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Competitor Collaborations and Competitive Restraints Leveraging New Guidance to Avoid Anti-Competitive Conduct When Structuring Collaborations Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. 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 Leveraging New Guidance to Avoid Anti-Competitive Conduct When Structuring Collaborations

    Today’s faculty features:

    1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

    The audio portion of the conference may be accessed via the telephone or by using your computer's

    speakers. Please refer to the instructions emailed to registrants for additional information. If you

    have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

    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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    March 6, 2013



  • 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?


  • 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




  • 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?


  • 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


  • 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)


  • 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‖


  • 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‖


  • 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



  • But Rule of Reason ≠ Panacea


    → ?

  • 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




  • 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


  • 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).


  • 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.‖


  • 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)


  • 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.


  • 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.


  • 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


  • 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.‖


  • 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).




  • 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


  • 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




  • 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.


  • 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.


  • 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.


  • 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.


  • 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




  • 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!


  • 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


  • 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.


  • 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.


  • 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.


  • 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.


  • 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.



    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.

    [email protected] | 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.

    [email protected] | 216-586-7096



    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.

    [email protected] | 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.

    [email protected] | 312-269-1555