Competitor Collaborations and

Competitive Restraints Leveraging New Guidance to Avoid Anti-Competitive Conduct When Structuring Collaborations

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WEDNESDAY, MARCH 6, 2013

Presenting a live 90-minute webinar with interactive Q&A

Paula W. Render, Partner, Jones Day, Chicago

Brian K. Grube, Of Counsel, Jones Day, Cleveland

Michelle K. Fischer, Partner, Jones Day, Cleveland

Eric P. Enson, Partner, Jones Day, Los Angeles

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COMPETITOR COLLABORATIONS AND COMPETITIVE RESTRAINTS

March 6, 2013

WHAT’S THE PROBLEM?

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What’s a competitor collaboration?

• Lawful joint venture? Or unlawful joint conduct?

• Joint ventures

• ―JV‖ is not a term of art; no specific meaning

• JVs include a broad range of activities from loose affiliation to creation of a new economic entity

• Any pooling of resources and sharing of risk between separate economic actors

• A procompetitive joint venture? Or an attempt to disguise price-fixing?

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What’s a competitor collaboration?

• Today:

• Key issues in analyzing joint ventures

• Ancillary restraints and In re Sulfuric Acid

• How the antitrust agencies analyze competitor collaborations

• Best practices

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KEY ISSUES IN ANALYSES OF JOINT VENTURES

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The Key Question

• Meaningful/sufficient pooling of resources/sharing of risk to be treated as one entity?

• Substance matters

• A dandelion isn‘t a rose, no matter what you call it. . .

• Just calling an agreement among competitors a joint venture is not good enough

• Meaningful integration, sharing of risk and profit?

• Or just a vehicle to fix prices, limit output, allocate customers/suppliers?

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The Answer Matters:

• No true integration/risk sharing → per se condemnation

• Integration in potentially pro-competitive ways?:

• Increase efficiency?

• Produce new product that neither could on own?

• Buy inputs more cost-effectively?

→ Rule of reason analysis

• Consider justifications, pro-competitive effects against anti-competitive harms

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When Rule of Reason Will Apply

• When there is true integration/pooling of resources/sharing of risk and rewards

Broadcast Music, Inc. v. Columbia Broadcasting Sys., Inc., 441 U.S. 1 (1979)

Texaco Inc. v. Dagher, 547 U.S. 1 (2006)

• When ―horizontal restraints on competition are essential if the product is to be available at all.‖

American Needle, Inc. v. Nat’l Football League, 130 S. Ct. 2201 (2010)

Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the

Univ. of Okla., 468 U.S. 85 (1984)

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Broadcast Music, Inc. v. CBS • Blanket licenses: provide unlimited right to perform any/all

member works for a term for a flat fee or revenue percentage

• Why rule of reason?

• not a naked restraint; ―accompanies the integration of sales,

monitoring and enforcement against unauthorized copyright

use, which would be difficult and expensive problems if left

to individual users and copyright owners;‖ non-exclusive

• ―quite different from anything any individual owner could

issue‖ → thus, ―ASCAP is not really a joint sales agency

offering the individual goods of many sellers, but is a

separate seller offering its blanket license, of which the

individual compositions are raw material‖

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Texaco Inc. v. Dagher • Texaco and Shell created joint venture: Equilon

• Both abandoned independent domestic refining and

marketing of gas in Western U.S.; consolidated operations

in Equilon (formation approved by consent decree)

• Multiple documented economic justifications

• To sell gas under two original brand names (Shell and

Texaco) at a single price

• Held: NOT per se unlawful for lawful, economically integrated

JV to set sales prices for its products (no ROR claim asserted)

• True integration → treatment as single entity

• ―As a single entity, a [JV]…must have the discretion to

determine the prices of the products that it sells‖

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American Needle, Inc. v NFL • Each NFL team owns own name/colors/logos/TMs/IP

• NFLP formed to develop/license/market that IP; in 2000, NFLP

authorized to grant exclusive licenses → granted one to Reebok

• Key Q: Was NFL a single entity (via NFLP) for this purpose? Is

NFL like Equilon? Or does NFLP join separate economic actors

pursuing separate economic interests, depriving market of

independent decision-making centers?

• Teams are separate, profit maximizers whose ―interests in

licensing team [TMs] are not necessarily aligned‖

• NFLP licensing decisions subject to Section 1 at least with

respect to marketing of individual team property, but ROR

analysis

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But Rule of Reason ≠ Panacea

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→ ？

NCAA v. Bd. of Regents of Univ. of Okla. • NCAA adopted plan to limit total # of televised college football

games and # by any single member -- Key Q: Did plan

enhance competition? → Violation of Sherman Section 1

• No pro-competitive efficiencies/justifications found

• No new product like in BMI (each team still sells its own

broadcasts but at a fixed price and subject to # limits)

• Exact opposite of efficiencies: lower output at higher prices

• Unnecessary to foster/maintain competitive balance among

amateur teams; no evidence of a relationship between two

• Restraints on TV broadcasts ―do not … fit into the same mold as

do rules defining the conditions of the contests, the eligibility of

participants, [etc.] ….‖ → unnecessary to produce football

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ANCILLARY RESTRAINTS

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What are ancillary (aka collateral) restraints?

• Nothing new: think covenant not to compete accompanying sale of a business

• United States v. Addyston Pipe & Steel Co. (CA6 1898)

No conventional restraint of trade can be enforced unless the covenant embodying it is merely ancillary to the main purpose

of a lawful contract, and necessary to protect the covenantee

in the full enjoyment of the legitimate fruits of the contract, or to

protect him from the dangers or unjust use of those fruits by

the other party.

• Align JV partners‘ incentives and efforts to achieve (pro-competitive) objectives of lawful JV

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When is a restraint “ancillary” • Court decisions

• ―A restraint is ancillary when it may contribute to the success of a

cooperative venture that promises greater productivity and output.‖

– Polk Bros. v. Forest City Enters., 776 F.2d 185, 189 (7th Cir. 1985).

• Ancillary restraints are ―reasonably related to … and no broader

than necessary to effectuate‖ the procompetitive benefits of the JV.

– SCFC ILC v. Visa U.S.A., Inc., 36 F.3d 958, 970 (10th Cir. 1994).

• Courts will examine whether ―substantially less restrictive

alternatives‖ available, but not require ―least restrictive alternative.‖

– United States v. Realty Multi-List, 629 F.2d 1351, 1375 (5th Cir. 1980).

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When is a restraint “ancillary” • US DOJ/FTC Competitor Collaboration Guidelines

• Ancillary restraint is an ―agreement that is reasonably related to

an integration and reasonably necessary to achieve its

procompetitive benefits.‖

• A restraint ―may be ‗reasonably necessary‘ without being

essential,‖ but ―if … an … integration [could be achieved] through

practical, significantly less restrictive means, then the [restraint]

… is not reasonably necessary.‖

• Agencies ―consider whether practical, significantly less restrictive

means were reasonably available when the agreement was

entered into, but do not search for a theoretically less restrictive

alternative that was not practical given the business realities.‖

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Why does characterization matter?

• Rule of reason vs. per se rule

• Restraints that if agreed upon by competitors in isolation would be challenged as per se illegal (e.g., price fixing, output restrictions, territorial allocations) are instead evaluated under the rule of reason

• Procompetitive justifications allowed (or not)

• Proof that the challenged restraint is, on balance, anticompetitive is required (or not)

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Case study: In re Sulfuric Acid Antitrust Litig., 703 F.3d 1004 (7th Cir. 2012) (Posner, J.)

• Background

• Sulfuric acid purchasers challenged as per se illegal restraints adopted as part of a JV among two Canadian mining companies and several U.S. sulfuric acid producers.

• U.S. producers agreed to stop producing (higher cost) sulfuric acid and to distribute in exclusive territories within the U.S. (lower cost) sulfuric acid produced by the mining companies in Canada as a by-product of their mining operations.

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In re Sulfuric Acid Antitrust Litig. (con’d)

• Plaintiffs characterized the challenged restraints as ―shut-down agreements‖

• ―[B]y reducing total sales of acid in the United States, the agreements raised the market price, and … an agreement to restrict output and therefore raise price is the per se illegal offense of price fixing.‖

• Plaintiffs pursued only a per se theory; if the restraint was found to be ancillary, the case was over.

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In re Sulfuric Acid Antitrust Litig. (con’d)

• Justification: restraints facilitated mining companies‘ entry into US market

• Mitigated business risks that all parties faced in participating in the JV

• ―[E]nable[d]‖ parties to combine ―substantial economies in transportation and marketing‖ associated with U.S. producers‘ distribution networks with mining companies‘ substantially lower costs of production, leading the price of sulfuric acid in the U.S. to drop significantly

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In re Sulfuric Acid Antitrust Litig. (con’d)

• Judge Posner agreed—rule of reason applies:

• Defendants plausibly showed that ―the challenged practice when adopted could reasonably have been believed to promote ‗enterprise and productivity.‘‖

• Restraints need only be ―plausibly argued to increase competition or other economic values on balance.‖

• Restraints need not be shown to pave the way for the introduction of a ―new product.‖

• Next step: ―assessment of the total economic effects of a restrictive practice.‖

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Other examples

• Ancillary restraints

• BMI v. CBS, 441 U.S. 1 (1979).

• Polk Bros. v. Forest City Enters., 776 F.2d 185 (7th Cir. 1985).

• Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210

(D.C. Cir. 1986).

• Not ancillary restraints

• Polygram Holding v. FTC, 416 F.3d 29 (D.C. Cir. 2005).

• Law v. NCAA, 134 F.3d 1010 (10th Cir. 1998).

• In re Oltrin Solutions (FTC consent decree) (Jan. 18, 2013).

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REASONABLENESS OF ANCILLARY RESTRAINTS

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Ancillary Does Not Mean Legal

• Ancillary restraints will still be judged under the ―rule of reason‖ or ―quick look‖ analysis.

• There are benefits and burdens associated with these more-forgiving standards:

• Burdens of proof

• Costs of proof

• Uncertain outcomes

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What About Changed Circumstances?

• Competitive effects of a relevant agreement may change over time.

• Generally, government agencies and courts assess competitive effects of a collaboration at the time of possible harm to competition, rather than creation.

• Example – DOJ challenge to Visa / MasterCard ―exclusionary rules‖ barring member banks from issuing AmEx or Discover cards

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THE AGENCIES’ VIEW OF COMPETITOR COLLABORATIONS

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It’s all about the competitive reality

• The agencies recognize that JVs offer procompetitive benefits to consumers:

• Lower prices/better value

• Output-enhancing investments

• Combinations of different capabilities or resources

• Attainment of economies of scale neither participant can achieve on its own

• If your JV provides one of these benefits, it‘s more likely to avoid or survive an agency challenge.

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It’s all about the competitive reality

• The agencies also view competitor collaborations as potentially harming competition.

• Intentionally: through facilitating explicit collusion

• Unintentionally: through limiting independent decision-making, combining control, or facilitating exchanges of sensitive price information

• The agencies assess competitive effects as of the time of the potential harm to competition.

• If your JV does any of these, it is at risk of a challenge.

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Agencies: Per Se vs. Rule of Reason

• Per se unlawful: Typically, these are agreements not to compete on price or output.

• Rule of reason:

• ―Participants in an efficiency-enhancing integration typically combine . . . technology, or other complementary assets to achieve procompetitive benefits‖ they could not achieve separately.‖

• Agreement must be ―reasonably‖ necessary. This does not mean essential, but merely necessary as a practical matter.

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When will the agencies challenge?

• Per se: Always

• Rule of reason decision tree

• If the nature of the agreement and the absence of market power=no harm, no challenge.

• Where harm is shown, agencies ask whether the harm is outweighed by benefits.

• Where harm is possible, agencies perform a detailed market analysis.

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When will the agencies challenge?

• Safety zones: where harm to competition is so unlikely that the collaborations are presumed lawful

• Where market shares of each collaboration and the collaboration collectively are less than 20%

• In innovation markets where three or more entities plus the collaboration have the ability and incentive to compete in R&D

• No per se agreements included

• Collaborations outside the zones may still be lawful

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BEST PRACTICES AND EXAMPLE ANALYSES

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Before you venture, ask . . .

• Does JV involve true pooling of resources/meaningful integration of resources/real risk sharing?

• Why is the JV being proposed/formed?

• To increase efficiency/lower costs?

• To produce a product that none could produce on its own in the absence of cooperation?

• Even if cooperation is required to produce X, is the particular agreement necessary to produce X?

• Does the agreement/restraint enhance competition?

• If the answer to any of these questions is no . . . BEWARE!

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Words to the wise . . .

• No excuses or justifications for naked restraints

• Lack of market power (the power to control price and exclude competition) does not justify a naked restraint on price or output

• To be considered ―ancillary‖—and subject to rule of reason review—plausible, procompetitive justifications for a restraint must exist

• Cursory (or pretextual) justifications are useless

• Justifications should be evaluated before adopting any restraint

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Words to the wise …

• Just because a restraint is not per se illegal does not mean that it is per se legal

• If the likely result of a JV is to increase price or reduce output, the burden to justify it will be especially heavy (if not impossible) to carry

• The existence of less (but not least) restrictive alternatives matters

• The costs of defending a (justifiable) restraint under the rule of reason should not be underestimated.

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Guidelines Example #7

• Each of three major battery producers has a patent on a

process to make a new, longer-lasting battery using zinc rather

than copper components like conventional batteries.

• It‘s unlikely any firm could produce a non infringing zinc battery

• Each could maximize its profits if it were the first to launch the

new zinc battery, but none knows when the others could launch

• All three believe their aggregate profits will be lower if they all

sell zinc, rather than only copper, batteries.

• They agree to sell only copper batteries.

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Guidelines Example #6

• Two firms compete in the word processing software marketplace.

• Each has about a 10% share.

• Neither is a major competitor to the companies who dominate the marketplace.

• The two companies form a joint venture to combine their skills and create a better product.

• Expenses and profits will be split equally; both companies contribute software developers.

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Guidelines Example #10

• Same facts as #6, plus:

• The firms agree that neither will conduct R&D to design WP

software outside the joint venture.

• This agreement resulted from each firm‘s concern that the other

would withhold its best ideas and use the JV to steal ideas.

• The firms further agree not to sell their previously designed

programs once the JV‘s program is available.

• This was to build greater trust to benefit the JV, and that a

similar JV failed in the absence of such an agreement.

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Guidelines Example #1

• Two oil companies agree to integrate all refining operations and refined product marketing.

• The term of the agreement is 12 years, but it is terminable on 6 months‘ notice.

• Each maintains separate crude oil production operations.

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PANELISTS

Eric Enson is currently representing clients in prominent antitrust and

unfair competition matters recently filed in federal and California courts. He

has extensive experience coordinating responses to government

investigations of alleged cartel activity, including price-fixing and market

allocation. Most recently, Eric represented companies targeted by the

Department of Justice in investigations of the packaged ice and automotive

industries, as well as executives in other non-public criminal proceedings.

epenson@jonesday.com | 213-243-2304

Michelle Fischer has focused on antitrust matters, including private

litigation brought individually and as class actions, governmental civil and

criminal investigations, and counseling in such industries as

pharmaceuticals, chemicals, food, beverages, surgical implants, health

care, and automotive components. Michelle also co-coordinates the Firm's

practice involving application of antitrust law to intellectual property issues.

mfischer@jonesday.com | 216-586-7096

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PANELISTS

Brian Grube's practice focuses on antitrust matters, including private

litigation, civil and criminal governmental investigations, and counseling.

He has represented clients in a variety of industries, including

pharmaceuticals, medical devices, energy, communications, consumer

goods and services, and industrial products and has counseled clients on

issues involving internal investigations, distribution and pricing policies,

intellectual property licensing, and joint ventures. In addition, Brian

regularly counsels trade associations on antitrust-related issues.

bkgrube@jonesday.com | 216-586-7784

Paula Render is an antitrust litigator, defending clients in class actions and

other cases against claims of price-fixing, market allocation, refusals to

deal, price discrimination, tying, and other antitrust claims. She also

litigates merger challenges brought by the enforcement agencies. Her

clients are in industries as diverse as specialty chemicals, financial

services, manufacturing technology, and consumer products. In addition,

Paula counsels clients on compliance and other antitrust issues.

prender@jonesday.com | 312-269-1555

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