Antitrust Analysis of Joint Ventures: How Big Is Too Big?

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 a JV is a legitimate collaboration.  The third post in the series discussed ancillary restraints–what they are and how they are analyzed.

In this installment, we’ll consider the questions of whether a properly structured JV can nevertheless have anticompetitive effects, and if so, under what circumstances.  As a threshold issue, these questions inquire about the size of the venture relative to the market, but more important they call for an evaluation of the likely effects of the JV’s ancillary restraints.

Market Shares and Market Concentration

As the federal enforcement agencies recognize, market share and market concentration affect the likelihood that a JV will create or increase market power or facilitate its exercise.  The creation, increase, or facilitation of market power may increase the ability and incentive profitably to raise price above or reduce output, quality, service, or innovation below competitive levels.  See DOJ and FTC, Antitrust Guidelines for Collaborations Among Competitors (April 2000) (“Collaboration Guidelines”) § 3.33.  The agencies assign a range of market shares to the collaboration.  The high end of that range is the sum of the market shares of the collaboration and its participants.  The low end is the share of the collaboration in isolation.  Market shares are by and large calculated as they would be for a merger.  See id.

As with mergers, market share and market concentration are a starting, not ending, point for evaluating the competitive effects of a JV.  In both cases, the agencies will also consider, inter alia, whether the market share and concentration data overstate or understate the likely competitive significance of participants and their collaboration, whether competition may be lessened through coordinated interaction of the participants,[i] and whether competition may be lessened through what the agencies call “unilateral effects.”[ii]  See id.

As a result, it is difficult to define bright-line rules regarding acceptable levels of market concentration.  However, as a guide to parties and their counsel, the agencies have developed certain market share-based “safety zones,” which we describe after first explaining how the agencies analyze potential anticompetitive effects.

Additional Factors Considered

In addition, where the nature of the JV agreement and market share and market concentration data reveal a likelihood of anticompetitive harm, the agencies more closely examine the extent to which the participants and the collaboration have the ability and incentive to compete independent of each other.  The agencies are likely to focus on six additional factors unique to the JV context and not necessarily considered in connection with full-blown mergers:

(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.

See id. § 3.34.  Not surprisingly, the greater the restraint, the more likely it is to raise a concern.  See, e.g., id. § 3.34(f) (“In general, the shorter the duration, the more likely participants are to compete against each other and their collaboration.”).  The issue of anticompetitive information sharing is sufficiently important that we will address it in the next post in this series.

The important point here is that these six factors look to agreements or commitments that, in isolation, may be properly structured and permissible ancillary restraints, but in context – whether due to market shares, market concentration, or other reasons – may tip the competitive balance and render the JV net anticompetitive.

Although not with great frequency, the agencies do sometimes challenge JVs as being too big or resulting in undue market concentration.  For example, in United States v. ConAgra Foods, Inc. (D.D.C. 2014), the DOJ objected to an agreement between ConAgra, Cargill and CHS which would have combined the wheat flour milling assets of ConAgra and Horizon Milling (itself a JV between Cargill and CHS) to form a JV known as Ardent Mills.  Under a consent decree, the defendants agreed to divest four flour mills.

Safety Zones

To provide guidance to companies and their counsel, and because “competitor collaborations are often procompetitive,” the agencies have established “safety zones” for JV activity.  They emphasize that “competitor collaborations are not anticompetitive merely because they fall outside the safety zones.  Indeed, many competitor collaborations falling outside the safety zones are procompetitive or competitively neutral.”  Id. § 4.1.

The first safety zone applies to competitor collaborations in general.  “Absent extraordinary circumstances, the Agencies do not challenge a competitor collaboration when the market shares of the collaboration and its participants collectively account for no more than twenty percent of each relevant market in which competition may be affected.”  Id. § 4.2.  For purposes of this safety zone, the agencies consider the combined market shares of the participants (parents) and the collaboration itself.  See id. § 4.2 n.54.

The second safety zone is specific to R&D JVs.  Again, absent extraordinary circumstances, “the Agencies do not challenge a competitor collaboration on the basis of effects on competition in an innovation market where three or more independently controlled research efforts in addition to those of the collaboration possess the required specialized assets or characteristics and the incentive to engage in R&D that is a close substitute for the R&D activity of the collaboration.”  Id. § 4.3.  Because the other three R&D firms may have less than a combined 80% market share, and the JV may have greater than a 20% share, this R&D safety zone is effectively broader than the general safety zone for competitor collaborations.

What’s Next?

The above details how JV size and market power are analyzed for purposes of determining whether the JV may have anticompetitive effects and, if so, how significant they will be.  In the next blog post in this series, we’ll examine the issue of information sharing, and after that we’ll wrap up with a checklist for thinking about JV issues.

[i] As the agencies explain in their Horizontal Merger Guidelines, “coordinated interaction is comprised of actions by a group of firms that are profitable for each of them only as a result of the accommodating reactions of the others.  This behavior includes tacit or express collusion, and may or may not be lawful in and of itself.”  Id. § 2.1.

[ii] “A merger may diminish competition even if it does not lead to increased likelihood of successful coordinate interaction, because merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output.”  Horizontal Merger Guidelines § 2.2.