1. Analysis of Individual Restraints v. Overall Collaboration
In many cases, an antitrust challenge concerns only one restraint within a collaboration -- not the entire collaboration. One of the more difficult issues in the antitrust analysis of competitor collaborations is how to evaluate individual restraints in the context of a broader agreement (or package of restraints). This issue most often arises in determining whether specific restraints are reasonably necessary to achieve a potentially efficiency-enhancing integration.
When should the Agencies analyze competitor collaborations as a whole, and when should they focus solely on specific restraints that raise competitive concerns? How should the Agencies determine whether a particular restraint is reasonably necessary to achieve the overall benefits of a potentially efficiency-enhancing integration? Even if collaboration is desirable or necessary in certain markets, should that exempt from per se scrutiny individual restraints that are unrelated to the overall efficiencies of the collaboration? Under what circumstances does the competitive significance of an individual restraint become clearer in light of other restraints between the parties? For example, would an agreement to set joint prices for a collaboration’s output appear more or less anticompetitive if the parties also agreed not to compete against the collaboration in the relevant market? Under what circumstances may the cumulative effect of an entire bundle or group of restraints between the parties be more competitively significant than the sum of the individual restraints may suggest?
Example: Two firms in a five-firm market with high entry barriers form a production joint venture to manufacture widgets. Originally, the firms continue to market joint venture output independently. Three years after the formation of the venture, the firms agree to set common prices for widgets sold through the venture. Widget prices begin to rise. The Agencies challenge the joint pricing arrangement as per se illegal under Section 1.
The parties argue that joint pricing is reasonably necessary to the effective operation of an efficiency-enhancing collaboration. More specifically, they argue that joint pricing is necessary for the parties to recoup high fixed costs associated with the collaboration.
Given that the parties had previously marketed venture production independently, is the shift to joint venture pricing reasonably necessary? What additional facts would be needed to show reasonable necessity?
How would your analysis differ if the Agencies challenged joint pricing at the time of collaboration? What if the parties argued that they would not engage in the collaboration if they were not able to set a common price for joint venture production?
- Whether a collaboration is likely to generate or has generated efficiencies plays a critical role in the analysis of its net competitive effects. Competitor collaborations may enable firms to produce goods or services that are cheaper or more valuable to consumers than would be possible absent the collaboration. Efficiencies may improve the competitive dynamics or deter the exercise of market power within a relevant market. However, not all efficiencies are relevant to assessing a collaboration’s net competitive effects; for example, the efficiencies that might be created by a price-fixing agreement will not bolster the legality of such an arrangement. The Agencies are interested in learning more about the following questions concerning the role of efficiencies:
- What kinds of efficiency benefits are most frequently attributed to competitor collaborations, e.g., economies of scale, risk reduction, or learning advantages? Are efficiencies associated with competitor collaborations more difficult to verify or quantify than those associated with mergers? How do efficiency benefits associated with collaborations differ from those associated with mergers? Is the revised efficiencies analysis to the 1992 Merger Guidelines applicable in the context of competitor collaborations? Why or why not?
- What kind of efficiencies ought to be considered by the Agencies in rule of reason analysis? How should efficiencies be verified? Under what circumstances could restraints in competitor collaborations give rise to efficiencies that are experienced over the long run or that affect competition in a dynamic sense (such as through incentives for innovation) rather than in the short run? When and how might restrictions on price, quality, advertising, geographic scope, or other dimensions of competition contribute to legitimate efficiency ends?
- Antitrust law often considers whether efficiency goals might be achieved with reasonably available, less competitively restrictive alternatives. What factors must participants in competitor collaborations take into account (other than potential antitrust liability) in determining the breadth of a competitive restraint? Are there real-world examples in which relatively narrow restraints were not reasonably necessary to achieve efficiency goals?
- How might the market context and duration of a restraint affect whether it is reasonably necessary to achieve a procompetitive purpose? Are some restrictions more closely related to the formation of a competitor collaboration, while others are needed to help the collaboration run smoothly after it is formed? Might a restraint that is reasonably necessary for a new entrant become unreasonable as that entrant gains market power?
- What mechanisms should be employed in assessing the net effects of a competitor collaboration (or of a restraint associated with a competitor collaboration) that would likely achieve efficiencies but also would likely harm competition absent the efficiencies? What problems, if any, have arisen in implementing the merger guidelines net effect test?
The intent of the parties to a competitor collaboration will often shed light on potential pro- and anticompetitive effects that result from their venture. Although intent alone will rarely be dispositive in rule of reason cases, it may nevertheless provide valuable evidence in cases involving ambiguous restraints or competitive effects. Intent evidence may show what efficiencies the parties expected to gain from their agreement, but may also show that some efficiency justifications are pretextual. Intent may be determined from internal corporate documents or, less frequently, the nature of the conduct itself.
What role should intent play in rule of reason analysis? How should the Agencies evaluate internal evidence of procompetitive intentions, particularly when such evidence may be created by well-counseled parties in anticipation of antitrust review? How should the agencies weigh evidence of "bad" intentions? Should direct evidence of anticompetitive intent relieve the Agencies of a detailed showing of market power or anticompetitive effects? Or should the Agencies rely upon "bad" intent primarily to show that efficiency justifications are pretextual?
4. Implications of Copperweld Corp. v. Independence Tube for Single Firm Treatment of Some Competitor Collaborations
The Agencies are interested in learning whether it would be useful to clarify their views concerning the scope of the United States Supreme Court’s decision in Copperweld Corp. v. Independence Tube Corp.(1) In Copperweld the Supreme Court held that the coordinated activity of a parent and its wholly owned subsidiary must be viewed as a single entity for purposes of § 1. The decision was based on the principle that the form of corporate structure should not trump the reality of whether a parent and a wholly-owned subsidiary share “a complete unity of interest.” The Court explained:
[The objectives of a parent and a wholly owned subsidiary] are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousness, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. With or without a formal “agreement,” the subsidiary acts for the benefit of the parent, its sole shareholder. If a parent and its wholly owned subsidiary do “agree” to a course of action, there is no sudden joining of economic resources that had previously served different interests, and there is no justification for §1 scrutiny . . . They share a common purpose whether or not the parent keeps a tight rein over the subsidiary; the parent may assert full control at any moment if the subsidiary fails to act in the parent’s best interests.
Although Copperweld’s holding was limited to the case of a parent that owns the entirety of its subsidiary, there has been some agreement that the rationale of its holding ought to be extended to certain parent-subsidiary relationships where a parent owns less than the entirety of its subsidiary. There also has been discussion of whether Copperweld ought to apply to some competitor collaborations.
The United States Department of Justice 1988 Antitrust Enforcement Guidelines for International Operations (repealed)(“1988 DOJ Guidelines”) addressed the issue of whether some parent-subsidiary relationships where the parent owns less than the entirety of the subsidiary ought to be entitled to single firm treatment. Those guidelines stated:
the policies underlying the Sherman Act (as discussed in Copperweld) support the conclusion that a parent corporation and any subsidiary corporation of which the parent owns more than 50 percent of the voting stock are a single economic unit under common control and are thus legally incapable of conspiring with one another within the meaning of section 1. If a parent company controlled a significant, but less than majority, share of the voting stock of a subsidiary, the Department would make a factual inquiry to determine whether the parent corporation actually had effective working control of the subsidiary.(2)
Some members of the public have suggested the Joint Venture Project revisit whether this statement could also provide useful guidance today.
Some have argued that, in certain circumstances, some competitor collaborations ought to be entitled to single entity treatment. For example, Judge Easterbrook’s opinion in Chicago Professional Sports Ltd. Partnership v. NBA (“Chicago Professional Sports”)(3) suggests that, under some circumstances, competitor collaborations ought to be scrutinized under the antitrust laws as a single entity. The court explained that the NBA might be viewed as a single entity if its conduct did not deprive the marketplace “of the independent centers of decisionmaking that competition assumes without the efficiencies that come with integration inside a firm.” Moreover, the court noted that it might be appropriate to scrutinize the NBA, and organizations like it, as a single-entity for some purposes and a joint venture for others.
The issues raised by the Chicago Professional Sports decision are further complicated by the fact that there are typically at least three different types of agreements related to a collaboration: agreements between a participant in the collaboration and the collaboration, agreements within the collaboration, and agreements external to the collaboration between the participants in the collaboration. Each type of agreement potentially raises distinct analytical issues under Copperweld.
The Agencies are interested in learning more about the proper scope of Copperweld and the following questions:
- What determines whether a parent exercises “effective working control” over a subsidiary?
- What factors other than ownership of equity stock might impact whether a parent and subsidiary share “a complete unity of interest,” e.g., ability to control on a day-to-day basis, a right to a majority of the profits of the entity, a contractual power to designate a majority of the board of directors? On a pragmatic level, which factors are susceptible to efficient and accurate investigation?
- Does the ability of a single participant to control the activities of a collaboration or the ability of the collaboration to control the activities of its participants elucidate the question of whether the internal restraints composing a collaboration ought to be shielded from § 1 scrutiny? If so, what indicia of control ought to be used to determine whether there is one source of controls?
- Should a single participant’s control of a collaboration immunize agreements between the participant and the collaboration from § 1 scrutiny? agreements within the collaboration? agreements between the participants external to the collaboration? What practical difficulties exist in distinguishing internal from external agreements between the participants to the collaboration?
- Judge Easterbrook’s opinion in Chicago Professional Sports states that courts should consider whether there is a “sudden joining” of interests that were previously separate as part of the inquiry to determine whether a firm is entitled to single-entity treatment. Is it also significant whether the participants were actual or potential competitors prior to forming the collaboration?
- Should a collaboration be entitled to Copperweld immunity if its participants have any independent economic interests? What if the participants to the collaboration have ceased operations in all markets related to the collaboration’s market? What practical problems arise from attempting to ascertain whether the effects of a collaboration are confined to particular markets or whether there is potential of spill-over effects?
- Another approach to determining whether the activities of a collaboration are subject to single-firm treatment would look to whether a creator of the collaboration could wholly absorb the activities of the collaboration into an unincorporated division of the creator at any time it wished. Does this test solve potential problems that may be associated with identifying a single source of control of the collaboration?
- Is this area of the law ripe for Agency guidance? Can safe harbors be delineated?
5. Mergers & Joint Ventures
There has been considerable debate concerning the differentiated antitrust treatment of the formation and subsequent conduct of mergers and competitor collaborations. Some argue that the framework of the 1992 Merger Guidelines provides a useful tool for the evaluation of competitor collaborations. Others argue that joint ventures are disadvantaged by the fact that they are subject to § 1 scrutiny while similar conduct by their single-firm competitors are subject to the relatively more lenient § 2 standard. The Agencies are interested in learning more about under what circumstances it may be appropriate to utilize aspects of merger analysis for competitor collaborations.
- Are certain types of competitor collaborations more like mergers than others in their effects? Is a collaboration less likely than a merger of the same participants to restrict competition? Could adjustments to merger analysis be made to accommodate competitor collaborations?
- It has been suggested that some competitor collaborations ought to be subject to § 1 analysis at their formation and § 2 analysis for their subsequent conduct. Does the potential for subsequent changes of the venture’s internal restraints or its participants make this approach problematic?
- Would it be permissible under § 1 jurisprudence to apply § 2 analysis to some competitor collaborations? Does Copperweld validate § 2 analysis for competitor collaborations?
6. Equity Investments
Equity investments are used by firms to facilitate strategic alliances, influence standards, and gain know-how, as well as to gain a return on investment. Such investments are commonly seen in the media, high-tech, and biotechnology industries, among others. In addition to the possibility of raising concerns under the rubric of §§ 7 or 8 of the Clayton Act, a firm’s equity investment in its competitor might invoke scrutiny under § 1 of the Sherman Act. The Agencies are interested in learning more about the competitive effects of equity investments and whether guidance in this area would be useful.
- When do partial acquisitions become problematic? when the acquisition grants the investor control of an issuer? when the investor gains the power to elect a member of the board of the issuing company? when the investor gains the ability to exert significant influence over the issuer, e.g., by threatening to sell its shares?
- How can small equity stakes (10% or less) between actual or potential competitors affect abilities and incentives to compete? Can a strategic pattern of small investments create a likelihood of anticompetitive effects not raised by any single investment?
- How might equity investments in actual or potential competitors generate procompetitive efficiencies? How might equity investments give rise to anticompetitive effects on the development of standards?
7. Denial of Access
One of the most debated topics in contemporary antitrust analysis is when competitor collaborations may be compelled to deal with rivals outside of the collaboration. As courts have long recognized, denial of access to competitor collaborations may harm competition by either enabling members to keep or raise prices above competitive levels or significantly raising the costs of excluded competitors. But courts have also acknowledged that the exclusion of rivals may be either competitively neutral or even competitively beneficial (e.g., by encouraging rivals to establish competing collaborations). Firms outside of the initial collaboration may contribute nothing to a particular venture, or could be free-riding on the collaboration’s production, marketing, or technological innovations. Moreover, compulsory access raises difficult remedial issues and could, in some cases, increase the market power wielded by the collaboration and its members.
In Northwest Wholesale Stationers, the Supreme Court stated that concerted refusals to deal with competitors may be per se illegal when a purchasing cooperative "possesses market power or exclusive access to an element essential to effective competition." Some courts have applied this standard to concerted refusals to deal by other forms of competitor collaborations.
In assessing concerted refusals to deal with competitors, how should the Agencies determine whether the collaborators possess market power? What sort of market power is relevant in determining whether denial of access to a collaboration will almost always maintain or reduce output below competitive levels? Is collective market share sufficient? If not, why not? Does the analysis depend on whether members compete against each other and their collaboration either independently or as part of another venture?
How should the Agencies determine whether the parties control "exclusive access to an element essential to effective competition?" Is this the correct standard? Or should it be enough that refusal or denial will significantly impair a firm’s ability to succeed in the relevant market? At what point does an "element" (presumably an input) become "essential" to effective competition? Should "essentiality" be determined at the time of the request for access? Or should it be determined at the time that the collaboration is formed?
Some commentators have asserted that the standard in Northwest Wholesale Stationers permits the parties to offer efficiency or procompetitive justifications for their refusal to deal with competitors. If so, what are cognizable efficiency justifications in this context? What justifications would make certain refusals always or almost always permissible? Is it sufficient for the collaborators to make plausible assertions that the formation of their collaboration was designed to enable members to obtain or retain competitive advantages in markets in which they continue to compete? Should it matter whether the parties are likely to pass through cost savings to consumers? If not, why not?
In some cases, the parties also may assert that denial of access to competitors is essential to prevent free-riding on innovations that the collaboration has produced. What sort of evidence would be necessary to support free-rider justifications in the context of potentially per se illegal refusals to deal? If competitors are willing to pay access fees that reflect the proportionate present value of ownership in the collaboration, do free-rider concerns persist? If so, why?
Under the rule of reason, how will the analysis differ from the per se inquiry? Does the rule of reason require a more sophisticated showing of market power and/or anticompetitive effects? Is it sufficient for the Agencies to show that concerted refusals to deal permitted the parties to the collaboration to raise or maintain prices above levels that would have existed in the absence of exclusion?
In some cases, the parties may assert that excluded firms remain free to form their own collaborations that will enable them to remain effective competitors. What factors should the Agencies examine in evaluating such claims? In network joint ventures, how may the Agencies determine whether excluded firms will be able to establish viable competing networks?
Assuming that denial of access is illegal under Section 1, what factors should the Agencies consider in crafting a remedy? When will compulsory access reduce competition between competing collaborations ("intersystem competition")? When will prohibitions on exclusivity reduce intersystem competition? When will prohibitions on exclusivity reduce intrasystem competition? How should the Agencies assess and/or resolve tradeoffs between intrasystem and intersystem competition?
(1)467 U.S. 752 (1984).
(2)This approach assumes that there may be cases where a parent-subsidiary relationship ought to be entitled to single-firm treatment even though the parent does not own a majority of the subsidiary’s equity stock. For example, a U.S. parent may be prohibited under another country’s law from owning a majority stake in a business incorporated under its laws, yet the parent may exercise control over the entity through contractual provisions and bargaining leverage.
(3)95 F.3d 593, 600-01 (7th Cir. 1996).