Download International Joint Ventures

International Joint Ventures:
What Antitrust Lawyers Need to Know
Monday, January 28, 2013
12:00 pm-1:15 pm EST
Presented By:
The International Committee
The Joint Conduct Committee
The Corporate Counseling Committee
of the ABA Section of Antitrust Law
and
The Reviewable Matters/Unilateral Conduct Committee
of the CBA National Competition Law Section
• First in monthly series of teleseminars
• Practical insights into competition issues that may arise
during the creation or operation of an international joint
venture.
• This first session: American and Canadian experts will
look at the legal and economic approach in North
America to the review of joint venture agreements.
• Subsequent sessions will highlight differences between
this framework and that of other jurisdictions around the
world, such as Brazil, Europe and India.
2
Moderator
• Mark Botti, Partner, Squire Sanders (US) LLP
Panelists
• Jim Brander, Professor, UBC
• Randy Hughes, Partner, Bennett Jones LLP
• Paul O'Brien, Office of International Affairs,
Federal Trade Commission
• Fiona Schaeffer, Partner, Jones Day
3
Overview of Joint Ventures
• US antitrust joint venture overview
• Canadian antitrust joint venture overview
• Introduction to economic issues in joint ventures
• International Enforcement Agency Cooperation and
Perspective on joint ventures
4
Initial Formation of a Joint Ventures
• Production joint ventures and other types
– Differences from R&D joint ventures and promotion
and marketing joint ventures
– Structural and general issues
5
Operation of a Joint Ventures
• Short versus long term perspective on joint ventures
• Issues arising during operation
– information flow
– R&D activities
– joint pricing
– management personnel
6
Policy Discussion
• Enforcement efficiency and cooperation
• Comments on convergence and divergence in
standards
• Business planning across jurisdiction
7
• Questions
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Antitrust Analysis of JVs: US Framework & Counseling Tools
January 28, 2013
Fiona Schaeffer
[email protected]
What Is a Joint Venture?
• Collaborative activity between independent firms short of
a full merger
• Characterized by some degree of risk sharing and
pooling of resources to achieve a common goal like:
• Researching and developing a technology
• Buying an input (joint purchasing)
• Producing a product
• Marketing and selling a product or service
• Establishing a network
• Just because you call it a “joint venture” doesn’t make it
so
2
Potential Competition Benefits & Concerns
Procompetitive Benefits
Anticompetitive Effects
• Create new products &
technology
• Facilitate collusion in same or
related markets
• Increase output
• Create or enhance market
power
• Lower costs
• Foreclose competitors
• Other synergies from pooling
complementary resources
• Eliminate potential
competition
• Facilitate entry
3
Legal Framework
• Formation may be subject to Section 7 of Clayton Act and is
potentially reportable under the HSR Act:
– Newly formed corporate JVs: see 16 C.F.R. § 801.40
– Newly formed unincorporated JVs: see 16 C.F.R. §
801.50
• Contributors are deemed Acquiring Persons and must file if
transaction meets the HSR thresholds; newly formed entity is
deemed the Acquired Person but need not file.
• JV also may be subject to Section 1 and Section 2 of Sherman
Act and/or Section 5 of FTC Act
4
DOJ/FTC Competitor Collaboration Guidelines
• Market Power (Safety Zone of <20% share)
• Incentives to Compete:
• Exclusivity
• Control over Assets
• Financial Interests in the Collaboration
• Control of Competitively Sensitive Decision-Making
• Likelihood of Anticompetitive Information Sharing
• Duration of the Collaboration
• Entry
• Cognizable Procompetitive Efficiencies
• Alternatives
5
Key Questions to Analyze Competitive Effects
Purpose and Scope
Governance and Financial Terms
•
What is the stated business purpose?
•
Will one of the parties control the JV?
•
Can the parties do this alone?
– Neither party?
•
What are the benefits to the parties and do they
also benefit consumers?
– Joint control?
•
What assets are being contributed?
•
•
•
What is each party’s financial interest in
the JV?
What markets are affected?
•
Do the parents or will the JV have market
shares > 20% in the affected market(s)?
What is the method for allocating profits
and costs?
•
At what level does financial consolidation
occur?
•
What risks and liabilities does each party
assume?
•
What is the governance structure? (e.g.,
board seats, voting rights)
•
How many competitors will remain?
•
Will it create or enhance market power?
•
Will it limit decision-making over competitively
sensitive variables like production or price?
•
Will participants continue to compete with each
other (or the JV)?
•
Will it limit access to an essential
facility/significant input/distribution channel?
•
Will it facilitate sharing of competitively sensitive
info?
•
How long will the agreement last?
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Spectrum of Competitor Collaborations
No integration of assets
or financial risk
Sealy & Topco
St. Francis Hospital
JV undertakes independent economic
activity and eliminates all competition
between the partners/parents in the relevant
market for at least 10 years
JV integrates some assets
& financial risk, but does
not eliminate competition
between partners or with
parents
Dagher
NFL
BMI
BAAA/IB
European Night
Services
BHP/Rio Tinto
Rule of reason (US)
Restrictions on price & output
are per se unlawful or
restrictions on object in the EU
Full merger
Original1
Full Function JV (EU)
Single Entity (US)
Exemption Article 101(3) (EU)
Potential for efficiency-enhancing integration
Subject to substantive merger analysis at
formation, but thereafter treated as a
single entity in both EU and US [and
Section 1 and Article 101 don’t apply]
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Case Studies Along the Continuum
New York v. St. Francis Hospital, 94 F. Supp. 2d 399 (SDNY 2000)
• Two hospitals (only two in the area) obtained NY Department of Health approval to create a
JV (a “virtual merger”) for three capital-intensive care and diagnostic facilities.
• Expanded the relationship beyond this (to essentially allocate services between the hospitals
and to jointly negotiate with payers) without actual integration of financial operations or
governance.
• The court held per se unlawful. What began as a lawful (and approved) JV transformed into
horizontal collusion, and the claimed efficiencies resulted only from
diminished competition between the hospitals (and unrelated to joint negotiations)
Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.,
444 U.S. 1 (1979)
• BMI and ASCAP issued licenses and distributed royalties on behalf of owners of copyrighted
music. They would issue “blanket licenses” for all of the material in their respective catalogs
(and not individual or limited licenses. However, they did permit publishers to issue individual
licenses, but that was considered a different product to the blanket licenses).
• Integration of sales, monitoring, and enforcement. Substantial efficiencies.
• The Supreme Court held not per se unlawful. The blanket license was a new product, the
ability to license was not-exclusive, and the blanket license substantially lowered transaction
costs.
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Case Studies Along the Continuum
Arizona v. Maricopa County Medical Soc’y, 457 U.S. 332 (1982)
• As part of their membership agreements, two foundations for medical care
coordinated the maximum prices their member doctors could charge for health
services provided to policyholders of specified insurance plans (participating doctors had no
financial interest in the organization).
• Supreme Court held the arrangement was per se unlawful. Evidence showed that fees and
insurance premiums tended to rise under this arrangement, and the foundations could not
provide a procompetitive justification for the price-fixing.
Texaco, Inc. v. Dagher, 247 U.S. 1 (2006)
• Texaco and Shell created a lawful, economically integrated JV, Equilon, to
refine and sell gasoline in the western United States. Equilon decided to price
both brands of gasoline (Texaco and Shell) identically.
• The Supreme Court held that Equilon’s pricing decisions were not per se illegal price fixing
among competitors. The JV functioned as a single firm in the marketplace (own production,
distribution, R&D, sales, etc.), with Texaco and Shell acting only as investors (and had been
approved by the FTC at formation).
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Recent Cases: U.S. v. Twin America, LLC
et al, (SDNY 2012)
•
•
•
•
•
December 2012: The DOJ and the NY State AG filed suit to dissolve
a JV between two NYC tour bus companies (Coach USA Inc. and City
Sights LLC).
In 2009, the two companies formed a JV, Twin America. Both
companies contributed all of their NYC hop-on, hop-off bus tour
operations and assets into the JV.
The DOJ alleges that the JV created a monopoly in the “New York
City hop-on, hop-off bus tour market” and enabled Coach and City
Sights to increase prices to consumers by 10 percent.
According to the complaint, one Coach board presentation described
a key benefit of the JV to be “ improved profitability,” because it
assumed a “10% fare increase.” The presentation also stated that
without the transaction, there would be no fare increase “due to
competition.”
After forming the JV, the cost of base fares increased by $5.
10
Latest Word from Supreme Court:
•
The National Football League
consists of 32 independently-owned
teams, each of which possesses its
own intellectual property (such as
team name, logo, trademarks, etc.).
•
The teams created an entity, National
Football League Properties (NFLP),
to develop and market that property
collectively.
•
The parties asked the Supreme Court
to determine if the NFL is a single
entity for antitrust purposes.
•
The Supreme Court held that the
NFL was not a single entity (at least
for the purpose of licensing the IP of
independent, competing teams).
Though the teams came together to
create “NFL football,” each is still an
independent economic actor.
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•
The NFLP’s IP licensing was
therefore concerted activity and
subject to the Sherman Act (under a
Rule of Reason analysis).
•
The Court emphasized substance
and not form in determining whether
a collaboration is a single entity for
antitrust purposes (and did not rule
or suggest how the agreement at
issue would fare under the Rule of
Reason).
Types of Joint Ventures
•
•
•
•
•
R&D
Joint Purchasing
Production
Marketing/Selling
Network
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Competitive Analysis of R&D JVs
Potential competitive benefits:
• Can develop and launch new or improved products by combining assets &
technology
• Usually considered procompetitive (Competitor Collaboration Guidelines)
Safety Zone: 3+ independent research efforts in an innovation market
Potential competitive harms:
• May reduce/slow down rather than promote R&D
• May create or increase market power by limiting independent decision
making or control of competitive significant assets (IP), reducing innovation
• Greater concern if:
– Participant(s) already has market power in a product that new R&D
might cannibalize
– Competition limited to firms with special characteristics/assets (e.g.
IP)
– Regulatory process limits ability of competitors to catch up
13
Competitive Analysis of Production JVs
Potential competitive benefits:
• May combine complementary assets, know-how, and/or
technology to produce something new or better, or produce
something more efficiently
Potential competitive harms:
• May create or increase market power by:
• Limiting independent decision making (e.g., if it involves
agreement on price, output and/or use of key assets)
• Consolidating control over the variables above
• Can reduce ability to compete independently
• Can undermine incentives to compete independently
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BHP/Rio Tinto
•
Takeover bid by BHP in 2008 – a full merger attempt failed
•
December 2009 sign Iron Ore Production Joint Venture
• Covers the entirety of both companies’ Western
Australia iron ore assets
• Both current and future assets and liabilities
• Combining the mines into single operations
• Combining management, procurement and general
overheads
• No joint marketing – separate sales by parents
•
•
Antitrust review under Article 101 by European Commission
National merger review by Germany
•
18 October 2010 – due to antitrust concerns, abandonment
of the JV
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Competitive Analysis of Marketing/Sales JVs
Potential competitive benefits:
• Products may reach the market more quickly and
efficiently by combining complementary assets (much
like production JVs)
Potential competitive harms:
• Restrict independent decisions and competition on
pricing and output
• Exert control over competitively significant assets that
otherwise would be controlled independently
• May create/increase market power
• Reduce advertising incentives – e.g., joint promotion
may eliminate comparative advertising
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Competitive Analysis of Joint Purchasing JVs
Potential competitive benefits: Cost savings and efficiencies by
aggregating purchases, centralizing orders and/or combining
warehousing or distribution
Potential competitive harms:
• Monopsony power, i.e., reduce price of input and depress output
below competitive level
• Healthcare Statements - safety zone where purchases are < 35%
of total sales of input in the market
• Facilitate collusion:
• If standardizes participants’ costs: Note Healthcare Statements
safety zone where input cost is < 20% of total revenues of
product sold by participants in the JV
• If knowledge of participants’ inputs gives insights into output
– Safeguard: use an independent third party to manage JV
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Competitive Analysis of Network JVs
Potential competitive benefits:
• Network efficiencies: bigger may be better because
demand increases as usage increases (e.g., ATMs,
telecom, electricity)
Potential competitive harms:
• May create or increase barriers to entry
• Limitations on access:
• Can incentivize competitors to develop networks and
participants to invest if they can prevent free riding
• But if the network is dominant, restriction may be
anticompetitive
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Some Common Restraints
• Restraints on JV composition or membership
• Agreements not to compete
• With the JV
• With those outside the JV
• Restraints on output
• Restraints on price
19
Framework for Analyzing Restraints
DOJ & FTC Antitrust Guidelines for Collaborations Among Competitors
Is the agreement reasonably necessary to achieve benefits from integration?
Rule of Reason
Business
Purpose?
Yes
No
No
Nature of the
restraint?
Likely Per Se Illegal
Does the agreement tend to:
Raise price?
or
Reduce output?
Yes
No
Does agreement increase ability/incentive to raise
price or reduce output, quality, service, innovation,
below what would prevail absent the agreement?
If based on these factors,
there is no competitive
harm, a detailed analysis
is not undertaken
Yes
No
Are there procompetitive benefits that can override this harm?
Yes
Illegal
Restraint
Undertake more detailed analysis of:
Market
Power?
Entry
Conditions
Is there a less
restrictive alternative?
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No
Legal
“Ancillary”
Restraint
Illegal
“Naked”
Restraint
Topical Issues: U.S. v. Adobe, et al.
•
Six high-tech firms entered into a
•
series of bilateral agreements not to
“cold-call” each others’ employees
with solicitations for employment.
•
The DOJ challenged the practice as
anticompetitive, and argued that the •
agreements diminished
“competition to attract high tech
employees.”
•
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The firms claimed the practice was
necessary to maintain working
relationships with technology
partners with whom they jointly
developed solutions.
The DOJ disagreed and argued that
because the agreements were not
sufficiently limited in scope and
duration and tailored specifically to
each collaboration, they were not
“reasonably necessary” for
partnership and, therefore, not
ancillary.
The parties settled and agreed to
stop the “no cold-call” practice.
Information Sharing Issues & Firewalls
During Operation
• Exchange of competitively
sensitive information among JV
participants can facilitate
collusion and is subject to same
reasonably necessary analysis as
other restraints
During Formation
• Same information exchange
guidelines apply as in premerger
planning
• Exchange of pricing information
and plans, cost information,
customer and bidding information,
strategic plans and forecasts, and
other competitively sensitive
information should be only that
which is necessary for evaluation
and should be limited in
distribution
• Firewalls may be necessary to
prevent the wide spread
exchange of competitively
sensitive information among
participants who compete
• Same categories of information
that are competitively sensitive
during formation may be sensitive
during operation, particularly
price and output information
• Generally, aggregated and
historical information is less
sensitive
22
Practical Guidance for Firewalls
• Define confidential information for the client
• Define the limitations on distribution of confidential information
• Define the limitations on use of the confidential information
• Sign confidentiality agreements
• Designate confidential information as such
• Establish physical restrictions
• restricted filing cabinets, locked storage rooms, separate
buildings…
• Establish technological restrictions
• password protection, restrictions on shared site access,
secure data warehouses, distinct networks, involve IT as
needed…
• Provide training
• Do audits
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Key Steps in US Antitrust Analysis of Joint Ventures
Are the
parties
competitors?
No
Few, if any
antitrust
issues.
Yes
Does one of
the parties
control the
joint venture?
No
Yes
Does the other
party have
separate
operations that
compete with
the joint
venture?
No
Need market
analysis to
determine
whether joint
venture would
have market
power.
No
Yes
Yes
Need to
set up
firewalls.
No
Are there
restrictions on
competition
between the
joint venture
partners
beyond those
necessary to
make the joint
venture work?
Is the joint
venture
economically
integrated?
Does either
party have
separate
operations that
compete with
the joint
venture?
Yes
Need
separate
analysis of
effects on
competition
of those
restrictions.
No
Yes
Yes
Need to
set up
firewalls.
Are restrictions on
competition
reasonably related
to those
efficiencies?
No
Pricing and other decisions
with competitive impact
may be per se illegal
regardless of market
power.
Yes
No
Are there
restrictions on
competition
between the
joint venture
partners
beyond those
necessary to
make the joint
venture work?
Does the joint
venture create other
efficiencies?
Pricing and other decisions
with competitive impact
may be per se illegal
regardless of market
power.
Yes
No
Need market
analysis to
determine
whether joint
venture would
have market
power.
Need
separate
analysis of
effects on
competition
of those
restrictions.
Does either party
have separate
operations that
compete with the
joint venture?
Yes
No
Are there restrictions on
competition between the
joint venture partners
beyond those necessary
to make the joint venture
work?
No
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Need market analysis to
determine whether joint
venture would have market
power.
Need to
set up
firewalls.
Resources
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•
•
•
•
•
•
•
•
•
•
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American Needle, Inc. v. National Football League, 130 S. Ct. 2201 (2010)
Arizona v. Maricopa County Medical Soc’y, 457 U.S. 332 (1982)
Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1 (1979)
California v. Safeway, 615 F.3d 1171 (9th Cir. 2010)
United States of America et al v. Twin America, LLC et al, Docket # #: 1:12-cv-08989-ALCGWG (SDNY 2012)
EC competition law and joint ventures, International Joint Ventures, Comparative Law
Yearbook of International Business, 2008 Special Issue, Kluwer Law International
EU Guidelines on Horizontal Cooperation Agreements, available at
http://europa.eu/legislation_summaries/competition/firms/l26062_en.htm
European Night Services, available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61994A0374:EN:NOT
FTC/DOJ Antitrust Guidelines for the Licensing of Intellectual Property, available at
http://www.justice.gov/atr/public/guidelines/0558.pdf
FTC/DOJ Competitor Collaboration Guidelines, available at
http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf
FTC/DOJ Statements of Antitrust Enforcement Policy in Health Care, available at
http://www.ftc.gov/bc/healthcare/industryguide/policy/hlth3s.pdf
New York v. St. Francis Hospital, 94 F. Supp. 2d 399 (SDNY 2000)
Texaco Inc. v. Dagher, 547 U.S. 1 (2006)
U.S. v. Adobe Systems, Inc. et al., 75 Fed. Reg. 60,820 (2010), available at
http://www.gpo.gov/fdsys/pkg/FR-2010-10-01/pdf/2010-24624.pdf
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