreme Court observed that it cannot be the case that "agreements between legally separate persons and companies to suppress competition among themselves and others can be justified by labeling the project a 'joint venture.'" Timken Roller Bearing Co. v. United States, 341 U.S. 593, 598 (1951), overruled or limited on other grounds by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 765, 777 (1984).  Otherwise, perhaps "every agreement and combination to restrain trade could be so labeled." Timken, 341 U.S. at 598.

A horizontal agreement to suppress competition by fixing prices or reducing output is per se unlawful. See Palmer v. BRG of Georgia, Inc., 498 U.S. 46, 49-50 (1990).  Such an agreement is often called a "naked" agreement, because it is not embedded in any structure that could legitimately be argued to generate cognizable procompetitive efficiencies.  A "JV" consisting of a naked, per se unlawful agreement is sometimes called a sham JV.  The Supreme Court evaluated a sham JV in United States v. Topco Associates, Inc., 405 U.S. 596 (1972).  There, Topco–a cooperative association of small- and medium-sized regional supermarket chains (i.e., a JV)–distributed Topco-branded products to its members, and prohibited its members from selling those products outside assigned territories.  The Court condemned the territorial restriction as a per se unlawful horizontal market division, see id. at 608, i.e., as a naked competitor agreement.  While there may be good reason to think that Topco would be decided differently today, see Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 226 (D.C. Cir. 1986), it has not been overruled.  At any rate, even if Topco were overruled, other agreements that are more clearly "core" violations, including naked agreements fixing prices, would remain per se unlawful, even if labeled "JVs."

Is the JV a Single Entity?

  Let's assume that we are evaluating a JV that is not a mere sham/does not consist of a naked, per se unlawful agreement.  The next question is whether or not the JV is a single entity.  If the JV is a single entity, then the antitrust consequence is that JV functions cannot be the result of a conspiracy, i.e., Section 1 of the Sherman Act does not apply to them.  That does not mean, however, that the formation of the JV is immune from antitrust scrutiny–as discussed above.

In American Needle, Inc. v. National Football League, 560 U.S. 183 (2010), the member teams of the National Football League ("NFL") authorized an affiliate of the NFL to grant exclusive licenses to manufacture and sell trademarked headwear for all 32 teams.  The Supreme Court rejected the teams' argument that their arrangement amounted to the operation of a single entity outside the scope of Section 1 of the Sherman Act, 15 U.S.C. § 1, and held that it was subject to Rule of Reason analysis.  Looking to function, not form, the Court considered whether the alleged "contract, combination . . ., or conspiracy" in restraint of trade joins together separate decision-makers or economic actors pursuing separate economic interests.  The Court found that the teams competed in the market for intellectual property.  "When each NFL team licenses its intellectual property, it is not pursuing the 'common interests of the whole' but is instead pursuing interests of each 'corporation itself.'" Id. at 197 (cit. omit.).  Although NFL teams have common interests such as promoting the NFL brand, "they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned." Id. at 198.  While the need for teams to cooperate can be weighed in a Rule of Reason analysis, the Court held, it is not relevant to whether the action is subject to Section 1 review.  See id. at 199.

American Needle's focus on the concept of unity of interests is problematic.[3]  JV parents often have divergent (or at least not completely aligned) interests.  That divergence is often inherent in the JV structure itself, which preserves JV parents as separate centers of economic decision-making.  Therefore, it may make more sense to understand American Needle as holding that JV functions that are controlled by the JV through its ownership of the assets necessary to supply those functions are single-entity functions.  Contractual control is not enough; after all, the teams in American Needle had contractually granted decision-making authority over certain team intellectual property to the league.  Instead, and consistent with the economic theory of the firm, "[t]he essential question for single entity determination is whether the joint venture can force individual members that have interests contrary to the voting majority to act as the majority has decided."  Klein at 683.  In other words, ownership of the assets necessary to supply the JV-controlled functions is key.  Because the member teams still owned their own intellectual property, their arrangement was within Section 1 of the Sherman Act.[4]

The "control through asset ownership principle" is substantially narrower than the single-entity principles elucidated in some previous single-entity cases–"specifically the cases where contractual control has been sufficient for single entity treatment." However, it "does not require the 'unity of interests' among joint venture members that other single entity cases required." Id. at 669.

Does the JV Involve Per Se Lawful Restraints Within the Scope of a Legitimate Collaboration?

Now suppose that we're not dealing with a single-entity JV. In that case, certain "core" restraints may often (if not always) be permissible, either under the Rule of Reason or under a sort of essentially per se lawful rule that some courts apply.

For example, in Dagher, Texaco and Shell Oil formed a JV, Equilon, to consolidate their operations in the western United States, thereby ending competition between the two companies in the domestic refining and marketing of gasoline.  The parents agreed to share the risks and profits from Equilon's activities.  The Equilon JV sold gasoline to downstream purchasers under the original Texaco and Shell Oil brand names. See 547 U.S. at 4.  The Court, assuming that the Sherman Act reached the arrangement, held that it was subject to Rule of Reason, and not per se, analysis. See id. at 3.[5]  In rejecting per se analysis, the Court wrote that a JV, "like any other firm, must have the discretion to determine the prices of the products that it sells . . . ." Id. at 7.  Such pricing is a "core activity of the joint venture itself." Id. at 8.

Compare Agnew v. National Collegiate Athletic Ass'n, 683 F.3d 328 (7th Cir. 2012), where the Seventh Circuit upheld a bylaw restraint that capped the number of student athlete scholarships and prohibited multi-year scholarships.  Citing American Needle, the court held certain agreements between members of a JV are likely to survive the Rule of Reason such that they do not require a detailed analysis, so the Rule of Reason can be applied in a "twinkling of an eye." Id. at 341.  This is tantamount to finding that such restraints are presumptively or per se lawful.

What's Next?

The above sums up the analysis of whether a JV is a legitimate collaboration, constitutes a single entity outside the reach of Section 1 of the Sherman Act, and/or involves restraints within the scope of a legitimate collaboration that are presumptively lawful. In the next blog post in this series, we'll discuss the analysis of so-called ancillary restraints.


[1] The Agencies treat a competitor collaboration as a horizontal merger in a relevant market and analyze the collaboration pursuant to the Horizontal Merger Guidelines if appropriate, which ordinarily is when: (a) the participants are competitors in that 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. See id.

[2] Not surprisingly, the safety zone does not apply to agreements that are per se unlawful.  Nor does it apply to agreements that would be challenged without a detailed market analysis, or to competitor collaborations to which a full-blown merger analysis is applied. See id.

[3] See Benjamin Klein, Single Entity Analysis of Joint Ventures after American Needle: An Economic Perspective, 78 Antitrust L.J. 670 (2013).

[4] Cf. Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 21 (1979), where the Supreme Court found that a JV's blanket IP license was "a necessary consequence of the integration necessary to achieve these efficiencies" and that "a necessary consequence of an aggregate license is that its price must be established." The Court ultimately held, not that the blanket license was outside the reach of Section 1, but that it was subject to Rule of Reason analysis. See id. at 24.

[5] It is not clear whether, if the Court were to decide Dagher today, it would find that the single-entity doctrine applied to the Equilon JV. See id. at 6 ("the 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 with respect to their competing products.").

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