Analyzing competitor joint ventures under the antitrust laws is fraught with uncertainty, mainly because there is no universally accepted analytical framework. The analytical difficulties, in turn, stem from the fact that joint ventures straddle the great doctrinal divide of antitrust jurisprudence in coordinated multi firm and unilateral single firm conduct. As actors in the marketplace, joint ventures act as single entities, for example, a purchasing cooperative buying supplies for its members. As restraints on the venturers’ conduct, joint ventures are horizontal agreements between competitors, for example, requiring the members of a purchasing cooperative to buy all of their supplies through the venture. An additional layer of complications is introduced by the distinction between the formation and the operation of the joint venture, where the formation may implicate either §7 for “structural” joint ventures or §1 for “non-structural” joint ventures, and the operation may implicate §1 or §2, depending on whether the emphasis is on multi- or single firm conduct.

The key criterion for determining whether single- or multi firm conduct should guide the analysis is the degree of economic integration pursued by the joint venture. If the venture promises some non-trivial integration of business operations, as opposed to the mere coordination of business decisions, then the venture is not treated as a per se illegal cartel. If the degree of integration is such that, as a result of the business integration, (i) all competition ceases between the venturers; and (ii) the venture is not set to dissolve within a couple of years, then a §7 merger-style analysis applies. (There is an interesting parallel to Copperweld here, where very different criteria of ownership and control are applied to decide whether a business arrangement between competitors (e.g., two widget making subsidiaries) ought to be analyzed as single- or multi firm conduct.) A modern framework for analyzing joint ventures could therefore proceed as follows:

1. Are the members competitors?
2. Does the venture pursue non-trivial efficiencies from economic integration? If not, then the “venture” is really a cartel subject to per se condemnation. (Sham v. bona fide venture dichotomy.)
3. Is the economic integration such that all competition ceases between the members for a longer-term period? If so, then §7 merger-style analysis applies. (This step is very similar to the “full function joint venture” test in EU competition law.)
4. For those ventures that are neither cartels nor equivalent to mergers, a rule of reason analysis is appropriate. Despite the synthesizing efforts of the 2000 Competitor Collaboration Guidelines, this is the least well structured part of the joint venture antitrust assessment. Relevant inquiries include: (i) Market power of the venture alone (= single entity) or together with its members (= multi firm); and (ii) ancillary restraints (= multi firm). A restraint is ancillary if it promotes the efficiency enhancing integration, e.g., an agreement between the members and the venture not to develop products that compete with the venture (= venture-member restraint) or an agreement between the members of a production joint venture to only sell in certain territories (= member-member restraint). Obviously, venture-member restraints are more clearly ancillary than member-member restraints. An ancillary restraint is reasonable if it is “reasonably necessary” to promote the venture-specific efficiencies and if there are no obvious, less restrictive alternatives to achieve the same goal. In other words, for ancillary restraints the reasonableness tradeoff is one between the anticompetitive effects of the restraint itself and the venture efficiencies, even if the restraint would ordinarily be per se illegal. In contrast, non-ancillary (or “naked”) restraints cannot be justified by venture efficiencies. (One of the best articles on this subject is still Greg Werden’s Antitrust Analysis of Joint Ventures: An Overview, 66 Antitrust L.J. 701 (1998)).

The Supreme Court’s decision in Texaco v. Dagher (which I discussed on this blog here and here) may have a lasting impact on step (4) of the joint venture analysis. In essence, as James Keyte persuasively argues in the current issue of the Antitrust Magazine (which, amazingly, doesn’t seem to have an up-to-date website, so no link), Dagher creates an inside/outside dichotomy, which may be outlined as follows:

• Conduct related to the business purpose of the venture, either by the venture itself or by the members, is “inside” activity.
• Conduct unrelated to the business purpose of the venture by the members is “outside” activity.

The court was very specific that the ancillary restraints analysis only applies to outside activity and outside restraints.

The … ancillary restraints doctrine … governs the validity of restrictions imposed by a … joint venture, on nonventure activities. (My italics.)

If that’s the case, what antitrust standard does apply to inside activity and inside restraints? Arguably none, except for maybe §2, because:

[w]hen persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit … such joint ventures [are] regarded as a single firm competing with other sellers in the market. As such, though [the joint venture’s] pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense. (My italics.)

In other words, inside restraints, even if they amount to price fixing, don’t cause the kind of harm that the antitrust laws are concerned with. One may therefore read Dagher as having created a §1-free zone for inside or venture-related activity. Here’s a chart:Of course, as others have correctly observed, Dagher is short on holding and long on dicta, so it is unclear as a matter of precedent whether lower courts will, in fact, develop an “inside venture restraints exemption” from §1. But if they do, and I expect that much, Dagher may quickly become more significant than Copperweld, particularly because the inside/outside distinction is by no means restricted to structural ventures. One could easily apply the same test to, say, franchise networks or other dual-distribution situations, that are only very imperfectly captured by the Copperweld criteria of ownership and control. Whether such a broad exemption for inside activities is desirable from a policy perspective is another question. But Dagher has clearly revitalized the single entity doctrine. As a result, joint venture law has just gotten a lot more exciting.

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