How does the US Supreme Court determine if a collaboration between competitors is illegal?

The industry environment in the United States has grown highly competitive and companies are entering into complex agreements and partnerships to survive the competition. Whether it is for foreign expansion or funding of innovation efforts, or about bringing operating expenses low, companies are forming complex collaborations to achieve stronger growth momentum. Mostly such collaborations are procompetitive and do not hurt competition in the market. 

They can be profitable for the collaborating companies as well as the customers and the economy of the United States. The number of civil cases against competitive agreements brought by the antitrust agencies has been relatively low during the last two decades. However, sometimes such competitive agreements or mergers may harm existing competition in the market if the intention of the collaborators is to gain market share or establish a monopoly. 

There are certain types of competitive agreements which may likely harm competition and not yield any procompetitive benefits. In such a case, there is no reason that an investigating agency would waste its time and resources carrying out particularized inquiries into such agreements.  Once an agency identifies such an agreement, it challenges the agreement as per se illegal. The remaining types of agreements are evaluated under the rule of reason. 

Evaluation on the basis of the rule of reason entails a factual inquiry into the overall competitive effect of the competitive agreement or merger. The Supreme court has explained in this regard that the inquiry carried out under the rule of reason is flexible and the focus and detail of inquiry generally vary depending on the nature of the agreement as well as market circumstances.

Agreements Challenged as Per Se Illegal:

The agreements that have once been identified as Per Se Illegal do not undergo specific inquiry. These are the types of agreements that almost always tend to increase prices and reduce output. Price fixing, bid-rigging, and customer allocation are types of agreements held as per se illegal. Competitors can enter into agreements for price-fixing, rigging bids, or for sharing or dividing markets through customer allocation or by allocating suppliers, territories, or lines of business. Such agreements do not have any procompetitive benefits and are considered outright illegal. The courts will not even bother about getting a detailed inquiry carried out into the nature of such agreements. There is no need to get a detailed analysis of the business purpose of such agreements, their procompetitive benefits, anticompetitive benefits, or the overall competitive impact of the agreement. The parties involved in hardcore-cartel agreements are criminally prosecuted by the Department of Justice.

Agreements under the rule of reason:

The agreements that are not challenged as per se illegal are analyzed under the rule of reason for determining their overall competitive impact. These agreements would otherwise be considered as per se illegal. However, there is a solid reason to believe that the agreements are targeted at improving the efficiency of the collaborating parties and could yield procompetitive benefits.  The main focus of the rule of reason analysis is to compare the state of competition with the agreement as well as without the agreement. It compares the anticipated situation with the relevant agreement with another situation where no such agreement exists.

The main question that the rule of reason addresses is that if the relevant agreement can in any way harm competition or allow the involved parties to leverage their capabilities to increase prices, reduce the quality of output, or affect the pace of innovation negatively compared to the state of competition without the agreement. Depending on the type of agreement as well as the market circumstances, the focus of the rule of reason analysis differs. However, the agencies focus mainly on the factors that are necessary to determine whether the competitive impact of the relevant agreement when conducting their analysis. Generally, any single factor cannot help conclusively determine the competitive impact of an agreement. 

To begin with, the investigating agency conducts analysis into the nature of the relevant agreement. For this purpose, the agency examines the purpose of the business agreement. It also examines whether the agreement has caused any anticompetitive harm if it is already in operation. In some cases, the nature of the agreement as well as the lack of market power of dominance may prove that there will be no competitive harm due to the agreement. In other cases, where the nature of the agreement may show anticompetitive harm or similar harm due to the agreement already being in operation, and there are no overriding procompetitive benefits that could offset the anticompetitive harm, the agency will challenge such an agreement without conducting a detailed market analysis. 

However, this is not true about all such cases and despite an initial examination showing the possibility of competitive concerns, the agency might need to go into an in-depth market analysis to prove competitive harm resulting from the agreement. In order to assess if the agreement will help the involved parties achieve market dominance or not, the agency first defines relevant markets as well as calculates market shares and market concentration. 

Apart from that, the agencies also examine whether the involved parties and the collaboration have the incentive to compete independently. They also evaluate other market circumstances like an entry that may cause or prevent anti-competitive harms. If after analyzing these factors the agencies reach the conclusion that there will be no anticompetitive harm resulting from the collaboration, the agencies will end their investigation without considering the procompetitive benefits of the agreement. If the agencies discover the potential for any kind of anticompetitive harm in the agreement, they will also examine if the agreement is reasonably necessary to achieve the procompetitive benefits that would likely offset the anticompetitive harms.

The Difference between Mergers and Competitive Agreements:

The impact of competitive agreements may differ vastly from the mergers due to a large number of factors. In most cases, mergers completely eliminate the chances of competition between the merging parties. However, the situation is different in the case of competitor collaborations. In the case of competitor collaboration, the chances of competition between the involved parties are not completely eliminated. Some chances of competition between the collaborating parties always remain in case of a competitive agreement. So, while the remaining competition may reduce concerns for the agencies, some questions still remain. There are chances that the collaborating parties may have agreed about restraints on competition in the remaining areas as well. 

Another important difference between mergers and competitive collaboration is related to the duration of the deal. While mergers are generally permanent, competitive collaborations are made for a limited duration. So, let’s say Honda and Toyota have partnered with each other for an R&D project. While the two companies will be able to pool their resources in a manner that helps them grow their business efficiency, they would still remain potential competitors in the real market. Therefore, the type of antitrust investigation that occurs in the case of mergers is different from that which takes place in the case of competitive collaborations. 

In some cases of competitive collaboration, the overall competitive effect can still be similar to mergers (complete or partial).  So, the investigating agencies treat the collaborative agreement as a Horizontal merger in a relevant market and analyze it according to the Horizontal Merger Guidelines. This is the case generally when

(a.) collaborating parties are competitors in the relevant markets.

(b.)  to undertake the collaboration, involved parties bring together resources and capabilities that help improve economic efficiency.

(c.) due to the integration, competition between the participants is eliminated in all forms in the relevant markets.

(d.) the duration of the collaboration is not definite or that it does not terminate within a sufficiently limited time period by its own specific and express terms.

The investigating agency uses these guidelines to identify the competitive impact of the collaboration in the other markets.

On what criteria does the investigating agency evaluate the competitive agreements?

The agencies use the following four main criteria to evaluate the agreements among competitors:

1. Potential Pro-competitive Benefits:

To determine whether a competitive agreement should be treated as a merger, agencies use the term of ten years. Generally, this term is sufficient to treat collaboration as permanent. The length of the term can however vary depending on the circumstances in specific industries like the technology life cycles. However, this definition does not determine the obligations arising under the Hart Scott Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a.

The agencies also recognize that there are a variety of benefits for consumers that may arise from competitive collaborations between competitors. For example, such collaborations can help the collaborating agencies bring cheaper products and services to the market that will actually benefit the consumers as well as grow the pace of innovation or bring products and services to the customers at a faster rate than usual.

Collaboration can also allow involved parties to use their existing assets better or create incentives that will encourage the involved parties to make investments for improving output which would not be possible without collaboration. There are several types of contractual agreements that the involved parties can utilize to achieve the benefits of competitive collaboration including joint ventures, trade or professional associations, trade or professional associations, licensing arrangements, or strategic alliances.

Competitor collaborations often help the involved parties gain performance efficiency by bringing various resources and capabilities together. 

For example, Toyota and Honda are getting involved in a competitive agreement. Toyota brings expertise and Honda combines it with its own manufacturing and marketing processes to achieve higher efficiency as well as better quality. In another case, the two players are unable to achieve economies of scale or scope by pooling resources and capabilities which might not be otherwise possible for any single player.  Apart from that, two players can also combine their resources and capabilities ( for example, R&D and marketing) in a manner that helps them lower the costs of production and sales or achieve lower lead times. This type of collaboration allows the involved players to reduce costs of the final products for the consumers, improve the quality of their existing products as well as bring new products to the market faster.  

2. Potential Anticompetitive harms:

In several instances, competitive collaborations can prove harmful to consumers and society. They may increase the ability of the involved players to raise the prices higher, reduce the level of output or product/services quality, as well as the rate of innovation below the normal (absent the collaboration). There are a large variety of mechanisms that can give rise to such effects.  Such agreements can have a limiting effect on decision making. They can combine the control of or financial interests in production,  or decisions related to pricing, output, or any other significant factor having an effect on competition.  Apart from that, these agreements may otherwise reduce the involved players’ ability to compete freely and effectively.

The involved parties may collude for their benefit in other ways too. For example, a competitive agreement may allow the involved players to exchange or disclose competitively sensitive information or through growth in market concentration. Such collusion may be limited to the relevant market or may also involve another market where the involved parties compete directly or indirectly.

3. Analysis of the overall collaboration and the included agreements:

Generally, competitor agreements include a set of one or more agreements  ( other than merger agreements) involving two or more competitors, for engaging in economic activity or the resulting economic activity.

Agencies mainly evaluate the competitive effects of the overall collaboration and any individual agreement or set of agreements included in the collaborative agreement that may harm competition. The agency assesses two or more competitive agreements when their pro-competitive benefits or anticompetitive harms are so intertwined that the two cannot be considered in isolation for their overall competitive impact. 

4. Relevance of time in terms of possible effects on competition:

The competitive effects of an agreement do not remain the same over time. Due to changing market circumstances or changing organizational dynamics, the addition of new terms to the same agreement, entry or departure of involved parties as well as new market conditions of changing market share, the competitive effect of the same agreement may change. So, the agencies also assess the competitive effects of a relevant agreement in terms of the time when it could cause possible anticompetitive harm (whether it is the time when the agreement is formed or at a later time).

However, if an agency investigates an agreement of anticompetitive effects post-collaboration, it will have to keep in mind the investments that the involved parties have made in the relevant collaboration. 

Nature of the relevant agreement: Business Purpose, Operation in the marketplace and possible competitive operations.

The nature of the agreement is an important determining factor that affects the investigating agency’s decision of whether any anti-competitive harm will result from the agreement. 

The investigating agency draws inferences related to the purpose of the agreement on the basis of objective facts while examining the nature of the relevant agreement. Another important factor is the evidence of the subjective intent of the participants that helps agencies decide the nature of the relevant agreement. Agencies consider the competitive effects of the agreement in light of the evidence of the subjective intent of the participants. Unless there are chances of anti-competitive harms occurring due to the agreement, the agencies will not carry out a detailed analysis of the benefits of the agreement. An agency can determine anti-competitive harm resulting from the agreement if: 

• a collaboration between two or more competing parties successfully mandates new anti-competitive conduct or,
•  it successfully eliminates pro-competitive pre collaboration conduct (practices like withholding services that were desired by the consumers)

If an agency finds anticompetitive harm in its investigation, it will not carry out a detailed examination of market power. In some cases, it is essential for the investigating agency to analyze market power in order to determine or effectively conclude that there is anti-competitive harm happening due to the agreement. 

Types of competitor collaborations that may give rise to anti-competitive concerns:

Production collaborations: 

Competing businesses may enter into agreements to make products/services that they may sell jointly. For example, HP and Dell together develop a CPU model that delivers higher performance. Or, the two companies may enter into a joint agreement to develop a product that they use as a raw material or input. For example, HP and Dell create a high-performance microchip that they use for making powerful laptops and computers. Generally, such agreements are procompetitive. Despite entering into a short term partnership for producing microchips, the two companies remain competitors in the PC and laptop markets. The collaboration between the two players improves their ability to compete in the PC market. As a part of such collaborations, competing players may bring their complementary technologies, assets, know-how, and other assets together to gain higher production efficiency or to achieve higher cost-efficiency in terms of production that was not possible for any of the individual players alone. 

However, there are many cases where such agreements may yield anticompetitive harms. For example, there are collaborations involving agreements at the output level or those involving the use of key assets, or regarding prices and other significant variables like quality, service, or promotional strategies. Such collaborations can help the involved layers grow their market power or exercise market power. These collaborations can also combine the control of the involved parties on production or key assets or decisions regarding key competitive variables that individual players would otherwise control. 

Such agreements may hurt independent competition. They may affect the individual players’ ability to compete independently by reducing their control over the assets necessary to compete. They can also combine financial interests in ways that will have a negative impact on the ability of the involved parties to compete independently. 

Marketing Collaborations:

Competitor collaborations may also be related to marketing, sales and distribution of goods and services produced individually or jointly by the involved parties. In most cases, these agreements are procompetitive. For example,, by combining their distribution capabilities, HP and Dell bring products to the market faster. Such agreements allow the involved businesses to achieve higher efficiency in terms of sales, marketing and distribution. 

However, while such agreements are mostly procompetitive, they can also result in anti-competitive harms in some cases. It happens when collaborations related to marketing and distribution involve agreements on price, output, or any other variable that may significantly impact output. In other cases, marketing and distribution collaborations may involve the agreements in the use of assets that may have a significant impact on competition like an extensive distribution network or online distribution capabilities that cover large geographical regions. Suppose, HP and Dell have entered into a competitive agreement that combines their distribution networks and allows them to grow their sales in various regions of the world. This agreement leaves the competing players in the PC industry at a significant disadvantage. 

Such an agreement can also increase the market power of the involved parties or allow them to exercise stronger market power. For example, two or three large players (like HP, Lenovo, and Dell) in the PC industry form a collaborative agreement that involves the joint promotion of their products. They promote their products and services together but this practice reduces or eliminates comparative advertising.  This has a negative impact on competition since it restricts the information customers had related to pricing or other significant competitive variables. 

Buying Collaborations:

Competing players may also form collaborative agreements that allow them to source raw materials at lower costs and with higher efficiency. These agreements can also generate or increase market power (also called monopsony power) or help the involved parties to exercise market power by allowing them to control the prices of raw materials and depress output below the level that would likely prevail if the relevant agreement was not formed. Buying collaborations may also facilitate collusion among the participating players. They can standardize participants’ costs or improve the ability of the involved parties to project or monitor a player’s output level through the knowledge of its input purchases. 

Research and Development collaborations:

Competing parties can also form collaborations to carry out research and development projects jointly. In most cases, such agreements are procompetitive. Investigating agencies analyze such collaborations under the rule of the reason. As a part of such collaborative agreements, companies can combine their assets, technologies or knowhow to develop new and improved goods and services or faster production processes. However, several times anticompetitive harms can also result from these agreements. They too can generate or increase market power or enable collusion between the involved parties in ways similar to those discussed above.

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