[Federal Register Volume 64, Number 193 (Wednesday, October 6, 1999)]
[Notices]
[Pages 54484-54497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26032]



[[Page 54483]]

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Part VI





Federal Trade Commission





_______________________________________________________________________



Request for Views on Draft Antitrust Guidelines for Collaborations 
Among Competitors; Notice

  Federal Register / Vol. 64, No. 193 / Wednesday, October 6, 1999 / 
Notices  

[[Page 54484]]



FEDERAL TRADE COMMISSION


REQUEST FOR VIEWS ON DRAFT ANTITRUST GUIDELINES FOR 
COLLABORATIONS AMONG COMPETITORS

AGENCY: Federal Trade Commission.

ACTION: Notice.

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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission''), in 
consultation with the Antitrust Division of the U.S. Department of 
Justice, has drafted Antitrust Guidelines for Collaborations Among 
Competitors. The Guidelines, if adopted in final form by the FTC and 
the Department of Justice (``the Agencies''), will state the antitrust 
enforcement policy of the Agencies with regard to competition issues 
raised by collaborations among competitors. The Guidelines should 
enable businesses to evaluate proposed transactions with greater 
understanding of possible antitrust implications, thus encouraging 
procompetitive collaborations, deterring collaborations likely to harm 
competition and consumers, and facilitating the Agencies' 
investigations of collaborations. The Agencies are issuing the 
Guidelines in draft form to obtain advice and suggestions from 
businesses, consumers, and antitrust practitioners that will assist in 
ensuring that the Guidelines achieve these goals.

DATES: Views should be submitted in writing as specified below by 
January 5, 2000.

ADDRESSES: To facilitate efficient review, all views should be 
submitted in written and electronic form. Six hard copies of each 
submission should be addressed to Donald S. Clark, Office of the 
Secretary, Federal Trade Commission, 600 Pennsylvania Avenue, N.W., 
Washington, D.C. 20580. Submissions should be captioned ``Draft 
Antitrust Guidelines for Collaborations Among Competitors--Submission 
of Views.'' Electronic submissions may be made in one of two ways. They 
may be filed on a 3\1/2\ inch computer disk, with a label on the disk 
stating the name of the submitter and the name and version of the word 
processing program used to create the document. (Programs based on DOS 
or Windows are preferred. Files from other operating systems should be 
submitted in ASCII text format.) Alternatively, electronic submissions 
may be sent by electronic mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Policy Planning staff at (202) 326-
3712.

SUPPLEMENTARY INFORMATION: The draft Guidelines are a product of the 
Joint Venture Project initiated by the Commission to determine whether 
antitrust guidance to the business community could be improved through 
clarifying and updating antitrust policies regarding joint ventures and 
other forms of competitor collaboration. The Commission has provided 
opportunity for public input throughout each stage of the project. See 
62 FR 22945 (1997) and 62 FR 48660 (1997). If adopted in final form, 
the draft Guidelines will state the Agencies' antitrust enforcement 
policy with regard to competition issues raised by collaborations among 
competitors. They are not intended to create or recognize any legally 
enforceable right or defense in any person or to affect the 
admissibility of evidence or in any other way to affect the course or 
conduct of any present or future litigation.

    By direction of the Commission.
Donald S. Clark,
Secretary.

Antitrust Guidelines for Collaborations Among Competitors

Preamble

    In order to compete in modern markets, competitors sometimes need 
to collaborate. Competitive forces are driving firms toward complex 
collaborations to achieve goals such as expanding into foreign markets, 
funding expensive innovation efforts, and lowering production and other 
costs.
    Such collaborations often are not only benign but procompetitive. 
Indeed, in the last two decades, the federal antitrust agencies have 
brought relatively few civil cases against competitor collaborations. 
Nevertheless, a perception that antitrust laws are skeptical about 
agreements among actual or potential competitors may deter the 
development of procompetitive collaborations.1
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    \1\ Congress has protected certain collaborations from full 
antitrust liability by passing the National Cooperative Research Act 
of 1984 (``NCRA'') and the National Cooperative Research and 
Production Act of 1993 (``NCRPA'') (codified together at 15 U.S.C. 
Sec. Sec. 4301-06). Relatively few participants in research and 
production collaborations have sought to take advantage of the 
protections afforded by the NCRA and NCRPA, however.
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    To provide guidance to business people, the Federal Trade 
Commission (``FTC'') and the U.S. Department of Justice (``DOJ'') 
(collectively, ``the Agencies'') previously issued guidelines 
addressing several special circumstances in which antitrust issues 
related to competitor collaborations may arise.2 But none of 
these Guidelines represents a general statement of the Agencies' 
analytical approach to competitor collaborations. The increasing 
varieties and use of competitor collaborations have yielded requests 
for improved clarity regarding their treatment under the antitrust 
laws.
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    \2\ The Statements of Antitrust Enforcement Policy in Health 
Care (``Health Care Statements'') outline the Agencies' approach to 
certain health care collaborations, among other things. The 
Antitrust Guidelines for the Licensing of Intellectual Property 
(``Intellectual Property Guidelines'') outline the Agencies' 
enforcement policy with respect to intellectual property licensing 
agreements among competitors, among other things. The 1992 DOJ/FTC 
Horizontal Merger Guidelines, as amended in 1997 (``Horizontal 
Merger Guidelines''), outline the Agencies'' approach to horizontal 
mergers and acquisitions, and certain competitor collaborations.
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    The new Antitrust Guidelines for Collaborations among Competitors 
(``Competitor Collaboration Guidelines'') are intended to explain how 
the Agencies analyze certain antitrust issues raised by collaborations 
among competitors. Competitor collaborations and the market 
circumstances in which they operate vary widely. No set of guidelines 
can provide specific answers to every antitrust question that might 
arise from a competitor collaboration. These Guidelines describe an 
analytical framework to assist businesses in assessing the likelihood 
of an antitrust challenge to a collaboration with one or more 
competitors. They should enable businesses to evaluate proposed 
transactions with greater understanding of possible antitrust 
implications, thus encouraging procompetitive collaborations, deterring 
collaborations likely to harm competition and consumers, and 
facilitating the Agencies' investigations of collaborations.

Section 1: Purpose, Definitions, and Overview

1.1  Purpose and Definitions

    These Guidelines state the antitrust enforcement policy of the 
Agencies with respect to competitor collaborations. By stating their 
general policy, the Agencies hope to assist businesses in assessing 
whether the Agencies will challenge a competitor collaboration or any 
of the agreements of which it is comprised.3 However, these 
Guidelines cannot remove judgment and discretion in antitrust law 
enforcement. The Agencies evaluate each case in light of its own facts 
and apply the analytical framework set forth in these Guidelines 
reasonably and flexibly.4
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    \3\ These Guidelines neither describe how the Agencies litigate 
cases nor assign burdens of proof or production.
    \4\ The analytical framework set forth in these Guidelines is 
consistent with the analytical frameworks in the Health Care 
Statements and the Intellectual Property Guidelines, which remain in 
effect to address issues in their special contexts.

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[[Page 54485]]

    A ``competitor collaboration'' comprises a set of one or more 
agreements, other than merger agreements, between or among competitors 
to engage in economic activity, and the economic activity resulting 
therefrom.5 ``Competitors'' include firms that are actual or 
potential competitors 6 in a relevant market.7 
Competitor collaborations involve one or more business activities, such 
as research and development (``R&D''), production, marketing, 
distribution, sales or purchasing. Information sharing and various 
trade association activities also may take place through competitor 
collaborations.
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    \5\ These Guidelines do not address the possible exclusionary 
effects of agreements among competitors that may foreclose or limit 
competition by rivals.
    \6\ A firm is treated as a potential competitor if there is 
evidence that entry by that firm is reasonably probable in the 
absence of the relevant agreement, or that competitively significant 
decisions by actual competitors are constrained by concerns that 
anticompetitive conduct likely would induce the firm to enter.
    \7\ Firms also may be in a buyer-seller or other relationship, 
but that does not eliminate the need to examine the competitor 
relationship, if present.
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    These Guidelines use the terms ``anticompetitive harm,'' 
``procompetitive benefit,'' and ``overall competitive effect'' in 
analyzing the competitive effects of agreements among competitors. All 
of these terms include actual and likely competitive effects. The 
Guidelines use the term ``anticompetitive harm'' to refer to an 
agreement's adverse competitive consequences, without taking account of 
offsetting procompetitive benefits. Conversely, the term 
``procompetitive benefit'' refers to an agreement's favorable 
competitive consequences, without taking account of its anticompetitive 
harm. The terms ``overall competitive effect'' or ``competitive 
effect'' are used in discussing the combination of an agreement's 
anticompetitive harm and procompetitive benefit.

1.2  Overview of Analytical Framework

    Two types of analysis are used by the Supreme Court to determine 
the lawfulness of an agreement among competitors: per se and rule of 
reason.8 Certain types of agreements are so likely to harm 
competition and to have no significant procompetitive benefit that they 
do not warrant the time and expense required for particularized inquiry 
into their effects. Once identified, such agreements are challenged as 
per se unlawful.9 All other agreements are evaluated under 
the rule of reason, which involves a factual inquiry into an 
agreement's overall competitive effect. As the Supreme Court has 
explained, rule of reason analysis entails a flexible inquiry and 
varies in focus and detail depending on the nature of the agreement and 
market circumstances.10
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    \8\ See National Soc'y of Prof'l. Eng'rs v. United States, 435 
U.S. 679, 692 (1978).
    \9\ See FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411, 
432-36 (1990).
    \10\ See California Dental Ass'n v. FTC, 119 S. Ct. 1604, 1617-
18 (1999); FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 459-61 
(1986); National Collegiate Athletic Ass'n v. Board of Regents of 
the Univ. of Okla., 468 U.S. 85, 104-13 (1984).
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    This overview briefly sets forth questions and factors that the 
Agencies assess in analyzing an agreement among competitors. The rest 
of the Guidelines should be consulted for the detailed definitions and 
discussion that underlie this analysis.
    Agreements Challenged as Per Se Illegal. Agreements of a type that 
always or almost always tends to raise price or to reduce output are 
per se illegal. The Agencies challenge such agreements, once 
identified, as per se illegal. Types of agreements that have been held 
per se illegal include agreements among competitors to fix prices or 
output, rig bids, or share or divide markets by allocating customers, 
suppliers, territories, or lines of commerce. The Department of Justice 
prosecutes participants in such hard-core cartel agreements criminally. 
Because the courts conclusively presume such hard-core cartel 
agreements to be illegal, the Department of Justice treats them as such 
without inquiring into their claimed business purposes, anticompetitive 
harms, procompetitive benefits, or overall competitive effects.
    Agreements Analyzed under the Rule of Reason. Agreements not 
challenged as per se illegal are analyzed under the rule of reason to 
determine their overall competitive effect. These include agreements of 
a type that otherwise might be considered per se illegal, provided they 
are reasonably related to, and reasonably necessary to achieve 
procompetitive benefits from, an efficiency-enhancing integration of 
economic activity.
    Rule of reason analysis focuses on the state of competition with, 
as compared to without, the relevant agreement. The central question is 
whether the relevant agreement likely harms competition by increasing 
the ability or incentive profitably to raise price above or reduce 
output, quality, service, or innovation below what likely would prevail 
in the absence of the relevant agreement.
    Rule of reason analysis entails a flexible inquiry and varies in 
focus and detail depending on the nature of the agreement and market 
circumstances. The Agencies focus on only those factors, and undertake 
only that factual inquiry, necessary to make a sound determination of 
the overall competitive effect of the relevant agreement. Ordinarily, 
however, no one factor is dispositive in the analysis.
    The Agencies' analysis begins with an examination of the nature of 
the relevant agreement. As part of this examination, the Agencies ask 
about the business purpose of the agreement and examine whether the 
agreement, if already in operation, has caused anticompetitive harm. In 
some cases, the nature of the agreement and the absence of market power 
together may demonstrate the absence of anticompetitive harm. In such 
cases, the Agencies do not challenge the agreement. Alternatively, 
where the likelihood of anticompetitive harm is evident from the nature 
of the agreement, or anticompetitive harm has resulted from an 
agreement already in operation, then, absent overriding benefits that 
could offset the anticompetitive harm, the Agencies challenge such 
agreements without a detailed market analysis.
    If the initial examination of the nature of the agreement indicates 
possible competitive concerns, but the agreement is not one that would 
be challenged without a detailed market analysis, the Agencies analyze 
the agreement in greater depth. The Agencies typically define relevant 
markets and calculate market shares and concentration as an initial 
step in assessing whether the agreement may create or increase market 
power or facilitate its exercise. The Agencies examine the extent to 
which the participants and the collaboration have the ability and 
incentive to compete independently. The Agencies also evaluate other 
market circumstances, e.g. entry, that may foster or prevent 
anticompetitive harms.
    If the examination of these factors indicates no potential for 
anticompetitive harm, the Agencies end the investigation without 
considering procompetitive benefits. If investigation indicates 
anticompetitive harm, the Agencies examine whether the relevant 
agreement is reasonably necessary to achieve procompetitive benefits 
that likely would offset anticompetitive harms.

1.3  Competitor Collaborations Distinguished from Mergers

    The competitive effects from competitor collaborations may differ

[[Page 54486]]

from those of mergers due to a number of factors. Mergers completely 
end competition between the merging parties in the relevant market(s). 
By contrast, most competitor collaborations preserve some form of 
competition among the participants. This remaining competition may 
reduce competitive concerns, but also may raise questions about whether 
participants have agreed to anticompetitive restraints on the remaining 
competition.
    Mergers are designed to be permanent, while competitor 
collaborations are more typically of limited duration. Thus, 
participants in a collaboration typically remain potential competitors, 
even if they are not actual competitors for certain purposes (e.g., 
R&D) during the collaboration. The potential for future competition 
between participants in a collaboration requires antitrust scrutiny 
different from that required for mergers.
    Nonetheless, in some cases, competitor collaborations have 
competitive effects identical to those that would arise if the 
participants merged in whole or in part. The Agencies treat a 
competitor collaboration as a horizontal merger in a relevant market 
and analyze the collaboration pursuant to the Horizontal Merger 
Guidelines if: (a) The participants are competitors in that relevant 
market; (b) the formation of the collaboration involves an efficiency-
enhancing integration of economic activity in the relevant market; (c) 
the integration eliminates all competition among the participants in 
the relevant market; and (d) the collaboration does not terminate 
within a sufficiently limited period 11 by its own specific 
and express terms.12 Effects of the collaboration on 
competition in other markets are analyzed as appropriate under these 
Guidelines or other applicable precedent. See Example 1.13
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    \11\ In general, the Agencies use ten years as a term indicating 
sufficient permanence to justify treatment of a competitor 
collaboration as analogous to a merger. The length of this term may 
vary, however, depending on industry-specific circumstances, such as 
technology life cycles.
    \12\ This definition, however, does not determine obligations 
arising under the Hart-Scott-Rodino Antitrust Improvements Act of 
1976, 15 U.S.C. Sec. 18a.
    \13\ Examples illustrating this and other points set forth in 
these Guidelines are included in the Appendix.
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Section 2: General Principles for Evaluating Agreements Among 
Competitors

2.1  Potential Procompetitive Benefits

    The Agencies recognize that consumers may benefit from competitor 
collaborations in a variety of ways. For example, a competitor 
collaboration may enable participants to offer goods or services that 
are cheaper, more valuable to consumers, or brought to market faster 
than would be possible absent the collaboration. A collaboration may 
allow its participants to better use existing assets, or may provide 
incentives for them to make output-enhancing investments that would not 
occur absent the collaboration. The potential efficiencies from 
competitor collaborations may be achieved through a variety of 
contractual arrangements including joint ventures, trade or 
professional associations, licensing arrangements, or strategic 
alliances.
    Efficiency gains from competitor collaborations often stem from 
combinations of different capabilities or resources. For example, one 
participant may have special technical expertise that usefully 
complements another participant's manufacturing process, allowing the 
latter participant to lower its production cost or improve the quality 
of its product. In other instances, a collaboration may facilitate the 
attainment of scale or scope economies beyond the reach of any single 
participant. For example, two firms may be able to combine their 
research or marketing activities to lower their cost of bringing their 
products to market, or reduce the time needed to develop and begin 
commercial sales of new products. Consumers may benefit from these 
collaborations as the participants are able to lower prices, improve 
quality, or bring new products to market faster.

2.2  Potential Anticompetitive Harms

    Competitor collaborations may harm competition and consumers by 
increasing the ability or incentive profitably to raise price above or 
reduce output, quality, service, or innovation below what likely would 
prevail in the absence of the relevant agreement. Such effects may 
arise through a variety of mechanisms. Among other things, agreements 
may limit independent decision making or combine the control of or 
financial interests in production, key assets, or decisions regarding 
price, output, or other competitively sensitive variables, or may 
otherwise reduce the participants' ability or incentive to compete 
independently.
    Competitor collaborations also may facilitate explicit or tacit 
collusion through facilitating practices such as the exchange or 
disclosure of competitively sensitive information or through increased 
market concentration. Such collusion may involve the relevant market in 
which the collaboration operates or another market in which the 
participants in the collaboration are actual or potential competitors.

2.3  Analysis of the Overall Collaboration and the Agreements of 
Which It Consists

    A competitor collaboration comprises a set of one or more 
agreements, other than merger agreements, between or among competitors 
to engage in economic activity, and the economic activity resulting 
therefrom. In general, the Agencies assess the competitive effects of 
the overall collaboration and any individual agreement or set of 
agreements within the collaboration that may harm competition. For 
purposes of these Guidelines, the phrase ``relevant agreement'' refers 
to whichever of these three the evaluating Agency is assessing. Two or 
more agreements are assessed together if their procompetitive benefits 
or anticompetitive harms are so intertwined that they cannot 
meaningfully be isolated and attributed to any individual agreement. 
See Example 2.

2.4  Competitive Effects Are Assessed as of the Time of Possible 
Harm to Competition

    The competitive effects of a relevant agreement may change over 
time, depending on changes in circumstances such as internal 
reorganization, adoption of new agreements as part of the 
collaboration, addition or departure of participants, new market 
conditions, or changes in market share. The Agencies assess the 
competitive effects of a relevant agreement as of the time of possible 
harm to competition, whether at formation of the collaboration or at a 
later time, as appropriate. See Example 3. However, an assessment after 
a collaboration has been formed is sensitive to the reasonable 
expectations of participants whose significant sunk cost investments in 
reliance on the relevant agreement were made before it became 
anticompetitive.

Section 3: Analytical Framework for Evaluating Agreements Among 
Competitors

3.1  Introduction

    Section 3 sets forth the analytical framework that the Agencies use 
to evaluate the competitive effects of a competitor collaboration and 
the agreements of which it consists. Certain types of agreements are so 
likely to be harmful to competition and to have no significant benefits 
that they do not warrant the time and expense required for 
particularized inquiry into their

[[Page 54487]]

effects.14 Once identified, such agreements are challenged 
as per se illegal.15
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    \14\ See Continental TV, Inc. v. GTE Sylvania Inc., 433 U.S. 36, 
50 n.16 (1977).
    \15\ See Superior Court Trial Lawyers Ass'n, 493 U.S. at 432-36.
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    Agreements not challenged as per se illegal are analyzed under the 
rule of reason. Rule of reason analysis focuses on the state of 
competition with, as compared to without, the relevant agreement. Under 
the rule of reason, the central question is whether the relevant 
agreement likely harms competition by increasing the ability or 
incentive profitably to raise price above or reduce output, quality, 
service, or innovation below what likely would prevail in the absence 
of the relevant agreement. Given the great variety of competitor 
collaborations, rule of reason analysis entails a flexible inquiry and 
varies in focus and detail depending on the nature of the agreement and 
market circumstances. Rule of reason analysis focuses on only those 
factors, and undertakes only the degree of factual inquiry, necessary 
to assess accurately the overall competitive effect of the relevant 
agreement.16
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    \16\ See California Dental Ass'n, 119 S. Ct. at 1617-18; Indiana 
Fed'n of Dentists, 476 U.S. at 459-61; NCAA, 468 U.S. at 104-13.
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    The following sections describe in detail the Agencies' analytical 
framework.

3.2  Agreements Challenged as Per Se Illegal

    Agreements of a type that always or almost always tends to raise 
price or reduce output are per se illegal.17 The Agencies 
challenge such agreements, once identified, as per se illegal. 
Typically these are agreements not to compete on price or output. Types 
of agreements that have been held per se illegal include agreements 
among competitors to fix prices or output, rig bids, or share or divide 
markets by allocating customers, suppliers, territories or lines of 
commerce.18 The Department of Justice prosecutes 
participants in such hard-core cartel agreements criminally. Because 
the courts conclusively presume such hard-core cartel agreements to be 
illegal, the Department of Justice treats them as such without 
inquiring into their claimed business purposes, anticompetitive harms, 
procompetitive benefits, or overall competitive effects.
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    \17\ See Broadcast Music, Inc. v. Columbia Broadcasting Sys., 
441 U.S. 1, 19-20 (1979).
    \18\ See, e.g., Palmer v. BRG of Georgia, Inc., 498 U.S. 46 
(1990) (market allocation); United States v. Trenton Potteries Co., 
273 U.S. 392 (1927) (price fixing).
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    If, however, participants in an efficiency-enhancing integration of 
economic activity enter into an agreement that is reasonably related to 
the integration and reasonably necessary to achieve its procompetitive 
benefits, the Agencies analyze the agreement under the rule of reason, 
even if it is of a type that might otherwise be considered per se 
illegal.19 See Example 4. In an efficiency-enhancing 
integration, participants collaborate to perform or cause to be 
performed (by a joint venture entity created by the collaboration or by 
one or more participants or by a third party acting on behalf of other 
participants) one or more business functions, such as production, 
distribution, or R&D, and thereby benefit, or potentially benefit, 
consumers by expanding output, reducing price, or enhancing quality, 
service, or innovation. Participants in an efficiency-enhancing 
integration typically combine, by contract or otherwise, significant 
capital, technology, or other complementary assets to achieve 
procompetitive benefits that the participants could not achieve 
separately. The mere coordination of decisions on price, output, 
customers, territories, and the like is not integration, and cost 
savings without integration are not a basis for avoiding per se 
condemnation. The integration must promote procompetitive benefits that 
are cognizable under the efficiencies analysis set forth in Section 
3.36 below. Such procompetitive benefits may enhance the participants' 
ability or incentives to compete and thus may offset an agreement's 
anticompetitive tendencies. See Examples 5 through 7.
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    \19\ See Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 
339 n.7, 356-57 (1982) (finding no integration).
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    An agreement may be ``reasonably necessary'' without being 
essential. However, if the participants could achieve an equivalent or 
comparable efficiency-enhancing integration through practical, 
significantly less restrictive means, then the Agencies conclude that 
the agreement is not reasonably necessary.20 In making this 
assessment, except in unusual circumstances, the Agencies consider 
whether practical, significantly less restrictive means were reasonably 
available when the agreement was entered into, but do not search for a 
theoretically less restrictive alternative that was not practical given 
the business realities.
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    \20\ See id. at 352-53 (observing that even if a maximum fee 
schedule for physicians' services were desirable, it was not 
necessary that the schedule be established by physicians rather than 
by insurers); Broadcast Music, 441 U.S. at 20-21 (setting of price 
``necessary'' for the blanket license).
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    Before accepting a claim that an agreement is reasonably necessary 
to achieve procompetitive benefits from an integration of economic 
activity, the Agencies undertake a limited factual inquiry to evaluate 
the claim.21 Such an inquiry may reveal that efficiencies 
from an agreement that are possible in theory are not plausible in the 
context of the particular collaboration. Some claims--such as those 
premised on the notion that competition itself is unreasonable--are 
insufficient as a matter of law,22 and others may be 
implausible on their face. In any case, labeling an arrangement a 
``joint venture'' will not protect what is merely a device to raise 
price or restrict output; 23 the nature of the conduct, not 
its designation, is determinative.
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    \21\ See Maricopa, 457 U.S. at 352-53, 356-57 (scrutinizing the 
defendant medical foundations for indicia of integration and 
evaluating the record evidence regarding less restrictive 
alternatives).
    \22\ See Indiana Fed'n of Dentists, 476 U.S. at 463-64; NCAA, 
468 U.S. at 116-17; Prof'l. Eng'rs, 435 U.S. at 693-96. Other 
claims, such as an absence of market power, are no defense to per se 
illegality. See Superior Court Trial Lawyers Ass'n, 493 U.S. at 434-
36; United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224-26 & 
n.59 (1940).
    \23\ See Timken Roller Bearing Co. v. United States, 341 U.S. 
593, 598 (1951).
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3.3  Agreements Analyzed Under the Rule of Reason

    Agreements not challenged as per se illegal are analyzed under the 
rule of reason to determine their overall competitive effect. Rule of 
reason analysis focuses on the state of competition with, as compared 
to without, the relevant agreement. The central question is whether the 
relevant agreement likely harms competition by increasing the ability 
or incentive profitably to raise price above or reduce output, quality, 
service, or innovation below what likely would prevail in the absence 
of the relevant agreement.24
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    \24\ In addition, concerns may arise where an agreement 
increases the ability or incentive of buyers to exercise monopsony 
power. See infra Section 3.31(a).
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    Rule of reason analysis entails a flexible inquiry and varies in 
focus and detail depending on the nature of the agreement and 
marketcircumstances.25 The Agencies focus on only those 
factors, and undertake only that factual inquiry, necessary to make a 
sound

[[Page 54488]]

determination of the overall competitive effect of the relevant 
agreement. Ordinarily, however, no one factor is dispositive in the 
analysis.
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    \25\ See California Dental Ass'n, 119 S. Ct. at 1612-13, 1617 
(``What is required * * * is an enquiry meet for the case, looking 
to the circumstances, details, and logic of a restraint.''); NCAA, 
468 U.S. 109 n.39 (``the rule of reason can sometimes be applied in 
the twinkling of an eye'') (quoting Phillip E. Areeda, The ``Rule of 
Reason'' in Antitrust Analysis: General Issues 37-38 (Federal 
Judicial Center, June 1981)).
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    Under the rule of reason, the Agencies' analysis begins with an 
examination of the nature of the relevant agreement, since the nature 
of the agreement determines the types of anticompetitive harms that may 
be of concern. As part of this examination, the Agencies ask about the 
business purpose of the agreement and examine whether the agreement, if 
already in operation, has caused anticompetitive harm.26 If 
the nature of the agreement and the absence of market power 
27 together demonstrate the absence of anticompetitive harm, 
the Agencies do not challenge the agreement. See Example 8. 
Alternatively, where the likelihood of anticompetitive harm is evident 
from the nature of the agreement,28 or anticompetitive harm 
has resulted from an agreement already in operation,29 then, 
absent overriding benefits that could offset the anticompetitive harm, 
the Agencies challenge such agreements without a detailed market 
analysis.30
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    \26\ See Board of Trade of the City of Chicago v. United States, 
246 U.S. 231, 238 (1918).
    \27\ That market power is absent may be determined without 
defining a relevant market. For example, if no market power is 
likely under any plausible market definition, it does not matter 
which one is correct.
    \28\ See California Dental Ass'n, 119 S. Ct. at 1612-13, 1617 
(an ``obvious anticompetitive effect'' would warrant quick 
condemnation); Indiana Fed'n of Dentists, 476 U.S. at 459; NCAA, 468 
U.S. at 104, 106-10.
    \29\ See Indiana Fed'n of Dentists, 476 U.S. at 460-61 (``Since 
the purpose of the inquiries into market definition and market power 
is to determine whether an arrangement has the potential for genuine 
adverse effects on competition, `proof of actual detrimental 
effects, such as a reduction of output,' can obviate the need for an 
inquiry into market power, which is but a `surrogate for detrimental 
effects.' '') (quoting 7 Phillip E. Areeda, Antitrust Law  para. 
1511, at 424 (1986)); NCAA, 468 U.S. at 104-08, 110 n. 42.
    \30\ See Indiana Fed'n of Dentists, 476 U.S. at 459-60 
(condemning without ``detailed market analysis'' an agreement to 
limit competition by withholding x-rays from patients' insurers 
after finding no competitive justification).
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    If the initial examination of the nature of the agreement indicates 
possible competitive concerns, but the agreement is not one that would 
be challenged without a detailed market analysis, the Agencies analyze 
the agreement in greater depth. The Agencies typically define relevant 
markets and calculate market shares and concentration as an initial 
step in assessing whether the agreement may create or increase market 
power 31 or facilitate its exercise and thus poses risks to 
competition.32 The Agencies examine factors relevant to the 
extent to which the participants and the collaboration have the ability 
and incentive to compete independently, such as whether an agreement is 
exclusive or non-exclusive and its duration.33 The Agencies 
also evaluate whether entry would be timely, likely, and sufficient to 
deter or counteract any anticompetitive harms. In addition, the 
Agencies assess any other market circumstances that may foster or 
impede anticompetitive harms.
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    \31\ Market power to a seller is the ability profitably to 
maintain prices above competitive levels for a significant period of 
time. Sellers also may exercise market power with respect to 
significant competitive dimensions other than price, such as 
quality, service, or innovation. Market power to a buyer is the 
ability profitably to depress the price paid for a product below the 
competitive level for a significant period of time and thereby 
depress output.
    \32\ See Eastman Kodak Co. v. Image Technical Services, Inc., 
504 U.S. 451, 464 (1992).
    \33\ Compare NCAA, 468 U.S. at 113-15, 119-20 (noting that 
colleges were not permitted to televise their own games without 
restraint), with Broadcast Music, 441 U.S. at 23-24 (finding no 
legal or practical impediment to individual licenses).
---------------------------------------------------------------------------

    If the examination of these factors indicates no potential for 
anticompetitive harm, the Agencies end the investigation without 
considering procompetitive benefits. If investigation indicates 
anticompetitive harm, the Agencies examine whether the relevant 
agreement is reasonably necessary to achieve procompetitive benefits 
that likely would offset anticompetitive harms.34
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    \34\ See NCAA, 468 U.S. at 113-15 (rejecting efficiency claims 
when production was limited, not enhanced); Prof'l. Eng'rs, 435 U.S. 
at 696 (dictum) (distinguishing restraints that promote competition 
from those that eliminate competition); Chicago Bd. of Trade, 246 
U.S. at 238 (same).
---------------------------------------------------------------------------

3.31  Nature of the Relevant Agreement: Business Purpose, Operation 
in the Marketplace and Possible Competitive Concerns

    The nature of the agreement is relevant to whether it may cause 
anticompetitive harm. For example, by limiting independent decision 
making or combining control over or financial interests in production, 
key assets, or decisions on price, output, or other competitively 
sensitive variables, an agreement may create or increase market power 
or facilitate its exercise by the collaboration, its participants, or 
both. An agreement to limit independent decision making or to combine 
control or financial interests may reduce the ability or incentive to 
compete independently. An agreement also may increase the likelihood of 
an exercise of market power by facilitating explicit or tacit 
collusion,35 either through facilitating practices such as 
an exchange of competitively sensitive information or through increased 
market concentration.
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    \35\ As used in these Guidelines, ``collusion'' is not limited 
to conduct that involves an agreement under the antitrust laws.
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    In examining the nature of the relevant agreement, the Agencies 
take into account inferences about business purposes for the agreement 
that can be drawn from objective facts. The Agencies also consider 
evidence of the subjective intent of the participants to the extent 
that it sheds light on competitive effects.36 The Agencies 
do not undertake a full analysis of procompetitive benefits pursuant to 
Section 3.36 below, however, unless an anticompetitive harm appears 
likely. The Agencies also examine whether an agreement already in 
operation has caused anticompetitive harm.37 Anticompetitive 
harm may be observed, for example, if a competitor collaboration 
successfully mandates new, anticompetitive conduct or successfully 
eliminates procompetitive pre-collaboration conduct, such as 
withholding services that were desired by consumers when offered in a 
competitive market. If anticompetitive harm is found, examination of 
market power ordinarily is not required. In some cases, however, a 
determination of anticompetitive harm may be informed by consideration 
of market power.
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    \36\ Anticompetitive intent alone does not establish an 
antitrust violation, and procompetitive intent does not preclude a 
violation. See, e.g., Chicago Bd. of Trade, 246 U.S. at 238. But 
extrinsic evidence of intent may aid in evaluating market power, the 
likelihood of anticompetitive harm, and claimed procompetitive 
justifications where an agreement's effects are otherwise ambiguous.
    \37\ See id.
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    The following sections illustrate competitive concerns that may 
arise from the nature of particular types of competitor collaborations. 
This list is not exhaustive. In addition, where these sections address 
agreements of a type that otherwise might be considered per se illegal, 
such as agreements on price, the discussion assumes that the agreements 
already have been determined to be subject to rule of reason analysis 
because they are reasonably related to, and reasonably necessary to 
achieve procompetitive benefits from, an efficiency-enhancing 
integration of economic activity. See supra Section 3.2.

3.31(a)  Relevant Agreements That Limit Independent Decision Making 
or Combine Control or Financial Interests

    The following is intended to illustrate but not exhaust the types 
of agreements that might harm competition by eliminating independent 
decision

[[Page 54489]]

making or combining control or financial interests.
    Production Collaborations. Competitor collaborations may involve 
agreements jointly to produce a product sold to others or used by the 
participants as an input. Such agreements are often 
procompetitive.38 Participants may combine complementary 
technologies, know-how, or other assets to enable the collaboration to 
produce a good more efficiently or to produce a good that no one 
participant alone could produce. However, production collaborations may 
involve agreements on the level of output or the use of key assets, or 
on the price at which the product will be marketed by the 
collaboration, or on other competitively significant variables, such as 
quality, service, or promotional strategies, that can result in 
anticompetitive harm. Such agreements can create or increase market 
power or facilitate its exercise by limiting independent decision 
making or by combining in the collaboration, or in certain 
participants, the control over some or all production or key assets or 
decisions about key competitive variables that otherwise would be 
controlled independently.39 Such agreements could reduce 
individual participants' control over assets necessary to compete and 
thereby reduce their ability to compete independently, combine 
financial interests in ways that undermine incentives to compete 
independently, or both.
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    \38\ The NCRPA accords rule of reason treatment to certain 
production collaborations. However, the statute permits per se 
challenges, in appropriate circumstances, to a variety of 
activities, including agreements to jointly market the goods or 
services produced or to limit the participants' independent sale of 
goods or services produced outside the collaboration. NCRPA, 15 
U.S.C. Secs. 4301-02.
    \39\ For example, where output resulting from a collaboration is 
transferred to participants for independent marketing, 
anticompetitive harm could result if that output is restricted or if 
the transfer takes place at a supracompetitive price. Such conduct 
could raise participants' marginal costs through inflated per-unit 
charges on the transfer of the collaboration's output. 
Anticompetitive harm could occur even if there is vigorous 
competition among collaboration participants in the output market, 
since all the participants would have paid the same inflated 
transfer price.
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    Marketing Collaborations. Competitor collaborations may involve 
agreements jointly to sell, distribute, or promote goods or services 
that are either jointly or individually produced. Such agreements may 
be procompetitive, for example, where a combination of complementary 
assets enables products more quickly and efficiently to reach the 
marketplace. However, marketing collaborations may involve agreements 
on price, output, or other competitively significant variables, or on 
the use of competitively significant assets, such as an extensive 
distribution network, that can result in anticompetitive harm. Such 
agreements can create or increase market power or facilitate its 
exercise by limiting independent decision making; by combining in the 
collaboration, or in certain participants, control over competitively 
significant assets or decisions about competitively significant 
variables that otherwise would be controlled independently; or by 
combining financial interests in ways that undermine incentives to 
compete independently. For example, joint promotion might reduce or 
eliminate comparative advertising, thus harming competition by 
restricting information to consumers on price and other competitively 
significant variables.
    Buying Collaborations. Competitor collaborations may involve 
agreements jointly to purchase necessary inputs. Many such agreements 
do not raise antitrust concerns and indeed may be procompetitive. 
Purchasing collaborations, for example, may enable participants to 
centralize ordering, to combine warehousing or distribution functions 
more efficiently, or to achieve other efficiencies. However, such 
agreements can create or increase market power (which, in the case of 
buyers, is called ``monopsony power'') or facilitate its exercise by 
increasing the ability or incentive to drive the price of the purchased 
product, and thereby depress output, below what likely would prevail in 
the absence of the relevant agreement. Buying collaborations also may 
facilitate collusion by standardizing participants' costs or by 
enhancing the ability to project or monitor a participant's output 
level through knowledge of its input purchases.
    Research & Development Collaborations. Competitor collaborations 
may involve agreements to engage in joint research and development 
(``R&D''). Most such agreements are procompetitive, and they typically 
are analyzed under the rule of reason.40 Through the 
combination of complementary assets, technology, or know-how, an R&D 
collaboration may enable participants more quickly or more efficiently 
to research and develop new or improved goods, services, or production 
processes. Joint R&D agreements, however, can create or increase market 
power or facilitate its exercise by limiting independent decision 
making or by combining in the collaboration, or in certain 
participants, control over competitively significant assets or all or a 
portion of participants' individual competitive R&D efforts. Although 
R&D collaborations also may facilitate tacit collusion on R&D efforts, 
achieving, monitoring, and punishing departures from collusion is 
sometimes difficult in the R&D context.
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    \40\ See NCRPA, 15 U.S.C. Secs. 4301-02. However, the statute 
permits per se challenges, in appropriate circumstances, to a 
variety of activities, including agreements to jointly market the 
fruits of collaborative R&D or to limit the participants' 
independent R&D or their sale or licensing of goods, services, or 
processes developed outside the collaboration. Id.
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    An exercise of market power may injure consumers by reducing 
innovation below the level that otherwise would prevail, leading to 
fewer or no products for consumers to choose from, lower quality 
products, or products that reach consumers more slowly than they 
otherwise would. An exercise of market power also may injure consumers 
by reducing the number of independent competitors in the market for the 
goods, services, or production processes derived from the R&D 
collaboration, leading to higher prices or reduced output, quality, or 
service. A central question is whether the agreement increases the 
ability or incentive anticompetitively to reduce R&D efforts pursued 
independently or through the collaboration, for example, by slowing the 
pace at which R&D efforts are pursued. Other considerations being 
equal, R&D agreements are more likely to raise competitive concerns 
when the collaboration or its participants already possess a secure 
source of market power over an existing product and the new R&D efforts 
might cannibalize their supracompetitive earnings. In addition, 
anticompetitive harm generally is more likely when R&D competition is 
confined to firms with specialized characteristics or assets, such as 
intellectual property, or when a regulatory approval process limits the 
ability of late-comers to catch up with competitors already engaged in 
the R&D.

3.31(b)  Relevant Agreements That May Facilitate Collusion

    Each of the types of competitor collaborations outlined above can 
facilitate collusion. Competitor collaborations may provide an 
opportunity for participants to discuss and agree on anticompetitive 
terms, or otherwise to collude anticompetitively, as well as a greater 
ability to detect and punish deviations that would undermine the 
collusion. Certain marketing, production, and buying collaborations, 
for example, may provide opportunities for their participants to 
collude on price, output,

[[Page 54490]]

customers, territories, or other competitively sensitive variables. R&D 
collaborations, however, may be less likely to facilitate collusion 
regarding R&D activities since R&D often is conducted in secret, and it 
thus may be difficult to monitor an agreement to coordinate R&D. In 
addition, collaborations can increase concentration in a relevant 
market and thus increase the likelihood of collusion among all firms, 
including the collaboration and its participants.
    Agreements that facilitate collusion sometimes involve the exchange 
or disclosure of information. The Agencies recognize that the sharing 
of information among competitors may be procompetitive and is often 
reasonably necessary to achieve the procompetitive benefits of certain 
collaborations; for example, sharing certain technology, know-how, or 
other intellectual property may be essential to achieve the 
procompetitive benefits of an R&D collaboration. Nevertheless, in some 
cases, the sharing of information related to a market in which the 
collaboration operates or in which the participants are actual or 
potential competitors may increase the likelihood of collusion on 
matters such as price, output, or other competitively sensitive 
variables. The competitive concern depends on the nature of the 
information shared. Other things being equal, the sharing of 
information relating to price, output, costs, or strategic planning is 
more likely to raise competitive concern than the sharing of 
information relating to less competitively sensitive variables. 
Similarly, other things being equal, the sharing of information on 
current operating and future business plans is more likely to raise 
concerns than the sharing of historical information. Finally, other 
things being equal, the sharing of individual company data is more 
likely to raise concern than the sharing of aggregated data that does 
not permit recipients to identify individual firm data.

3.32  Relevant Markets Affected by the Collaboration

    The Agencies typically identify and assess competitive effects in 
all of the relevant product and geographic markets in which competition 
may be affected by a competitor collaboration, although in some cases 
it may be possible to assess competitive effects directly without 
defining a particular relevant market(s). Markets affected by a 
competitor collaboration include all markets in which the economic 
integration of the participants' operations occurs or in which the 
collaboration operates or will operate, 41 and may also 
include additional markets in which any participant is an actual or 
potential competitor.42
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    \41\ For example, where a production joint venture buys inputs 
from an upstream market to incorporate in products to be sold in a 
downstream market, both upstream and downstream markets may be 
``markets affected by a competitor collaboration.''
    \42\ Participation in the collaboration may change the 
participants' behavior in this third category of markets, for 
example, by altering incentives and available information, or by 
providing an opportunity to form additional agreements among 
participants.
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3.32(a)  Goods Markets

    In general, for goods 43 markets affected by a 
competitor collaboration, the Agencies approach relevant market 
definition as described in Section 1 of the Horizontal Merger 
Guidelines. To determine the relevant market, the Agencies generally 
consider the likely reaction of buyers to a price increase and 
typically ask, among other things, how buyers would respond to 
increases over prevailing price levels. However, when circumstances 
strongly suggest that the prevailing price exceeds what likely would 
have prevailed absent the relevant agreement, the Agencies use a price 
more reflective of the price that likely would have prevailed. Once a 
market has been defined, market shares are assigned both to firms 
currently in the relevant market and to firms that are able to make 
``uncommitted'' supply responses. See Sections 1.31 and 1.32 of the 
Horizontal Merger Guidelines.
---------------------------------------------------------------------------

    \43\ The term ``goods'' also includes services.
---------------------------------------------------------------------------

3.32(b)  Technology Markets

    When rights to intellectual property are marketed separately from 
the products in which they are used, the Agencies may define technology 
markets in assessing the competitive effects of a competitor 
collaboration that includes an agreement to license intellectual 
property. Technology markets consist of the intellectual property that 
is licensed and its close substitutes; that is, the technologies or 
goods that are close enough substitutes significantly to constrain the 
exercise of market power with respect to the intellectual property that 
is licensed. The Agencies approach the definition of a relevant 
technology market and the measurement of market share as described in 
Section 3.2.2 of the Intellectual Property Guidelines.

3.32(c)  Research and Development: Innovation Markets

    In many cases, an agreement's competitive effects on innovation are 
analyzed as a separate competitive effect in a relevant goods market. 
However, if a competitor collaboration may have competitive effects on 
innovation that cannot be adequately addressed through the analysis of 
goods or technology markets, the Agencies may define and analyze an 
innovation market as described in Section 3.2.3 of the Intellectual 
Property Guidelines. An innovation market consists of the research and 
development directed to particular new or improved goods or processes 
and the close substitutes for that research and development. The 
Agencies define an innovation market only when the capabilities to 
engage in the relevant research and development can be associated with 
specialized assets or characteristics of specific firms.

3.33  Market Shares and Market Concentration

    Market share and market concentration affect the likelihood that 
the relevant agreement will create or increase market power or 
facilitate its exercise. The creation, increase, or facilitation of 
market power will likely increase the ability and incentive profitably 
to raise price above or reduce output, quality, service, or innovation 
below what likely would prevail in the absence of the relevant 
agreement.
    Other things being equal, market share affects the extent to which 
participants or the collaboration must restrict their own output in 
order to achieve anticompetitive effects in a relevant market. The 
smaller the percentage of total supply that a firm controls, the more 
severely it must restrict its own output in order to produce a given 
price increase, and the less likely it is that an output restriction 
will be profitable. In assessing whether an agreement may cause 
anticompetitive harm, the Agencies typically calculate the market 
shares of the participants and of the collaboration.44 The 
Agencies assign a range of market shares to the collaboration. The high 
end of that range is the sum of the market shares of the collaboration 
and its participants. The low end is the share of the collaboration in 
isolation. In general, the Agencies approach the calculation of market 
share as set forth in Section 1.4 of the Horizontal Merger Guidelines.
---------------------------------------------------------------------------

    \44\ When the competitive concern is that a limitation on 
independent decision making or a combination of control or financial 
interests may yield an anticompetitive reduction of research and 
development, the Agencies typically frame their inquiries more 
generally, looking to the strength, scope, and number of competing 
R&D efforts and their close substitutes. See supra Sections 3.31(a) 
and 3.32(c).
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    Other things being equal, market concentration affects the 
difficulties and

[[Page 54491]]

costs of achieving and enforcing collusion in a relevant market. 
Accordingly, in assessing whether an agreement may increase the 
likelihood of collusion, the Agencies calculate market concentration. 
In general, the Agencies approach the calculation of market 
concentration as set forth in Section 1.5 of the Horizontal Merger 
Guidelines, ascribing to the competitor collaboration the same range of 
market shares described above.
    Market share and market concentration provide only a starting point 
for evaluating the competitive effect of the relevant agreement. The 
Agencies also examine other factors outlined in the Horizontal Merger 
Guidelines as set forth below:
    The Agencies consider whether factors such as those discussed in 
Section 1.52 of the Horizontal Merger Guidelines indicate that market 
share and concentration data overstate or understate the likely 
competitive significance of participants and their collaboration.
    In assessing whether anticompetitive harm may arise from an 
agreement that combines control over or financial interests in assets 
or otherwise limits independent decision making, the Agencies consider 
whether factors such as those discussed in Section 2.2 of the 
Horizontal Merger Guidelines suggest that anticompetitive harm is more 
or less likely.
    In assessing whether anticompetitive harms may arise from an 
agreement that may increase the likelihood of collusion, the Agencies 
consider whether factors such as those discussed in Section 2.1 of the 
Horizontal Merger Guidelines suggest that anticompetitive harm is more 
or less likely.
    In evaluating the significance of market share and market 
concentration data and interpreting the range of market shares ascribed 
to the collaboration, the Agencies also examine factors beyond those 
set forth in the Horizontal Merger Guidelines. The following section 
describes which factors are relevant and the issues that the Agencies 
examine in evaluating those factors.

3.34  Factors Relevant to the Ability and Incentive of the 
Participants and the Collaboration to Compete

    Competitor collaborations sometimes do not end competition among 
the participants and the collaboration. Participants may continue to 
compete against each other and their collaboration, either through 
separate, independent business operations or through membership in 
other collaborations. Collaborations may be managed by decision makers 
independent of the individual participants. Control over key 
competitive variables may remain outside the collaboration, such as 
where participants independently market and set prices for the 
collaboration's output.
    Sometimes, however, competition among the participants and the 
collaboration may be restrained through explicit contractual terms or 
through financial or other provisions that reduce or eliminate the 
incentive to compete. The Agencies look to the competitive benefits and 
harms of the relevant agreement, not merely the formal terms of 
agreements among the participants.
    Where the nature of the agreement and market share and market 
concentration data reveal a likelihood of anticompetitive harm, the 
Agencies more closely examine the extent to which the participants and 
the collaboration have the ability and incentive to compete independent 
of each other. The Agencies are likely to focus on six factors: (a) The 
extent to which the relevant agreement is non-exclusive in that 
participants are likely to continue to compete independently outside 
the collaboration in the market in which the collaboration operates; 
(b) the extent to which participants retain independent control of 
assets necessary to compete; (c) the nature and extent of participants' 
financial interests in the collaboration or in each other; (d) the 
control of the collaboration's competitively significant decision 
making; (e) the likelihood of anticompetitive information sharing; and 
(f) the duration of the collaboration.
    Each of these factors is discussed in further detail below. 
Consideration of these factors may reduce or increase competitive 
concern. The analysis necessarily is flexible: the relevance and 
significance of each factor depends upon the facts and circumstances of 
each case, and any additional factors pertinent under the circumstances 
are considered. For example, when an agreement is examined subsequent 
to formation of the collaboration, the Agencies also examine factual 
evidence concerning participants' actual conduct.

3.34(a)  Exclusivity

    The Agencies consider whether, to what extent, and in what manner 
the relevant agreement permits participants to continue to compete 
against each other and their collaboration, either through separate, 
independent business operations or through membership in other 
collaborations. The Agencies inquire whether a collaboration is non-
exclusive in fact as well as in name and consider any costs or other 
impediments to competing with the collaboration. In assessing 
exclusivity when an agreement already is in operation, the Agencies 
examine whether, to what extent, and in what manner participants 
actually have continued to compete against each other and the 
collaboration. In general, competitive concern likely is reduced to the 
extent that participants actually have continued to compete, either 
through separate, independent business operations or through membership 
in other collaborations, or are permitted to do so.

3.34(b)  Control Over Assets

    The Agencies ask whether the relevant agreement requires 
participants to contribute to the collaboration significant assets that 
previously have enabled or likely would enable participants to be 
effective independent competitors in markets affected by the 
collaboration. If such resources must be contributed to the 
collaboration and are specialized in that they cannot readily be 
replaced, the participants may have lost all or some of their ability 
to compete against each other and their collaboration, even if they 
retain the contractual right to do so.45 In general, the 
greater the contribution of specialized assets to the collaboration 
that is required, the less the participants may be relied upon to 
provide independent competition.
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    \45\ For example, if participants in a production collaboration 
must contribute most of their productive capacity to the 
collaboration, the collaboration may impair the ability of its 
participants to remain effective independent competitors regardless 
of the terms of the agreement.
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3.34(c)  Financial Interests in the Collaboration or in Other 
Participants

    The Agencies assess each participant's financial interest in the 
collaboration and its potential impact on the participant's incentive 
to compete independently with the collaboration. The potential impact 
may vary depending on the size and nature of the financial interest 
(e.g., whether the financial interest is debt or equity). In general, 
the greater the financial interest in the collaboration, the less 
likely is the participant to compete with the 
collaboration.46 The Agencies also assess direct equity 
investments between or among the participants. Such investments may 
reduce the incentives of the participants to compete with each other. 
In either case, the analysis is sensitive to the level of financial 
interest in the collaboration or in another participant relative to the

[[Page 54492]]

level of the participant's investment in its independent business 
operations in the markets affected by the collaboration.
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    \46\ Similarly, a collaboration's financial interest in a 
participant may diminish the collaboration's incentive to compete 
with that participant.
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3.34(d)  Control of the Collaboration's Competitively Significant 
Decision Making

    The Agencies consider the manner in which a collaboration is 
organized and governed in assessing the extent to which participants 
and their collaboration have the ability and incentive to compete 
independently. Thus, the Agencies consider the extent to which the 
collaboration's governance structure enables the collaboration to act 
as an independent decision maker. For example, the Agencies ask whether 
participants are allowed to appoint members of a board of directors for 
the collaboration, if incorporated, or otherwise to exercise 
significant control over the operations of the collaboration. In 
general, the collaboration is less likely to compete independently as 
participants gain greater control over the collaboration's price, 
output, and other competitively significant decisions.47
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    \47\ Control may diverge from financial interests. For example, 
a small equity investment may be coupled with a right to veto large 
capital expenditures and, thereby, to effectively limit output. The 
Agencies examine a collaboration's actual governance structure in 
assessing issues of control.
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    To the extent that the collaboration's decision making is subject 
to the participants' control, the Agencies consider whether that 
control could be exercised jointly. Joint control over the 
collaboration's price and output levels could create or increase market 
power and raise competitive concerns. Depending on the nature of the 
collaboration, competitive concern also may arise due to joint control 
over other competitively significant decisions, such as the level and 
scope of R&D efforts and investment. In contrast, to the extent that 
participants independently set the price and quantity 48 of 
their share of a collaboration's output and independently control other 
competitively significant decisions, an agreement's likely 
anticompetitive harm is reduced.49
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    \48\ Even if prices to consumers are set independently, 
anticompetitive harms may still occur if participants jointly set 
the collaboration's level of output. For example, participants may 
effectively coordinate price increases by reducing the 
collaboration's level of output and collecting their profits through 
high transfer prices, i.e., through the amounts that participants 
contribute to the collaboration in exchange for each unit of the 
collaboration's output. Where a transfer price is determined by 
reference to an objective measure not under the control of the 
participants, (e.g., average price in a different unconcentrated 
geographic market), competitive concern may be less likely.
    \49\ Anticompetitive harm also is less likely if individual 
participants may independently increase the overall output of the 
collaboration.
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3.34(e)  Likelihood of Anticompetitive Information Sharing

    The Agencies evaluate the extent to which competitively sensitive 
information concerning markets affected by the collaboration likely 
would be disclosed. This likelihood depends on, among other things, the 
nature of the collaboration, its organization and governance, and 
safeguards implemented to prevent or minimize such disclosure. For 
example, participants might refrain from assigning marketing personnel 
to an R&D collaboration, or, in a marketing collaboration, participants 
might limit access to competitively sensitive information regarding 
their respective operations to only certain individuals or to an 
independent third party. Similarly, a buying collaboration might use an 
independent third party to handle negotiations in which its 
participants' input requirements or other competitively sensitive 
information could be revealed. In general, it is less likely that the 
collaboration will facilitate collusion on competitively sensitive 
variables if appropriate safeguards governing information sharing are 
in place.

3.34(f)  Duration of the Collaboration

    The Agencies consider the duration of the collaboration in 
assessing whether participants retain the ability and incentive to 
compete against each other and their collaboration. In general, the 
shorter the duration, the more likely participants are to compete 
against each other and their collaboration.

3.35  Entry

    Easy entry may deter or prevent profitably maintaining price above, 
or output, quality, service or innovation below, what likely would 
prevail in the absence of the relevant agreement. Where the nature of 
the agreement and market share and concentration data suggest a 
likelihood of anticompetitive harm that is not sufficiently mitigated 
by any continuing competition identified through the analysis in 
Section 3.34, the Agencies inquire whether entry would be timely, 
likely, and sufficient in its magnitude, character and scope to deter 
or counteract the anticompetitive harm of concern. If so, the relevant 
agreement ordinarily requires no further analysis.
    As a general matter, the Agencies assess timeliness, likelihood, 
and sufficiency of committed entry under principles set forth in 
Section 3 of the Horizontal Merger Guidelines.50 However, 
unlike mergers, competitor collaborations often restrict only certain 
business activities, while preserving competition among participants in 
other respects, and they may be designed to terminate after a limited 
duration. Consequently, the extent to which an agreement creates 
opportunities that would induce entry and the conditions under which 
ease of entry may deter or counteract anticompetitive harms may be more 
complex and less direct than for mergers and will vary somewhat 
according to the nature of the relevant agreement. For example, the 
likelihood of entry may be affected by what potential entrants believe 
about the probable duration of an anticompetitive agreement. Other 
things being equal, the shorter the anticipated duration of an 
anticompetitive agreement, the smaller the profit opportunities for 
potential entrants, and the lower the likelihood that it will induce 
committed entry. Examples of other differences are set forth below.
---------------------------------------------------------------------------

    \50\ Committed entry is defined as new competition that requires 
expenditure of significant sunk costs of entry and exit. See Section 
3.0 of the Horizontal Merger Guidelines.
---------------------------------------------------------------------------

    For certain collaborations, sufficiency of entry may be affected by 
the possibility that entrants will participate in the anticompetitive 
agreement. To the extent that such participation raises the amount of 
entry needed to deter or counteract anticompetitive harms, and assets 
required for entry are not adequately available for entrants to respond 
fully to their sales opportunities, or otherwise renders entry 
inadequate in magnitude, character or scope, sufficient entry may be 
more difficult to achieve.51
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    \51\ Under the same principles applied to production and 
marketing collaborations, the exercise of monopsony power by a 
buying collaboration may be deterred or counteracted by the entry of 
new purchasers. To the extent that collaborators reduce their 
purchases, they may create an opportunity for new buyers to make 
purchases without forcing the price of the input above pre-relevant 
agreement levels. Committed purchasing entry, defined as new 
purchasing competition that requires expenditure of significant sunk 
costs of entry and exit--such as a new steel factory built in 
response to a reduction in the price of iron ore--is analyzed under 
principles analogous to those articulated in Section 3 of the 
Horizontal Merger Guidelines. Under that analysis, the Agencies 
assess whether a monopsonistic price reduction is likely to attract 
committed purchasing entry, profitable at pre-relevant agreement 
prices, that would not have occurred before the relevant agreement 
at those same prices. (Uncommitted new buyers are identified as 
participants in the relevant market if their demand responses to a 
price decrease are likely to occur within one year and without the 
expenditure of significant sunk costs of entry and exit. See id. at 
Sections 1.32 and 1.41.)

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[[Page 54493]]

    In the context of research and development collaborations, 
widespread availability of R&D capabilities and the large gains that 
may accrue to successful innovators often suggest a high likelihood 
that entry will deter or counteract anticompetitive reductions of R&D 
efforts. Nonetheless, such conditions do not always pertain, and the 
Agencies ask whether entry may deter or counteract anticompetitive R&D 
reductions, taking into account the following:
    Where market participants typically can observe the level and type 
of R&D efforts within a market, the principles of Section 3 of the 
Horizontal Merger Guidelines may be applied flexibly to determine 
whether entry is likely to deter or counteract a lessening of the 
quality, diversity, or pace of research and development. To be timely, 
entry must be sufficiently prompt to deter or counteract such harms. 
The Agencies evaluate the likelihood of entry based on the extent to 
which potential entrants have (1) core competencies (and the ability to 
acquire any necessary specialized assets) that give them the ability to 
enter into competing R&D and (2) incentives to enter into competing R&D 
in response to a post-collaboration reduction in R&D efforts. The 
sufficiency of entry depends on whether the character and scope of the 
entrants' R&D efforts are close enough to the reduced R&D efforts to be 
likely to achieve similar innovations in the same time frame or 
otherwise to render a collaborative reduction of R&D unprofitable.
    Where market participants typically cannot observe the level and 
type of R&D efforts by others within a market, there may be significant 
questions as to whether entry would occur in response to a 
collaborative lessening of the quality, diversity, or pace of research 
and development, since such effects would not likely be observed. In 
such cases, the Agencies may conclude that entry would not deter or 
counteract anticompetitive harms.

3.36  Identifying Procompetitive Benefits of the Collaboration

    Competition usually spurs firms to achieve efficiencies internally. 
Nevertheless, as explained above, competitor collaborations have the 
potential to generate significant efficiencies that benefit consumers 
in a variety of ways. For example, a competitor collaboration may 
enable firms to offer goods or services that are cheaper, more valuable 
to consumers, or brought to market faster than would otherwise be 
possible. Efficiency gains from competitor collaborations often stem 
from combinations of different capabilities or resources. See supra 
Section 2.1. Indeed, the primary benefit of competitor collaborations 
to the economy is their potential to generate such efficiencies.
    Efficiencies generated through a competitor collaboration can 
enhance the ability and incentive of the collaboration and its 
participants to compete, which may result in lower prices, improved 
quality, enhanced service, or new products. For example, through 
collaboration, competitors may be able to produce an input more 
efficiently than any one participant could individually; such 
collaboration-generated efficiencies may enhance competition by 
permitting two or more ineffective (e.g., high cost) participants to 
become more effective, lower cost competitors. Even when efficiencies 
generated through a competitor collaboration enhance the 
collaboration's or the participants' ability to compete, however, a 
competitor collaboration may have other effects that may lessen 
competition and ultimately may make the relevant agreement 
anticompetitive.
    If the Agencies conclude that the relevant agreement has caused, or 
is likely to cause, anticompetitive harm, they consider whether the 
agreement is reasonably necessary to achieve ``cognizable 
efficiencies.'' ``Cognizable efficiencies'' are efficiencies that have 
been verified by the Agencies, that do not arise from anticompetitive 
reductions in output or service, and that cannot be achieved through 
practical, significantly less restrictive means. See infra Sections 
3.36(a) and 3.36(b). Cognizable efficiencies are assessed net of costs 
produced by the competitor collaboration or incurred in achieving those 
efficiencies.

3.36(a)  Cognizable Efficiencies Must Be Verifiable and Potentially 
Procompetitive

    Efficiencies are difficult to verify and quantify, in part because 
much of the information relating to efficiencies is uniquely in the 
possession of the collaboration's participants. Moreover, efficiencies 
projected reasonably and in good faith by the participants may not be 
realized. Therefore, the participants must substantiate efficiency 
claims so that the Agencies can verify by reasonable means the 
likelihood and magnitude of each asserted efficiency; how and when each 
would be achieved; any costs of doing so; how each would enhance the 
collaboration's or its participants' ability and incentive to compete; 
and why the relevant agreement is reasonably necessary to achieve the 
claimed efficiencies (see Section 3.36 (b)). Efficiency claims are not 
considered if they are vague or speculative or otherwise cannot be 
verified by reasonable means.
    Moreover, cognizable efficiencies must be potentially 
procompetitive. Some asserted efficiencies, such as those premised on 
the notion that competition itself is unreasonable, are insufficient as 
a matter of law. Similarly, cost savings that arise from 
anticompetitive output or service reductions are not treated as 
cognizable efficiencies. See Example 9.

3.36(b)  Reasonable Necessity and Less Restrictive Alternatives

    The Agencies consider only those efficiencies for which the 
relevant agreement is reasonably necessary. An agreement may be 
``reasonably necessary'' without being essential. However, if the 
participants could have achieved or could achieve similar efficiencies 
by practical, significantly less restrictive means, then the Agencies 
conclude that the relevant agreement is not reasonably necessary to 
their achievement. In making this assessment, the Agencies consider 
only alternatives that are practical in the business situation faced by 
the participants; the Agencies do not search for a theoretically less 
restrictive alternative that is not realistic given business realities.
    The reasonable necessity of an agreement may depend upon the market 
context and upon the duration of the agreement. An agreement that may 
be justified by the needs of a new entrant, for example, may not be 
reasonably necessary to achieve cognizable efficiencies in different 
market circumstances. The reasonable necessity of an agreement also may 
depend on whether it deters individual participants from undertaking 
free riding or other opportunistic conduct that could reduce 
significantly the ability of the collaboration to achieve cognizable 
efficiencies. Collaborations sometimes include agreements to discourage 
any one participant from appropriating an undue share of the fruits of 
the collaboration or to align participants' incentives to encourage 
cooperation in achieving the efficiency goals of the collaboration. The 
Agencies assess whether such agreements are reasonably necessary to 
deter opportunistic conduct that otherwise would likely prevent the 
achievement of cognizable efficiencies. See Example 10.

3.37  Overall Competitive Effect

    If the relevant agreement is reasonably necessary to achieve 
cognizable

[[Page 54494]]

efficiencies, the Agencies assess the likelihood and magnitude of 
cognizable efficiencies and anticompetitive harms to determine the 
agreement's overall actual or likely effect on competition in the 
relevant market. To make the requisite determination, the Agencies 
consider whether cognizable efficiencies likely would be sufficient to 
offset the potential of the agreement to harm consumers in the relevant 
market, for example, by preventing price increases.52
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    \52\ In most cases, the Agencies' enforcement decisions depend 
on their analysis of the overall effect of the relevant agreement 
over the short term. The Agencies also will consider the effects of 
cognizable efficiencies with no short-term, direct effect on prices 
in the relevant market. Delayed benefits from the efficiencies (due 
to delay in the achievement of, or the realization of consumer 
benefits from, the efficiencies) will be given less weight because 
they are less proximate and more difficult to predict.
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    The Agencies' comparison of cognizable efficiencies and 
anticompetitive harms is necessarily an approximate judgment. In 
assessing the overall competitive effect of an agreement, the Agencies 
consider the magnitude and likelihood of both the anticompetitive harms 
and cognizable efficiencies from the relevant agreement. The likelihood 
and magnitude of anticompetitive harms in a particular case may be 
insignificant compared to the expected cognizable efficiencies, or vice 
versa. As the expected anticompetitive harm of the agreement increases, 
the Agencies require evidence establishing a greater level of expected 
cognizable efficiencies in order to avoid the conclusion that the 
agreement will have an anticompetitive effect overall. When the 
anticompetitive harm of the agreement is likely to be particularly 
large, extraordinarily great cognizable efficiencies would be necessary 
to prevent the agreement from having an anticompetitive effect overall.

Section 4: Antitrust Safety Zones

4.1  Overview

    Because competitor collaborations are often procompetitive, the 
Agencies believe that ``safety zones'' are useful in order to encourage 
such activity. The safety zones set out below are designed to provide 
participants in a competitor collaboration with a degree of certainty 
in those situations in which anticompetitive effects are so unlikely 
that the Agencies presume the arrangements to be lawful without 
inquiring into particular circumstances. They are not intended to 
discourage competitor collaborations that fall outside the safety 
zones.
    The Agencies emphasize that competitor collaborations are not 
anticompetitive merely because they fall outside the safety zones. 
Indeed, many competitor collaborations falling outside the safety zones 
are procompetitive or competitively neutral. The Agencies analyze 
arrangements outside the safety zones based on the principles outlined 
in Section 3 above.
    The following sections articulate two safety zones. Section 4.2 
sets out a general safety zone applicable to any competitor 
collaboration.53 Section 4.3 establishes a safety zone 
applicable to research and development collaborations whose competitive 
effects are analyzed within an innovation market. These safety zones 
are intended to supplement safety zone provisions in the Agencies' 
other guidelines and statements of enforcement policy.54
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    \53\ See Sections 1.1 and 1.3 above.
    \54\ The Agencies have articulated antitrust safety zones in 
Health Care Statements 7 & 8 and the Intellectual Property 
Guidelines, as well as in the Horizontal Merger Guidelines. The 
antitrust safety zones in these other guidelines relate to 
particular facts in a specific industry or to particular types of 
transactions.
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4.2  Safety Zone for Competitor Collaborations in General

    Absent extraordinary circumstances, the Agencies do not challenge a 
competitor collaboration when the market shares of the collaboration 
and its participants collectively account for no more than twenty 
percent of each relevant market in which competition may be 
affected.55 The safety zone, however, does not apply to 
agreements that are per se illegal, or that would be challenged without 
a detailed market analysis,56 or to competitor 
collaborations to which a merger analysis is applied.57
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    \55\ For purposes of the safety zone, the Agencies consider the 
combined market shares of the participants and the collaboration. 
For example, with a collaboration among two competitors where each 
participant individually holds a 6 percent market share in the 
relevant market and the collaboration separately holds a 3 percent 
market share in the relevant market, the combined market share in 
the relevant market for purposes of the safety zone would be 15 
percent. This collaboration, therefore, would fall within the safety 
zone. However, if the collaboration involved three competitors, each 
with a 6 percent market share in the relevant market, the combined 
market share in the relevant market for purposes of the safety zone 
would be 21 percent, and the collaboration would fall outside the 
safety zone. Including market shares of the participants takes into 
account possible spillover effects on competition within the 
relevant market among the participants and their collaboration.
    \56\ See supra notes 28-30 and accompanying text in Section 3.3.
    \57\ See Section 1.3 above.
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4.3  Safety Zone for Research and Development Competition Analyzed 
in Terms of Innovation Markets

    Absent extraordinary circumstances, the Agencies do not challenge a 
competitor collaboration on the basis of effects on competition in an 
innovation market where three or more independently controlled research 
efforts in addition to those of the collaboration possess the required 
specialized assets or characteristics and the incentive to engage in 
R&D that is a close substitute for the R&D activity of the 
collaboration. In determining whether independently controlled R&D 
efforts are close substitutes, the Agencies consider, among other 
things, the nature, scope, and magnitude of the R&D efforts; their 
access to financial support; their access to intellectual property, 
skilled personnel, or other specialized assets; their timing; and their 
ability, either acting alone or through others, to successfully 
commercialize innovations. The antitrust safety zone does not apply to 
agreements that are per se illegal, or that would be challenged without 
a detailed market analysis,58 or to competitor 
collaborations to which a merger analysis is applied.59
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    \58\ See supra notes 28-30 and accompanying text in Section 3.3.
    \59\ See Section 1.3 above.
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Appendix

Section 1.3

Example 1 (Competitor Collaboration/Merger)

Facts

    Two oil companies agree to integrate all of their refining and 
refined product marketing operations. Under terms of the agreement, the 
collaboration will expire after twelve years; prior to that expiration 
date, it may be terminated by either participant on six months' prior 
notice. The two oil companies maintain separate crude oil production 
operations.

Analysis

    The formation of the collaboration involves an efficiency-enhancing 
integration of operations in the refining and refined product markets, 
and the integration eliminates all competition between the participants 
in those markets. The evaluating Agency likely would conclude that 
expiration after twelve years does not constitute termination ``within 
a sufficiently limited period.'' The participants'' entitlement to 
terminate the collaboration at any time after giving prior notice is 
not termination by the

[[Page 54495]]

collaboration's ``own specific and express terms.'' Based on the facts 
presented, the evaluating Agency likely would analyze the collaboration 
under the Horizontal Merger Guidelines, rather than as a competitor 
collaboration under these Guidelines. Any agreements restricting 
competition on crude oil production would be analyzed under these 
Guidelines.

Section 2.3

Example 2 (Analysis of Individual Agreements/Set of Agreements)

Facts

    Two firms enter a joint venture to develop and produce a new 
software product to be sold independently by the participants. The 
product will be useful in two areas, biotechnology research and 
pharmaceuticals research, but doing business with each of the two 
classes of purchasers would require a different distribution network 
and a separate marketing campaign. Successful penetration of one market 
is likely to stimulate sales in the other by enhancing the reputation 
of the software and by facilitating the ability of biotechnology and 
pharmaceutical researchers to use the fruits of each other's efforts. 
Although the software is to be marketed independently by the 
participants rather than by the joint venture, the participants agree 
that one will sell only to biotechnology researchers and the other will 
sell only to pharmaceutical researchers. The participants also agree to 
fix the maximum price that either firm may charge. The parties assert 
that the combination of these two requirements is necessary for the 
successful marketing of the new product. They argue that the market 
allocation provides each participant with adequate incentives to 
commercialize the product in its sector without fear that the other 
participant will free-ride on its efforts and that the maximum price 
prevents either participant from unduly exploiting its sector of the 
market to the detriment of sales efforts in the other sector.

Analysis

    The evaluating Agency would assess overall competitive effects 
associated with the collaboration in its entirety and with individual 
agreements, such as the agreement to allocate markets, the agreement to 
fix maximum prices, and any of the sundry other agreements associated 
with joint development and production and independent marketing of the 
software. From the facts presented, it appears that the agreements to 
allocate markets and to fix maximum prices may be so intertwined that 
their benefits and harms ``cannot meaningfully be isolated.'' The two 
agreements arguably operate together to ensure a particular blend of 
incentives to achieve the potential procompetitive benefits of 
successful commercialization of the new product. Moreover, the effects 
of the agreement to fix maximum prices may mitigate the price effects 
of the agreement to allocate markets. Based on the facts presented, the 
evaluating Agency likely would conclude that the agreements to allocate 
markets and to fix maximum prices should be analyzed as a whole.

Section 2.4

Example 3 (Time of Possible Harm to Competition)

Facts

    A group of 25 small-to-mid-size banks formed a joint venture to 
establish an automatic teller machine network. To ensure sufficient 
business to justify launching the venture, the joint venture agreement 
specified that participants would not participate in any other ATM 
networks. Numerous other ATM networks were forming in roughly the same 
time period.
    Over time, the joint venture expanded by adding more and more 
banks, and the number of its competitors fell. Now, ten years after 
formation, the joint venture has 900 member banks and controls 60% of 
the ATM outlets in a relevant geographic market. Following complaints 
from consumers that ATM fees have rapidly escalated, the evaluating 
Agency assesses the rule barring participation in other ATM networks, 
which now binds 900 banks.

Analysis

    The circumstances in which the venture operates have changed over 
time, and the evaluating Agency would determine whether the exclusivity 
rule now harms competition. In assessing the exclusivity rule's 
competitive effect, the evaluating Agency would take account of the 
collaboration's substantial current market share and any procompetitive 
benefits of exclusivity under present circumstances, along with other 
factors discussed in Section 3.

Section 3.2

Example 4 (Agreement Not to Compete on Price)

Facts

    Net-Business and Net-Company are two start-up companies. Each has 
developed and begun sales of software for the networks that link users 
within a particular business to each other and, in some cases, to 
entities outside the business. Both Net-Business and Net-Company were 
formed by computer specialists with no prior business expertise, and 
they are having trouble implementing marketing strategies, distributing 
their inventory, and managing their sales forces. The two companies 
decide to form a partnership joint venture, NET-FIRM, whose sole 
function will be to market and distribute the network software products 
of Net-Business and Net-Company. NET-FIRM will be the exclusive 
marketer of network software produced by Net-Business and Net-Company. 
Net-Business and Net-Company will each have 50% control of NET-FIRM, 
but each will derive profits from NET-FIRM in proportion to the 
revenues from sales of that partner's products. The documents setting 
up NET-FIRM specify that Net-Business and Net-Company will agree on the 
prices for the products that NET-FIRM will sell.

Analysis

    Net-Business and Net-Company will agree on the prices at which NET-
FIRM will sell their individually-produced software. The agreement is 
one ``not to compete on price,'' and it is of a type that always or 
almost always tends to raise price or reduce output. The agreement to 
jointly set price may be challenged as per se illegal, unless it is 
reasonably related to, and reasonably necessary to achieve 
procompetitive benefits from, an efficiency-enhancing integration of 
economic activity.

Example 5 (Specialization without Integration)

Facts

    Firm A and Firm B are two of only three producers of automobile 
carburetors. Minor engine variations from year to year, even within 
given models of a particular automobile manufacturer, require re-design 
of each year's carburetor and re-tooling for carburetor production. 
Firms A and B meet and agree that henceforth Firm A will design and 
produce carburetors only for automobile models of even-numbered years 
and Firm B will design and produce carburetors only for automobile 
models of odd-numbered years. Some design and re-tooling costs would be 
saved, but automobile manufacturers would face only two suppliers each 
year, rather than three.

Analysis

    The agreement allocates sales by automobile model year and 
constitutes an agreement ``not to compete on * * * output.'' The 
participants do not combine production; rather, the

[[Page 54496]]

collaboration consists solely of an agreement not to produce certain 
carburetors. The mere coordination of decisions on output is not 
integration, and cost-savings without integration, such as the costs 
saved by refraining from design and production for any given model 
year, are not a basis for avoiding per se condemnation. The agreement 
is of a type so likely to harm competition and to have no significant 
benefits that particularized inquiry into its competitive effect is 
deemed by the antitrust laws not to be worth the time and expense that 
would be required. Consequently, the evaluating Agency likely would 
conclude that the agreement is per se illegal.

Example 6 (Efficiency-Enhancing Integration Present)

Facts

    Compu-Max and Compu-Pro are two major producers of a variety of 
computer software. Each has a large, world-wide sales department. Each 
firm has developed and sold its own word-processing software. However, 
despite all efforts to develop a strong market presence in word 
processing, each firm has achieved only slightly more than a 10% market 
share, and neither is a major competitor to the two firms that dominate 
the word-processing software market.
    Compu-Max and Compu-Pro determine that in light of their 
complementary areas of design expertise they could develop a markedly 
better word-processing program together than either can produce on its 
own. Compu-Max and Compu-Pro form a joint venture, WORD-FIRM, to 
jointly develop and market a new word-processing program, with expenses 
and profits to be split equally. Compu-Max and Compu-Pro both 
contribute to WORD-FIRM software developers experienced with word 
processing.

Analysis

    Compu-Max and Compu-Pro have combined their word-processing design 
efforts, reflecting complementary areas of design expertise, in a 
common endeavor to develop new word-processing software that they could 
not have developed separately. Each participant has contributed 
significant assets--the time and know-how of its word-processing 
software developers--to the joint effort. Consequently, the evaluating 
Agency likely would conclude that the joint word-processing software 
development project is an efficiency-enhancing integration of economic 
activity that promotes procompetitive benefits.

Example 7 (Efficiency-Enhancing Integration Absent)

Facts

    Each of the three major producers of flashlight batteries has a 
patent on a process for manufacturing a revolutionary new flashlight 
battery--the Century Battery--that would last 100 years without 
requiring recharging or replacement. There is little chance that 
another firm could produce such a battery without infringing one of the 
patents. Based on consumer surveys, each firm believes that aggregate 
profits will be less if all three sold the Century Battery than if all 
three sold only conventional batteries, but that any one firm could 
maximize profits by being the first to introduce a Century Battery. All 
three are capable of introducing the Century Battery within two years, 
although it is uncertain who would be first to market.
    One component in all conventional batteries is a copper widget. An 
essential element in each producers' Century Battery would be a zinc, 
rather than a copper widget. Instead of introducing the Century 
Battery, the three producers agree that their batteries will use only 
copper widgets. Adherence to the agreement precludes any of the 
producers from introducing a Century Battery.

Analysis

    The agreement to use only copper widgets is merely an agreement not 
to produce any zinc-based batteries, in particular, the Century 
Battery. It is ``an agreement not to compete on * * * output'' and is 
``of a type that always or almost always tends to raise price or reduce 
output.'' The participants do not collaborate to perform any business 
functions, and there are no procompetitive benefits from an efficiency-
enhancing integration of economic activity. The evaluating Agency 
likely would challenge the agreement to use only copper widgets as per 
se illegal.

Section 3.3

Example 8 (Rule-of-Reason: Agreement Quickly Exculpated)

Facts

    Under the facts of Example 4, Net-Business and Net-Company jointly 
market their independently-produced network software products through 
NET-FIRM. Those facts are changed in one respect: rather than jointly 
setting the prices of their products, Net-Business and Net-Company will 
each independently specify the prices at which its products are to be 
sold by NET-FIRM. The participants explicitly agree that each company 
will decide on the prices for its own software independently of the 
other company. The collaboration also includes a requirement that NET-
FIRM compile and transmit to each participant quarterly reports 
summarizing any comments received from customers in the course of NET-
FIRM's marketing efforts regarding the desirable/undesirable features 
of and desirable improvements to (1) that participant's product and (2) 
network software in general. Sufficient provisions are included to 
prevent the company-specific information reported to one participant 
from being disclosed to the other, and those provisions are followed. 
The information pertaining to network software in general is to be 
reported simultaneously to both participants.

Analysis

    Under these revised facts, there is no agreement ``not to compete 
on price or output.'' Absent any agreement of a type that always or 
almost always tends to raise price or reduce output, and absent any 
subsequent conduct suggesting that the firms did not follow their 
explicit agreement to set prices independently, no aspect of the 
partnership arrangement might be subjected to per se analysis. Analysis 
would continue under the rule of reason.
    The information disclosure arrangements provide for the sharing of 
a very limited category of information: customer-response data 
pertaining to network software in general. Collection and sharing of 
information of this nature is unlikely to increase the ability or 
incentive of Net-Business or Net-Company to raise price or reduce 
output, quality, service, or innovation. There is no evidence that the 
disclosure arrangements have caused anticompetitive harm and no 
evidence that the prohibitions against disclosure of firm-specific 
information have been violated. Under any plausible relevant market 
definition, Net-Business and Net-Company have small market shares, and 
there is no other evidence to suggest that they have market power. In 
light of these facts, the evaluating Agency would refrain from further 
investigation.

Section 3.36(a)

Example 9 (Cost Savings from Anticompetitive Output or Service 
Reductions)

Facts

    Two widget manufacturers enter a marketing collaboration. Each will 
continue to manufacture and set the

[[Page 54497]]

price for its own widget, but the widgets will be promoted by a joint 
sales force. The two manufacturers conclude that through this 
collaboration they can increase their profits using only half of their 
aggregate pre-collaboration sales forces by (1) taking advantage of 
economies of scale--presenting both widgets during the same customer 
call--and (2) refraining from time-consuming demonstrations 
highlighting the relative advantages of one manufacturer's widgets over 
the other manufacturer's widgets. Prior to their collaboration, both 
manufacturers had engaged in the demonstrations.

Analysis

    The savings attributable to economies of scale would be cognizable 
efficiencies. In contrast, eliminating demonstrations that highlight 
the relative advantages of one manufacturer's widgets over the other 
manufacturer's widgets deprives customers of information useful to 
their decision making. Cost savings from this source arise from an 
anticompetitive output or service reduction and would not be cognizable 
efficiencies.

Section 3.36(b)

Example 10 (Efficiencies From Restrictions on Competitive 
Independence)

Facts

    Under the facts of Example 6, Compu-Max and Compu-Pro decide to 
collaborate on developing and marketing word-processing software. The 
firms agree that neither one will engage in R&D for designing word-
processing software outside of their WORD-FIRM joint venture. Compu-Max 
papers drafted during the negotiations cite the concern that absent a 
restriction on outside word-processing R&D, Compu-Pro might withhold 
its best ideas, use the joint venture to learn Compu-Max's approaches 
to design problems, and then use that information to design an improved 
word-processing software product on its own. Compu-Pro's files contain 
similar documents regarding Compu-Max.
    Compu-Max and Compu-Pro further agree that neither will sell its 
previously designed word-processing program once their jointly 
developed product is ready to be introduced. Papers in both firms' 
files, dating from the time of the negotiations, state that this latter 
restraint was designed to foster greater trust between the participants 
and thereby enable the collaboration to function more smoothly. As 
further support, the parties point to a recent failed collaboration 
involving other firms who sought to collaborate on developing and 
selling a new spread-sheet program while independently marketing their 
older spread-sheet software.

Analysis

    The restraints on outside R&D efforts and on outside sales both 
restrict the competitive independence of the participants and could 
cause competitive harm. The evaluating Agency would inquire whether 
each restraint is reasonably necessary to achieve cognizable 
efficiencies. In the given context, that inquiry would entail an 
assessment of whether, by aligning the participants' incentives, the 
restraints in fact are reasonably necessary to deter opportunistic 
conduct that otherwise would likely prevent achieving cognizable 
efficiency goals of the collaboration.
    With respect to the limitation on independent R&D efforts, possible 
alternatives might include agreements specifying the level and quality 
of each participant's R&D contributions to WORD-FIRM or requiring the 
sharing of all relevant R&D. The evaluating Agency would assess whether 
any alternatives would permit each participant to adequately monitor 
the scope and quality of the other's R&D contributions and whether they 
would effectively prevent the misappropriation of the other 
participant's know-how. In some circumstances, there may be no 
``practical, significantly less restrictive'' alternative.
    Although the agreement prohibiting outside sales might be 
challenged as per se illegal if not reasonably necessary for achieving 
the procompetitive benefits of the integration discussed in Example 6, 
the evaluating Agency likely would analyze the agreement under the rule 
of reason if it could not adequately assess the claim of reasonable 
necessity through limited factual inquiry. As a general matter, 
participants' contributions of marketing assets to the collaboration 
could more readily be monitored than their contributions of know-how, 
and neither participant may be capable of misappropriating the other's 
marketing contributions as readily as it could misappropriate know-how. 
Consequently, the specification and monitoring of each participant's 
marketing contributions could be a ``practical, significantly less 
restrictive'' alternative to prohibiting outside sales of pre-existing 
products. The evaluating Agency, however, would examine the experiences 
of the failed spread-sheet collaboration and any other facts presented 
by the parties to better assess whether such specification and 
monitoring would likely enable the achievement of cognizable 
efficiencies.

[FR Doc. 99-26032 Filed 10-5-99; 8:45 am]
BILLING CODE 6750-01-P