Antitrust Analysis of Joint Ventures: An Introduction

Businessman hand touching JOINT VENTURE sign with businesspeople icon network on virtual screen Antitrust Analysis of Joint Ventures Antitrust Analysis of Joint Ventures – Structural Considerations

Joint ventures (“JVs”) can require navigation of a potential minefield of antitrust issues, which we’ll explore in a series of six blog posts beginning with this introductory post. Not all of the law in this area is entirely settled, and there remain ongoing debates about some aspects of the antitrust treatment of JVs.  Indeed, arriving at a coherent and unified view of JV law is like putting together a jigsaw puzzle with missing and damaged pieces.

Before digging into some of the legal issues, however, let’s first take a step back to establish some agreed-upon definitions and consider why you should care about antitrust law if you are forming, operating, selling or buying a JV.

What Is a Joint Venture?

Let’s start with a well-known “secret” of antitrust law that may nevertheless surprise non-antitrust specialists: there is no well-established definition of the term “joint venture” for antitrust purposes. Although “joint venture” may be a well-defined term in other areas of the law or in business practice, using the term cavalierly in the context of antitrust analysis may be tantamount to committing the sin of synecdoche (i.e., may be under- or over-inclusive)–and may therefore cause us to miss and overlook important issues and questions because we’re, for example, using a potentially narrow term to refer to a broader canvas of activities.

In fact, for antitrust law purposes, the term “JV” is flexible and reaches many types of activity that you might not otherwise think of as a JV. The term of course reaches traditional formal business collaborations between or among companies to produce or buy products or services.  But the antitrust analysis of joint ventures also reaches, or can reach, trade associations, standard-setting bodies, patent pools, agreements to jointly market products, and even professional and amateur sports leagues.

A related issue is how to distinguish a JV from a full-blown merger, which is subject to merger control analysis. Not surprisingly, the conventional wisdom is that a JV is something less than a full-blown merger, but the dividing line between the two categories is not always a bright one.

A better term for “JV” might be “competitor collaboration,” but even that term has its limitations. For one thing, potential competitors can count in or towards the antitrust analysis, and it can sometimes be difficult to determine when firms are legitimate potential competitors.  In addition, although vertical collaborations between non-competitors typically do not raise substantial antitrust concerns, they are not immune from antitrust liability.

With the above caveats in mind, we’ll use the terms “joint venture” and “JV” throughout this series of blog posts, if only because many of the cases and agency guidance documents have used and continue to use those terms.

Why Should I Care About Antitrust and Joint Ventures?

If you’re forming, buying, or operating a “false” JV–a JV that is a JV in name only, but is in reality a naked competitor agreement–you could face substantial civil (or even potentially criminal) claims of a per se unlawful agreement.  Even if your JV is legitimate, you still may face potential liability for so-called “ancillary” restraints (those affecting activities outside the JV itself) imposed by or on the JV, or because the JV is “too big,” or because it is structured improperly and has a tendency to facilitate price or other potentially problematic coordination between JV members.  In addition to (trebled) damages, you may be required to restructure, suspend, or in the worst case even dissolve your JV.  To avoid all these problems, it makes abundant sense to structure JVs properly in the first instance.

Why Does Antitrust Law Apply to Joint Ventures?

Generally speaking, antitrust law is intended to foster competition, which is thought to improve product quality while lowering product price. JVs are often procompetitive, but they can have anticompetitive effects.

On the procompetitive side of the balance sheet, JVs can create efficiencies and economies of scale, leading to lower costs, new or higher-quality products, and more rapid or higher levels of innovation. In addition, if a JV sets prices for its own products, doing so can eliminate free riding and improper information exchange with JV members.

On the anticompetitive side of the balance sheet, JV member firms might compete with each other–or at least compete more vigorously–absent the JV. In addition, an output JV can reduce competition in the market for the purchase of inputs used by the JV and its member firms.  Other types of JVs can have similar effects on ancillary or related markets.  Some JVs aren’t real JVs at all but are “naked” competitor agreements masquerading as JVs, and thus squarely within the crosshairs of antitrust enforcement.  And JVs can impose ancillary restraints that restrict or harm competition, thus posing antitrust concerns.  For example, an agreement by JV members not to compete with the JV itself is an ancillary restraint.

However, to some extent we are putting the cart before the horse, because much of the above discussion assumes that an analysis and balancing of procompetitive benefits and anticompetitive effects is necessary. Sometimes it is, and sometimes it is not–as we shall explore in subsequent posts in this series.

What Are the Major Antitrust Questions Raised by JVs?

In general, antitrust analysis of a JV raises the following four sets of questions, the first of which inquires whether there is a legitimate JV, and the next three of which focus on whether the JV’s procompetitive efficiencies outweigh its anticompetitive effects:

  • Does the JV constitute a “naked” agreement among competitors which is per se unlawful, does it not present an antitrust issue because there is only a single, integrated entity performing the JV functions, or does it involve restraints within the scope of a legitimate collaboration that are virtually per se lawful?
  • Does the JV impose so-called ancillary restraints on the venture itself or its members, and if so, what standard of review applies to such restraints?
  • Assuming the JV is properly structured to avoid an unlawful conspiracy charge, is it “too big” to be acceptable? What guidance applies to the size or market footprint of a JV?
  • Will operation of the JV involve sharing of information between or among competitors, and if so, what practical steps should be taken to manage and limit information sharing between and among the JV and JV members?

What Are the Sources of Guidance?

The guidance in this area is somewhat varied. It includes several prominent Supreme Court cases, a number of lower court cases and agency actions, and several agency guidelines.  Of the latter, the most notable are the Antitrust Guidelines for Collaboration Among Competitors (“Collaboration Guidelines”), which are now slightly long in the tooth (predating a few important Supreme Court cases concerning JVs) and somewhat general (some say too general to be very useful). Also potentially applicable are the federal enforcement agencies’ Antitrust Guidelines for the Licensing of Intellectual Property (“IP Guidelines”) and Statements of Antitrust Enforcement Policy in Health Care (“Healthcare Guidelines”), which discuss, inter alia, patent pools and physician/hospital networks and collaborations, respectively, but whose reasoning may be more broadly applicable.

What’s Next?

Our series of forthcoming posts will discuss these major questions as well as other issues concerning JVs. Then we’ll wrap-up with a checklist for thinking about JV issues.