Joint Ventures

Does California’s Ban on Non-Competes Apply to Business Agreements? The California Supreme Court May Weigh In Shortly.

The Ninth Circuit recently certified a question to the California Supreme Court regarding the scope of California Business & Professions Code Section 16600.  As readers of the Orrick Trade Secrets Watch blog are likely aware, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions.  The Ninth Circuit now wants to know whether the statute should apply to an agreement between two businesses.  The Supreme Court’s answer may have significant effects on business agreements and collaborations in or involving California.

The question arises in a recent case, Ixchel Pharma LLC v. Biogen, Inc., where the plaintiff sought to apply Section 16600 to an agreement limiting a pharmaceutical company’s ability to develop a new drug.  In 2016, Ixchel and a third-party company, Forward Pharma, entered into a collaboration agreement to develop a new and potentially profitable drug.  The collaboration agreement stated that Forward had the ability to terminate the agreement at any time by written notice.

In 2017, Forward entered into a separate agreement with Biogen.  Pursuant to that agreement, Forward agreed to terminate the collaboration agreement with Ixchel, stop development of the new drug, and refrain from entering into any new contracts for the development of the new drug.  In exchange, Biogen agreed to pay Forward $1.25 billion.

Ixchel subsequently filed suit against Biogen asserting claims for interference with contract, interference with prospective economic advantage, and unfair and unlawful business practices.  As a predicate for its unlawful business practices claim, Ixchel argued that Biogen entered into an agreement that violates Section 16600.  Specifically, Ixchel argued that the provision in the agreement with Biogen restricting Forward from working on the new drug violates Section 16600.

According to Ixchel, the statute applies to provisions that restrain “anyone” from engaging in lawful business.   Although “anyone” is not defined in the statute, Ixchel contends it should indeed mean “any” person and that other statutes regulating competition define “person” to include “a corporation, partnership, or other association.”  The district court disagreed.  It found that Section 16600 does not apply outside of the employer-employee context and dismissed the case.  Ixhcel appealed and the Ninth Circuit, after argument, certified this question to the California Supreme Court.

Applying Section 16600 to invalidate provisions in business-to-business agreements could have significant implications for all California businesses and firms doing business in California.  According to Biogen, for example, such a ruling would be contrary to the rule of reason in the federal antitrust context and could jeopardize any joint venture, lease, distribution agreement, or license agreement, as well as other widely used business agreements in which a business voluntarily limits the scope of its operations geographically, by sector, or otherwise.

When the California Supreme Court takes up certified questions, it generally requires separate briefs and oral argument.  The time to resolution varies among cases, but Antitrust Watch will keep an eye on the issue and provide updates as it develops.

Not Subject to Per Se Analysis – Sixth Circuit on Plausibly Procompetitive Activity in Connection with a Joint Venture

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

In The Medical Center at Elizabeth Place, LLC v. Atrium Health System, Case No. 17-3863 (6th Cir. Apr. 25, 2019), the Sixth Circuit held that activity in connection with a joint venture that is plausibly procompetitive is not subject to per se analysis or condemnation. In doing so, it aligned itself with the Second, Seventh, Eighth and Ninth Circuits, and against the minority approach taken by the Eleventh Circuit.

The Medical Center at Elizabeth Place (MCEP) was a physician-owned, for-profit hospital in Dayton, Ohio. It failed as a physician-owned enterprise and was sold to Kettering Health Network. MCEP alleged that it failed because of the anticompetitive efforts of Premier Health (Premier), a dominant healthcare network in the Dayton area comprising four hospitals. In an earlier opinion, 817 F.3d 934 (6th Cir. 2016), the Court held that Premier comprised multiple competing entities and, therefore, could engage in concerted action.

On remand, the plaintiffs pursued only a per se claim and eschewed a Rule of Reason claim. The trial court granted the defendants’ motion for summary judgment, finding that the defendants’ behavior had plausible procompetitive effects and so was not subject to per se analysis.

The Sixth Circuit affirmed. “[A]t the summary judgment phase,” the court held, “the right question to ask regarding per se claims is whether the plaintiff has shown that the challenged restraint is so obviously anticompetitive that it should be condemned as per se illegal. If, in spite of the plaintiff’s efforts, the record indicates that the challenged restraint is plausibly procompetitive, then summary judgment for the defendants is appropriate.” Slip. Op. at 10.

Under Texaco Inc. v. Dagher, 547 U.S. 1 (2006), there are three types of joint venture restraints: (1) those core to the venture’s efficiency-enhancing purpose (such as setting prices for venture products); (2) those ancillary to the venture’s efficiency-enhancing purpose; and (3) restraints nakedly unrelated to the purpose of the venture. Only the last of these three justifies per se treatment. See id. at 7-8; see also Medical Center at Elizabeth Place, Slip. Op. at 11.

The Sixth Circuit held that, in the case of ancillary restraints, defendants need not show that the restraints are necessary to the venture’s efficiency-enhancing purposes. Instead, there only need be a plausible procompetitive rationale for the restraint. See id. at 12-13. “We follow the majority of Circuits and hold that a joint venture’s restraint is ancillary and therefore inappropriate for per se categorization when, viewed at the time it was adopted, the restraint ‘may contribute to the success of a cooperative venture.’” Id. at 14 (cit. omit.).

The Court also rejected MCEP’s argument that the defendants had the burden of proving that a challenged restraint is procompetitive and therefore ancillary. For a per se claim, whether challenged conduct belongs in the per se category is a question of law. See id. at 15.

The Court then reviewed the two kinds of conduct challenged by MCEP. First were “panel limitations,” wherein the hospital defendants stipulated to payers that if they added MCEP to their networks, the hospital defendants would be able to renegotiate prices. The Sixth Circuit held that these restraints supported procompetitive justifications (helping to ensure patient volume and reduced customer premiums). See id. at 16-17.

Second, MCEP challenged a letter by physicians affiliated with the defendants purportedly threatening a loss of patient referrals to doctors who invested in MCEP as well as terminations of leases of MCEP-affiliated doctors and non-compete agreements. But the letter, the Court held, was not a restraint itself but merely an expression of opinion, while the lease terminations arguably prevented free-riding by the doctors and the non-competes were subject to Rule of Reason review.

MCEP also alleged a conspiracy among payers and a conspiracy among physicians not to deal with it. But the Court held that these conspiracy allegations were new and untimely and therefore not properly before the district court.

The Sixth Circuit’s decision further clarifies the limited applicability of the per se rule in the context of joint ventures, and aligns the Sixth Circuit with the majority approach of the other circuits that have considered the issue. However, the Sixth Circuit’s first decision in the case, reported at 817 F.3d 934 (6th Cir. 2016) – where the Court found that the defendant hospitals could conspire with each other despite the existence of a well-crafted joint operating agreement and based on “intent” evidence – remains somewhat opaque and counsels in favor of careful review of joint venture structure and monitoring of joint venture operations.

 

M&A HSR Premerger Notification Thresholds Increase in 2019

Takeaways

  • The new minimum HSR threshold is $90 million and applies to transactions closing on or after April 3, 2019.
  • The current threshold of $84.4 million is in effect for all transactions that will close through April 2, 2019.
  • Failure to file may result in a fine of up to $42,530 per day of non-compliance.
  • The HSR Act casts a wide net, catching mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

The Federal Trade Commission has announced new HSR thresholds for 2019. The thresholds are adjusted annually, and were delayed this year by the government shutdown. Transactions closing on or after April 3, 2019 that are valued in excess of $90 million potentially require an HSR premerger notification filing to the U.S. antitrust agencies. The HSR Act and Rules require that parties to certain transactions submit an HSR filing and wait up to 30 days (or more, if additional information is formally requested) before closing, which gives the government time to review the transaction for potential antitrust concerns. The HSR Act applies to a wide variety of transactions, including those outside the usual M&A context. Potentially reportable transactions include mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

Determining reportability: Does the transaction meet the Size of Transaction test?

The potential need for an HSR filing requires determining whether the acquiring person will hold an aggregate amount of voting securities, non-corporate interests, and/or assets valued in excess of the HSR “Size of Transaction” threshold that is in place at the time of closing. Calculating the Size of Transaction may require aggregating voting securities, non-corporate interests, and assets previously acquired, with what will be acquired in the contemplated transaction. It may also include more than the purchase price, such as earnouts and liabilities. Talk to your HSR counsel to determine what must be included in determining your Size of Transaction.

If the transaction will close before April 3, 2019, the $84.4 million threshold still applies; closings as of April 3, 2019 will be subject to the new $90 million threshold.

Determining reportability: Do the parties to the transaction have to meet the Size of Person test?

Transactions that satisfy the Size of Transaction threshold may also have to satisfy the “Size of Person” thresholds to be HSR-reportable. These new thresholds are also effective for all closings on or after April 3, 2019. Talk to your HSR counsel to determine which entity’s sales and assets must be evaluated.

Filing Fee

For all HSR filings, one filing fee is required per transaction. The amount of the filing fee is based on the Size of Transaction.

Failure to File Penalty

Failing to submit an HSR filing can carry a significant financial penalty for each day of non-compliance.

Always consult with HSR counsel to determine if your transaction is HSR-reportable. Even if the Size of Transaction and Size of Person tests are met, the transaction may be exempt from the filing requirements.

Potential Antitrust Issues Lurking in Blockchain Technology

Blockchain technology has burst onto the scene and into the public consciousness over the last few years. While the securities and privacy law questions surrounding blockchain technology have received much attention, perhaps less obvious are the potential antitrust issues raised by the technology.

Although these issues are nascent, they are not wholly theoretical. For example, on March 16 the FTC announced that it is creating a Blockchain Working Group to look at, inter alia, competition policy. “Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace” (FTC Blog Post). And in January of this year, the Japan Fair Trade Commission also indicated that it may look into the competition policy issues involving blockchain-based cryptocurrencies.

This blog post briefly discusses some of the potential antitrust issues associated with blockchain technology. READ MORE

CMA Launches Consultation Concerning Changes to its Jurisdiction over M&A in the Tech Sector

The UK government considers that transactions in the following sectors can raise national security concerns:

1. quantum technology;
2. computing hardware; and
3. the development or production of items for military or military and civilian use.

In order to allow the UK’s Secretary of State to intervene in transactions in these sectors, the UK government has proposed amendments to the Enterprise Act 2002 that would expand the Competition & Markets Authority’s (“CMA”) jurisdiction to review transactions in these sectors from a competition perspective. READ MORE

Antitrust Issues with Joint Ventures – PLI CLE presented by Howard Ullman

Orrick Antitrust Of Counsel Howard Ullman will present a Practising Law Institute (PLI) One-Hour Briefing on the topic of Antitrust Issues with Joint Ventures.  This One-Hour Briefing will analyze the potential antitrust ramifications of joint ventures and other collaborations between competitors and how to balance the pro-competitive efficiencies against the anti-competitive effects of a proposed JV.  Registration for the webcast can be found here, and to read Howard’s series on Orrick’s Antitrust Watch Blog analyzing the antitrust effects on joint ventures, click here.

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. READ MORE

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. READ MORE

Antitrust Analysis of Joint Ventures: Structural Considerations

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

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 this installment, we will unpack some of the major antitrust issues surrounding the threshold question of whether or not a JV is a legitimate collaboration.  In particular, we will first try to separate the analyses of, on the one hand, JV formation, and on the other, JV operation and structure.  Then we will consider whether a JV (i) constitutes a “naked” agreement between or among competitors which is per se unlawful, (ii) presents no significant antitrust issue because there is only a single, integrated entity performing the JV functions, or (iii) involves restraints within the scope of a legitimate collaboration that are virtually per se lawful.

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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.

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Observations on “Brexit” and the EU/UK Competition Law Regime

Rightly considered to be a “once in a generation decision,” the UK electorate will on 23 June 2016 have a chance to vote on whether the UK should remain a member of the European Union (“EU”).

This upcoming referendum has resulted in emotional rhetoric and heated discussions in the media (and no doubt around dining tables throughout the UK and elsewhere) on which way to vote, and why. However, what is striking to us is the relative lack of focus on the legal implications of so-called “Brexit,” including on EU and UK competition law.

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