CHAPTER § 4.04 Joint Research, Marketing, and Selling Arrangements

• Jurisdiction: United States

§ 4.04 Joint Research, Marketing, and Selling Arrangements

A joint venture "denotes a group of independent economic actors who have joined together, in part, to provide a common product or service."²⁴⁰ Joint ventures, as well as other joint activities such as co-development and co-marketing arrangements, are also referred to as competitor collaborations.

Competitor collaborations consist of agreements among actual or potential competitors to jointly engage in certain business activities, such as research and development, production or manufacturing efforts, marketing and distribution of products, information sharing, and other economic transactions.²⁴¹ Courts analyze joint ventures under Sections 1 and 2 of the Sherman Act²⁴² and Section 5 of the FTC Act.²⁴³ Joint ventures may also be subject to Section 7 of the Clayton Act.²⁴⁴ The premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 also apply to joint ventures if all notification thresholds are met.

Competitor collaborations are typically evaluated under the rule of reason.²⁴⁵ The rule of reason requires that "the fact-finder weigh all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition."²⁴⁶ Factors to consider include "specific information about the relevant business" and "the restraint's history, nature, and effect."²⁴⁷ Courts look at the anticompetitive effects that are harmful to consumers and weigh those against the pro-competitive effects of a particular restraint that benefits consumers when conducting a rule of reason analysis. The Antitrust Agencies have characterized competitor collaborations as "often not only benign but procompetitive."²⁴⁸

[1] Competitor Collaborations Generally

[a] Most Competitor Collaborations Are Pro-Competitive and Evaluated Under Rule of Reason

Competitor collaborations are usually viewed favorably by the courts and the Antitrust Agencies, particularly where the arrangement enables the availability of a product that the firms could not individually offer.²⁴⁹ For example, drug companies may form co-marketing agreements and other alliances in order to take advantage of the strengths of each company. One of the firms may have stronger research and development ("R&D") capabilities and another may have more success in marketing the drug. Together they can bring to market a generic drug more quickly, efficiently, and inexpensively.

Joint ventures can nonetheless raise anticompetitive concerns because they are often entered into by competitors and because they affect pricing and marketing, which are both integral to competition.²⁵⁰ The Antitrust Agencies look at firms' market share within the relevant market, output, and prices as the main factors in considering the pro- or anticompetitive effects of a joint venture. The Antitrust Agencies also consider whether a joint venture is an exclusive or inclusive agreement, which may affect the joint venture's impact on the firms' market power and independent decision-making capabilities. For example, if two generic manufacturers are the only manufacturers with approved ANDAs and they form a co-marketing agreement, they may be able to raise the price at which the generic is sold. However, there are not high barriers to entry in such a market because other generic manufacturers can also have their ANDAs approved, thereby decreasing the danger of price increases. Drug companies likely must explain to the Antitrust Agencies why their joint venture will enhance competition and enable them to improve innovation, improve the product, and/or reduce prices in a way that they could not do without the joint venture. Without the integration and efficiencies created by licensing and co-marketing agreements, these joint ventures would be held per se unlawful.²⁵¹ In contrast, in the merger context, if one or more of the competitors possesses significant market power or the exclusive ability to manufacture a certain drug, competitors may be enjoined from engaging in licensing and co-marketing agreements for that product without prior approval from the Antitrust Agencies.²⁵²

[b] Joint Research & Development

Courts tend to view R&D joint ventures favorably, typically analyzing them under the rule of reason.²⁵³ Courts have emphasized that the pharmaceutical industry in particular "depends greatly" on R&D initiatives, principally due to "the economic returns to intellectual property created when a successful new drug is brought to market."²⁵⁴ The procompetitive benefits of these kinds of joint ventures include the ability of the firms to share the economic risks associated with R&D, increased economies of scale, the ability to pool information and capabilities, and the ability to discourage free riders by forcing the end-users to participate in the process and expenses associated with R&D.²⁵⁵ For example, in 2004, BMS and Gilead Sciences, Inc. formed a joint venture to develop and commercialize Atripla, a drug used for the treatment of HIV-1 infection in adults.²⁵⁶ Likewise, courts acknowledge that "a rule that too quickly condemns actions as per se illegal" may deter pharmaceutical companies from engaging in R&D of new drugs, including generics, would "do[] competition—and thus, the Sherman Act—a disservice."²⁵⁷

The Antitrust Agencies also typically analyze R&D joint ventures under the rule of reason, and often evaluate such arrangements as "a separate . . . market," due to the unique competitive effects stemming from such arrangements.²⁵⁸ The Antitrust Agencies consider the number of participants in the R&D joint venture, how independent the participants are, what their comparative research capabilities are, and how well "competitively sensitive information" will be protected.²⁵⁹ If the Antitrust Agencies perceive indications of collusion, such facts could lead to an enforcement action. The Antitrust Agencies have cautioned the public that joint research and development ventures may sometimes "injure customers by reducing innovation below the level that would otherwise 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."²⁶⁰

Courts and the Antitrust Agencies are particularly concerned with the concentration and exercise of market power when analyzing R&D joint ventures, noting anticompetitive effects are likelier to occur where a higher concentration of market power exists.²⁶¹ In fact, if R&D for a particular drug constitutes a barrier to entry, and the joint venture being challenged possesses a significant market share, the arrangement is more likely to merit antitrust scrutiny.²⁶² As a result of the National Cooperative Research and Production Act of 1993 (the "NCRPA"),²⁶³ however, R&D joint ventures can file notifications of their joint ventures with both the DOJ and the FTC in an effort to limit exposure to antitrust liability.

[c] Joint Ventures for Promotion, Marketing, and Distribution

The Supreme Court has held that "[j]oint ventures and other cooperative agreements are . . . not usually unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all."²⁶⁴ Joint ventures whose "core function" is the promotion, marketing, and distribution of a product are preumptively governed under the rule of reason. For example, in Texaco, Inc. v. Dagher, the Supreme Court unanimously held when two companies created a joint venture to refine and sell gasoline and set a single price for both companies' brands of gasoline, it was not per se unlawful because the companies were participating in the market jointly through their investments in the joint venture and shared the profits, and therefore were not price fixing in violation of the antitrust laws.²⁶⁵ The Dagher court emphasized that the Sherman Act does not bar "a lawful, economically integrated joint venture [from] set[ting] the prices at which it sells its products," particularly where the joint venture imposes no pricing restrictions and the members to the joint venture's activities are limited by "their role as investors, not competitors."²⁶⁶ However, if the joint venture is simply "a formalistic shell for ongoing concerted action," it may be subject to Section 1 liability despite the fact that the potential competitors are sharing in profits or losses from the joint venture.²⁶⁷

[d] Group Purchasing Agreements

Courts and the Antitrust Agencies have acknowledged that joint purchasing agreements may have procompetitive effects and allow their participants to achieve efficiencies, such as the ability to centralize ordering or to combine warehousing or distribution functions.²⁶⁸ As a result of the potential for procompetitive effects, group purchasing agreements are evaluated under therule of reason.²⁶⁹

The Supreme Court, in Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co.,²⁷⁰ concluded that the membership restrictions of a purchasing cooperative should be analyzed under a rule of reason test because joint purchasing agreements "are not a form of concerted activity characteristically likely to result in predominantly anticompetitive effects" and therefore are not illegal per se.²⁷¹ The Court emphasized that purchasing joint ventures had beneficial competitive effects, such as allowing their partners to "achieve economies of scale in both the purchase and warehousing of wholesale supplies."²⁷² However, the Court noted that a rule of reason test might not always be appropriate in situations where the buying cooperative possessed "market power or exclusive access to an element essential to effective competition."²⁷³

Group purchasing agreements created by pharmacy benefits managers ("PBMs") have been reviewed under the rule of reason as well. In North Jackson Pharmacy, Inc. v. Caremark RX, Inc.,²⁷⁴ an independent retail pharmacy sued...