Antitrust Treatment of Joint Ventures: Analyzing Competitor Collaborations

Copyright 2009.  Reprinted with permission from Minnesota CLE.

It has been said that "[i]n order to compete in modern markets, competitors sometimes need to collaborate."[1] An increasingly popular form of competitor collaboration is the joint venture.[2] Joint ventures include a vast array of business combinations, from newly consolidated entities, to strategic contractual alliances, to models incorporating both integration and networking in innovative and complex ways.[3] The subject matter of joint ventures can include any of a number of business activities, such as research and development, production, marketing, distribution, sales, and purchasing.[4] And while significant pro-competitive benefits can be achieved through joint ventures, it is nevertheless the case that when competitors collaborate, there is potential for harm to competition.[5] This article outlines the basic principles of the antitrust analysis of joint ventures.

I.  Elements of the Analysis: Procompetitive Benefit and Anticompetitive Harm

On the one hand, the joint venture provides a method of organization which enables competitors to join together to produce that which is beyond the productive capacity or inclination of its individual members. Conversely, the joint venture threatens to reduce actual or potential competition between rivals by providing a method of operations which engenders collusion detrimental to competition.

COMPACT v. Metro. Gov't., 594 F. Supp. 1567, 1574  (M.D. Tenn. 1984).

A. Procompetitive Benefits of Joint Ventures

In some cases, a joint venture might allow participants to realize a number of otherwise unattainable market efficiencies. For example, firms may achieve economies of scale through joint ventures, resulting in the production of goods or provision of services at lower cost or of greater value to consumers. Joint ventures enable participants to combine research and marketing activities to reduce the time needed to develop new products and lower the costs of bringing those products to market. By allowing firms to make better use of existing assets, joint ventures facilitate the expansion of participant businesses into new product, services, and geographic markets. When these market efficiencies are realized, competition is enhanced and consumers benefit.

B. Potentially Anticompetitive Aspects of Joint Ventures

Joint ventures also have the potential to harm competition. When competitors collaborate, their ability and incentive to compete against one another may be compromised.  For example, parties to a joint venture are uniquely able to raise prices above or reduce output, quality, service, or innovation below what likely would prevail in the absence of their collaborative arrangement. Joint ventures also have the potential to limit participants' independent decision making by combining control of or financial interest in production, key assets, and other competitively sensitive variables. Joint ventures thus create the risk of collusion-precisely the type of anticompetitive conduct that antitrust law aims to prevent.

Federal Trade Commission and U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors, p. 1 (2000) (Collaboration Guidelines):

• §§ 2.1 - 2.4

II. Analyzing Joint Ventures under Section 1 of the Sherman Act

The antitrust analysis of joint ventures has been developed by the courts in numerous decisions, and also articulated by the Department of Justice and the FTC, most notably in the Collaboration Guidelines.  It can be broken down by reference to four inquiries.

Question 1.      Is the joint venture acting as a single firm or as a collaboration of independent competitors engaged in a potential conspiracy in restraint of trade?

Question 2.      If the joint venture is acting as a collaboration of independent competitors, then is its conduct of a type that always or almost always tends to raise price or to reduce output?

Question 3.      If not, then is the joint venture causing or likely to cause anticompetitive harm?

Question 4.      If so, then is the overall competitive effect of the joint venture such that its overriding procompetitive benefits outweigh its anticompetitive harms?      

Each of these questions is treated in greater depth below.

A.  The Single-Entity Determination

The threshold inquiry in the antitrust analysis of joint ventures is whether the venture operates as a collaboration of independent competitors, or as a single firm. The answer to that question determines whether the joint venture is subject to the rigors of Section 1 of the Sherman Act, which prohibits contracts, combinations or conspiracies in restraint of trade, or Section 2 of the Sherman Act, which prohibits monopolization and attempted monopolization.  This distinction is an important one, because while concerted conduct among independent firms can be per se illegal under Section 1 regardless of the parties' combined market power, concerted single-firm conduct  is subject to Section 2, and therefore only illegal if the joint venture possesses, or threatens to possess, monopoly power (at least a two-thirds share of the market).  Thus, if a court or agency treats a joint venture as a single firm rather than as a collaboration of multiple entities, it is more likely to escape liability under antitrust laws.

Joint ventures are more likely to be considered single entities when competitors pool their capital and share risks of loss as well as opportunities for profit. Courts also consider whether the firms that comprise a joint venture operate as independent economic competitors in the relevant market, or rather depend on a degree of cooperation for their economic survival.  The ultimate question in a single-entity determination, then, is whether the venture functions as a single source of economic power.

Leading Cases:

• Texaco Inc. v. Dagher, 547 U.S. 1, 6 (2006).
• Arizona v. Maricopia County Med. Soc'y, 457 U.S. 332, 356 (1982).
• Freeman v. San Diego Ass'n of Realtors, 322 F.3d 1133 (9th Cir. 2003).

Collaboration Guidelines: 

• § 1.3.

B.  Determination of "Per se" Unreasonableness

Under the principle of per se unreasonableness, the practice complained of must have such an inherently harmful effect on competition that it should be conclusively presumed to be unreasonable and therefore illegal.

Carson Mach. Tools. v. Am. Tool, 678 F.2d 1253, 1259 (5th Cir. 1982).

Certain restraints of trade are unreasonable per se under Section 1 of the Sherman Act because of their pernicious effect on competition and lack of any redeeming virtue. If a practice appears on its face to be one that would always or almost always tend to restrict competition, then it is subject to the per se rule. Types of conduct that have been held per se illegal include agreements among competitors to fix prices or output, rig bids, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce. Courts conclusively presume these agreements illegal without any further inquiry or analysis. But because the application of the per se rule forecloses detailed antitrust analysis, its application is limited to only those collaborative arrangements that have proven through considerable judicial experience to be plainly or manifestly anticompetitive.

In considering whether an agreement within a joint venture is per se unlawful, courts and agencies consider whether the venture itself is an efficiency-enhancing integration and whether the restraint in question is reasonably necessary to attain efficiencies. When a joint venture is an efficiency-enhancing integration, then agreements between joint-venture participants will be analyzed under the rule of reason if they are "reasonably necessary" to bring about the efficiencies of the venture. An agreement may be "reasonably necessary" without being essential, but if an equivalent or comparable efficiency-enhancing integration could be achieved through less restrictive means, then the agreement will not be considered reasonably necessary.

Leading Cases: 

• Capital Imaging Assoc., P.C. v. Mohawk Valley Med. Assoc., Inc., 996 F.2d 537, 542-43 (2nd Cir. 1993).
• State Oil Co. v. Kahn, 522 U.S. 3, 10 (1997).
• Timken Roller Bearing Co. v. U.S., 341 U.S. 593, 598 (1951).

Collaboration Guidelines: 

• § 3.2

C.  Assessment of Anticompetitive Harm

1.  "Quick Look" Analysis

If a joint venture is not per se illegal, then the central question under Section 1 of the Sherman Act is whether the arrangement harms or is likely to harm competition.  Where any anticompetitive effects of a joint venture are intuitively obvious (if the challenged activity has raised prices, for example), courts and agencies will apply a quick look analysis to the venture. In a quick look analysis, a rebuttable presumption of illegality arises from the close resemblance between the suspect practice of a joint venture and another practice already considered illegal per se. That presumption can be defeated by a legitimate justification for the practice that is both cognizable under antitrust laws, and at least facially plausible. When such a justification is advanced, a restraint within a joint venture will be condemned only upon a showing that the disputed conduct, in fact, harms or is likely to harm competition. A quick look analysis "carries the day when the great likelihood of anticompetitive effects can be easily ascertained."  Cal. Dental Ass'n v. FTC, 526 U.S. 756, 771 (1999).

Leading Cases: 

• N. Tex. Specialty Physicians v. FTC, 528 F.3d 346, 363 (5th Cir. 2008).
• FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 458-59 (1986).
• NCAA v. Bd. of Regents, 468 U.S. 85, 109 (1984).

2.  "Rule of Reason" Analysis

Where the anticompetitive effects of a joint venture are not immediately obvious, courts and agencies evaluate their legality using the rule of reason. A rule of reason analysis focuses on the state of competition with, as compared to without, the relevant collaboration. It is a flexible inquiry and varies in focus and detail depending on the nature of the agreement and market circumstances. In applying the rule of reason, courts and agencies consider the following factors:

• The nature and business purpose of the agreement;
• The markets in which the agreement operates;
• The market power of the parties to the joint venture and of the venture itself;
• The extent to which the relevant agreement is non-exclusive in that participants are likely to continue to compete independently outside the collaboration in the market in which the collaboration operates;
• The extent to which participants retain independent control of assets necessary to compete;
• The control of the collaboration's competitively significant decision making;
• The likelihood of anticompetitive information sharing; and
• The duration of the collaboration.

Only on those factors necessary to make a sound determination of the competitive effect a joint venture will be considered; no one factor is dispositive.

If the examination of these factors indicates no potential for anticompetitive effects, the joint venture will be considered legal without any further analysis. If, on the other hand, the examination uncovers anticompetitive effects, then courts and agencies will consider whether the collaborative arrangement is reasonably necessary to achieve procompetitive benefits that outweigh anticompetitive harm. 

Leading Cases: 

• Bus. Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 723-24 (1988).
• Martin B. Glauser Dodge Co. v. Chrysler Corp., 570 F.2d 72, 82 (3rd Cir. 1977).
• Nat'l Soc'y of Eng'rs v. U.S., 435 U.S. 679, 691 (1978).

Collaboration Guidelines: 

• §§ 3.31 - 3.34

D.  Assessing Overall Competitive Effect

The general issue is "whether the restraint's anticompetitive effects substantially outweigh the procompetitive effects for which the restraint is reasonably necessary."

Atl. Coast Airlines Holdings, Inc. v. Mesa Air Group, Inc., 295 F. Supp. 2d 75, 95 (D.D.C. 2003).

If harm to competition exists or is likely to exist, then the rule of reason inquiry shifts to whether the overall competitive effect of the joint venture is such that its procompetitive benefits offset its anticompetitive harms.  The benefits must be verifiable, not vague or speculative, and the challenged restraint on trade must be reasonably necessary to achieve those benefits. An agreement may be reasonably necessary without being essential, though if the participants could have achieved similar efficiencies by less restrictive means, then the agreement is not reasonably necessary.

If the relevant agreement is reasonably necessary to achieve cognizable efficiencies, then courts and agencies will assess the likelihood and magnitude of cognizable efficiencies and anticompetitive harms to determine the agreement's overall competitive effect. As the expected anticompetitive harm of the collaborative arrangement increases, evidence establishing a correspondingly greater level of cognizable efficiencies is required to establish that the joint venture will have a procompetitive effect overall.

Leading Cases: 

• Am. Ad. Mgmt., Inc. v. GTE Corp., 92 F.3d 781, 787 (9th Cir. 1996).
• Gordon v. Lewistown Hosp., 423 F.3d 184, 207 (3rd Cir. 2005).
• Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57, 69 (1st Cir. 2004).

Collaboration Guidelines: 

• §§ 3.36 - 3.37

III.  Safe Harbors

Recognizing that certain joint ventures are often procompetitive, the Collaborative Guidelines set forth two safe harbors to encourage those types of arrangements.  The first safe harbor applies to those joint ventures where the combined market share of the participants accounts for no more than twenty percent of the relevant market in which competition may be affected. Joint ventures with such limited market power are protected by the safe harbor and are presumptively lawful, as long their main purpose or effect is not illegal per se.

The second safe harbor in the Collaborative Guidelines applies only to research and development joint ventures. It protects collaborative arrangements where three or more independently controlled research efforts in addition to those of the collaboration possess the required specialized assets or characteristics and the incentive to engage in research and development that is a close substitute for the research and development activity of the collaboration. In determining whether independently controlled research and development efforts are close substitutes, courts and agencies consider, among other things, the nature, scope, and magnitude of the efforts; their access to financial support; their access to intellectual property, skilled personnel, or other specialized assets; their timing; and their ability, either acting alone or through others, to successfully commercialize innovations. The safe harbor does not apply to agreements that are illegal per se.

Collaboration Guidelines: 

• §§ 4.1 - 4.3

IV.  Additional Resources

• ABA Section of Antitrust Law: http://www.abanet.org/antitrust/
• DOJ Antitrust Division: http://www.usdoj.gov/atr/
• FTC Bureau of Competition: http://www.ftc.gov/bc/guidance.shtm