"INTEGRATED JOINT VENTURES"
Mary L. Azcuenaga
Federal Trade Commission
American Bar Association
Section of Antitrust Law and Section of Business Law
Panel: "Joint Ventures -- Finding the Safety Zone"
August 7, 1995
The views expressed are those of the Commissioner and do not necessarily reflect those of the Federal Trade Commission or any other Commissioner.
Good afternoon. I am delighted to be here with the other panelists to explore the important subject of joint ventures. As a courtesy to my colleagues on the Commission, I will begin with the disclaimer that the views I express are my own and do not necessarily represent those of the Commission or any other Commissioner.
My topic is to discuss when a joint venture risks enforcement action due to insufficient integration. The term "integrated," which, as I understand it, is used to indicate that a joint venture withstands antitrust scrutiny, invites attention to the form of integration, to the mechanics of how the venture is organized. But this emphasis may be misdirected. What is appropriate and necessary for one venture may not be appropriate and necessary in another context. Instead of emphasizing the form of the business association, it may be more useful to ask the fundamental questions whether a venture achieves efficiencies and whether any restraints are reasonably necessary to accomplish that result.
Despite the frequent repetition of the term "integration" in connection with legitimate joint ventures, remarkably little attention has been devoted to giving content to the term. I rarely use the term because I have not found it particularly useful. "Integration" seems to imply that the partners to the venture are bringing disparate parts together to form a unified whole, but that does not tell us very much. Certainly sharing profits and the risk of loss, combining operations, sharing capital assets, or the joint creation of a new product or service all come to mind as familiar examples of ways in which joint venturers might bring disparate parts together to form a new entity. The variety of avenues of cooperation is almost unlimited and may include various nontraditional business arrangements or arrangements that apply only in unique circumstances. For example, agreement on a set of rules and a schedule may be the "integration" used by sports teams to create a league. A real estate multiple listing service is another kind of joint venture that involves a limited integration of the realtors who participate and that need not involve significant risk under the antitrust laws.(1)
Another way to evaluate risk under the antitrust laws is to consider the efficiencies of the joint venture, rather than the mechanics of integration. From this perspective, the question we would pose is not whether the degree of risk-sharing (or other integration) is sufficient, but instead whether the joint venture achieves some efficiency that the individual partners could not achieve alone and whether any restraints are reasonably necessary to achieve the efficiency. It is the efficiency enhancing potential of joint ventures that justifies their treatment under the rule of reason, and looking at the nature of the efficiency may clarify whether the joint venture is sufficiently integrated. Put another way, identification and evaluation of the efficiency will help determine whether the joint venture is anticompetitive.
Agreements that fix prices or allocate markets are per se unlawful,(2) unless they are protected as an essential part of an integrated joint venture. Rather than trying to classify conduct as per se unlawful on one hand or as an "integrated joint venture" on the other hand, it may be more useful to go back to Judge Taft's formula in United States v. Addyston Pipe and Steel Co., 85 F. 271 (6th Cir. 1898)(Taft, C.J.), aff'd, 175 U.S. 211 (1899), and ask whether "the sole object . . . is merely to restrain competition" or whether the restraint is "merely ancillary to the main purpose of a lawful contract," which can be allowed when "reasonably necessary." The central questions arising in connection with ancillary restraints are whether they are reasonably necessary to the operation of the venture and whether they are broader than necessary.(3)
Although stating general rules regarding the degree of integration necessary to avoid antitrust liability is difficult, we can identify some outside limits. Two Commission cases provide examples. My first example involves a per se unlawful market allocation agreement in the guise of a joint venture. Before 1984, the Kansas City, Missouri, School District negotiated individual contracts with four companies to provide school bus transportation to discrete areas of the district. In an effort to obtain lower prices for the 1984/1985 school year, the district solicited competitive bids for six service areas. Each bidder was invited to bid to serve any or all of the six areas.
The four school bus companies formed a joint venture, called "Kansas City School Transportation" (KCST), which submitted a single, joint bid for all the areas. In the absence of other bidders, the school district awarded the contract to KCST. The Commission challenged the conduct. It's complaint alleged that KCST was a market allocation agreement among horizontal competitors. The complaint made the following four allegations: (1) the bus company members of Kansas City School Transportation did not "integrate their operations in any substantial manner;" (2) the bus company members did not make any "substantial contributions of capital to KCST;" (3) the bus companies did not share any substantial risk of loss; and (4) the bus companies did not provide new or more efficient services. B & J School Bus Service, Inc., Docket No. C-3425 (April 22, 1993)(4) .
Another extreme example involved a corporation called Southbank, which was a venture of twenty-three OB/GYNS who collectively constituted virtually the entire staff of physicians in that specialty at the Baptist Medical Center in Jacksonville, Florida. According to the Commission's complaint, Southbank was an exclusive IPA. The member physicians agreed on a fee schedule to be charged to third-party payers for services provided through Southbank and agreed not to contract with any other IPA without first obtaining Southbank's permission. The complaint alleged that the physicians did not assume any financial risk of loss and did not provide any new or more efficient services through Southbank.
Although the Commission order required the dissolution of Southbank and prohibited agreements to fix prices or coerce third-party payers, it did not prohibit legitimate joint activities.(5) The order allows the physicians to form an integrated, nonexclusive joint venture to deal with third-party payers and allows them to participate in various peer-review and information-sharing activities.
The Kansas City school bus case and Southbank represent the extreme, the absence of any integration. Although the orders specifically do not prohibit integrated joint ventures, they shed little light on what forms of or how much integration would legitimize the ventures. Unfortunately, the courts also have not illuminated the kind of integration necessary to legitimize a joint venture. On one hand, we find statements such as those in Arizona v. Maricopa County Medical Society, 457 U.S. 332, 356-57 (1982), that could be read to require a high level of risk-sharing. In Maricopa, the Court condemned fee fixing as per se illegal, but said that the defendant joint ventures (the Maricopa Foundation for Medical Care and the Pima Foundation for Medical Care) were not analogous to partnerships in which persons pool their capital and share both the risk of loss and opportunity for profit. The Court observed that if a clinic offered complete medical coverage for a flat fee, the cooperating doctors would have the type of partnership arrangement in which fee fixing would have been proper. Id. Although in Maricopa the Court emphasized risk-sharing and profit-sharing, in Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979), the Court emphasized the creation of a new product and virtually disregarded the need to share risks. Commentators have examined the case law in vain to discover a test of integration,(6) and they have noted the difficulty of reconciling the decisions of the Supreme Court.(7)
The "Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust," issued by the Department of Justice and Federal Trade Commission on September 27, 1994, (hereafter "1994 Health Care Statements")(8) provided guidance on the degree of integration necessary for certain health care joint ventures. Statement 8, relating to physician network joint ventures (this is analogous to the Southbank case), and Statement 9, relating to multiprovider networks, both say that participants in a legitimate joint venture must share substantial financial risk. To do so, the venture participants must either: (1) agree to provide services to a benefits plan at a capitated rate; or (2) agree to significant financial incentives for members of the venture to achieve cost-containment goals, such as withholding substantial portions of payments for services with distribution of the amount withheld only if cost-containment goals are met.(9) The statements do not preclude the possibility that other forms of integration or other forms of risk-sharing might pass muster, but these two alternatives are the only ones given explicit blessing. Id.
The Statements suggest that a PPO's agreement on price must be ancillary to an integrated joint venture and the integration must take the form of financial risk-sharing. Letter opinions of the staff of the Commission issued under the 1994 Health Care Statements suggest that the risk-sharing must be genuine. In one opinion letter, a medical society proposed to sponsor a statewide PPO that would use a 15 percent fee withhold, and that the withhold would be paid only if a predetermined savings target was met.(10) The physicians would be paid at the 88th percentile of fees regularly charged by participating doctors. All society members would be eligible, and many were expected to participate. The PPO would face little competition from other managed care providers. The FTC staff declined to conclude that this withholding plan would result in significant risk-sharing, observing that the plan did not require most physicians to discount their fees, and that because of the large number of participants, most physicians would have fee PPO patients and relatively little commitment to its success.
In contrast, in a second opinion letter issued the same day, the staff concluded that another plan that used a 15 percent withhold of a significantly discounted fee schedule did provide strong incentives for the physician participants to meet the cost saving targets and appeared to be satisfactory under the law.(11) It is significant that this latter network would involve only about 20 percent of the physicians in the area and, unlike the first one, probably would not have market power.
To what extent can the lessons in the 1994 Health Care Statements and the related opinion letters be transferred to other contexts? The 1994 Health Care Statements simply represent the application of ordinary antitrust principles in a specialized setting; so it is tempting to say that the lessons can be generalized without difficulty. But the Health Care Statements were not drafted to be a comprehensive guide to the analysis of joint ventures and, in my view, relying on them exclusively would risk inhibiting efficiencies and innovation that might be achieved through joint ventures in other markets.
The 1994 Health Care Statements emphasize the importance of financial risk-sharing in the form of capitation and meaningful financial withholds. These requirements appear to be designed to promote the cost-containment objectives of a provider organization. Although this emphasis is appropriate in the context of the market for physician services in 1995, it is questionable whether the same emphasis on financial risk-sharing always can be transferred to other markets, at least without consideration of whether analogous market conditions exist. In a different market with different conditions, financial risk-sharing may seem almost irrelevant. The emphasis on financial risk-sharing in the Maricopa case should not obscure the possibility of other efficient joint ventures, such as that in BMI.
Instead of attempting to transplant the emphasis on capitation and risk-sharing from the market for physician services to other markets, it may be more useful to examine the market context in which the venture is being formed, including the likely market power of the venture. Although financial risk-sharing can be a key feature of an integrated joint venture, it may be easier in evaluating a joint venture in a new market simply to ask the more general questions posed by Judge Taft in Addyston Pipe or to explore as a matter of common sense whether the venture is reasonable for some purpose other than restricting competition. In short, I would warn against spending too much time examining the mechanics of how a joint venture is integrated and too little time considering the efficiency aspects of the venture and its significance to competition given the particular circumstances in which the venture is formed.
1. Although participation in a multiple listing service need not entail antitrust risk, that does not mean that price restraints or other restrictions on competition may be imposed by a listing service. See, e.g., Bellingham-Whatcom County Multiple Listing Bureau, Docket C-3299 (August 2, 1990); Multiple Listing Service of Mid County Inc., Docket C-3227 (April 20, 1988).
2. Merely affixing the label "joint venture" to conduct provides no antitrust guarantees. See Timken Roller Bearing Co. v. United States, 341 U.S. 593, 598 (1951).
3. See, e.g., Rothery Storage & Van Co., v. Atlas Van Lines, 792 F.2d 210, 224 (D.C. Cir. 1986), cert. denied, 479 U.S. 1033 (1987)(observing that if a restraint "is so broad that part of the restraint suppresses competition without creating efficiency, the restraint is, to that extent, not ancillary.")
4. I concurred in the finding of liability and dissented from the order on the ground that the remedy was too limited.
5. Southbank IPA, Inc., Docket No. C-3355 (December 20, 1991).
6. M. Popofsky, Integration, Market Power, and Necessity: Guideposts for the Practitioner, 54 Antitrust Law J. 1141, 1142 (1994).
7. W. Liebler, Antitrust Adviser 35 (1984).
8. Reprinted in, 5 CCH Trade Reg. Rept. ¶ 13,152 at 20,769 (September 27, 1994).
9. 1994 Health Care Statements at 70, 91-92; 5 CCH Trade Reg. Rept. ¶ 13,152 at 20,788, 20,793-94.
10. Letter from Mark J. Horoschak to Paul W. McVay (ACMG, Inc.)(July 5, 1994).
11. Letter from Mark J. Horoschak to George Q. Evans (SEMCO/JMC)(July 5, 1994).