United States: FTC Challenges Trade Association's Rules Restricting Access To Jointly Developed Technology

On August 18, 2017, the Federal Trade Commission (FTC) announced a consent decree settling charges that the National Association of Animal Breeders (NAAB) violated Section 5 of the FTC Act by adopting restrictions on its members' use of certain technology rights held by NAAB. 1 The technology, jointly developed by NAAB and the Department of Agriculture, is a genetic testing technology that predicts the transmission of commercially valuable traits by cattle sold for breeding. While NAAB had exclusive rights to the technology, the FTC alleged that it "acted as a combination of its Members" when it prohibited individual members from using the technology with respect to bulls they did not own, at least in part. The FTC alleged that NAAB's rules were a method of unfair competition under the Act that unlawfully "impeded" the development of a market for the sale of access to the technology and "dampened" competition in cattle transactions conducted without access to the technology by keeping the price of bulls from being driven "toward its true value."

This enforcement action raises important issues for trade organizations and professional associations as well as others that engage in competitor collaborations and joint research and development efforts.

Background

NAAB is a non-profit trade association of firms that provide cattle artificial insemination, comprising about ninety percent of that market, according to the FTC. 2 In 2006, NAAB entered into a Cooperative Research and Development Agreement (CRADA) with the Department of Agriculture (USDA) for the development of a technology that predicts the transmission of commercially valuable traits by dairy bulls called genomic predicted transmitting ability (GPTA). According to the Complaint, NAAB provided funding and logistical support to a USDA laboratory, which substantially developed the technology. The FTC characterized GPTA technology as the best indicator of bulls' genetic merit, noting that the "traditional" method to estimate bulls' genetic merit is to observe the milk production of the bulls' offspring and takes four to five years. 3

NAAB had exclusive access to the GPTA technology under the CRADA from March 2008 until February 2013. 4 In late 2008, the FTC alleged that NAAB acted "as a combination of its members" to pass a resolution requiring members to have an interest in a dairy bull before being allowed access to the GPTA of the bull through NAAB. 5 The FTC also alleged that, in effect, members were prohibited from selling access to GPTA technology to non-members. 6 These restrictions remained in effect until NAAB's exclusivity period ended in 2013, after which time non-members could purchase GPTA through an industry organization for a fee. 7

FTC Enforcement Action

The FTC challenged NAAB's GPTA restrictions as a method of unfair competition in violation of Section 5 of the FTC Act. 8 The FTC alleged that NAAB's restrictions stifled competition in the sale of bulls because they allowed NAAB members to acquire GPTA of a particular bull only after purchasing an interest in the bull and "impeded" development of a market for NAAB members selling GPTA access to nonmembers. According to the FTC, this "dampened competition among NAAB Members when buying dairy bulls" as "[a]ccess to GPTA information would tend to drive the price of the bull toward its true value." 9

NAAB settled the charges by agreeing to certain conduct for a period of twenty years. Specifically, the consent decree prohibits NAAB from restricting its members' ability to sell technology or information from "research projects," defined to include both CRADA research conducted with a government agency as well as any research and development conducted by NAAB independently. 10 The consent decree also prohibited NAAB from adopting any regulations that might limit price-related competition among its members. 11 However, the consent decree specifically noted that NAAB would still be permitted to engage in "reasonably necessary" conduct to achieve "procompetitive benefits or efficiencies." 12

The FTC also required that NAAB maintain an antitrust compliance program until 2020 and provide the agency with notice if it adopts or modifies any regulations that might restrict the ability of its members to sell or use technology resulting from NAAB research projects. 13

Lessons for Trade Associations & Competitor Collaborations Generally

Trade associations serve an important, procompetitive purpose. They often allow for development of new technology, standards, or better sources of market information and benchmarking services, all of which can promote and enhance competition. However, when competitors collaborate, whether through a trade association or other means, they need to be careful not to enter into restrictive agreements that outweigh such procompetitive benefits and violate the antitrust laws.

The NAAB case presents three key lessons that should be heeded by trade associations, their members, and competitors otherwise engaging in collaborations and other joint development activity.

  • Restraints ancillary to procompetitive benefits must be narrowly tailored. The Antitrust Guidelines for Collaborations Among Competitors, published jointly by the US Department of Justice (DOJ) and the FTC, recognize that some restrictions on access to jointly developed technology or benefits encourage procompetitive research and development efforts, but these restrictions must be balanced against the procompetitive benefits. In particular, the DOJ and the FTC will consider whether restraints are "reasonably related to the integration and reasonably necessary to achieve its procompetitive benefits" in determining whether a violation of the antitrust laws has occurred with a competitor collaboration. 14

Trade associations and individual market participants alike need to make sure that any competitor collaborations properly balance procompetitive benefits against potential restraints on competition. Here, NAAB and its members were arguably engaged in procompetitive activities by conducting joint research and development with USDA. However, NAAB's restraints appear to have gone too far in the FTC's view, despite only being in existence during the period of NAAB's exclusive rights to GPTA technology. Notably, the FTC did not go so far as to say NAAB could impose no restrictions on GPTA access—the consent decree made specific allowance for restraints reasonably necessary to achieve the research project benefits, consistent with the Guidelines. Accordingly, trade groups and others engaged in competitor collaborations should thoroughly consider the scope of any restraints when first establishing a joint program and potentially revisit existing programs periodically to ensure compliance with the antitrust laws.

  • Trade associations remain subject to the antitrust laws, the same as their members. While a professional organization or trade association is typically not an active market participant, it is important to remember that its activities still can have an impact on competition, in part, due to the make-up of its membership. As a result, trade associations can be directly liable for violations of the antitrust laws in the same manner as their members. Indeed, the FTC's Complaint noted that when NAAB passed the resolution restricting access to the GPTA, the organization "acted as a combination of its Members." 15

And this is not the first time that NAAB policies have been subject to antitrust scrutiny. In 2015, the FTC challenged NAAB's Code of Ethics as improperly restricting competition among members by prohibiting certain advertising practices.16 Trade associations must carefully consider the antitrust implications of their rules and programs, particularly when access to membership benefits can have a significant impact on competition in the members' industries.

  • Heightened scrutiny may occur when government resources are involved. In its Analysis to Aid Public Comment, the FTC characterized this case as "illustrating" that "industry groups that obtain valuable and unique technology from the government may not establish rules or regulations regarding that technology that unreasonably restrain competition." 17Thus, it appears that the fact that the GPTA was jointly developed by USDA may have led to heightened scrutiny in this case.

Notably, the case presents somewhat atypical theories of harm to competition. First, the FTC's concerns were framed around a potential market for the sale of GPTA information to non-members. Although the antitrust authorities are clear that they will challenge behavior that reduces potential competition, this case is notable in that it does not present allegations that NAAB members actually had plans to enter this type of business. Second, the FTC alleges that selling the bulls "in this environment–without the NAAB Member or the Non-Member knowing the GPTA–dampened competition," specifying that the bulls would not be sold for their "true value." 18 Typically, US antitrust enforcers are not concerned with having any particular price value prevail. Rather they typically focus on whether there is an effect on competition between parties. Here, it is not clear from the Complaint how competition, rather than particular prices, was affected given that the FTC seemed focused on a situation where all parties to a potential bull transaction lacked the GPTA information.

The proper scope of "unfair competition" under Section 5 of the FTC Act has been the subject of renewed debate in recent years. In 2015, the FTC issued a policy statement that described Section 5 as encompassing conduct that "contravene[s] the spirit of the antitrust laws" and said that the FTC would be more likely to bring Section 5 cases when enforcement under the Sherman or Clayton Acts would be insufficient.19 While the FTC might have brought a Section 5 case here regardless of the role USDA played due to a perceived impact on competition among the NAAB members, its comments in the Analysis to Aid Public Comment suggest that the involvement of the USDA may have contributed to a heightened concern. Thus, trade associations and their members should exercise additional caution when designing membership programs, activities, or benefits that rely on or stem from government resources to ensure their compliance with the antitrust laws.

Footnotes

1 Federal Trade Commission, National Association of Animal Breeders, Inc. Agreed to Refrain from Adopting Rules that Restrict Competition Among Members, FTC, Aug. 18, 2017, (NAAB GPTA Press Release).

2 Complaint, at 1-2, In the Matter of National Association of Animal Breeders, Inc., FTC 151-0135 (Aug. 18, 2017), (NAAB GPTA Complaint).

3 NAAB GPTA Complaint, at 3; Analysis to Aid Public Comment, at 4, In the Matter of National Association of Animal Breeders, Inc., FTC 151-0135 (Aug. 18, 2017), (NAAB GPTA Analysis).

4 NAAB GPTA Complaint, at 3.

5 The member could either (1) own the bull; (2) have an agreement to purchase at least 30% of the bull; (3) have a lease on the bull; or (4) have an exclusive marketing agreement for the bull. NAAB GPTA Complaint, at 3.

6 NAAB GPTA Press Release ("NAAB's Board of Directors adopted a resolution that remained in effect for five years and required that only NAAB members could obtain GPTAs.").

7 NAAB GPTA Complaint, at 4.

8 NAAB GPTA Analysis, at 2.

9 NAAB GPTA Complaint, at 3.

10 Decision and Order, at 2-3, In the Matter of National Association of Animal Breeders, Inc., FTC 151-0135 (Aug. 18, 2017), (NAAB GPTA Order).

11 NAAB GPTA Order, at 2.

12 NAAB GPTA Order, at 3.

13 NAAB GPTA Order, at 5.

14 Fed. Trade Comm'n and US Dep't of Justice, Antitrust Guidelines for Collaborations Among Competitors, at 3.2 (2000).

15 NAAB GPTA Complaint, at 3.

16 Analysis to Aid Public Comment, at 1, In the Matter of National Association of Animal Breeders, FTC 141-0215 (Sept. 24, 2015); Complaint, at 3, In the Matter of National Association of Animal Breeders, FTC 141-0215 (Nov. 6, 2015). To resolve these claims, NAAB signed a consent decree and agreed to lift some of the restrictions on its members' advertising practices. Decision and Order, at 3, In the Matter of National Association of Animal Breeders, FTC 141-0215 (Nov. 6, 2015). NAAB was also required to design and maintain an antitrust compliance program, including providing annual training to its directors, officers, and employees. Id. at 5.

17 NAAB GPTA Analysis, at 1.

18 NAAB GPTA Complaint, at 3.

19 Statement of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act, Federal Trade Commission, Aug. 13, 2015.

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