In a recent paper (unfortunately, no link yet), Greg Werden discusses The Ancillary Restraints Doctrine after Dagher, a topic that was previously addressed on this blog. Werden begins with a review of the nature of the ancillary restraints doctrine, and restates his position that ancillarity is a question of calibrating the scope of the antitrust inquiry. If restraint R is ancillary to the main agreement, here a JV, then the rule of reason analysis applies to the package of venture and restraint, and we ask whether AE(JV+R) > PE(JV+R). (AE = anticompetitve effect; PE = procompetitive effect.) If restraint R is not ancillary to the JV, then there are two separate inquiries:

1. AE(JV) > PE(JV); and
2. AE(R) > PE(R), assuming that the rule of reason even applies to R, which may not be the case if R is a price or output restraint. If the rule of reason does not apply to R, then the second inquiry is simply per se(R).

The key analytical question is: Under what conditions is a restraint ancillary? One necessary condition is that the restraint is neither too closely related to the JV, nor too distant from it, like a planet that can only sustain conditions for organic life if it is in what astronomers call the Goldilocks zone, not too close to a star and not too far away from it. A restraint is in the legal Goldilocks zone only if it is collateral to the joint venture.

• Condition 1: The restraint must not be too close to the joint venture. The ancillary restraints doctrine

  applies only to “collateral” restraints associated with joint ventures. Such restraints regulate not what the joint venture does or how it is done, but rather the conduct of the joint venture participants outside the venture.

  In the words of the Dagher court, the restraint must not “involve the core activity of the venture itself.” That makes sense. Suppose that car manufacturers A and B form a JV to make and sell SUVs. They agree on the territories in which at the prices at which the SUVs are sold. That is a restraint on the JV’s activities, not a restraint collateral to the JV’s activities. In contrast, an agreement between A and B not to make and sell their own SUVs in competition with the JV would be a collateral restraint.
• Condition 2: The restraint must not be too far away from the joint venture. Not every outside-venture restraint is collateral to the venture. A restraint is collateral only if it has

  an “organic connection” to the venture’s operations and serves to make the venture operate more efficiently or effectively

  That, too, is eminently sensible. The “organic connection” to the SUV joint venture is lacking if, say, A and B agree not to compete in the sale of trucks. (Note that for Werden the “organic connection” is an element of ancillarity not of collateralness. Nothing truly substantive turns on these labels.)

Once we’ve established that the restraint is a candidate for ancillarity (because it is in the legal Goldilocks zone), then the “reasonably necessary” test kicks in.

[Condition 3:] [A] collateral restraint is ancillary if, and only if, it was reasonably necessary to make the venture operate more efficiently or effectively at the time the restraint was entered into. Defendants have the burden of demonstrating ancillarity, but that’s not a heavy one. The more important of the two words in “reasonably necessary” is the first. Defendants are required to show only that the ability of their legitimate joint venture to function efficiently or effectively was compromised in a significant way that was sensibly addressed by the restraint.

In the remainder of the article, Werden discusses Topco and Citizen Publishing the two most infamous per se cases in the joint venture context. He proposes that

it seems best to conclude that Citizen Publishing is no longer good law after Dagher.

While I agree with Werden’s discussion of the nature of the ancillary restraints doctrine, the question is still open to what extent Dagher redefined its scope of applicability in the joint venture context. It seems to me, as previously noted, that Dagher’s inside/outside dichotomy significantly expands the “Section 1 free inside zone” at the expense of the ancillary restraints doctrine. In the words of the Dagher court:

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

Thus, defining the scope of the venture activities, similar to what’s referred to as Condition 1 above, will undoubtedly become one of the main battlegrounds of joint venture analysis going forward.

Technorati Tags: antitrust, joint venture, dagher

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