© 2005 Dechert LLP “Peaking” Under the Big Tent of Joint Venture Law Lessons from Recent Cases and Government Guidelines on the Line Between Lawful and Unlawful Joint Venture Conduct Paul T. Denis April 2, 2005

2 OVERVIEW Joint Ventures Defined How will you know one when you see it? Forms of Joint Ventures How big is that tent? The Limits of Jointness What you can do depends on the form of the JV.

3 Joint Ventures Defined The Importance of Definition The Joint Venture Continuum The Necessary Elements of a Joint Venture Distinguishing Mergers

4 The Importance of Definition Price fixing is per se unlawful and will be prosecuted criminally Joint ventures may create significant efficiencies and can be procompetitive But merely labeling something a joint venture does not preclude per se or even criminal condemnation What is a conscientious counselor to do?

5 The Joint Venture Continuum Characterization Cartel Joint VentureMerger Degree of integration Limited Complete

6 Critical Elements of Joint Venture Characterization Integration Efficiency Enhancing Reasonably Necessary

7 Critical Elements of Joint Venture Characterization Integration –how much is enough remains unclear –often entails combining significant capital, technology or other assets –may be satisfied by risk sharing in certain circumstances –need not entail creation of new entity –must be more than coordinating decisions on price, output, customers, territories, and the like enforcement agency bias toward tangible physical integration

8 Critical Elements of Joint Venture Characterization Efficiency Enhancing –but only certain efficiencies are cognizable –must be verifiable –cannot arise from anticompetitive reduction in output or service

9 Critical Elements of Joint Venture Characterization Reasonably Necessary –restrictions on parents must be reasonably necessary to achieve the efficiency benefits of the integration –need not be essential –benefits must not be achievable through practical, significantly less restrictive means

10 Distinguishing Mergers Mergers typically end all competition between the parties in the relevant market(s); joint ventures preserve competition between the parties in other markets Mergers are designed to be permanent; joint ventures typically are of limited duration

11 Forms of Joint Ventures Essential Organizations/Market Creation – competing companies create the marketplace in which competition takes place Teaming Arrangements – complete integration, albeit for limited duration (typically project specific)

12 Forms of Joint Ventures Cost Centers – parents compete downstream but combine one or more upstream functions Downstream combinations – parents compete upstream but merge one or more downstream functions into a single entity Patent Pools and Other IP Licensing Collaborators – common marketing of a bundle of IP each element is both necessary to a downstream function and complementary to other IP in the bundle

13 The Limits of Jointness Cost Centers – San Diego Realtors; Visa/MasterCard Downstream Combinations – Dagher Patent Pools – 3G Wireless

14 Illustrations of Issues in Cost Center Joint Ventures Collusion – San Diego Realtors Competitors may collaborate to reduce costs but may not extend that collaboration to reduce downstream competition Exclusion – Visa/MasterCard Competitors may collaborate to reduce costs but may not do so in ways that unnecessarily preclude others from competing downstream

15 Collusion Issues in Cost Center Joint Ventures Participants to cost center JV must avoid collusion with respect to prices of downstream services Courts endorse the efficiency enhancing potential of cost center JV, but require restrictions on the parties to the venture to be reasonably necessary to achieving those efficiencies

16 San Diego Realtors Combination of multiple real estate databases into a single database with complete San Diego coverage was recognized as a benefit But benefit did not justify collusion between Multiple Listing Services (“MLS”) in what they charged individual realtors for support services related to database access

17 San Diego Realtors: Pre-JV Stylized Facts DB i -database of real estate listing -Multiple listing services -realtors MLS j X KEY FACTS No database covered entire area No MLS had access to all databases Realtors subscribed to multiple MLS Realtors had competitive options for all databases MLS 1 MLS 2 MLS 3 MLS 11 MLS 10 MLS 9 MLS 8 MLS 7 MLS 4 MLS 5 MLS 6 DB 1 DB 2 DB 3 DB 4 xx x x x x xxx x x x x x x x x x x x x x xxxx x xxx x x x x x x x x x x xx x xxx x x x xx x x x x x x x x xx xx x x x x x x x x x x x x x

18 San Diego Realtors: Post-JV Stylized Facts DB -single database - Multiple testing services -realtors MLS j X KEY FACTS JV created a single database covering entire area Any realtor could access the entire database through one MLS But MLSs colluded on price for support services MLS 1 MLS 2 MLS 3 MLS 11 MLS 10 MLS 9 MLS 8 MLS 7 MLS 4 MLS 5 MLS 6 Combined DB x x x x x x x x x x x x x x x x x x x x xxx x x x x x x x x x xxxx x x x x x x x x x x x x x x x x x x x x x x x x x x x

19 Exclusion Issues in Cost Center Joint Ventures Participants to cost center JV’s must avoid unnecessarily restrictive rules that preclude downstream competition Courts will carefully scrutinize restrictions that reduce downstream competition

20 Visa/MasterCard Visa and MasterCard both allowed “duality” – a practice of allowing a bank to issue the cards of both networks But both Visa and MasterCard precluded member banks from issuing cards from networks other than Visa or MasterCard Duality undercut purported justification for excluding other networks - creating “cohesion” among card issuing banks Absence of exclusivity rules outside U.S. also undercut the purported justification since there was no evidence of harm from non-exclusivity

21 Simplified Credit Card Payment System Card Holders Issuing Banks Payment Card Networks Merchant Banks Merchants millions of card holders thousands of issuing banks four networks thousands of merchant banks millions of merchants

22 Effect of Exclusivity was to Disadvantage Competing Payment Networks Card Holders Merchant Banks Merchants Issuing Banks Visa MasterCard Discover Amex Banks issuing Visa and MasterCard could not issue cards processed on other networks But at the same time, they could not give up Visa and MasterCard due to the popularity of those cards Effect of exclusivity was to preclude competing networks from growth opportunities through banks already issuing Visa or MasterCard

23 Issues in Downstream Combinations Must achieve single entity status under Copperweld Absent single entity status, restrictions must be reasonably necessary to achieve the benefits of the JV

24 Petroleum Products Stages of Production Exploration Production Refining Marketing Retailing upstream downstream commonly handled by vertically integrated petroleum companies commonly handled by independent retailers under license or franchise

25 Dagher Pre-JV Stylized Facts Shell Exploration Production Refining Marketing Retailing Texaco Exploration Production Refining Marketing Retailing

26 Dagher Post-JV Stylized Facts ShellTexaco Exploration Production Exploration Production Joint Venture Refining Marketing Independents Retailing

27 Dagher Key Facts Term – terminable on 2 years notice after 5 years; otherwise evergreen Noncompete agreements – preclude downstream competition with the JV by either parent Parents retained control of trademarks JV handled licensing of retailers and pricing to retailers FTC and State Attorneys General reviewed transaction as a merger and required divestitures before allowing it to proceed “In all subsequent mergers undertaken by the Commission, we have considered Texaco and Shell to be a single entity when evaluating downstream market concentration.” – concurring statement of Commissioners Anthony and Thompson in Chevron/Texaco

28 Single-Entity Status in Dagher Not explicitly analyzed in Dagher but the implication of the decision was that the JV was not a single entity In Copperweld the Supreme Court found that a corporation and its wholly–owned subsidiary were a single entity, legally incapable of conspiring –joint decision by parent and subsidiary was not a “sudden joining of two independent sources of economic power previously pursuing separate interests” –the coming together of the parent and the subsidiary was properly judged under Section 7 of the Clayton Act, not through application of Sherman Act Section 1 to every corporate decision

29 Single-Entity Status in Dagher Prior FTC/State AG review under Section 7 of the Clayton Act should have ensured that subsequent pricing decisions of the JV would be treated as the actions of a single entity rather than as a conspiracy among the owners of the entity But Ninth Circuit may have been influenced by the fact that Texaco and Shell maintained an appearance of independence while under joint control

30 Issues in Patent Pools and Other IP Licensing Collaborations Over inclusiveness Collusion among licensors Collusion among licensees

31 Key Features of 3G Patent Licensing Arrangement Five versions of third generation (“3G”) wireless telecommunications technology More than 100 companies holding IP rights essential to development on one or more versions of 3G Desire by industry participants to foster development of 3G and eventual wide-spread usage Solution – consolidated licensing arrangements with safeguards

32 Guidance for Patent Pools As a general matter the pool must be limited to patents that are necessary to practice the technology in question essentially must be determined by a common but independent expert the patents deemed essential must be clearly identified to prospective licensees prospective licensees must be offered the opportunity to license individual patents á la carte as well as in a package

33 Guidance for Patent Pools For consolidated arrangements that license competing technologies proof, rather than assertions, that tangible efficiencies will arise from the consolidated licensing arrangement independent determination of key variables in any royalty formula used across competing technologies safeguards against the flow of competitively sensitive information among licensors of the competing technologies

34 Appendix Resource Materials On Joint Ventures

35 Joint Venture Case Law Freeman et al. v. San Diego Association of Realtors Freeman et al. v. San Diego Association of Realtors et al. (9 th Cir. 2003) United States v. Visa U.S.A., Inc., et al. (2 nd Cir. 2003) Dagher et al. v. Saudi Refining Inc. et al. Dagher et al. v. Saudi Refining Inc. et al. (9 th Cir. 2004)

36 Federal Trade Commission and U.S. Department of Justice Guidance on Joint Ventures Antitrust Guidelines for Collaboration Among Competitors (2000) Statement of Antitrust Enforcement Policy in Healthcare (1996) Antitrust Guidelines for the Licensing of Intellectual Property (1995) Horizontal Merger Guidelines (1992, revised 1997)

37 Other Government Materials Relating to Joint Ventures Movielink Joint VentureMovielink MusicNet Joint VentureMusicNet Patent Pool Business Review Letters –3G Wireless (2003)3G Wireless –DVD – Hitachi/Matsushita (1999)DVD – Hitachi/Matsushita –DVD – Philips/Sony (1998)DVD – Philips/Sony –MPEG – LA (1999)MPEG – LA

38 About the Author Paul T. DenisPaul T. Denis is a partner in the Antitrust/Competition Practice Group at Dechert LLP, where his practice is devoted primarily to business combinations and government investigations. Previously, Paul served in the Antitrust Division as Counselor to the Assistant Attorney General, Acting Deputy Assistant Attorney General for Regulation, and principal draftsman of the 1992 Horizontal Merger Guidelines.Antitrust/Competition Practice GroupDechert LLP Washington, DC (202)