United States: Joint Ventures
Most joint ventures are lawful under section 1 of the Sherman Act1 because they bring together independent and complementary resources that promote competition. The US antitrust agencies have brought few cases against joint ventures and other competitor collaborations. Nevertheless, some ventures can reduce competition by combining competing resources and exercising market power, and private plaintiffs have had some success challenging joint ventures.
Once formed, joint ventures may be sufficiently integrated that their activity is akin to that of a single economic entity without the capacity to conspire. As such, they may be beyond the reach of section 1 of the Sherman Act because Section 1 requires an agreement among independent actors. But as recent developments show, courts are still working through the application of pertinent Supreme Court precedent and have inconsistently weighed the various factors of the single-entity doctrine when drawing their conclusions.
Given the uncertainty associated with the single-entity doctrine, joint ventures should carefully consider whether their conduct may constitute an unreasonable restraint of trade in violation of section 1 of the Sherman Act. Such an assessment requires the parties involved to consider current market dynamics, such as market power and concentration, as well as the likely competitive effects of their conduct.
Copperweld and the capacity of joint venture members to conspire
Section 1 of the Sherman Act prohibits agreements that unreasonably restrain trade. The elements of a section 1 violation are:
• a contract, combination, or conspiracy between two or more independent entities;
• an unreasonable restraint of trade; and
• an effect on interstate commerce.
For an agreement between two or more competitors to violate section 1 of the Sherman Act, the competitors must be ‘independent entities’. Since 1984, the Supreme Court has addressed on three occasions whether companies or joint ventures are independent entities and capable of conspiring. At the heart of the Supreme Court’s discussions on this matter is the single-entity doctrine, which holds that if a joint venture operates as a single economic entity, the members of that joint venture are incapable of conspiring with each other.
In Copperweld Corp v Independence Tube Corp,2 the Supreme Court held that a parent and its wholly owned subsidiary were not legally capable of conspiring. Rather than focusing on the fact that a parent and wholly owned subsidiary were legally distinct entities, the Supreme Court analysed the functional relationship between the two entities. The key question in determining whether activity was unilateral or concerted was whether it united ‘economic power that was previously pursuing divergent goals’.3 The Supreme Court held that a corporation and its wholly owned subsidiary have a complete unity of interest.4
In Texaco, Inc v Dagher,5 the Supreme Court held that price-setting was not a per se unlawful activity of a joint venture where the parties had contributed all their competing assets and the joint venture operated as a single entity. In Dagher, the Shell Oil Company and Texaco contributed all of their downstream energy businesses to a joint venture. The joint venture sold Texaco and Shell branded gasoline. Plaintiffs asserted that the common setting of prices for the two brands constituted a per se violation of the Sherman Act.6 The Supreme Court disagreed, explaining that ‘the pricing policy challenged here amounts to little more than price setting by a single entity – albeit within the context of a joint venture – and not a pricing agreement between competing entities with respect to their competing products’.7
In American Needle, Inc v NFL,8 the Supreme Court considered the question of whether joint venture partners are capable of agreeing under Section 1. The defendants in American Needle included the National Football League (NFL), its 32 member football teams, and National Football League Properties (NFLP), an entity formed by the NFL and its members that developed, licensed and marketed the intellectual property of the NFL and its teams. Each NFL team had to approve each NFLP trademark licence. Plaintiff American Needle had been granted a non-exclusive licence to manufacture and sell NFL apparel until December 2000. When the NFLP declined to renew American Needle’s existing licence, American Needle sued, alleging that the decision to refuse to license American Needle constituted an unlawful agreement between the NFL, NFLP and NFL teams.
According to the Supreme Court, the relevant inquiry is:
whether there is a [conspiracy] amongst ‘separate economic actors pursuing separate economic interests,’ such that the agreement ‘deprives the marketplace of independent centers of decision making,’ and therefore the ‘diversity of entrepreneurial interests.’9
The answer would be determined by the ‘competitive reality’, and not merely by the legal form of the entities in question.10
The Supreme Court found that the NFL teams did not possess a unity of interests. According to the Supreme Court, the teams competed in various ways – for fans, for tickets, for personnel and also in the market for intellectual property. The Supreme Court also concluded that despite the fact that the NFL and its member teams jointly created the NFLP, they were capable of conspiring with the NFLP. The Supreme Court was not persuaded by the fact that the NFLP had its own management and the NFL teams shared NFLP profits on an equal basis. The Supreme Court explained that agreements within a single firm are treated as independent action and beyond the reach of section 1 only if the firm and actors are seeking to maximise the firm’s profits.11 Because decisions of the NFLP required the agreement of each owner and each NFL team continued to own its trademark, the Supreme Court found that the teams were ‘separately controlled . . . with economic interests that are distinct from the NFLP’s financial well-being’.12
Lower courts have not applied these cases consistently, differing on which factors are important for the single-entity analysis and arriving at differing conclusions. For example, In re Credit Default Swaps Antitrust Litigation, the US District Court for the Southern District of New York focused on the ‘centralised decision-making’ aspect of American Needle when deciding that an independent legal entity was capable of conspiring with one or more of its owners, and gave little or no weight to some of the other factors articulated in that decision.13 Conversely, in Top Rank Inc v Alan Haymon, the US District Court for the Central District of California concluded that a defendant entity and its investor were not capable of conspiring by focusing on whether the parties had a complete unity of interest.14
Disagreement on how to conduct the single-entity analysis was particularly stark in the Sixth Circuit’s decision in Medical Center at Elizabeth Place, LLC v Atrium Health System.15 The majority interpreted American Needle as requiring an inquiry into the actual conduct of the joint venture to determine whether the members were separate, competing entities or if the joint venture was a single centre of decision-making.16 The members retained ownership of their assets and held themselves out to the public as independent competitors, leading the majority to conclude that the members were capable of conspiring under Copperweld.17 The dissent argued that the proper application of American Needle should be to focus on the joint operating agreements.18 The dissent concluded that if a single entity is given operational control over the separate members, then Copperweld should apply.19
Recently, in In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation,20 the US District Court for the Eastern District of Pennsylvania focused on the operations of the joint venture and the economic realities of the two members when it rejected arguments that it should apply Copperweld’s single-entity doctrine to a patent holder and exclusive licensee. In re Suboxone involved two pharmaceutical drug manufacturers that allegedly conspired to extend the term of drug exclusivity and prevent generic versions of a drug from entering the market. The defendants first argued that they did not have the capacity to conspire under Copperweld because their relationship constituted a joint venture that warranted treatment as a single entity.21 The court made clear that for the defendants to be able to take advantage of the single-entity doctrine, the relationship had to be more than ‘a company and its agents acting jointly for a common purpose’.22 The court distinguished the defendant’s joint venture from others that courts have found to be a single entity by noting that, in this case, neither defendant was an inseparable part of the business structure of the other (eg, handling the day-to-day operations of the other business) and neither defendant’s economic success was tied fully to the economic success of the other.23
The court in In re Suboxone also rejected the defendants’ argument that their patent licensor–licensee relationship created a single-entity structure under Copperweld24 because the patent rights were ancillary to the alleged anticompetitive conduct.25 The alleged anticompetitive conduct included the two companies coordinating to withdraw the brand-name product from the market, using safety concerns as a pretext to delay generic manufacturers obtaining Food and Drug Administration approval and entering the market.26 The court held that ‘the mere fact that this overall scheme included the existence of an exclusive license relationship between [the defendants]’ does not bring it ‘within the realm of the Copperweld doctrine’ and concluded that ‘the amended complaint describes two separate entities that engaged in concerted action to jointly advance their independent economic interests’.27
Joint ventures and unreasonable restraints of trade
If the members of a joint venture or other collaboration are independent entities and capable of conspiring, the joint venture may face antitrust liability if it engages in conduct that unreasonably restrains trade. Despite the broad language of the Sherman Act, only ‘unreasonable’ restraints on trade are prohibited. Some conduct, such as price-fixing, is per se unlawful, which is to say that such conduct is always unreasonable. Other conduct, like the formation of a joint venture, is typically reviewed under the rule of reason, which considers the degree of market power, pro-competitive justifications of the challenged conduct and potential anticompetitive effects. Trial courts have recently examined allegations of anticompetitive conduct by joint ventures related to exclusive dealing arrangements and product innovation.
There are well-recognised economic benefits associated with exclusive dealing arrangements, but these arrangements can raise foreclosure concerns under the Sherman or Clayton Acts. Such agreements are reviewed under the rule of reason and will only violate the antitrust laws if their effect is to ‘foreclose competition in a substantial share of the line of commerce affected’.28
In Power Analytics Corp v Operation Technology, Inc,29 the US District Court for the Central District of California evaluated whether an antitrust claim alleging an exclusive dealing arrangement in violation of section 1 of the Sherman Act could survive a motion to dismiss. The plaintiff alleged that the defendants, developers of software for use with power grids, had entered into ‘strategic partnerships’ and ‘cooperative agreements’ to jointly produce power grid design and management products.30 The court noted that a necessary component of an exclusive dealing claim is the existence of an exclusive contract.31 The plaintiff failed to identify any terms of exclusivity in the agreements but argued that the agreements were de facto exclusive.32 To succeed under a theory of de facto exclusivity, the court noted, the plaintiff needed to allege specific terms of the agreement that cause it to operate as an exclusivity agreement.33 Terms including purchasing requirements, volume or market share targets, or terms that are long in duration are indicative of de facto exclusivity because they serve to remove purchasers from the market.34 Conversely, exclusive agreements that have short terms or are readily terminable rarely run afoul of antitrust laws. The plaintiff in Power Analytics Corp did not allege specific terms that would indicate de facto exclusivity.
Additionally, the court in Power Analytics Corp explained that exclusive dealing will generally only be unlawful where the market is highly concentrated, the defendant possesses significant market power and there is some element of coercion present.35 Without these factors present, an exclusive dealing arrangement is unlikely to result in competitive harm. Moreover, the court clarified that the plaintiff must show harm to competition generally, not to itself as a single competitor.36 The plaintiffs failed to allege these market conditions existed and the court dismissed the antitrust
Development and introduction of new product
Joint ventures that are formed to innovate, develop and introduce a new product to the market may face complaints from competitors who fear that such innovation will adversely affect their ability to compete. Although it is well-settled that the introduction of a new product generally benefits consumers and is pro-competitive, the introduction of a new product alone does not excuse a joint venture from antitrust liability if the introduction of the product is combined with some other wrongful conduct.
In In re Suboxone, the defendants argued that the court should dismiss the plaintiffs’ antitrust claims because the introduction of a new drug to the market was pro-competitive.38 The court, however, found reasonable inferences that the introduction of the new product was coupled with a conspiracy to delay generic entry through product withdrawals and other delay tactics, and rejected the defendants’ motion to dismiss.39 The court noted that although product innovation generally benefits consumers and harms competitors, courts must look for evidence of ‘exclusionary or anticompetitive effects’ to distinguish conduct that defeats a competitor through innovation and product superiority and conduct that ‘impedes competition through means other than competition on the merits’.40
The lower courts continue to struggle to apply American Needle in a consistent, coherent manner. Companies should be aware of the uncertain legal standards in determining whether a joint venture will be treated as a single economic entity and therefore outside the scope of section 1 of the Sherman Act. Lower courts focus on a variety of factors when applying the single-entity doctrine to joint ventures and other collaborations, including the extent of joint operations within the joint venture and the degree to which the economic success of one member is tied to the other. Because it remains unclear which factors from Copperweld and the Supreme Court cases that followed weigh most heavily, joint ventures relying on the single-entity doctrine should be prepared to argue them all.
Additionally, joint ventures that are not outside of the scope of Section 1 of the Sherman Act should be careful to consider market conditions and the competitive effects of their conduct, even if the joint venture has strong pro-competitive justifications. Lower courts have recently stressed the importance of such factors in their analysis of exclusive dealing arrangements and product innovation by joint ventures.
This article is intended for educational and informational purposes only and does not constitute legal advice or services. These materials represent the views of and summaries by the authors. They do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients.
1 15 USC Section 1.
2 467 US 752 (1984).
3 467 US at 769.
4 Id at 771. The Court limited its holding to a parent-wholly owned subsidiary situation. Id at 767.
5 547 US 1 (2006).
6 An agreement among competitors to fix prices is presumptively unlawful. Other agreements are judged under the rule of reason to determine their overall impact on competition.
7 547 US at 6.
8 560 US 183 (2010).
9 560 US at 195 (citations omitted).
10 Id at 196.
11 Id at 200.
12 Id (citations omitted).
13 In re Credit Default Swaps Antitrust Litigation, No. 13md2476 (DLC), 2014 WL 4379112 at *12 (SDNY 4 September 2014).
14 Top Rank, Inc v Alan Haymon, et al, CVV 15-4961-JFW (MRWx), 2015 WL 9948936 at *16 (DC Cal. 16 October 2015).
15 The Medical Center at Elizabeth Place, LLC v Atrium Health System, 817 F.3d 934 (6th Cir. 2016).
16 Id at 939.
17 Id at 945.
18 Id at 948–949.
19 Id at 952.
20 In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, No. 16-cv-5073, 2017 WL 4910673 (ED Pa. 30 October 2017).
21 Id at *7.
24 Id at *8.
25 Id at *8–9.
26 Id at *9.
28 Omega Entl., Inc v Gilbarco, Inc, 127 F3d 1157, 1162 (9th Cir. 1997).
29 Power Analytics Corporation v Operation Technology, Inc, No. SA CV16-01955 JAK (FFMx), 2017 WL 5479638 (CD Ca. 10 May 2017).
30 Id at *4–5.
31 Id at *10.
35 Id at *15.
37 Id at *22.
38 In re Suboxone Antitrust Litigation, 2017 WL 4910673, at *9.
39 Id at *9–10.
40 Id at *9 (quoting New York ex rel. Schneiderman v Actavis PLC, 787 F3d 638, 652 (2d Cir. 2015)).