TESTIMONY OF CHARLES A. JAMES

on behalf of

THE U.S. CHAMBER OF COMMERCE

FEDERAL TRADE COMMISSION
PROJECT ON JOINT VENTURES
Washington, DC
December 4, 1997

 

Mr. Chairman and Members of the Federal Trade Commission, my name is Charles A. James. I am a partner in the law firm Jones, Day, Reavis & Pogue and a member of the Antitrust Council of the U.S. Chamber of Commerce. I appear before you today to present the Chamber's views with respect to the appropriate antitrust treatment of joint ventures, strategic alliances and other forms of competitor collaboration. The Chamber is the world’s largest business federation representing an underlying membership of more than three million businesses and organizations of every size, sector, and region of the country. As one of the oldest and largest organizations representing the interests of the American business community, the Chamber welcomes this opportunity to comment on these important issues.

At the outset, the Chamber would like to applaud the Commission for commencing this wide-ranging review of joint venture policy. In particular, we commend the Commission for seeking to inform its policy through an open dialogue with affected constituencies and experts in the field. This process had obvious beneficial effects upon the recent revisions to the efficiency provisions of the DOJ/FTC Horizontal Merger Guidelines, and likely will benefit the enforcement agencies' work in the joint venture area in a similar fashion. Having followed much of the thoughtful commentary that has been presented in prior sessions, the Chamber hopes that this process will:

1. reinforce the view that joint ventures can be an important and procompetitive business tool in a dynamic, technology-driven economy;
2. convince the Commission and the Antitrust Division of the need for certain limited but important clarifications in their enforcement policies regarding joint ventures; and
3. move the agencies to take a leading role in pressing for reforms that will permit even more procompetitive joint venture activity.

That said, generally, this is an area in which the law is functioning effectively to facilitate well founded legal challenges to problematic combinations without unduly burdening the vast majority of joint venture transactions that raise no substantial antitrust concerns. Thus, the Chamber urges caution in the hope that these hearings will not serve as a catalyst for overly broad policy pronouncements or increased government intervention.

Joint Ventures in Today's Economy

The term joint venture can be used to describe a wide variety of business combinations ranging from a short-term contract to achieve some very limited purpose to the merger of operations in a particular line of business. In fact, it is the ability of firms to tailor their combinations to meet the specific requirements of the venture that makes the joint venture such a prevalent business format in today's economy.

Joint ventures allow firms to combine resources to create new products, explore new markets, form networks and achieve efficiencies, while at the same time leveraging capital investments and spreading risks. More importantly, as distinguished from the outright merger, many joint ventures allow the parties to retain flexibility and preserve autonomy. These features of the joint venture are particularly attractive to firms in highly dynamic industries such as energy, telecommunications, defense, financial services, information technology and health care, all of which are undergoing rapid change due to emerging technologies and deregulation.

Consider, for example, the telecommunications industry. Twenty years ago, the various modes of telecommunication were locked into narrow categories of service by technological limitations, regulation and recently abandoned antitrust consent decrees. Today deregulation, new digital technologies and other forces are driving broadscale service convergence, creating a wealth of new products and services to meet consumer demand for instant access to information and anywhere communication. We have mobile telephones that provide access to database services and receive electronic mail; we have devices that combine conventional television technologies with the Internet; we have a rapidly expanding system of electronic commerce that permits paperless buy-sell transactions. In this business environment, no single firm has the breadth and scope necessary to remain state-of-the-art in all of the relevant technologies, and no firm can afford to bet its entire future on any single technological approach. Witness the recently-announced joint undertaking by IBM, Novell, Netscape and others to develop a next-generation series of Internet products and services, while continuing to compete with respect to existing products and technologies. Joint ventures make it possible for firms to combine strengths, to achieve economies of scale and scope, and to pursue simultaneously multiple modes of product development. Joint ventures also allow the parties to set market-driven time limits on their affiliations.

In other industry settings, firms are pressed to do more with less resources and to capture economies of scope and scale that may not be available to individual producers. Such industries often provide an ideal setting for production joint ventures and similar productivity enhancing relationships. Because these ventures often allow firms to remain competitors downstream from their joint production facilities, they provide a less restrictive alternative to an outright merger.

By all accounts, joint ventures are proliferating at a rapid rate. To the extent that such ventures facilitate output expansion, new entry or product line extension, such ventures are unquestionably procompetitive. Contrary to the old axiom that competitors seldom get together for any good purpose, today's joint ventures demonstrate that certain forms of competitor collaboration can enhance efficiency and benefit consumers.

The Legal Treatment of Joint Ventures

Very clearly, the rapid proliferation of joint ventures in today's economy indicates that the legal climate generally is favorable to such combinations. Indeed, notwithstanding the general antitrust angst associated with most forms of competitor collaboration, relatively few joint ventures have been challenged by the federal antitrust agencies.

One reason for this favorable climate is the fact that the Supreme Court has given clear guidance in this area. Its decisions in Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979), and NCAA v Bd. of Regents of Univ. of Okla., 468 U.S. 85 (1984), set forth a sound analytical framework that preserves per se treatment for cartels masquerading as joint ventures, while permitting an appropriate rule of reason balancing of potential benefits and risks in the case of legitimate joint venture transactions. Moreover, agency policy statements, such as the joint venture provisions of the 1988 Department of Justice Guidelines for International Operations and the more recent DOJ/FTC Health Care Policy Statements, have been faithful to the Supreme Court's approach, clarifying issues that warrant agency emphasis, but generally not seeking to alter the basic legal standards. Thus, the most basic concepts of the antitrust treatment of joint ventures are well understood within the antitrust bar.

There remain areas of uncertainty in the application of the basic concepts to specific cases. Some of this uncertainty is the inevitable result of rule of reason analysis, which is by its very nature open-ended and fact-specific. Some of this uncertainty, however, has its roots in doctrinal conflict between the strong bias against competitor collaboration embodied in Section 1 of the Sherman Act and the growing recognition that certain types of collaboration can be procompetitive. It is this latter form of uncertainty that the Commission should address as it considers its going-forward enforcement policy with regard to joint ventures.

The Section 1 Problem

Many of your prior panelists have discussed the disparate treatment accorded joint ventures versus mergers with regard to issues of formation and subsequent conduct. Mergers, of course, alter forever the ownership structure of a competitive entity and, once consummated, generally shield that entity from antitrust scrutiny under Section 1 of the Sherman Act. While it is theoretically possible to challenge a merger under Section 1, and to do so well after consummation, such cases are rare and difficult to bring_. Thus, the market power effects of a merger are typically assessed at the time that the merged entity is formed and, once a merger has been consummated, challenges to its subsequent conduct typically must rely on Section 2 monopolization theories. By contrast, many joint ventures are contractual in nature. This fact, alone, makes the venture subject to continuing Section 1 scrutiny, particularly with regard to post-formation conduct.

The continuing applicability of Section 1 to joint ventures creates any number of potential antitrust risks for the joint venture entity and its parents. The risks are most severe for the venture that succeeds in establishing a significant market position. No matter how insignificant such a venture might have been at the time of its formation, down the road, any decision it makes regarding dealings with third parties has the potential to face condemnation and potential treble damage liability as an unlawful agreement in restraint of trade. Joint ventures are particularly susceptible to Section 1 theories based upon alleged refusals to deal and other exclusionary conduct.

The merger that over time achieves a comparable level of market success faces considerably fewer antitrust risks. Since its conduct can be attacked almost solely under Section 2, its pricing decisions are virtually invulnerable to attack unless they are predatory in nature, and its decisions regarding dealings with third parties are typically judged under the essential facilities doctrine. These monopolization theories are difficult to sustain because prevailing antitrust doctrine protects all but the most egregious unilateral conduct and is extremely hesitant about imposing mandatory duties to deal. Thus, as several prior panelists have pointed out, structure, not economic effect, can be the dispositive factor in judging identical conduct by similarly situated firms when one is a merged entity and one is a joint venture.

The difference in treatment between similarly situated merged and joint venture firms can have adverse public policy consequences. As an initial matter, the more favorable treatment accorded mergers may cause firms to choose a merger over a joint venture, even though a joint venture might be a less restrictive means of achieving the desired business objective. Additionally, fear of future antitrust entanglements might cause joint venturers to shy away from joint venture provisions that would optimize the competitive posture of the venture. For example, firms might adopt over-inclusive rules of participation, when over-inclusiveness dilutes member incentives to promote the venture's goals. By the same token, over-inclusiveness might create its own antitrust risks. Fear of after-the-fact challenges also may make it possible for non-participants to free ride on the efforts of the original venturers. Once the initial joint venture participants have borne the risks of start-up, others may force their way into the venture through threatened or actual antitrust litigation. In short, the merger format provides the parties considerable certainty, while the joint venture remains a vulnerable antitrust target throughout its existence.

The Intra-Enterprise Conspiracy Problem

A related problem for the joint venture is the manner in which the antitrust laws treat business entities that are not controlled by a single economic actor. Because many joint ventures seek to equalize conditions of ownership and governance, such ventures find themselves subject to the full wrath of Section 1. Since the Supreme Court's decision in Copperweld v. Independence Tube Corp., 467 U.S. 752 (1984), a nearly steady stream of lower court opinions has progressively lowered the hurdle for single-firm treatment of commonly owned enterprises._ Indeed, in Chicago Professional Sports, Ltd. v. NBA, 95 F.3d 593 (7th Cir. 1996) the court suggests that the NBA may be a single firm for certain purposes and a joint venture for others, irrespective of its ownership structure.

Notwithstanding the considerable liberalization of the intra-enterprise conspiracy doctrine since Copperweld, the law remains fairly unsettled in this area. This necessarily means that there are greater risks to be borne the farther a venture moves from the controlling-firm paradigm permitted under Copperweld. Very clearly, joint venture participants address this risk in a variety of ways: for example, by opting for a merger over a joint venture, by providing for unequal ownership structures when equality is in fact desired, and perhaps by foregoing ventures they might otherwise be interested in pursuing. In other words, this is another way in which current joint venture law elevates structure over substance.

The Chamber agrees with many of the prior panelists that it would be desirable to place joint ventures on a more even footing with mergers as a matter of antitrust policy. The Chamber believes that issues relating to the market power effects flowing from the creation of a joint venture should be assessed as of the time of formation under standard Section 1 principles. Thereafter, the joint venture's conduct -- as distinguished from the conduct of its parents -- should be judged under Section 2 standards. Under such an approach, it still might be appropriate to evaluate issues relating to competition between the parents or competition between the venture and its parents under Section 1 theories, but the venture itself should be only subject to Section 1. This would leave ample room for traditional conduit or spillover collusion challenges to conduct arguably outside of the joint venture, while treating the venture itself similar to a merged firm.

This result would be aided by an expansive reading of the Copperweld doctrine similar to that which is suggested by the 7th Circuit in the recent Chicago Professional Sports decision. That case advocates looking to the "jointness" of the conduct under scrutiny, rather than the legal ownership structure, to determine whether a particular venture should be considered a single competitive entity or a contractual combination of independent firms.

Prospects for Joint Venture Guidelines

Many prior panelists have assumed that the end result of these hearings will be the publication of enforcement guidelines for joint ventures. The Chamber does not advocate the publication of guidelines in this area, but will offer a few comments in the event the Commission is inclined to move in that direction.

By and large, agency enforcement guidelines have been quite useful to the business community. In most instances, the agency guidelines have provided useful insight into the enforcement policies and priorities of the agencies. Moreover, the most successful of these guidelines have reflected genuine insight into caselaw, policy and methods of analysis. Such guidelines, therefore, have been useful to parties in structuring potential transactions and to courts in guiding their deliberations. The DOJ and DOJ/FTC Merger Guidelines, for example, have filled the void created by the notable absence of Supreme Court jurisprudence in the merger area since the early 1970s, and have been one of the most positive forces in the modernization of merger policy.

On the other hand, guidelines that have sought to force rather than guide the law in one direction or the other largely have been ignored. The ill-fated DOJ Vertical Restraints Guidelines (which have since been rescinded) and the merger guidelines published by the National Association of Attorneys General are examples of failed attempts to dictate policy conclusions rather than to provide for deeper analysis within the framework of the existing law. Both have received virtually no judicial recognition and therefore neither guide business conduct nor contribute to the development of judicial standards.

The Chamber believes that the publication of guidelines is appropriate when there is a significant need for a deeper and more thoughtful articulation of policy in a particular area and when the agencies have progressed far enough in their experience and experimentation to offer new insights within the framework of existing law. It is unclear to us that those two conditions are present at this time with regard to joint ventures.

As discussed above, the basic features of joint venture analysis are functioning well and have been clearly articulated in earlier agency guidelines. The most pressing issues of joint venture policy are creatures of the Sherman Act jurisprudence. Even if the agencies were to adopt enforcement policies that make real progress on the problem areas -- particularly after-the-fact Sherman 1 claims -- joint ventures still would face the prospect of treble damages in private litigation. Thus, there are real limits upon what the agencies can reasonably accomplish through publication of new joint venture guidelines. Below we discuss a few areas that have been discussed in antitrust policy circles and during the course of these hearings.

Market Share Screens

The merger area clearly benefits from the existence of the bright line market share screens set forth in the DOJ/FTC Horizontal Merger Guidelines. Although it has finally been accepted that Herfindahl-Hirschman Indices are merely a starting point in merger analysis, the Guidelines' standards provide a useful counseling tool and provide considerable comfort to the business community. Market share levels are considerably more difficult to measure and interpret in many joint venture settings. Some joint ventures combine the parent companies' total operations in a line of business and, therefore, typically are treated as mergers for purposes of premerger notification and substantive analysis. Market shares are a useful tool in that context. Many joint ventures, however, involve more complex competitive relationships, making the attribution of market shares a much more difficult exercise. Parent companies may have existing operations independent of the venture or may be free to pursue other opportunities. Varying degrees of exclusivity may complicate the measurement of market share. Similarly, the competitive significance of a venture may be tempered by contractual rights or rules of governance that also might complicate the attribution of market share to either the venture or its parents.

These factors, among others, argue against any simple, one-size-fits-all market share tests for joint ventures. The variability of joint venture transactions defeats the notion that generalized approaches will allow the meaningful assessment of market power across the full range of potential joint venture transactions. Moreover, a restrictive approach or a simple listing of potential factors may send improper enforcement signals, causing prospective venturers to structure transactions in a less than optimal fashion. Accordingly, the Chamber would urge the Commission to steer clear of any over-simplification of market power tests.

The Safe Harbor

Some have suggested the creation of a joint venture safe harbor, perhaps based upon whether a merger of the joint venture parents would present problems under Section 7 of the Clayton Act. On the surface, this is an attractive notion and appears to be analytically sound as a matter of antitrust theory. It would be difficult to hypothesize a situation in which a merger between two firms would not facilitate the exercise of market power, but a joint venture involving the same firms and operations would be competitively problematic. A joint venture safe harbor, however, should not be viewed as a major advancement in antitrust policy.

The merger safe harbor in the Merger Guidelines is beneficial to the business community in large part because most significant mergers are subject to premerger review under Hart-Scott-Rodino. Thus, the parties' internal assessment of the transaction is subject to immediate review and confirmation. Moreover, the broadscale acceptance of the Merger Guidelines means that most courts will hold the agencies to their self-articulated enforcement standards, such that parties can reasonably expect a court to approve a true safe-harbor transaction, even if the agencies disagree with the parties on questions such as market definition or market share measurement. Finally, the federal antitrust agencies are the primary enforcer with regard to mergers, and few independent challenges are attempted or sustained following the receipt of agency clearance.

Joint venture transactions, however, are not necessarily subject to pretransactional review by the agencies. Rather, joint ventures may operate for years prior to the assertion of an antitrust claim, rendering the parties' self-determined assertion that the venture falls within the safe harbor a fairly useless tool. Additionally, private plaintiffs, not the federal agencies, are the principal risk in joint venture enforcement. In the absence of prior agency review, the existence of a self-proclaimed guidelines safe harbor may have little force in a private lawsuit.

To the extent that prior well-reasoned guidelines have been influential in guiding the courts, a guidelines safe harbor for joint ventures certainly would not necessarily be harmful. Such a safe harbor, however, should not be viewed as a significant comfort zone for the business community; nor should it be viewed as a substitute for viable joint venture reform. Not surprisingly, the antitrust agencies have set safe harbor levels at the lowest possible point of absolute certainty, fearing that more inclusive safe harbor would foreclose the unlikely but theoretically possible antitrust challenge. A joint venture safe harbor based, for example, upon whether a merger between the parent companies would itself be a safe harbor transaction under the Merger Guidelines would be virtually useless in most real world counseling situations. Indeed, unless the agencies could somehow fashion a much broader safe harbor, the Chamber would question whether adoption of the safe harbor would be worth the effort.

If the Commission is inclined to adopt a safe harbor, the Chamber urges the Commission to make it crystal clear that safe harbor in no way defines the full range of lawful joint venture conduct and that the vast majority of ventures falling outside of the safe harbor still likely would be lawful. As the Commission is aware, legal safe harbors sometimes become a regulatory ceiling in the minds of overly cautious business people. That would not be a good public policy result in this area.

Copperweld Expansion

As discussed above, the Chamber urges the Commission to adopt an expansive reading of the intra-enterprise conspiracy doctrine, treating most legitimate joint ventures as single economic actors for Sherman Act Section 1 purposes. This is an area where the Supreme Court has left considerable room for interpretation and where a Commission guideline tying together the threads of the subsequent lower court decisions could be beneficial to agency deliberations and very influential to the courts. A well-reasoned re-articulation of the intra-enterprise conspiracy doctrine could well lead to a welcomed moderation of the Section 1 treatment of joint ventures.

Pretransactional Notification

Some panelists have suggested that pretransactional notification and review may be an appropriate way of achieving more front-end certainty in the joint venture process. The Chamber vehemently opposes any form of additional pretransactional notification, whether mandatory or permissive, for joint ventures.

One of the principal benefits of joint ventures is that they are flexible contractual relationships that can be formed with a minimum of regulatory interference. The historical record indicates that all but a few of these transactions raise no substantial antitrust issues. Under these circumstances the case cannot be made that prenotification of joint venture transactions is needed or would be beneficial. To the contrary, prenotification would impose an unnecessary regulatory burden on thousands of transactions ranging from simple research and production deals to the formation of complex networks. This would be a further disincentive to the formation of these largely procompetitive business arrangements.

Additionally, the Chamber would be remiss if it did not take this opportunity to point out that the current scheme of prenotification for mergers is far from perfect. As the Chamber has pointed out in the past, Hart-Scott-Rodino (“HSR”) is characterized by distorted regulatory incentives, an over-inclusive reporting scheme, arbitrary and excessive filing fees, and the imposition of excessive burden through the second request process. HSR should not become a model for the imposition of new regulatory burdens upon joint ventures.

Treble Damage Actions

These hearings, we believe, have demonstrated the important procompetitive role joint ventures play in our modern economy. We have moved well beyond the time when these forms of competitor collaboration were viewed in the same light as potentially criminal per se offenses. Given the tenor of most of the testimony, it should be becoming clear that treble damage relief for rule of reason antitrust claims is a concept that has outlived its usefulness. By and large, these are not sinister cartels formed in airport hotel rooms. They are sophisticated business proposals, typically designed to expand output and enhance efficiency. Challenges to these transactions almost always require rigorous analysis of the facts and law. Even the Congress has recognized that the research & development and production versions of these transactions typically are not appropriate targets for the punitive trebling of damages.

The Chamber believes that the time has finally come to revisit the question of treble damages for rule of reason claims and for the federal enforcement agencies to take a leading role in pressing for appropriate reform. Even in the absence of other joint venture reforms, detrebling of damages would eliminate unnecessary risks to the joint venturers. While it is clear why we should place punitive sanctions on hardcore collusion and naked restraints of trade, it is less clear that good faith transactions subject to varying economic interpretation should receive the same treatment. Detrebling of damages in rule of reason cases would make the relief more closely approximate the harm. The Chamber urges the Commission to become a leading voice in questioning the continuing need for treble damages with regard to rule of reason claims.

Conclusion

The record of these hearings establishes that joint ventures are not a major problem area in the antitrust realm. Despite our innate suspicion of competitor collaboration, the law has evolved in way that permits most joint venture activity to proceed unimpeded. This, the Chamber believes, is an indication that moderate efforts by the antitrust agencies to clarify enforcement policy in certain limited respects would be useful. There is, however, no compelling need for major reforms that would increase the level of government intervention in the joint venture area.

United States v. First Nat'l Bank & Trust Co., 376 U.S. 665, 671-72 (1964); United States v. Columbia Steel Co., 334 U.S. 495, 529-30 (1948); United States v. Rockford Mem'l Corp., 898 F.2d 1278, 1281-82 (7th Cir.), cert. denied, 498 U.S. 920 (1990).

Novatel Communications v. Cellular Tel. Supply, 1986-2 Trade Cas. (CCH) ¶ 67,412 (N.D. Ga. 1986) (parent cannot conspire with 51 percent-owned subsidiary); Bell Atl. Bus. Sys. v. Hitachi Data Sys. Corp., 849 F. Supp. 702 (N.D. Cal. 1994) (wholly-owned subsidiary and 80 percent-owned subsidiary cannot conspire). But see Aspen Title & Escrow, Inc. v. Jeld-Wen, Inc., 677 F. Supp. 1477 (D.C. Cir. 1987) (corporation could conspire with 60 or 70 percent-owned subsidiary).

The National Cooperative Research and Production Act of 1993, 15 U.S.C. §§ 4301-05 (1994), for example, limits damage awards with regard to certain joint ventures.