International Joint Ventures: What Antitrust Lawyers Need to Know

Transcription

1 International Joint Ventures: What Antitrust Lawyers Need to Know Monday, January 28, :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

2 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

3 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

4 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

5 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

6 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

7 Policy Discussion Enforcement efficiency and cooperation Comments on convergence and divergence in standards Business planning across jurisdiction 7

8 Questions 8

9 Antitrust Analysis of JVs: US Framework & Counseling Tools January 28, 2013 Fiona Schaeffer

10 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

11 Potential Competition Benefits & Concerns Procompetitive Benefits Create new products & technology Increase output Lower costs Other synergies from pooling complementary resources Facilitate entry Anticompetitive Effects Facilitate collusion in same or related markets Create or enhance market power Foreclose competitors Eliminate potential competition 3

12 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 Newly formed unincorporated JVs: see 16 C.F.R 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

13 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

14 Key Questions to Analyze Competitive Effects Purpose and Scope What is the stated business purpose? Can the parties do this alone? What are the benefits to the parties and do they also benefit consumers? What assets are being contributed? What markets are affected? Do the parents or will the JV have market shares > 20% in the affected market(s)? 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? Governance and Financial Terms Will one of the parties control the JV? Neither party? Joint control? What is each party s financial interest in the JV? 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) 6

15 Spectrum of Competitor Collaborations No integration of assets or financial risk Sealy & Topco JV integrates some assets & financial risk, but does not eliminate competition between partners or with parents JV undertakes independent economic activity and eliminates all competition between the partners/parents in the relevant market for at least 10 years Full merger St. Francis Hospital NFL BMI Dagher BHP/Rio Tinto BAAA/IB European Night Services Original1 Restrictions on price & output are per se unlawful or restrictions on object in the EU Rule of reason (US) Exemption Article 101(3) (EU) Full Function JV (EU) Single Entity (US) 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] 7

16 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. 8

17 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). 9

18 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

19 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. 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). 11

20 Types of Joint Ventures R&D Joint Purchasing Production Marketing/Selling Network 12

21 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

22 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 14

23 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 15

24 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 16

25 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 17

26 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 18

27 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

28 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 Yes No Likely Per Se Illegal Business Purpose? Does agreement increase ability/incentive to raise price or reduce output, quality, service, innovation, below what would prevail absent the agreement? Yes Market Power? Nature of the restraint? Are there procompetitive benefits that can override this harm? Yes Undertake more detailed analysis of: Entry Conditions No No Is there a less restrictive alternative? Raise price? Does the agreement tend to: If based on these factors, there is no competitive harm, a detailed analysis is not undertaken No No or Illegal Restraint Legal Ancillary Restraint Reduce output? Yes Illegal Naked Restraint 20

29 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. 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. 21

30 Information Sharing Issues & Firewalls 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 Generally, aggregated and historical information is less sensitive During Operation Exchange of competitively sensitive information among JV participants can facilitate collusion and is subject to same reasonably necessary analysis as other restraints 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 22

31 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 23

32 Key Steps in US Antitrust Analysis of Joint Ventures Are the parties competitors? Yes Does one of the parties control the joint venture? No Is the joint venture economically integrated? No Does the joint venture create other efficiencies? No Pricing and other decisions with competitive impact may be per se illegal regardless of market power. No Yes Yes Yes Few, if any antitrust issues. Does the other party have separate operations that compete with the joint venture? No Yes Need to set up firewalls. Does either party have separate operations that compete with the joint venture? No Yes Need to set up firewalls. Are restrictions on competition reasonably related to those efficiencies? Yes No Pricing and other decisions with competitive impact may be per se illegal regardless of market power. Are there restrictions on competition between the joint venture partners beyond those necessary to make the joint venture work? No Need market analysis to determine whether joint venture would have market power. Yes Need separate analysis of effects on competition of those restrictions. Are there restrictions on competition between the joint venture partners beyond those necessary to make the joint venture work? No Need market analysis to determine whether joint venture would have market power. Yes 24 Need separate analysis of effects on competition of those restrictions. Does either party have separate operations that compete with the joint venture? No Are there restrictions on competition between the joint venture partners beyond those necessary to make the joint venture work? No Need market analysis to determine whether joint venture would have market power. Yes Need to set up firewalls.

33 Resources American Needle, Inc. v. National Football League, 130 S. Ct (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 ALC- GWG (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 European Night Services, available at FTC/DOJ Antitrust Guidelines for the Licensing of Intellectual Property, available at FTC/DOJ Competitor Collaboration Guidelines, available at FTC/DOJ Statements of Antitrust Enforcement Policy in Health Care, available at 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 25