Joint ventures and competition law: when does cooperation create risks for companies?

Companies enter joint ventures in a broad range of circumstances, for example: to share risks, to pool expertise, to increase market presence, reduce costs and realise efficiencies. Such arrangements offer many benefits. Competition authorities on the other hand are sceptical about companies cooperating, and there are notable cases of joint ventures having been investigated and sanctioned for anticompetitive behaviour.

For companies, the challenge is in navigating where the legal boundaries lie in order to allow beneficial arrangements to take place. On 12 April 2018 the UK’s primary competition regulator, the Competition Markets Authority (the CMA), published advice on joint ventures and competition law.¹ Its list of “dos and don’ts” comes after it recently fined two cleanroom laundry services companies £1.7 million for breaching competition law by allocating territories and customers to each other “under the umbrella of a joint venture”.²

The CMA pursued the cleanroom laundry case despite the fact that the joint venture had been terminated before the investigation was opened, and the relatively small size of the companies involved. The CMA’s message is clear that enforcement of competition law in respect of small and medium sized companies will continue, with the objective of stopping infringing behaviour, but also deterring others from engaging in similar anti-competitive behaviour. But their guidance establishes some useful principles that businesses can apply when evaluating the risks related to potential joint ventures in the UK and beyond.

Joint ventures, alliances or other forms of collaboration with competitors are a frequent source of competition law compliance questions, but are a complex area to advise on.

Most regimes around the world, including the European Union, require notification of joint ventures to competition authorities under their merger control regimes where (i) they are “full-function”, which, in essence, are those joint ventures that operate as self-standing, independent businesses; and (ii) the relevant jurisdictional thresholds are met. If a joint venture is notified and cleared, this provides comfort to the business about the competition law assessment of the joint venture, but it involves significant cost and can cause delay to the deal timetable.

However, there are some notable merger control regimes that do not apply a “full-function” test to joint ventures, including Germany and China. In these jurisdictions, the joint venture may have to be notified for clearance even if it is not a full-function joint venture – and this can be an unexpected hurdle for the deal to clear.

Where the joint venture does not qualify for notification under a merger control regime, companies will generally be required to assess for themselves whether the cooperation is compliant with competition law across the relevant jurisdictions (some jurisdictions, e.g. Ukraine, also require notification of cooperative arrangements). This is where the CMA’s latest guidance may be useful.

The CMA’s latest guidance on joint ventures is aimed primarily to assist (i) companies who are conducting compliance self-assessments (i.e. where the joint venture is not notifiable under merger control regimes); and (ii) when monitoring compliance of pre-existing collaboration.

The advice makes clear that collaborative arrangements should not be used to mask what is otherwise price fixing, market sharing, output restriction or bid-rigging (“hardcore restrictions”). In order to avoid this, the CMA has outlined various steps companies should take to satisfy themselves that any collaboration entered into with competitors does not breach competition rules. We outline below the key advice and some practical questions that companies should be considering:

1.  Define the true purpose of the joint venture at the outset and be precise as to what it aims to achieve.

2.  Be clear, specific and honest about pro-competitive goals and the limits of the collaboration and provide clarity on how proposed innovation will directly benefit your customers.

• Can you show that the goal of the cooperation i.e. a new technology, product or service will provide customers with increased choice or quality?

3.  Demonstrate that the proposed innovation could not be achieved by the businesses acting alone.

• Projects involving high costs and high risk for companies may be unattainable by one company alone and require investment with others. That said, ensure that the collaboration is limited in scope to what is really necessary. Can some parts of the project be done by the competing companies separately?
• In the context of joint bidding, have you considered whether you would be able to supply the capacity yourself? If you can, joint bidding with competitors is likely to increase the chances of breaching competition law.

4.  Ensure any reduction in competition brought about by collaboration is no more than is absolutely necessary to achieve your goals.

• Can you achieve your goals in a way that involves a lesser reduction in competition between the collaborating companies – for example, without sharing competitively sensitive information?
• Do all products / services need to be covered by the restrictions?
• If you are collaborating in specific jurisdictions, have you ensured that any restrictions are also geographically limited and do not extend to the entire geographical scope of your business?
• Are the restrictions on competition limited to a proportionate duration? Once you have recouped the cost of the investment can you still justify restrictions on competition in the same way? Non-compete clauses in non-full function joint ventures are unlikely to be acceptable where they are indefinite.

5.  Do not share sensitive information that is not absolutely necessary for the functioning of the joint venture.

• Joint ventures can easily be used as a vehicle for the parent companies to exchange competitively sensitive information which might influence their conduct in markets outside the joint venture (“spill-over effects”). Have you ensured that the risk of spill-over effects has been carefully managed through appropriate precautions and protocols, including information barriers, use of non-disclosure agreements, and other steps?
• Does your company have a competition law compliance programme in place to educate employees of the remit of competition law and the risks of breaking it?

6.  Collaborations should be regularly monitored to ensure that marketplace changes or agreement specific changes do not change the analysis as to whether the collaboration is still competition law compliant. Indeed, the joint venture under scrutiny in the cleanroom laundry services case commenced in the 1980s and evolved over time, so that the actual infringement only occurred between 2012 and 2016 when both the marketplace and the arrangements had changed. As emphasised by the CMA, that should have been “an opportunity for the business to consider the competition law implications of their commercial arrangements”.

• Do your employees discuss changes to current joint venture arrangements with in-house counsel to alert them to any potential impacts on competition compliance?
• Do you have a mechanism in place to revisit collaborations at appropriate intervals to determine if market changes have altered the competitive assessment?
• Are you keeping track of potential mergers or other market changes which may necessitate a review of your collaborative arrangements?

7.  Overall, joint ventures are one of the more complex areas of competition law analysis where the rules on mergers and anti-competitive agreements intersect. The CMA’s guidance is to be welcomed as providing support for businesses in this tricky area, but it leaves many of the more difficult issues to be resolved by the parties. The questions above should be a helpful first step in undertaking this analysis.