The antitrust laws are intended to promote and protect competition by prohibiting unreasonable restraints to it. In theory, the presence of competition leads to lower prices, higher quality and increased output of goods and services, all of which are beneficial to consumers. Collaborations between rivals (direct competitors) raise antitrust concerns because they can lead to the formation of unlawful agreements (as to prices, supplies and the exclusion of competitors) or indirectly used to facilitate such agreements. That said, competitor collaborations in the form of trade associations, industry groups, collectives, joint ventures can promote and protect competition by engaging in a variety of lawful activities, including:
- Educating the public
- Conveying information to governmental entities
- Product and service innovation
- Lowering production costs
This article examines some of the ways in which rivals can legitimately engage in behavior that produces competitively benign or pro-competitive outcomes and minimize antitrust exposure.
The antitrust problem
There are two federal statutes that usually come into play with competitor collaborations. Section 1 of the Sherman Act prohibits a “contract, combination…or conspiracy” that unreasonably restrains interstate trade or commerce. The trigger for a violation of Section 1 is the existence of “joint” conduct. A “contract, combination … or conspiracy” exists if there is proof of an “agreement” between two or more legally distinct entities. An “agreement” need not be written, but can be inferred from the conduct of the parties. “Horizontal” agreements (between direct competitors) as to prices, supplies, market divisions and/or the exclusion of competitors are unlawful without more (“per se” unreasonable).
Other forms of horizontal restraints (as well as all forms of “vertical” restraints between entities at different levels of distribution) are judged by the “rule of reason” which asks a court to determine whether the restraint, in practice, produces more competitive harm than good in the market where the restraint exists. The Sherman Act is enforced by the Department of Justice’s (DOJ) Antitrust Division (criminal and civil), state attorneys general (civil) and private plaintiffs (civil). A violation of Section 1 of the Sherman Act may lead to corporate and individual criminal penalties and incarceration as well as heavy civil fines and damages.
Section 5 of the Federal Trade Commission Act (FTCA) prohibits unfair methods of competition. The FTCA is enforced only by the Federal Trade Commission (FTC) and is directed at the early formation of restraints which, if left unchecked, could lead to a full-blown violation of the Sherman Act. Because Section 5 seeks to ferret out and curb restraints at their infancy, a violation leads only to a cease and desist order to prevent future competitive harm.
Competitor collaborations can be procompetitive
Competitor collaborations take many forms including trade associations, industry groups, collectives and joint ventures. Competitive rivals can promote and protect competition in the many ways listed in the introduction. Sharing technology, technical know-how and intellectual property between rivals, for example, can be pro-competitive, speeding-up critical product advancements and development which substantially benefits consumers. Despite such consumer benefits, these circumstances can raise antitrust concerns because of the risk that competitive rivals will seize the opportunity to enter into unlawful agreements or exchange prices or other information which can be used to facilitate unlawful agreements in the future, leading to consumer harm.
To allay the specter of collusion, collaborative organizations should be:
- Created for legitimate, pro-competitive purposes
- Overseen by antitrust counsel
- Controlled by written policies, procedures and agendas
Within the protective framework surrounding collaborative organizations, competitive rivals must take independent steps avoid discussions and exchanges of current and future pricing and supply information.
There are several important and useful guides issued by the DOJ and FTC over the years that can be used to assist competitor considering collaborative efforts. Worth noting is the Antitrust Guidelines for Collaborations Among Competitors, issued in 2000, which identified several “antitrust safety zones” which were created to encourage pro-competitive activities by competitive rivals. These “safety zones” give a degree of certainty to competitor collaborators where the likelihood of anti-competitive effects is minimal. The guidelines identify two types of zones:
- A general safety zone that applies to competitor collaborations where the “market shares of the collaboration and its participants collectively account for no more than twenty percent of the each relevant market in which competition may be affected”
- A research and development safety zone that applies to competitor collaborations in an innovation market where three or more independently controlled research efforts.
Statement No. 5 of the Statement of Antitrust Enforcement Policy in Healthcare issued in 1996 (and broadly applicable to other industries as well) sets forth the guidelines for the legitimate process of exchanging pricing and cost information of competitive rivals through third-party surveys where:
- Written survey is managed by a third-party
- Information provided by the survey participants is more than 3 months old
- There are at least five providers reporting data with no one provider accounting for more than 25 percent of the weighted basis of the statistic
- Survey is sufficiently aggregated to prevent the recipients to identify the prices charged or compensation paid by any provider.