There are occasions when an idea or concept is so
old that it becomes new again. Such is the case with respect to the ancillary restraint
doctrine in the antitrust world. Over a century ago, Judge (and later Chief Justice)
William Howard Taft articulated the antitrust principle that, when a business partnership
is formed, restraints on competition among the participants were to be
“encouraged” since they were only ancillary to the main end of the union, and
necessary for its success. United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th
Cir. 1898) aff’d as modified 175 U.S. 211 (1899). This became known in antitrust
circles as the “ancillary restraint doctrine.”
This doctrine has been embraced in the “Antitrust Guidelines For
Collaborations Among Competitors” (hereinafter “Guidelines”) issued in
April 2000 by the federal antitrust enforcers, the Federal Trade Commission
(“FTC”) and the Antitrust Division of the Department of Justice (DOJ). The basic
principle underlying the Guidelines is that, in some circumstances, restraints that
otherwise might be considered per se illegal — such as price fixing — are
subject to the rule of reason and may not be illegal at all if they are reasonably
necessary to achieve pro competitive benefits from an “efficiency-enhancing
integration of economic activity.” To a
large extent, this is simply the ancillary restraint doctrine dressed in modern e-commerce
language.
The purpose of the Guidelines is to provide guidance to the business
and legal community as to when the federal antitrust enforcers will challenge the legality
of a “competitor collaboration” under the antitrust laws. “Competitor
collaborations” (aka joint ventures) are simply agreements among competitors short of
a merger to jointly engage in a business activity such as production, marketing, or
research and development. Competitor collaborations by definition involve some curtailment
in competition among the participants and thus necessarily raise serious antitrust issues.
Although joint ventures and other competitor collaborations have a
long history, their use as a business tool has exploded in recent years. In the first few
months of 2000, there were many public announcements about the formation of business to
business (“B2B”) e-commerce sites among major competitors in several “old
economy” industries. Such B2B collaborations included those between Ford, GM, and
DaimlerChrysler in the automotive industry, Boeing, Raytheon and Lockheed in the aerospace
industry, and McKesson, Cardinal and others in the healthcare field. (See “B to B
Ain’t Dead Yet,” Industry Standard/Yahoo News, June 1, 2000.)
Another fertile area for competitor collaborations is foreign
marketing necessitated by globalization, as such joint efforts can substantially reduce
costs and achieve other efficiencies. Competitor collaborations are also a logical way to
approach the development of new products or technology that will benefit consumers. Since
it would be unwise and futile for antitrust law to stand in the way of such progress, a
return to the ancillary restraint doctrine permits such collaborations to proceed but
still challenge those that are mere disguises for hard core cartel behavior.
The ancillary restraint doctrine
The ancillary restraint doctrine simply provides that a restraint
among competitors that would otherwise be illegal may not be so where it is part of a
broader business combination that may lower prices, provide better products, or otherwise
benefit consumers. The doctrine actually predated the rule of per se illegality by
slightly over a decade. Standard Oil & Co. v. United States, 221 U.S. 1, 60-70 (1911).
The per se rule provides that certain categories of restraints, such
as horizontal price fixing or market allocation agreements among competitors, are presumed
to unreasonably restrain trade without any analysis of market conditions or the business
purpose of such restraints.
Other restraints, such as exclusive dealing and vertical territorial
or customer restraints, are deemed unreasonable only after an analysis of the market and
their impact on competition. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320
(1961); Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).
 During
much of the first two-thirds of the 20th century, the ancillary restraint doctrine was
relegated to an archaic principle as the per se rule was steadily expanded to include
almost any arrangement among competitors which had a negative impact on competition. See
e.g., Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951); United States v.
Sealy, 388 U.S. 350 (1967).
The ancillary restraint doctrine began its modern comeback in
Broadcast Music Inc. v. CBS, 441 U.S. 1, a 1979 Supreme Court decision. In Broadcast
Music, thousands of authors and composers had joined together and granted nonexclusive
rights to two joint venture type entities to offer a blanket license to all their musical
compositions.
Although the Second Circuit held the arrangement to be per se illegal
price fixing, the Supreme Court reversed noting that the blanket license accompanied the
integration of sales, monitoring, and enforcement against copyright infringements and thus
was potentially beneficial to both sellers and buyers. It remanded the case for review
under the rule of reason.
This was followed by NCAA v. Board of Regents, 468 U.S. 85 (1984),
which held that restrictions imposed by a membership organization governing
intercollegiate athletics should be judged under the rule of reason rather than summarily
condemned by the per se rule. This led to a series of appellate court decisions
enunciating the principle that restraints ancillary to a legitimate joint venture should
be analyzed under the rule of reason rather than summarily condemned under the per se
rule. See e.g., Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d.210, 224 (D.C.
Cir. 1986); SCFC ILC Inc. v. Visa Inc., 36 F.3d 958 (10th Cir. 1994).
The return to the ancillary restraint doctrine has been most
pronounced in the health care area. A 1982 Supreme Court decision, Arizona v. Maricopa
County Medical Society, 457 U.S. 332 (1982), struck down as per se illegal price fixing an
agreement among competing doctors to adhere to a maximum fee schedule, but noted that such
an agreement might be permissible under the rule of reason if the doctors had formed a
partnership or otherwise pooled their capital or shared risk to achieve integrative
efficiencies.
Later decisions picked up on this point and permitted physicians and
other medical providers to fix fees when they were part of groups that achieved
“integrative efficiencies” through risk sharing or otherwise. See, e.g. Hassan
v. Independent Practice Assocs., 698 F.Supp. 679, 688-90 (E.D. Mich. 1988).
In 1994, the DOJ/FTC issued their Statements of Antitrust Enforcement
Policy in Health Care which permit medical providers to jointly negotiate fees with health
care payors so long as there is risk sharing or similar integration. (1994 Health Care
Statements, amended 1996, 4 Trade Reg. Rptr. (CCH) paragraphs 13, 153.)
The Health Care Guidelines also adopted the principle that price and
other restraints collateral to these integrations would be evaluated on the basis of
whether the collateral restraints are reasonably necessary to achieve the efficiencies
sought by the joint venture.
Thus, modern antitrust jurisprudence recognizes that joint ventures
among competitors can sometimes lower prices, improve products or channels of delivery,
and that the success of such ventures is dependent in part on eliminating some aspects of
competition among the joint venture participants. Hence the return to the ancillary
restraint doctrine.
The Guidelines set forth the “analytical framework” by
which the federal antitrust enforcers will judge joint ventures and other competitor
collaborations, including B2B e-commerce ventures. As is usually the case with such
enforcement guidelines, they begin by reiterating the principle that hardcore antitrust
violations — such as horizontal price fixing and market divisions — unconnected
to any “efficiency-enhancing integration of economic activity” — are per se
illegal and subject to criminal prosecution.
The Guidelines then go on, however, to articulate some general
principles, largely derived from court decisions, to guide firms considering various types
of competitor collaborations. While the Guidelines are quite useful, much uncertainty
remains and in some respects they raise more questions than they answer.
The Guidelines apply to any competitor collaboration short of a
merger. Such collaborations normally involve one or more business activities, such as
research and development (“R&D”), production, marketing, distribution, sales
or purchasing. While mergers end competition entirely between the merging parties,
competitor collaborations preserve some form of competition among the participants. In the
event that a business arrangement labeled as a joint venture or collaboration in fact
eliminates all competition among the participants in a relevant market, the Guidelines
state that it will be treated as a merger for purposes of antitrust analysis. It should be
noted, however, that many joint ventures that are not mergers are subject to the premerger
notification requirements of the Hart-Scott-Rodino Act. See 16 CFR 801.40.
As noted above, for a competitor collaboration to receive favorable
treatment under the Guidelines, it must be an “efficiency-enhancing integration of
economic activity.” The
“efficiency-enhancing” aspect of this phrase means that it must achieve a cost
savings or other benefit to consumers by expanding output, reducing prices, or enhancing
quality, service or innovation. The “integration” aspect of this phrase requires
that the participants make a real contribution, by contract or otherwise, of significant
capital, technology, or other complimentary assets to the joint venture or other
collaboration itself. Absent such efficiencies and integration, the mere coordination of
decisions on prices, output, customers, and other competitively sensitive subjects will be
summarily condemned under the per se rule. See, e.g., State of New York v. St. Francis
Hospital, 2000 U.S. Dist. Lexis 4655 (S.D.N.Y. 2000).
Forming a competitor collaboration
While the precise antitrust analysis which applies to any joint
venture or other competitor collaboration will vary, the Guidelines, and applicable case
law, identify seven key inquiries that should be made by a business before embarking on a
joint venture or similar competitor collaboration.
 Types of business
function: Most competitor collaborations fall into one of four categories —
marketing, production, purchasing, or research and development (“R& D”). The
Guide-lines state that “most” R&D
agreements are pro-competitive, and typically analyzed under the rule of reason. The same
is true, although to a lesser extent, of purchasing collaborations.
The Guidelines likewise concede that competitor collaboration
involving agreements to jointly produce a product are “often pro-competitive.” The highest degree of antitrust risk lies with
marketing collaborations. Such collaborations involve agreements to jointly sell,
distribute or promote goods and services and thus often result in agreements on price,
output, or other competitively significant variables that can result in anticompetitive
harm.
The market power of the
participants: This requires an
identification of the relevant market utilizing the tests set forth in the Horizontal
Merger Guidelines, followed by a determination of the market shares in that market of each
of the participants. It also requires an analysis of barriers to entry, as a high market
share may not be an indicia of market power if barriers to entry are low in the market in
question. The Guidelines do contain a “safe harbor” where the market share of
the participants is 20 percent or less and does not involve agreements that are otherwise
per se illegal. There will, however, be many cases in which collaboration involving market
shares above the safe harbor threshold will be permissible, depending upon the facts and
circumstances. The Guidelines themselves are quick to note that they are not designed to
“discourage” collaborations falling outside the safe harbors.
Type of Restraints: Another
major factor is whether the restraints among competitors that accompany a collaboration
are restraints which, outside the joint venture context, would be considered to be per se
illegal or subject to the rule of reason. Restraints which usually result in high prices
or lower output, such as price or output restrictions, are much more likely to invalidate
the collaboration than other restraints which impose reasonable limits on the ability of
collaborators to do business outside the collaboration. Nonetheless, the Guidelines
frequently reiterate the principle that restraints that might otherwise be considered per
se illegal may be judged under the rule of reason when reasonably related to, and
reasonably necessary to achieve, the pro competitive benefits, of the collaboration or
joint venture.
Whether the Restraints
Are Reasonably Necessary: The next area of inquiry should be whether the
restraints, regardless of whether they fall into the per se or rule of reason categories,
are “reasonably necessary” to achieve the business purpose and pro-competitive
benefit of the proposed collaboration. The Guidelines take the position that such
restraints may be reasonably necessary “without being essential.” If, however,
the business purpose and pro-competitive benefits of the collaboration can be achieved
through less restrictive means, then the restrictions may not be reasonably necessary.
This obviously is a fact-specific inquiry which requires a careful analysis of the purpose
of the collaboration and whether the collateral restraints are really necessary to achieve
its objectives.
Facilitating Collusion: Whether
the proposed collaboration will be used as a facilitating device to exchange competition
sensitive information unrelated to the collaboration and thus promote collusion among the
participants is a major concern of the enforcement agencies. Since the Guidelines by
definition deal only with “competitor” collaborations, such collaborations
provide an opportunity for the participants to discuss and agree on prices, output,
customer or other competitively sensitive information which may be unrelated to the
purpose of the collaboration entirely. It is very important that safeguards be adopted and
implemented to reduce, if not prevent, the opportunities for such tacit collusion. This is
a major concern of the enforcement agencies with respect to the B2B e-commerce joint
ventures which provide the opportunity for competitors to obtain “real time”
information about price and other terms of sale offered by competitors. The installation
of firewalls, or similar safeguards to prevent the sharing of competitively sensitive
information among competitors on e-commerce exchanges, is important and crucial.
Continued competition:
This is the extent to which the collaboration prevents participants to continue to compete
against each other. The Guidelines state that collaborations accompanied by exclusivity
are more likely to raise antitrust concerns. For example, where the joint venture
participants in a B2B e-commerce exchange are prohibited from selling, or purchasing,
their products through another exchange, this is more likely to raise antitrust concerns
than where such participation is on a non-exclusive basis. While the success of the
collaboration often requires some degree of exclusivity, it is wise to structure the
agreements to permit the participants to conduct some business activity in the relevant
market outside the collaboration, as well as continue aggressive competition with respect
to business functions not covered by the collaboration.
Duration of The
Collaboration: A collaboration of unlimited duration obviously reduces the
ability and incentive of the participants to compete against each other. The Guidelines
state, not surprisingly, that the shorter the duration, the more likely the participants
are to compete against each other. The Guidelines offer no meaningful statements as to
what is too long, and it will vary depending on the industry and the nature of the
collaboration. As a rule of thumb, however, those in the one- to three-year range are
likely to be upheld depending on the outcome of the analysis of the other factors set
forth above. In any event, it is wise to have a “sunset” or similar provision in
most collaboration agreements.
The foregoing is not an exhaustive list of factors set forth in the
Guidelines, but does identify those most likely to be dispositive and at least some will
apply to most joint ventures. Other factors identified in the Guidelines include the
extent to which participants have a financial interest in the collaboration (the greater
the financial interest, the less likely is the participant to compete with the
collaboration) and the degree of control the collaboration’s decision-making process
held by their participants. (The greater the degree of control over the
collaborations’ price output, and other competitively significant decisions, the less
likely it is that the collaboration will compete independently.)
In any event, as emphasized previously, the antitrust analysis
applicable to any collaboration depends upon the nature of the collaboration, the industry
involved, and other inquiries that can be make only on a case by case basis.
Safety zones
Like prior enforcement guidelines in the merger, health care and
intellectual property areas, the competitor collaboration guidelines include “safety
zones” to provide potential collaborators with a degree of certainty that, in some
situations, the anticompetitive effects are so unlikely to occur that the collaborations
will be presumed lawful. Here, however, there are only two safety zones which themselves
are subject to various qualifications and exceptions.
The first safety zone is where the participants account for no more
than 20 percent of each relevant market in which competition may be effected. This safety
zone, however, does not apply to agreements that are otherwise per se illegal, or that
would be challenged without a detailed market analysis such as those subject to the
“quick look” rule of reason analysis. See, e.g., FTC v. Indiana Federation of
Dentists, 476 U.S. 447 (1986).
The second safety zone applies only to R&D collaborations in
innovation markets.
An innovation market is one that consists of research and development
directed to particular new or improved goods or processes. The safety zone exists where,
in addition to the collaboration itself, there are three or more independently controlled
research efforts that possess the specialized assets or characteristics and the incentive
to engage in R&D that is either the same as, or a close substitute for, the R&D
activity of the collaboration.
Again, this safety zone does not apply to agreements that are
otherwise per se illegal, or that otherwise would be challenged without a detailed market
analysis.
Thus, while two safety zones exist, they really do not provide much
safety. The Guidelines are quick to note, however, that the purpose of the safety zones is
to establish a rule of certainty for the business community and they do not intend to
discourage competitor collaborations that fall outside the safety zones.
Conclusion
Subject to the various qualifications, the basic purpose of the
competitor collaboration guidelines is to tolerate, if not endorse, restraints on
competition among competitors where such restraints are necessary to the success of a
joint venture or other collaboration which itself may result in lower prices, better
product, or other benefits to consumers. In this respect, it “frees” the
business community to better adapt to an economy characterized by increased globalization
and rapid technological change.
While such an economy cannot have been foreseen by Judge Taft when he
formulated the ancillary restraint doctrine over a century ago, it does demonstrate the
willingness of the enforcement agencies, and the courts, to adapt traditional antitrust
principles to fit the needs of the modern world. As can be seen from the foregoing
analysis, however, many aspects of the Guidelines are obscure and a substantial degree of
uncertainty exists, and will continue to exist as to how to apply these principles to
specific collaborations.
Early and effective antitrust counseling is both necessary and
desirable when firms contemplate joint ventures or similar competitor collaborations.
Carlton A. Varner is a
partner in the litigation and antitrust department of the Los Angeles office of Sheppard
Mullin Richter & Hampton. |
