Considerations for Companies Seeking Competitor Collaborations
There are many legitimate reasons why your company may wish to collaborate with one of its competitors. You may, for example, want to enter into an agreement with your competitor to develop a new product. Collaboration between competitors that leads to innovation and directly benefits customers is normally permissible under competition law. However, you need to be careful, as there are competition law risks when competitors interact to such an extent that they are no longer acting independently. Certain forms of collaboration between competitors are illegal under competition law and carry serious consequences, including:
- Agreements being declared void.
- Director disqualification in some jurisdictions (e.g., the UK).
- Potential prosecution and imprisonment (e.g., bid-rigging amounts to a criminal law violation in the UK and Germany).
- Significant and long-lasting reputational damage, which may impact the company’s valuation.
- Potential private damages actions brought by disgruntled customers or competitors who have suffered loss because of the infringement.
When entering into, setting up, or managing joint ventures, alliances or other forms of collaboration with your competitors, it’s important to collaborate legally, check that you are compliant with competition law from the outset and keep arrangements under regular review to help ensure that you remain compliant. You also should:
- Consider carefully the true purpose of the collaboration and the benefit for competition and customers, be precise about what the collaboration aims to achieve, and document it.
- Determine whether the collaboration restricts competition between the parties involved and, if so, whether that level of restriction is proportionate and necessary for the objective pursued, as the greater any reduction in competition, the higher the legal risk (and the greater the need for legal advice).
- Pursue collaborations only where the proposed innovation could not be achieved by the collaborating businesses acting alone.
- Keep in mind that the circumstances (the marketplace, the legal framework, etc.) in which your collaboration takes place may change, and regularly check your arrangements to ensure compliance.
- Be alert to changes in the business, such as a merger.
- Do not assume collaborative arrangements that try to mask what is otherwise price fixing, market sharing, output restriction or bid-rigging will escape detection and fines.
- Refrain from sharing competitively sensitive information that relates to business matters not covered by your arrangement (i.e., discussions about pricing should only be those that are necessary for the collaboration and limited to the specific scope of the relevant venture).
Common forms of collaboration agreements
The most common forms of collaboration agreements concern research and development (R&D), production and purchasing. We’ve summarized the main principles of each agreement type below.
1. R&D agreements
In R&D agreements, the parties agree to jointly carry out research and/or jointly develop using the results of the research. While these types of agreements often are a cost-efficient way of pooling expertise, skills and assets with other players in the market in order to drive innovation and improve the products you are selling, they can trigger antitrust concerns. Be sure that your agreement does not:
- Reduce or slow down innovation, leading to fewer or lower quality products or, products coming to the market later than they otherwise would.
- Lead to higher prices by reducing competition significantly between the parties outside the scope of the agreement or by making anti-competitive coordination likely in those markets.
- Foreclose access to key technology where at least one party has a significant degree of market power.
- Include price restrictions and market allocation.
- An R&D agreement is less likely to be anti-competitive if it includes cooperation:
- At an early stage, far removed from the exploitation of possible results.
- Between noncompetitors.
- Between competitors who cannot carry out the necessary R&D independently.
- Carried out by specialized companies, research institutes or academic bodies that are not active in the exploitation of the results.
- That avoids the joint exploitation of possible results by means of licensing, production and/or marketing.
Note: In some jurisdictions, there is an automatic exemption from antitrust rules if the parties’ combined market share does not exceed a certain threshold and the agreement does not contain hardcore restrictions.
2. Production agreements
In production agreements, the parties agree to carry out production by one party alone or more than one party jointly. This tends to save costs, as the parties pool their complementary skills, know-how or their financial resources, which in turn leads to improved product quality and variety. Ideally, these benefits are passed on to consumers. However, production agreements may trigger antitrust concerns.
Joint production can be carried out in different ways, such as via a joint venture or a subcontracting agreement between actual or potential competitors or between companies operating at different levels of the market.
Such arrangements may restrict competition on the product markets of the products manufactured under the agreement, as well as the spillover markets, which are the markets upstream or downstream to the markets directly affected by the agreement.
Determining whether a production agreement violates antitrust rules involves looking at the extent of the parties’ market power on the relevant markets that may be affected by the terms of the agreement. Production agreements restrict competition if they do not truly concern joint production but serve as a tool to engage in a disguised cartel. For example, production agreements may restrict competition if they:
- Directly align (between the parties) the output, quality, prices or other competitively important parameters of the joint venture’s sales.
- Coordinate the parties’ competitive behavior as suppliers, which may lead to higher prices or reduced output, as well as have an impact product quality, variety and innovation.
- Foreclose third parties in related markets (i.e., where parties use their joint production to raise input costs for their competitors downstream).
A production agreement is less likely to be anti-competitive if:
- The parties only agree to the output directly concerned by the production agreement, provided other parameters of competition are not eliminated.
- The parties only set sales prices for jointly manufactured products only where it’s essential for a production and joint distribution agreement to go ahead in the first place.
- The cooperation falls within the scope of any special exemptions.
3. Purchasing agreements
In purchasing agreements, the parties agree to jointly purchase all or part of their product requirements (i.e., components to manufacture new products or products for resale). This tends to save money in the form of reduced purchase prices and transaction, transportation and storage costs, as such agreements increase the parties’ buying power and economies of scale. In turn, this may lead to lower prices and qualitative benefits for consumers. Nonetheless, purchasing agreements may trigger antitrust concerns.
Joint purchasing can be carried out in different ways, such as through a jointly controlled company, a company in which many other companies hold noncontrolling stakes, a contractual arrangement or even looser forms of cooperation. While such agreements often are considered pro-competitive, as they may lead to lower purchase prices, over the past few years we have seen intense scrutiny of purchase agreements that were considered purchase cartels. Although less common than their sales counterparts, purchase cartels also are illegal and have resulted in significant fines.
Determining whether a purchasing agreement violates antitrust rules involves looking at the extent to which the parties’ market power on the purchasing and selling markets may be affected by the agreement. Purchasing agreements restrict competition if they do not truly concern joint purchasing but instead serve as a tool to engage in a cartel. Purchasing arrangements may restrict competition if they:
- Require the parties to source all or a high percentage of their purchases under the agreement.
- Impose maximum purchase prices and, in doing so, distort the structure of demand in the market.
- Impose ancillary restrictions (e.g., on resale).
- Are not visible to the supplier and result in a de facto exclusion of competition.