ANTITRUST GUIDELINES FOR COLLABORATIONS AMONG COMPETITORS HAVE IMPACT ON E-COMMERCE VENTURES By: Edward C. LaRose and Vincent B. Lynch 1 INTRODUCTION To compete in global markets, U.S. companies that may otherwise be business competitors may need to collaborate to enhance their efficiencies and competitive stature. Competitor collaborations may allow companies to engage in activities which, hopefully, will enhance consumer welfare in the form of more and better products and lower prices. Historically, competitor collaborations have not been automatically unlawful under the federal antitrust laws. However, concern with the significant risks associated with actual or perceived antitrust violations have caused competitors to tread carefully in planning and implementing collaborative efforts. In April 2000, the Federal Trade Commission ( FTC ) and the Department of Justice ( DOJ ) issued Antitrust Guidelines for Collaborations Among Competitors ( Guidelines ) 2 to explain how these antitrust enforcement agencies will assess collaborative activities by and among competitors under the federal antitrust laws. 3 Issuance of the Guidelines coincidentally corresponds with the explosion of internet business-to-business, B2B, exchanges. Although the Guidelines explain general antitrust principles that are relevant to B2B exchanges, they offer scant practical guidelines on the issues facing B2B exchanges. 4 As cooperative efforts among competitors emerge, the Guidelines should help explain how the FTC and the DOJ will analyze antitrust issues raised by competitor collaborations to assist businesses in assessing the likelihood of an antitrust challenge.... 5
The Guidelines provide business people and their counsel an important analytical framework for evaluating the antitrust implications of business arrangements with competitors. FTC Commissioner Thompson stated that [the guidelines] represent an important step in providing the public with an overview of an analysis of strategic collaborations and responding to an increasingly dynamic marketplace. 6 Indeed, Companies that enter strategic alliances often do so in response to the dynamic competitive forces that are reshaping much of our economy. Moreover, many collaborations are being undertaken to enable companies to expand into foreign markets, fund expensive innovation and research efforts, and lower costs. But, some may raise competition issues. 7 The Guidelines offer flexible principles of antitrust analysis applicable to any collaborative activity by or among competitors. 8 However, companies likely will proceed conservatively in implementing any competitor collaboration. 9 FEAR OR THREAT OF GOVERNMENTAL CHALLENGE Antitrust enforcement agencies wield broad investigatory and enforcement powers. The threat or actual use of these powers by the FTC or the DOJ to challenge anti-competitive conduct may discourage collaborative arrangements between or among competitors. Price fixing, bid-rigging, and market allocation are but a few examples of conduct historically condemned as illegal per se under the antitrust laws. Indeed, the DOJ frequently prosecutes price-fixing agreements as criminal offenses. 10 Consequently, competitors are wary to engage in otherwise lawful joint activities which, even though efficiency enhancing, may increase the risk of scrutiny under federal antitrust laws. As a result, many competitor collaborations, including B2B and other electronic
commerce exchanges, are proceeding slowly. Technologically, such exchanges are extremely complicated and will require much time to organize. Additionally, because of the involvement of competitors in such ventures, antitrust implications abound. Indeed, because such ventures may entail extensive cooperation and information sharing, some companies are wary to enter such ventures. For example, Walmart decided not to join K-Mart and Safeway on the World Wide Retail Exchange because it did not want to link-up with its competitors. 11 Companies also are concerned that the sharing of information with a competitor could be viewed as unlawful collusive activity. Thus, the mere hint of FTC concern could cause... industry exchanges to put their plans on hold to see what, if anything, the FTC says. 12 THE GUIDELINES: AN ANTITRUST ANALYTICAL FRAMEWORK The Guidelines provide an analytical tool to evaluate the risks of an antitrust challenge to a competitor collaboration. These Guidelines should promote procompetitive collaborations between and among competitors. 13 Indeed, the Guidelines reflect the FTC s and DOJ s recognition that some arrangements between or among competitors pose no antitrust concerns, at all. Competitor Collaborations 3
The Guidelines define a competitor collaboration as a set of one or more agreements, other than merger agreements, between or among competitors to engage in economic activity, and the resulting activity. 14 Although the list of collaborative activities is not exhaustive, the Guidelines state that a collaboration includes one or more business activities, such as research and development, production, marketing, distribution, sales or purchasing. 15 The term competitor includes actual and potential competitors. 16 Agreements Challenged as Per Se Illegal Some arrangements between or among competitors are devoid of competitive benefits and are viewed as illegal per se under the antitrust laws. For example, pricefixing agreements between competitors are condemned under the federal antitrust laws because no pro-competitive benefits flow from such an agreement. 17 Agreements among competitors that always or almost always tend to raise price or reduce output are per se illegal. 18 They are presumptively illegal without inquiry into their alleged business purposes, anti-competitive harms, pro-competitive benefits or overall competitive effect. 19 To assess whether a competitor collaboration should be condemned as illegal per se, the Guidelines provide a two step process. First, the enforcement agencies determine whether or not the agreement is of the type generally classified as a per se offense of the antitrust laws. Second, the enforcement agencies assess whether any agreement involves circumstances that may justify a Rule of Reason analysis. If competitors in an efficiency-enhancing integration of economic activity enter into an agreement that is reasonably related to that integration and is reasonably necessary to 4
achieve its pro-competitive benefits, such an agreement may be subject to a Rule of Reason analysis. 20 The integration must be a type that would generate cognizable pro-competitive benefits. The collaborators must be able to substantiate the claimed efficiencies and these efficiencies must be potentially pro-competitive to avoid per se analysis. 21 Rule of Reason: A Flexible Inquiry The Guidelines anticipate that most competitor collaborations will be assessed under the Rule of Reason where the pro-competitive benefits are weighed against anticompetitive concerns. If, on balance, the arrangement is pro-competitive, neither the FTC nor the DOJ will challenge the collaboration under the federal antitrust laws. Rule of Reason analysis compares competition with and without the relevant collaboration agreement. 22 Ultimately, the question is whether the collaboration likely harms competition by increasing the ability or motive to raise prices above, or reduce out-put, quality, service or innovation, below what would likely have existed absent the collaboration. 23 The Rule of Reason analysis focuses on the business purpose of the collaboration and whether the agreement has caused any competitive harm. 24 The Guidelines address two variations of the Rule of Reason analysis: first, an abbreviated analysis that focuses on the nature of the agreement and the presence of market power; and second, a comprehensive analysis involving a detailed market analysis to determine whether anti-competitive harm is outweighed by factors showing potential pro-competitive benefits. 25 The Rule of Reason analysis is a flexible inquiry which will vary in focus and specificity in three general ways depending on market conditions and the nature of the agreement. 5
First, if the nature of the agreement and the absence of market power establishes the absence of anti-competitive harm, then no agency should challenge the agreement. 26 Second, if a competitive collaboration poses a likelihood of anti-competitive harm, or anti-competitive harm has actually resulted, then the collaboration would be subject to challenge absent countervailing pro-competitive benefits. Such scrutiny would occur without any detailed market analysis. 27 Third, if the nature of the arrangement and market conditions suggest only the possibility of anti-competitive harm, the Guidelines suggest use of a detailed market analysis to verify the likelihood and magnitude of anticompetitive harm in the relevant market. 28 If the cognizable efficiencies of the collaboration outweigh any anti-competitive harm and the collaboration represents the least restrictive alternative for realizing those efficiencies, the Guidelines suggest such an agreement will not be challenged. 29 The Safety Zones The Guidelines identify two antitrust safety zones for competitor collaborations. 30 The first safety zone exists for a competitor collaboration where the market share of the collaboration and its participants collectively account for no more than 20% of each relevant market in which competition may be affected. 31 The second antitrust safety zone applies to research and development collaborations in an innovation market. 32 The enforcement agencies will not challenge a competitor collaboration: in an innovation market where three or more independently controlled research efforts in addition to those of the collaboration, possess the required specialized assets or characteristics and the incentive to engage in R&D that is a close substitute for the R&D activity of the collaboration. 33 6
In determining whether independently controlled R&D efforts are close substitutes, the enforcement Agencies will consider the nature, scope and magnitude of the R&D efforts, their access to financial support their, access to intellectual property, skilled personnel, or other specialized assets, their timing, and their ability, either acting alone or through others, to successfully commercialize innovations. 34 THE GUIDELINES IMPLICATIONS FOR B2B JOINT BUYING AND SELLING EXCHANGES With the emergence of electronic exchanges, or marketplaces, that use software systems and networks for buying and selling products over the internet, companies, including competitors, are forming alliances or entering other agreements designed to enhance B2B commerce. 35 The FTC already is investigating an internet site planned by the three largest automobile makers - Ford, General Motors and Daimler Chrysler. 36 Federal and state antitrust enforcement agencies will likely examine many more of these B2B exchanges to ensure compliance with federal antitrust laws. In addition to the Ford-GM-Chrysler venture, other examples of already announced or initiated B2B exchanges include: $ An agreement among 11 major retailers, including K-Mart and Safe-Way, to form a worldwide retail exchange; $ Sears Roebuck & Co. and Kroger s global net exchange; $ An auto supply exchange involving Eden Corp., Dana Corp., and Motorola, Inc. $ A consumer products exchange by Proctor & Gamble, Nestle S.A. and H. G. Heinz Co. $ International Paper, Georgia-Pacific Corp., and Weyerhaeuser created an exchange to allow customers to buy a broad range of paper and forest products on line. 37 7
The Guidelines offer little practical specific guidance to corporations and their antitrust counsel who are seeking to implement arrangements designed to improve business performance in the new economy. Yet, these arrangements may pose serious antitrust implications. Clearly, B2B exchanges can be analyzed to see if they fall within the first safety zone provided in the Guidelines. If the exchange involves competitors where the market share of the collaboration and its participants collectively amount for no more than 20% of the relevant market, the exchange may not face scrutiny by antitrust enforcement agencies. How the agencies will analyze these exchanges likely will vary depending upon the circumstances. Most antitrust attorneys are keeping a close eye on the government s moves in this area. The FTC held a public workshop on B2B marketplaces on June 29, 2000 to enhance understanding of how B2B electronic marketplaces function and the means by which they may generate efficiencies,... and to identify any antitrust issues they raise. 38 Generally, there are two main types of B2B exchange sites: (1) participantcontrolled, and (2) proprietary or independent networks. Participant-controlled exchanges may face greater antitrust scrutiny and exposure than independentlycontrolled sites. Although the FTC and the DOJ appreciate the potential for efficiencies gained through these exchanges, one of the biggest concerns to antitrust enforcers is the potential for collusion among competitors. 39 Electronic communication of price is instantly transparent, and although that can be a boon to consumers in many settings, since it forces firms to bid more aggressively with one another, it also can facilitate collusion among rival buyers or rival sellers. 40 8
Accordingly, any web-based purchasing and selling activities including those on B2B exchanges, should be examined to assess compliance with the antitrust laws. This antitrust assessment should be reevaluated on a periodic basis as the venture evolves. In evaluating participation in a B2B exchange, would-be participants should examine, among many things, (1) the expected efficiencies of the venture; (2) the nature and size of the relevant market; (3) the market shares of the participants and the venture; (4) membership criteria and the possibility of exclusionary practices; (5) protections to prevent collusion among buyers or sellers; and (6) the risks of monopoly or monopsony power. The Statements of Antitrust Enforcement Policy in Healthcare may also help in addressing concerns raised by B2B exchanges. 41 These Statements in part, address the dissemination of fee and non-fee related information to purchasers; sharing of price and cost information and joint purchasing agreements. 42 The Department of Justice and Federal Trade Guidelines for the Dissemination of Price or Cost Data are particularly instructive. A safety zone exists for companies that exchange price and cost information with competitors when: (1) the survey is managed by a third party; (2) the information provided by survey participants is based on data more than three-months old; (3) there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider s data represents more than 25% on a weighted basis of that statistic, and any such information disseminated is sufficiently aggregated such that it would not allow the recipients to identify the prices charged or paid by any particular provider. 43 B2B exchanges reduce the risk of pass antitrust scrutiny if there is no need for 9
exchange of price or cost data between competitors to complete the exchange (indeed the data and information can generally be controlled by an independent third party) and the exchange is made available to all companies interested in participating in the exchange. The purpose of these exchanges is to create efficiencies to reduce prices for supplies needed for businesses to operate. Independent exchanges have a vested interest in opening up the exchange to as many interested companies as possible. The exchange can be operated without any dissemination of the costs paid by any participant or the prices charged by any particular supplier. One example of a protective technical measure is a fire wall built between competitor s databases to protect the sharing of competitively sensitive information that may facilitate collusion. CONCLUSION The Guidelines for Collaboration Among Competitors appear to be a reaction to the globalization of the economy, the growth of e-commerce and a need to re-state enforcement views towards arrangements designed to enhance efficiencies. The Guidelines do not rewrite the antitrust laws. The practical implication of the guidelines is that federal antitrust enforcement agencies are attempting to provide guidance to businesses evaluating their compliance with the antitrust laws when entering collaborative ventures with competitors. In most instances, competitor collaborations will be subject to a Rule of Reason analysis will apply. However, certain agreements that always or almost always tend to raise price or reduce output will be challenged as per se illegal. The Guidelines are designed to encourage efficiency and enhance pro- 10
competitive activity. However, businesses should conduct a detailed factual analysis of their proposed collaborations to ensure compliance with all applicable antitrust laws. The Guidelines provide a general framework for such analysis. ENDNOTES 1. Mr. LaRose is a shareholder and Mr. Lynch is an associate of Trenam, Kemker, Scharf, Barkin, Frye, O Neill & Mullis, P.A., in Tampa, Florida. 2. The FTC/DOJ issued a draft of the Guidelines on October 1, 1999 for public comment. The Guidelines are available at http:// www.ftc.gov. 3. The FTC and DOJ have previously issued guidelines regarding mergers, healthcare and intellectual property. See The Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Healthcare (1996), 4 Trade Regulation Reports (CCH) 13,104. The Department of Justice, Federal Trade Commission, Antitrust Division, 1992 Horizontal Merger Guidelines 57 Fed. Reg 41552 1.21; United States Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property 4 (1995). 4. The FTC and other groups have conducted workshops to address antitrust issues associated with B2B exchanges. See www.ftc.gov/bc/b2b. 5. See Guidelines at p. 1. 6. Commissioners Thomas B. Leary and Mozel W. Thompson issued statements supporting the significance of the Guidelines and the guidance they will provide toward the articulation and synthesis of relevant antitrust principles in an important area of antitrust law. See Statement of Commissioner Thomas B. Leary; Statement of Commissioner Mozel W. Thompson at http://www.ftc.gov/05/2000/04/antitrustguide. 7. Statement of Commissioner Mozel W. Thompson, supra. 8. Id. 9. See Andrea Foster, B2B s Raise Antitrust Concerns, The National Law Journal, May 8, 2000. 10. See United States v. Maloof, 205 F. 3d 819 (5 th Cir. 2000); United States v. Dispoz-O- Plastics, Inc., 172 F. 3d 275 (3 rd Cir. 1999). 11. See Clare Ansberry, Let s Build an Online Supply Network! Wall Street Journal, April 11
17, 2000, at B10. 12. The Wall Street Journal, Market Place, Monday, April 17, 2000, p B-10. 13. Guidelines at 1. 14. Guidelines at 2. 15. Id. 16. The FTC and DOJ distinguish between a competitor collaboration and a merger. The Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) 13, 104, apply to any agreement that eliminates competition among the participants in a relevant market and the collaboration does not terminate within a sufficiently limited period by its own specific and express terms. The Guidelines are not applicable to such an agreement. 17. See, e.g., United States v. Trenton Potteries Co., 273 U. S. 392 (1927). 18. See, e.g., Broadcast Music, Inc., v. Columbia Broadcasting System, Inc., 441 U. S. 1 (1979). 19. Guidelines at 8. 20. Guidelines at 8-9. 21. Guidelines at 8, 23-25. 22. Guidelines at 10. 23. Id. 24. Id. 25. Guidelines at 10-11. 26. Guidelines at p. 10. 27. Guidelines at 10-11. 28. Id. 29. Guidelines at 11. 30. These safety zones do not apply to collaborations that are per se illegal, would be challenged without a detailed market analysis, or would be treated as a horizontal merger. Guidelines at 25-26. 12
31. Guidelines at 26. 32. Id at 26-27. 33. Id. 34. Id. 35. An exchange model may involve the matching of sellers and buyers of products with prices determined by a bid-ask system. Some competitors are teaming up to form group buying exchanges to acquire, at lower costs, the supplies they need to operate. 36. See Clare Ansberry, Let s Build an Online Supply Network! Wall Street Journal, April 17, 2000, at B10. 37. Id. 38. FTC, Press Release - FTC to Hold Public Workshop to Examine Competition Issues in Business-to-Business Electronic Marketplaces, May 4, 2000. 39. David Balto, Assistant Director of the Federal Trade Commission s Office of Policy and Evaluation, B2B s Raise Antitrust Concerns, National Law Journal, May 8, 2000. 40. Id. 41. See supra Note 3 42. See supra Note 3. 43. See supra Note 3. 13