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© 2005 Dechert LLP
“Peaking” Under the Big Tent of Joint Venture Law
Lessons from Recent Cases and Government Guidelines
on the Line Between Lawful and Unlawful Joint Venture Conduct
Paul T. Denis April 2, 2005
2
OVERVIEW
• Joint Ventures Defined
How will you know one when you see it?
• Forms of Joint Ventures
How big is that tent?
• The Limits of Jointness
What you can do depends on the form of the JV.
3
Joint Ventures Defined
• The Importance of Definition
• The Joint Venture Continuum
• The Necessary Elements of a Joint Venture
• Distinguishing Mergers
4
The Importance of Definition
Price fixing is per se unlawful and will be prosecuted criminally
Joint ventures may create significant efficiencies and can be procompetitive
But merely labeling something a joint venture does not preclude per se or even criminal condemnation
What is a conscientious counselor to do?
5
The Joint Venture Continuum
Characterization
Cartel Joint Venture Merger
Degree of integration
Limited Complete
6
Critical Elements of JointVenture Characterization
• Integration
• Efficiency Enhancing
• Reasonably Necessary
7
Critical Elements of Joint Venture Characterization
• Integration
– how much is enough remains unclear
– often entails combining significant capital, technology or other assets
– may be satisfied by risk sharing in certain circumstances
– need not entail creation of new entity
– must be more than coordinating decisions on price, output, customers, territories, and the like
• enforcement agency bias toward tangible physical integration
8
Critical Elements of Joint Venture Characterization
• Efficiency Enhancing
– but only certain efficiencies are cognizable
– must be verifiable
– cannot arise from anticompetitive reduction in output or service
9
Critical Elements of Joint Venture Characterization
• Reasonably Necessary
– restrictions on parents must be reasonably necessary to achieve the efficiency benefits of the integration
– need not be essential
– benefits must not be achievable through practical, significantly less restrictive means
10
Distinguishing Mergers
• Mergers typically end all competition between the parties in the relevant market(s); joint ventures preserve competition between the parties in other markets
• Mergers are designed to be permanent; joint ventures typically are of limited duration
11
Forms of Joint Ventures
• Essential Organizations/Market Creation – competing companies create the marketplace in which competition takes place
• Teaming Arrangements – complete integration, albeit for limited duration (typically project specific)
12
Forms of Joint Ventures
• Cost Centers – parents compete downstream but combine one or more upstream functions
• Downstream combinations – parents compete upstream but merge one or more downstream functions into a single entity
• Patent Pools and Other IP Licensing Collaborators – common marketing of a bundle of IP each element is both necessary to a downstream function and complementary to other IP in the bundle
13
The Limits of Jointness
• Cost Centers – San Diego Realtors; Visa/MasterCard
• Downstream Combinations – Dagher
• Patent Pools – 3G Wireless
14
Illustrations of Issues inCost Center Joint Ventures
• Collusion – San Diego Realtors
Competitors may collaborate to reduce costs but may not extend that collaboration to reduce downstream competition
• Exclusion – Visa/MasterCard
Competitors may collaborate to reduce costs but may not do so in ways that unnecessarily preclude others from competing downstream
15
Collusion Issues in CostCenter Joint Ventures
• Participants to cost center JV must avoid collusion with respect to prices of downstream services
• Courts endorse the efficiency enhancing potential of cost center JV, but require restrictions on the parties to the venture to be reasonably necessary to achieving those efficiencies
16
San Diego Realtors
• Combination of multiple real estate databases into a single database with complete San Diego coverage was recognized as a benefit
• But benefit did not justify collusion between Multiple Listing Services (“MLS”) in what they charged individual realtors for support services related to database access
17
San Diego Realtors: Pre-JV Stylized Facts
DBi - database of real estate listing
- Multiple listing services
- realtors
MLSj
X
KEY FACTS
•No database covered entire area
•No MLS had access to all databases
•Realtors subscribed to multiple MLS
•Realtors had competitive options for all databases
MLS1
MLS2 MLS3
MLS11
MLS10
MLS9 MLS8 MLS7
MLS4
MLS5
MLS6
DB1 DB2
DB3 DB4
x x x xx x x x x x xx
xx
xx
x
x
x
xx
xxxxxxxxxxxx
x
xx
xxx
xx xxx x xxxxxx
xx
xx
x
xx
x x x x x x x xx
xx
xx
x
x
x
x
x
18
San Diego Realtors: Post-JV Stylized Facts
DB - single database
- Multiple testing services
- realtors
MLSj
X
KEY FACTS
•JV created a single database covering entire area
•Any realtor could access the entire database through one MLS
•But MLSs colluded on price for support services
MLS1MLS2 MLS3
MLS11
MLS10
MLS9
MLS8 MLS7
MLS4
MLS5
MLS6
CombinedDB
xx
xx
xx
x
x
x
xx
xx
xx
x
x
x xx
x x x
x
x
x
xx
x
x
xx
xx
x
xx
xx x
xx
xx
xx
x
x
x x xx
xx
x
xx x
xx
x
19
Exclusion Issues in Cost Center Joint Ventures
• Participants to cost center JV’s must avoid unnecessarily restrictive rules that preclude downstream competition
• Courts will carefully scrutinize restrictions that reduce downstream competition
20
Visa/MasterCard
• Visa and MasterCard both allowed “duality” – a practice of allowing a bank to issue the cards of both networks
• But both Visa and MasterCard precluded member banks from issuing cards from networks other than Visa or MasterCard
• Duality undercut purported justification for excluding other networks - creating “cohesion” among card issuing banks
• Absence of exclusivity rules outside U.S. also undercut the purported justification since there was no evidence of harm from non-exclusivity
21
Simplified Credit Card Payment System
Card Holders
Issuing Banks
Payment Card Networks
Merchant Banks
Merchants
millions of card holders
thousands of issuing banks
four networks
thousands of merchant banks
millions of merchants
22
Effect of Exclusivity was to Disadvantage Competing Payment Networks
Card Holders
Merchant Banks
Merchants
Issuing Banks
Issuing Banks
Visa
MasterCard
Discover
Amex
•Banks issuing Visa and MasterCard could not issue cards processed on other networks
•But at the same time, they could not give up Visa and MasterCard due to the popularity of those cards
•Effect of exclusivity was to preclude competing networks from growth opportunities through banks already issuing Visa or MasterCard
23
Issues in Downstream Combinations
• Must achieve single entity status under Copperweld
• Absent single entity status, restrictions must be reasonably necessary to achieve the benefits of the JV
24
Petroleum Products Stages of Production
Exploration
Production
Refining
Marketing
Retailing
upstream
downstream
commonly handled by vertically integrated petroleum companies
commonly handled by independent retailers under license or franchise
25
Dagher Pre-JV Stylized Facts
Shell
Exploration
Production
Refining
Marketing
Retailing
Texaco
Exploration
Production
Refining
Marketing
Retailing
26
Dagher Post-JV Stylized Facts
Shell Texaco
Exploration
Production
Exploration
Production
Joint Venture
Refining
Marketing
Independents
Retailing
27
Dagher Key Facts
• Term – terminable on 2 years notice after 5 years; otherwise evergreen
• Noncompete agreements – preclude downstream competition with the JV by either parent
• Parents retained control of trademarks
• JV handled licensing of retailers and pricing to retailers
• FTC and State Attorneys General reviewed transaction as a merger and required divestitures before allowing it to proceed
“In all subsequent mergers undertaken by the Commission, we have considered Texaco and Shell to be a single entity when evaluating downstream market concentration.”
– concurring statement of Commissioners Anthony and Thompson in Chevron/Texaco
28
Single-Entity Status in Dagher
• Not explicitly analyzed in Dagher but the implication of the decision was that the JV was not a single entity
• In Copperweld the Supreme Court found that a corporation and its wholly–owned subsidiary were a single entity, legally incapable of conspiring
– joint decision by parent and subsidiary was not a “sudden joining of two independent sources of economic power previously pursuing separate interests”
– the coming together of the parent and the subsidiary was properly judged under Section 7 of the Clayton Act, not through application of Sherman Act Section 1 to every corporate decision
29
Single-Entity Status in Dagher
• Prior FTC/State AG review under Section 7 of the Clayton Act should have ensured that subsequent pricing decisions of the JV would be treated as the actions of a single entity rather than as a conspiracy among the owners of the entity
• But Ninth Circuit may have been influenced by the fact that Texaco and Shell maintained an appearance of independence while under joint control
30
Issues in Patent Pools and OtherIP Licensing Collaborations
• Over inclusiveness
• Collusion among licensors
• Collusion among licensees
31
Key Features of 3G PatentLicensing Arrangement
• Five versions of third generation (“3G”) wireless telecommunications technology
• More than 100 companies holding IP rights essential to development on one or more versions of 3G
• Desire by industry participants to foster development of 3G and eventual wide-spread usage
• Solution – consolidated licensing arrangements with safeguards
32
Guidance for Patent Pools
As a general matter• the pool must be limited to patents that are necessary to practice
the technology in question
• essentially must be determined by a common but independent expert
• the patents deemed essential must be clearly identified to prospective licensees
• prospective licensees must be offered the opportunity to license individual patents á la carte as well as in a package
33
Guidance for Patent Pools
For consolidated arrangements that license competing technologies
• proof, rather than assertions, that tangible efficiencies will arise from the consolidated licensing arrangement
• independent determination of key variables in any royalty formula used across competing technologies
• safeguards against the flow of competitively sensitive information among licensors of the competing technologies
34
Appendix
Resource Materials On Joint Ventures
35
Joint Venture Case Law
Freeman et al. v. San Diego Association of Realtors et al. (9th Cir. 2003)
United States v. Visa U.S.A., Inc., et al.
(2nd Cir. 2003)
Dagher et al. v. Saudi Refining Inc. et al. (9th Cir. 2004)
36
Federal Trade Commission andU.S. Department of Justice
Guidance on Joint Ventures
Antitrust Guidelines for Collaboration Among Competitors (2000)
Statement of Antitrust Enforcement Policy in Healthcare (1996)
Antitrust Guidelines for the Licensing of Intellectual Property (1995)
Horizontal Merger Guidelines (1992, revised 1997)
37
Other Government MaterialsRelating to Joint Ventures
• Movielink Joint Venture
• MusicNet Joint Venture
• Patent Pool Business Review Letters
– 3G Wireless (2003)
– DVD – Hitachi/Matsushita (1999)
– DVD – Philips/Sony (1998)
– MPEG – LA (1999)
38
About the Author
Paul T. Denis is a partner in the Antitrust/Competition Practice Group at Dechert LLP, where his practice is devoted primarily to business combinations and government investigations. Previously, Paul served in the Antitrust Division as Counselor to the Assistant Attorney General, Acting Deputy Assistant Attorney General for Regulation, and principal draftsman of the 1992 Horizontal Merger Guidelines.
Dechert LLP
Washington, DC
(202) 261-3430
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