Refusals to deal in the context of network joint ventures

Business Lawyer

Volumn 52, Issue 2, 1997, Pages 531-557

  Pratt, William H ^a   Sonda, James D ^b   Racanelli, Mark A ^a  

^a New York Office of Kirkland and Ellis   (United States)

^b Kirkland and Ellis   (United States)

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[No Author keywords available]

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EID: 21744454097     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (123)

1. See Herbert Hovenkamp, Exclusive Joint Ventures and Antitrust Policy, 1995 COLUM. BUS. L. REV. 1, 13 (1995) (explaining the challenge of antitrust law to "seek ojit and condemn joint arrangements that injure competition, " while doing so "without causing substantial injury to the system of incentives that motivates firms to enter efficient joint ventures in the first place").
2. 2.As a matter of general antitrust law, agreements among competitors to refuse to deal with another competitor are judged under the "rule of reason, " unless the conspiring competitors "possess [ ] market power or exclusive access to an element essential to effective competition." Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co., 472 U.S. 284, 296 (1985).
3. If such market power or exclusive access is found, refusals to deal are held to violate § 1 of the Sherman Act, 15 U.S.C. § 1 (1994), when the boycott adversely affects competition and the procompetitive justifications for the refusal to deal do not outweigh any anticompetitive effects. See Northwest Wholesale Stationers, 472 U.S. at 296.
4. While it may be that network-type services could be provided by a single firm if all the members of the network merged into one, the network joint venture allows these services to be provided without such consolidation. The network joint venture allows services to be provided that no one firm could ofTer individually assuming that the size and scope of the participating firms does not change (that is, assuming the participating firms do not merge).
5. Associated Press v. United States, 326 U.S. 1 (1945).
6. Robert Pitofsky, A Framework for Antitrust Analysis of Joint Ventures, 74 Geo. L.J. 1605, 1605 (1986).
7. COMPACT v. Metropolitan Gov't of Nashville & Davidson County, Tenn., 594 F. Supp. 1567, 1574 (M.D. Tenn. 1984).
8. See, e.g., United States v. Automobile Mfrs. Ass'n, 1969 Trade Cas. (CCH) ¶ 72, 907 (G.D. Cai. 1969) (alleging a conspiracy among automobile manufacturers to eliminate competition in the development of certain automobile equipment by entering into a joint arrangement to develop such equipment), .
9. modified and replaced, 1982-83 Trade Cas. (CCH) ¶ 65, 088 (C.D. Cai. 1982).
10. Pitofsky, supra note 5, at 1610.
11. See Northern Pac. Ry. v. United States, 356 U.S. 1, 4 (1958) (stating the Sherman Act "rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress").
12. 441 U.S. 1 (1979).
13. Id. at 20-23;.
14. see also NCAA v. Board of Regents, 468 U.S. 85, 101 (1984) (recognizing that, in some industries, such as the market for sports, a certain amount of collaboration among competitors is "essential if the product is to be available at all").
15. Pitofsky, supra note 5, at 1606.
16. See NCAA, 468 U.S. at 103. It should be noted that, because ancillary restraints are analyzed under the rule of reason, the extent of a venture's market power will also be a focus of the court's antitrust analysis of the venture's activities. Joint venture activities violate the rule of reason only when they result in anticompetitive effects. See id. A joint venture that possesses no market power, however, cannot institute rules that injure competition and, thus, have anticompetitive effects. The analysis undertaken in this Article, therefore, assumes that the issue of market power has already been resolved and that there has been a finding of market power.
17. 85 F. 271 (6th Cir. 1898).
18. Id. at 280-83.
19. Id. at 282-83.
20. Id.
21. 15 U.S.C. § 1 (1994).
22. See JEAK TIROLE, THE THEORY OF INDUSTRIAI. ORGANIZATION 405 (1990);.
23. John M. Stevens, Antitrust Law and Open Access to the NREN, 38 VILL. L. Rev. 571, 598 n. 112 (1993).
24. TREASURER, Inc. v. Philadelphia Nat'l Bank, 682 F. Supp. 269, 271 (D.NJ.), qff'd, 853 F.2d 921 (3d Cir. 1988).
25. Id. at 271-72.
26. Id. at 272.
27. Id.
28. See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 221 (D.C. Cir. 1986).
29. See infra text accompanying notes 44-51 for a more detailed discussion of the extent to which, or even whether, free-riding concerns have any application in the context of access to network joint ventures.
30. 779 F.2d 592 (11th Cir. 1986).
31. Id. at 602.
32. Dennis W. Carlton & Alan S. Frankel, The Antitrust Economics of Credit Card Networks, 63 Antitrust L.J. 643, 655-61 (1995).
33. Id. at 656-61. Carlton and Frankel argue that, because interchange fees are paid by merchant banks to the card-issuing banks and the merchant banks pass their costs from these fees to shop owners, in the absence of interchange fees, merchant banks would pass along the cost-savings to shop owners. Id. at 656. The shop owners, in turn, would lower the price of the goods they sell to consumers to reflect their savings. Id. at 656-57. Card-issuing banks could then charge consumers directly to compensate for their costs. Id. at 657. In this way, consumers ultimately pay the same amount for the goods without the imposition of interchange fees as they would if the fees were reflected in the price of the goods themselves. Id.
34. 94 F.T.G. 1174 (1979), aff'd in part and modified in part sub nom. Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cir. 1981).
35. Id. at 1275. The FTC held that the horizontal territorial division of markets instituted by the joint venture at issue violated the antitrust laws because they were not "limited to those inevitably arising out of dealings between [the members], or necessary (and of no broader scope than necessary) to make the joint venture work." Id.
36. SCFC ILC, Inc. v. Visa USA, Inc., 36 F.3d 958, 961 (10th Cir. 1994), cert, denied, 115 S. Ct. 2600(1995).
37. For a discussion of possible operational rules that a venture might adopt, see supra text accompanying notes 25-31.
38. See Pitofsky, supra note 5, at 1607 ("Unlike cartels, joint ventures are devices that frequently achieve legitimate business advantages; unlike mergers, they usually do so without the complete or permanent disappearance of one or more previously independent firms. The result is that joint ventures in the United States generally have been treated leniently.").
39. Id.
40. Id.
41. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 296 n.7 (1985);.
42. see also William Blumenthal, Three Vexing Issues Under the Essential Facilities Doctrine: ATM Networks as Illustration, 58 ANTITRUST L.J. 855, 865-66 (1990).
43. Northwest Wholesale Stationers, 472 U.S. at 296 n.7.
44. 792 F.2d 210 (D.C. Cir. 1986).
45. Id. at 213.
46. Id.
47. Id. at 224.
48. Id.
49. Premier Elee. Constr. Co. v. National Elec. Contractors Ass'n, 814 F.2d 358, 370 (7th Cir. 1987).
50. Chicago Prof'l Sports Ltd. Partnership v. National Basketball Ass'n, 961 F.2d 667, 675 (7th Cir. 1992).
51. Id. at 674. One commentator has noted that[fjirms participate in ventures because they anticipate gains, but participation involves significant risks. . . . Compulsory access rules would destroy the incentives to form ventures if they permitted firms to avoid joining at the time the venture is formed, when the risk is high, because they know they could participate later, when the risks have been reduced or eliminated.... As a result, the venture would never be formed at all.
52. Hovenkamp, supra note 1, at 96.
53. It is for this reason that Congress passed the National Cooperative Research and Production Act of 1993, Pub. L. No. 103-42, 107 Stat. 117 (codified at 15 U.S.C. §§ 4301-06 (1994)) (Cooperative Research Act). The Cooperative Research Act requires courts to analyze challenges to joint ventures designed for the purpose of research and development under the rule of reason, and specifically forbids per se treatment of such arrangements. 15 U.S.C. §4302(1994).
54. See Hovcnkamp, supra note 1, at 98 ("Free riding. . . is economically inefficient because it leads to reduced output.").
55. This analysis, of course, assumes that the computer chip at issue in the hypothetical is not determined to be an "essential facility" for purposes of competing in the relevant market. A finding that it does constitute an essential facility may require the A and B venture to allow access to C and D on certain terms under certain circumstances.
56. Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 224 (D.C. Cir. 1986).
57. See Dennis W. Carlton & Steven C. Salop, You Keep on Knocking But You Can't Come In: Evaluating Restrictions on Access to Input Joint Ventures, 9 HARV.J.L. & Tech. 319, 326-28 (1996).
58. As one commentator has explained, "the court must be able to distinguish between free riding concerns [and] the simple desire to avoid competition." Hovenkamp, supra note 1, at 102. "[F|ree rider concerns do not become decisive simply because they can be articulated." Id. at 96-97.
59. 224 U.S. 383 (1912).
60. Id. at 394.
61. Id. at 404-05.
62. Id. at 397.
63. Id. at 405.
64. Id. at 411-13.
65. Nor did the association even argue that the exclusion of new firms would contribute to the venture's efficiencies. The association argued only that the exclusionary rule was justified "by '(1) the physical or topographical conditions peculiar to the locality; by (2) its commercial, industrial and railroad development and history; by (3) public opinion expressed legislatively and judicially, and (4) by the judgment of experienced railroad engineers and managers.' " Id. at 404. It did not, for example, argue that additional members would congest the venture in a way that more than offset the network and other efficiency benefits of admission.
66. 326 U.S. 1 (1944).
67. Id. at 22.
68. Id. at 17-18.
69. Id. (footnote omitted).
70. Id. at 21.
71. 15 U.S.C. § 1 (1994).
72. 629 F.2d 1351 (5th Cir. 1980).
73. Id. at 1388.
74. Id. at 1383-84.
75. Id. at 1383.
76. Id. at 1374.
77. 872 F.2d 127 (5th Cir. 1989).
78. Id. at 130-31.
79. Id. at 131.
80. Id.
81. 36 F.3d 958 (10th Cir. 1994).
82. Id. at 961.
83. Id. at 972.
84. Id. at 971-72.
85. Id.
86. Id. at 972.
87. Hovenkamp, supra note 1, at 104.
88. Northwest Wholesale Stationers, Ine. v. Pacific Stationary & Printing Co., 472 U.S. 284, 296 n.7 (1985).
89. See Neil Buckley & Motoko Rich, Brussels Warns Visa Over Curbs on Rival Cards, FIN. TIMES, May 31, 1996, at 2;.
90. Julie Wolf, EU Attacks Visa Plan to Curb Rivals, Guardian, May 31, 1996, at 20.
91. Id.
92. Related to, but distinct from, compensatory rules are rules restricting the ability of network members to recoup some of their costs by charging end-user customers surcharges on network transactions. Such "no surcharge" rules were the subject of litigation in the ATM context in SouthTrust Corp. v. Plus System, Inc., 913 F. Supp. 1517 (N.D. Ala. 1995).
93. In SouthTrust, the court held that the plaintiff lacked standing to challenge the "no-surcharge" rule at issue and that, even if it had such standing, the rule contributed to the efficiency of the venture and was not unlawful under the rule of reason. Id. at 1521-22. Specifically, the court found that the no surcharge rule "createfd] price certainty" for consumers because they would not "have to spend large amounts of time seeking the lowest fee for an ATM transaction." Id. at 1524. This in turn would create network efficiencies by encouraging network use and growth. Id. at 1524-25.
94. National Bancard Corp. v. Visa U.S.A., Inc., 779 F.2d 592 (11th Cir. 1986).
95. Id. at 602.
96. See Carlton & Frankel, supra note 27, at 655-61.
97. See Donald I. Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?, 1993 UTAH L. REV. 999, 1015 (1993).
98. Associated Press v. United States, 326 U.S. 1 (1944).
99. United States v. Realty Multi-List, Inc., 629 F.2d 1351 (5th Cir. 1980).
100. SCFC ILC, Inc. v. Visa USA, Inc., 36 F.3d 958 (10th Cir. 1994).
101. Carlton & Frankel, subra note 27, at 664.
102. Id.
103. See supra notes 82-83 and accompanying text.
104. Although Visa International did not adopt the proposed rule, a similar rule is currently in effect in the United States. See supra text accompanying notes 82-83.
105. See Buckley & Rich, supra note 82;.
106. Wolf, supra note 82.
107. 485 F.2d 119 (8th Cir. 1973).
108. Id. at 122-23.
109. See Interchange Fees Set by ATM Network Violate Section 1 Absent Surcharges, Rebates, 55 Antitrust & Trade Reg. Rep. (BNA) 305 (1988).
110. Worthen Bank & Trust Co., 485 F.2d at 119;.
111. letter from William F. Baxter, Assistant U.S. Attorney General, to Donald I. Baker (Aug. 3, 1983) (on file with The Business Lawyer, University of Maryland School of Law).
112. 1969 Trade Cas. (CCH) ¶ 72, 717 (E.D. Mich. 1969).
113. Id.
114. Id. at 86, 564.
115. United States v. florists' Transworld Delivery Ass'n, No. GIVA. 15748, 1990 WL 656781 (E.D. Mich. Nov. 8, 1990).
116. The Antitrust Division recently charged FTD with violating the modified final judgment. United States v. FTD Corp., No. CIV.A.56-15748, 1995 WL 864082 (E.D. Mich. Dec. 14, 1995). The DOJ's Proposed Enforcement Order-submitted five years after the original consent decree was obtained-would prohibit FTD from offering financial incentives to its members in return for terminating their membership in any competing floral-wire association. Id.
117. 66 Antitrust & Trade Reg. Rep. (BNA) 473 (1994).
118. Id.
119. Id.
120. United States v. Terminal R.R. Ass'n, 224 U.S. 393 (1912).
121. 15 U.S.C. §2 (1994).
122. See Blumenthal, supra note 36, at 865-66.
123. See United States v. Florists' Transworld Delivery Ass'n, 1969 Trade Cas. (CCH) ¶72, 717 (E.D. Mich. 1969) (preventing network from imposing exclusivity requirement prohibiting its members from participating in other networks did not limit the number of firms that could belong to the venture through Antitrust Division consent decree).