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February 1999
TRADE ASSOCIATIONS
U.S. ANTITRUST GUIDELINES
...continued - pg 3.
Since the Guide often discusses intended activity as being more or less
susceptible to antitrust ramifications, a useful checklist of alternatives for
the venturers' counsel to consider follows. The chart below summarizes by topic
the likelihood that certain aspects of joint R&D activity will leave the
venture vulnerable to opposition from competitors or increased scrutiny from the
antitrust authorities:
| |
Antitrust Concern |
| Topic |
Not Likely |
More Likely |
| ACCESS TO ASSOCIATION |
Reasonable fees, royalties or expenses may be
charged; reasonable premium to latecomers |
Unreasonable charge that creates or abuses
market power |
| ACCESS TO ASSOCIATION'S RESULTS |
Fees to nonmembers that reasonably reflect
expenses |
Concerted denial is analogous to boycott;
"blackball systems" to re-strict relicensing are illegal |
| ANCILLARY RESTRAINTS |
Limited |
Broad |
| AVAILABILITY OF INDIVIDUAL RESEARCH |
Cost and risk high; small companies; small
R&D budgets; outside financing unavailable; research-poor industry |
Cost and risk low; large companies; large
R&D budgets |
| COLLATERAL RESTRAINTS IN GENERAL |
"Rule-of-reason" (reasonably
ancillary to main purpose, scope or duration reasonable, and not a pattern
of anticompetitive agreements) |
"Per se" (price fixing, market
division, tying arrangements, group boycotts) |
| COLLATERAL RESTRAINTS (DISCLOSURE OF
RESULTS) |
Full disclosure, no limits on individual effort |
Restraints on public disclosure, pooling of
confidential information |
| COLLATERAL RESTRAINTS (NONPATENT) |
Closely related to venture's purpose; e.g.,
duty to exchange previous results; confidentiality pending patent,
division of research effort |
Remote relation to venture's purpose and
anticompetitive; e.g., restrictions on individual development,
production and marketing of inventions; sharing of cost or other
confidential information; unreasonable membership rules |
| COLLATERAL RESTRAINTS (PATENTS AND
KNOW-HOW) |
Require sponsor to obtain patents;
cross-licensing of new patents; exchange of know-how related to project |
Price agreements; market division; agreements
to limit products; unreasonable patent pooling |
| COMPETITIVE RELATIONSHIP OF VENTURERS
IF ASSETS (E.G., PATENTS) ARE ACQUIRED |
Could merge under DOJ and FTC Guidelines;
members of different industries (improves likelihood of licensing);
potential competitors; failing company combining with only available
venturer |
Too large to merge under DOJ and FTC
guidelines; members of same industry; actual competitors |
| CONDUCT OF PROJECT |
By independent third party; e.g.,
university (more incentive to speed research and publicize results) |
By participants |
| CONTRIBUTIONS BY PARTICIPANTS |
Pooling of background patents (especially if
they are blocking research) and know-how |
Dedication of subsequent patents or know-how
(disincentive to future research) |
| DISPLACEMENT OF INDIVIDUAL RESEARCH |
Joint research fosters new research or
alternative research by freeing funds |
Joint research displaces or discourages
participant research |
| EFFECT OF GOVERNMENT INVOLVEMENT |
Restraint imposed as "act of
government" or express immunity |
Mere knowledge or tacit approval is of little
use |
| EFFECT ON MARKET COMPETITION |
Minimal (pro-competitive if smaller competitors
group to meet larger competitor) |
Significant |
| EFFECT ON R&D COMPETITION |
Other avenues for R&D activity exist and
are used by market participants |
All or majority of market participants rely
predominantly and exclusively on same R&D venture, diminishing number
of R&D sources |
| IMPORTANCE AND IMMEDIACY OF PROJECT ON
INDUSTRY-WIDE BASIS |
"Crash" program needed |
No immediate concern |
| METHOD OF EXPLOITATION OF RESEARCH
RESULTS |
Individual (particularly if venturers are not
competitors) |
Joint (particularly if venturers have
significant market share) |
| MOTIVE OF PARTICIPANTS |
To speed research |
To slow research or reduce competitive threat |
| NUMBER OF COMPETITORS IN INDUSTRY |
Many |
Few (highly concentrated) |
| OVERALL BALANCE OF ACTIVITY |
Less restrictive and directly related to goals
of venture |
Too restrictive in light of reasonable
alternative |
| PATENTABILITY OF RESULTS |
Not protectable ("free rider"
problem) |
Protectable |
| PHASE OF PROJECT |
Earlier ("basic") research |
Later--production or marketing phase |
| PROJECT AGREEMENT |
No restraints |
Restraining provisions |
| PURELY CONTRACTUAL RESEARCH |
Legitimate purposes for joint research |
No business purpose for joint research |
| SCOPE OF PROJECT |
Narrow in subject matter of research and short
in duration; few or small participants |
Broad in subject matter of research and long in
duration; many or large participants such that major portion of industry
is involved |
| SIZE OF RESEARCH PROJECT |
Expensive |
Inexpensive |
| SPECIAL CASE OF COMPLIANCE WITH
GOVERNMENT STANDARDS ON EXTERNALITIES (E.G., POLLUTION) |
Joint projects are a natural response |
Research pace slowed, intentional failure to
meet standards, or projects are too broad |
| STRUCTURE OF INDUSTRY |
Many competitors; easy entry |
Concentrated, with barriers to entry |
| TYPE OF RESEARCH |
"Pure" basic research (no ancillary
restraints) |
Developmental research (especially if
restraints are present) |
| USE OF ASSOCIATION'S RESULTS BY MEMBERS |
Freedom to sublicense (subject to reasonable
royalties); reasonable license from venture; reasonable period during
which members exclusively may exploit results (pre-publication) |
Significant restrictions |
This checklist should not be misread or misapplied. In particular, a
trade association could have many legitimate elements and nonetheless run afoul
of the antitrust laws. To state the obvious, for example, if an otherwise
legitimate R&D joint venture had a price-level clause in the eventual
licensing agreement, then that agreement would be per se violative
of the Sherman Act, notwithstanding the propriety of the balance of the
cooperative relationship.
One must examine each element of the proposed joint undertaking with
reference to the Act, the Guide, judicial decisions, and business review
letters. Counsel should then balance the whole and determine whether some less
restrictive alternative is reasonably protective of the participants' interests
and preferable to the one under consideration. As before, this will always be a
complex undertaking, and the Guide certainly assists in the effort.
Minimizing Antitrust Concerns
The remaining portion of this memorandum specifically discusses how the
Association may minimize antitrust exposure to the Association's members.
Membership Requirements
Membership requirements should be consistent with the stated objectives of
the Association, and the Association should apply them in a consistent,
nondiscriminatory manner. Because membership in the Association may confer
competitive benefits, membership should be open to all companies that might not
be able to compete equally with the members if they were excluded. Remember,
however, that over-inclusiveness is discouraged by the Act, and ventures may no
longer rely on open-access policy to avoid antitrust liability.(3)
Membership requirements must therefore be reasonably necessary to accomplish
the legitimate goals of the Association. For example, the Association may not
exclude or discriminate against potential members on the basis of criteria
unrelated to the potential member's ability to further the objectives of the
Association. If excluded firms cannot practicably or effectively duplicate the
Association's research efforts, the Sherman Act may mandate access. Access
problems are most clearly presented in situations where denial of access will
result in a competitive disadvantage to competitors of one or more of the
participants.
Access problems sometimes require analysis under both Section 1 and Section 2
of the Sherman Act. Section 1 of the Sherman Act forbids all forms of agreement
in unreasonable restraint of trade. Section 2 of the Sherman Act forbids
monopolization, attempts to monopolize, and conspiracy to monopolize. Analysis
of an R&D joint venture under Section 2 begins with a definition of the
relevant market and an evaluation of the degree of market power possessed by the
participants as a group. Where that power is substantial, as when the ventures
collectively possess a predominant share of a relevant market towards which
research is directed or collectively control a facility essential to effective
competition, exclusion of outsiders from participation may require a Section 2
analysis.
Collective denial of access to the venture may raise serious problems under
Section 1 of the Sherman Act as being a boycott or concerted refusal to deal. A
"blackball system", under which a single venture participant has the
authority to control access, is particularly likely to be found illegal.
To implement the Association's nondiscriminatory membership policy, the
Association should publicize its existence and requirements for membership in
professional journals, at professional meetings, and through direct mailings to
potential members. Dues charged to members must also not unreasonably exclude
potential members. The dues structure should be based on assets or sales of
potential members, because smaller companies may be excluded if the same dues
are charged to all members.
Organization
The Association's structure should be such as to reduce the possibility that
the Association can be controlled by a small group of members that might
therefore more easily use the Association to violate the antitrust laws.
Dominance by a small group of powerful market members would be immediately
suspect under the principles enunciated in the Guide. To disperse control, the
Association should follow these principles:
(1) one vote per member, instead of weighted votes based on assets or sales;
(2) election of the Board of Directors by members;
(3) selection by the Board of an Executive Director who is not an employee of
any member; and
(4) equal opportunity to be elected to the Board of Directors and to serve on
nominating and other committees.
To the extent decisions made by the Association are made pursuant to votes,
every effort should be made to prevent commercially-interested voters from
having a "disproportionate voice" in the process. For example,
procedures should be implemented to prevent meeting-packing by interested
voters. Additionally, voters should be held to some realistic level of relevant
expertise or knowledge concerning the issues on which they vote.
In a recent case, the U.S. Supreme Court held that a steel concern
unreasonably restrained trade when it recruited new members to a standards
organization on the eve of a particularly important vote. The voters were to
decide whether a new product, made of plastic, could be certified and thus
placed in competition with steel products previously approved. The steel concern
encouraged its employees and their spouses as well as its sales representatives
and agents to become members of the organization. The ensuing vote narrowly
defeated the approval of plastics. Many of those voting lacked any familiarity
with the technical issues on which they voted. The steel concern's actions
violated the antitrust laws by subverting the organization's consensus
procedures.
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