How to tell if your joint venture breaks competition law

Out-Law Analysis | 18 Jun 2018 | 2:28 pm | 3 min. read

ANALYSIS: Joint ventures can vary enormously in terms of their scope and nature and be pro-competitive and justified, but as businesses increasingly look to collaborate to innovate, the agreements are coming in for greater scrutiny from competition authorities.

Recently the UK's Competition and Markets Authority (CMA) published dos and don'ts for joint ventures, and followed that with a blog detailing questions businesses should ask their lawyers when they are considering entering into JV arrangements.

The CMA's focus has intensified after it stumbled upon illegal arrangements involving a JV business formed by two laundry companies specialising in garments worn in cleanrooms. The companies had operated a JV since the 1980s.

In 2012 the companies entered into new reciprocal trade mark licensing agreements, under which they divided the UK into north and south territories, allocating the territories between them and agreeing not to compete with each other for customers within those territories. Some other customers were allocated between the two companies based on the nature of their business or the product or service they required. The parties did not seem to be aware that these types of arrangements constituted illegal market sharing agreements.

However, the case came to the CMA’s attention when it was investigating two mergers between the JV vehicle and other businesses. The CMA ruled that this was a breach of competition law, denying customers any real choice of supplier, and fined the companies a total of £1.71m.

The dos and don'ts issued by the CMA in response to the case offer useful guidance for businesses considering JV arrangements.

The dos

  • Define the true purpose of the collaboration. Be precise about what it aims to achieve.
  • Be clear, specific, and honest about your pro-competitive goals and the limits of your collaboration. For example, in terms of the products, services and the geography covered as well as how long collaboration will last
  • Be clear on how your proposed innovation will directly benefit your customers. For example, if you are collaborating together in Brazil, you are unlikely to need a clause restricting you both from competing in Spain and Portugal.
  • Be clear that the proposed innovation could not be achieved by the collaborating businesses acting alone. If it could, there may be issues – as the general starting point in competition law is that competitors should act independently of each other.
  • Check whether the collaboration would reduce or get rid of existing competition between the collaborating businesses. The greater any reduction in competition, the higher the legal risk (and the greater the need for legal advice).
  • Make sure that any reduction in competition brought about by the collaboration is no more than is absolutely necessary to achieve its goals. Ask yourself - could you achieve these goals in a way that involves a lesser reduction in competition between the collaborating parties?
  • Regularly check your joint venture arrangements to ensure they are compliant with the law. Keep an eye on any changes to your arrangements, the marketplace and the law – be particularly alert to changes in circumstances at key moments for a business (for example, a merger). Think about setting up a competition law compliance programme. The CMA has published guidance on how to run a compliance programme.

The dont’s

  • Don't think that collaborative arrangements which try to mask what is otherwise price fixing, market sharing, output restriction or bid-rigging will escape detection and fines.
  • Don't think that using an intellectual property licence as a framework for collaboration (or simply calling it a joint venture) will protect you from scrutiny. Any sales restrictions agreed between competitors are likely to be seen as a market sharing arrangement and could attract significant fines.
  • Don't share sensitive information that relates to business matters not covered by your joint venture. For example, any discussions about pricing should only be those that are necessary for the collaboration, and limited to the specific scope of the relevant venture.

The CMA's guidance will apply to many different types of cooperation. Examples include:

  • project specific collaborations
  • stand-alone (full function) JVs
  • joint bidding
  • R&D
  • production and specialisation agreements
  • IP licensing
  • joint selling
  • marketing or distribution agreements

JVs between non-competitors are less likely to raise competition issues than those between actual or potential rivals in a market.

As the CMA has highlighted in its blog, lawyers can help businesses identify any competition risks in JVs and how they can be appropriately managed.

Alan Davis is a competition law expert at Pinsent Masons, the law firm behind Out-Law.com.