Antitrust Analysis of Joint Ventures – Ancillary Restraints

In the first post in this series, we introduced the concept of joint ventures (“JVs”), outlined why antitrust law applies to their formation and operation, identified the major antitrust issues raised by JVs, and discussed why you should care about these issues. In the second installment, we unpacked some of the major antitrust issues surrounding the threshold question of whether or not a JV is a legitimate collaboration. This third post in the series discusses ancillary restraints—what they are and how they are analyzed.

Ancillary Restraints – in General

The parties to a JV frequently reach agreements to facilitate the formation and/or operation of the JV. However, the JV parties, or some of them, are often horizontal competitors or have a vertical relationship, so their agreements can trigger the same concerns under the antitrust laws that other horizontal or vertical agreements can trigger. The fact that they are reached in the context of a JV does not provide a blanket immunity from the antitrust laws—unless the single-entity doctrine (which we discussed in a prior post) applies or unless, perhaps, the restraints are so necessary to the existence of the JV that they are core restraints. At the same time, antitrust law allows some agreements that facilitate the formation or operation of a JV but that may not be strictly or absolutely required for its operation. These types of agreements are known as “ancillary restraints.” The questions we confront here are: What’s an ancillary restraint, and how does it differ from a core restraint or from an unlawful agreement?

What an Ancillary Restraint Is Not

It’s likely easier to characterize certain types of restraints as nonancillary than it is to explain satisfactorily and succinctly what an ancillary restraint is. As an example, an agreement not to compete between JV parents themselves is almost never ancillary. That was essentially the holding of the Eighth Circuit in Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cir. 1981), where parties to a boat motor production venture agreed to divide territories on products outside the venture. “In essence the parties agreed not to seek out the other’s dealers in [certain] markets, but rather to concentrate their competitive efforts against other manufacturers. This is merely an agreement between horizontal competitors to direct their efforts elsewhere. It has no substantial relation to any legitimate purpose of the joint venture.” Id. at 981.

A similar issue was presented in Polygram Holding, Inc. v. FTC, 416 F.3d 29 (D.C. Cir. 2005). There, three world-famous tenors (Pavarotti, Carreras, and Domingo) had given acclaimed concerts in 1990 and 1994 and were scheduled to perform another in 1998. PolyGram and Warner distributed the 1990 and 1994 recordings, respectively. The two record companies initially agreed to jointly distribute the 1998 recording while separately pursuing each company’s own sales strategy for its earlier “Three Tenors” recording. Subsequently, the parties realized the various recordings were effectively substitutes for each other and therefore agreed not to advertise or discount the 1990 and 1994 recordings. The FTC condemned the agreement as inherently suspect. The D.C. Circuit affirmed, applying a somewhat truncated or “quick look” type analysis of market effects. See id. at 37-39.

At the extremes, such parent/parent agreements may render the JV a “sham” and may be per se unlawful “naked” restraints. In United States v. Topco Associates, Inc., 405 U.S. 596 (1972), a cooperative association of small- and medium-sized grocery stores—whose members even collectively lacked market power—provided high-quality products to its members under private labels so that Topco’s members could better compete with large national grocery store chains. Topco prohibited its members from selling Topco-branded products outside their assigned territories. The Supreme Court held that this restraint was a per se unlawful agreement to divide territories. See id. at 608. See also United States v. Sealy, Inc., 388 U.S. 350, 355-56 (1967) (condemning a similar arrangement among Sealy licensees who owned substantially all of Sealy’s stock and controlled its management; the case also involved allegations of price-fixing). The continuing viability of Topco has been questioned, see, e.g., Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 226 (D.C. Cir. 1986), but the Supreme Court has yet to overrule it. See also In re Blue Cross Blue Shield Antitrust Litig., 26 F. Supp. 3d 1172, 1186 (N.D. Ala. 2014) (denying motion to dismiss per se challenge to geographic restrictions on Blue Cross/Blue Shield companies’ ability to compete outside assigned territories).

What an Ancillary Restraint Is

In general, an ancillary restraint is a restraint that promotes the procompetitive attributes and competitive success of a legitimate collaboration, including a JV. For example, an agreement by a parent not to compete directly with the JV itself is usually an ancillary restraint. Indeed, in the absence of such an agreement, parent companies would have reduced or perhaps no incentive to enter into JVs with competitors in the first place.

If a restraint is ancillary, then the burden arguably should be on a plaintiff to prove a less-restrictive alternative that furthers the same legitimate objectives. But cf.   (“Collaboration Guidelines”) § 3.2 (Restraint must be reasonably related to efficiency-enhancing integration and reasonably necessary to achieve procompetitive benefits.). At the margins, the question of whether the JV parties or a potential plaintiff has the burden of proof on less-restrictive alternatives can be outcome-determinative.

Some JVs involve multiple members (the Topco grocery store collaboration was one such JV). The multiple-member phenomenon often occurs in connection with buying cooperatives. Those cooperatives usually have rules regarding the criteria for membership and the revocation of membership. In Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985), the Supreme Court held that such rules and decisions are subject to Rule of Reason analysis, i.e., that they are effectively ancillary restraints. “Wholesale purchasing cooperatives such as Northwest are not a form of concerted activity characteristically likely to result in predominantly anticompetitive effects. Rather, such cooperative arrangements would seem to be ‘designed to increase economic efficiency and render markets more, rather than less, competitive.’” Id. at 295 (cit. omit.). Moreover, “[t]he act of expulsion from a wholesale cooperative does not necessarily imply anticompetitive animus and thereby raise a probability of anticompetitive effect . . . . Wholesale purchasing cooperative must establish and enforce reasonable rules in order to function effectively . . . . Nor would the expulsion characteristically be likely to result in predominantly anticompetitive effects, at least in the type of situation this case presents. Unless the cooperative possesses market power or exclusive access to an element essential to effective competition, the conclusion that expulsion is virtually always likely to have an anticompetitive effect is not warranted.” Id. at 296 (cit. omit.). Nevertheless, denial of access can still sometimes be condemned. See, e.g., Realcomp II Ltd. v. FTC, 635 F.3d 815, 827 (6th Cir. 2011) (applying Rule of Reason to condemn a real estate multiple listing service rule limiting the distribution of certain types of real estate listings to the public).

How Ancillary Restraints Are Analyzed

That brings us to how a restraint—if it is truly ancillary—is analyzed. “In general, the Agencies assess the competitive effects of the overall collaboration and any individual agreement or set of agreements within the collaboration that may harm competition.” Collaboration Guidelines § 2.3. In doing so, the Agencies are likely to focus on six factors: “(a) the extent to which the relevant agreement is non-exclusive in that participants are likely to continue to compete independently outside the collaboration in the market in which the collaboration operates; (b) the extent to which participants retain independent control of assets necessary to compete; (c) the nature and extent of participants’ financial interests in the collaboration or in each other; (d) the control of the collaboration’s competitively significant decision making; (e) the likelihood of anticompetitive information sharing; and (f) the duration of the collaboration.” Id. § 3.3.4.

The application of some of these factors is relatively straightforward. Not surprisingly, everything else being equal, the longer the duration of a JV, the more likely it is to raise competitive concerns. Similarly, the greater the extent of the JV’s exclusivity, the greater the probability that the JV could be anticompetitive. One factor—the potential for anticompetitive information sharing—raises enough questions that we will consider it separately in an upcoming blog post.

What’s Next?

The above details the analysis of ancillary restraints. In the next blog post in this series, we’ll discuss the issue of joint venture size or market power. After that, we’ll examine the issue of information sharing and wrap up with a checklist for thinking about JV issues.