• ANTITRUST PUBLICATIONS AND OTHER MATERIALS BY RONALD W. dAVIS

JOINT VENTURES AND COLLABORATION AMONG COMPETITORS

Materials 

Discussion

Here is a scenario that is becoming more and more common. Each of two competitors have diverse product offerings, and significant market shares, in a properly defined market for widgets. The widget business is R&D intensive. Research discloses the potential for a new, specialized widget that would usefully extend the product lines of either or both companies, to the advantage of consumers. But the thing cannot be produced without infringing patents held by both firms. Neither is willing simply to license the other. Some form of collaboration, in the form of a joint venture entity or otherwise, is the only business approach acceptable to both firms.

The parties' intention is not to combine their respective widget businesses. (Either they don't want to merge, or they think that antitrust would prevent a merger, or both.) Each fully intends to go on  independently selling a widget product line including many products viewed by consumers as perfect or imperfect substitutes for the new and improved widget that is to be made and sold as part of the collaboration.

The scenario presents three significant antitrust issues. (The difficulty in resolving these issues in practical counseling situations is increased by the scarcity of case law directly on point.)

First, is it legal to collaborate at all? My article identified but did not discuss this issue. A good starting point for analysis would be the Antitrust Division/FTC Competitor Collaboration Guidelines. (My article on innovation markets also has some bearing on the question.)

Second, to what extent may the parents make lawful contractual promises not to produce products that compete directly with the joint product?

If we assume a favorable answer to the first question - the JV, in other words, is legal - then the answer to the second question is presumably that the non-compete clause may be limited in time, geographic space, and product scope, so that the parents are contractually obliged not to make products that are reasonable substitutes for the JV's products. This is familiar ground. My article did not address the second question, either.

But suppose the parents don't want a broad non-compete clause: they want a narrow one, because they do intend to offer products competitive with the JV's products? Hence the next question.

Third, may the parents limit the competition that will continue to exist - in other words, the competition between the joint entity's product and the similar product offerings in each parent's product line?

For example, may they agree on the prices the parent companies will charge for substitutable products, so as not to take too many sales away from the joint product? May they limit the time and manner in which they promote products that compete with the joint product?

In PolyGram the Federal Trade Commission flatly answered no. (Surprisingly, this appears to be just about the only authority directly addressing the question. Of course, much prior case law has an indirect bearing, but how to apply antitrust principles to this particular scenario remains subject to debate. That is why the Commission's decision is so significant.)

My article argued that the Commission's result is correct but that its reasoning is flawed and misleading, and offered a different rationale for the same result.

In stark contrast, an article in the same issue of Antitrust magazine contended that PolyGram violates common sense and sound antitrust analysis. William Kolasky & Richard Elliott, The Federal Trade Commission's Three Tenors Decision: "Wual due fiori a un solo stello," Antitrust (Spring, 2004).

After these two articles appeared, the D.C. Circuit affirmed the FTC. Its decision was not, however, warmly greeted by all commentators. I will write more in due course.