Energy companies frequently enter into collaborative ventures with their competitors. There are many legitimate reasons for such joint arrangements. But agreements among competitors can also violate the antitrust laws, and recent Department of Justice investigations and private antitrust suits alleging bid rigging for oil and gas leases highlight these potential risks.

When does a collaboration cross the line? The antitrust laws only prohibit anticompetitive activities, and not those that promote competition or enhance efficiencies. Participants should carefully consider the antitrust risks by asking questions, reviewing internal documents and taking proactive compliance measures.

Antitrust analysis of joint activities

Joint ventures among competitors are generally reviewed under Section 1 of the Sherman Act, which prohibits agreements—express or informal—that unreasonably restrain trade. Depending on the nature of the joint arrangement, it may be analyzed under the rule of reason standard, which examines the effect of the venture on competition, or it can be found illegal under the per se rule with little market analysis, or it may be somewhere in between.

The collaboration could also be reviewed under Section 7 of the Clayton Act to determine if it will increase prices. Though similar to the Sherman Act’s rule of reason analysis, Section 7 also includes an incipiency standard designed to prevent consumer harm before it occurs.

Joint ventures are usually analyzed using the following methods:

Merger analysis. It is advisable to evaluate a joint venture as a merger. The merger standard will determine if the formation of the venture would substantially lessen competition in an antitrust market. If the arrangement passes antitrust muster, it will be difficult for a plaintiff to successfully challenge decisions made by the venture in the operation of its business.

Horizontal agreements challenged without a detailed market analysis. Another analysis is whether the venture is an unreasonable agreement between competitors. The initial inquiry is whether the agreement is one that “always or almost always” harms competition by raising price or reducing output.

Practices without redeeming efficiencies, such as price fixing, bid rigging, market division, or customer allocation, will usually be challenged with little analysis of the market impact. These are considered “per se” unlawful because they are anticompetitive and have no redeeming virtues—and they are difficult to defend. Agreements may be per se unlawful even if the companies have small market shares.

Moving along the sliding scale, agreements that are not patently anticompetitive, but that have obvious anticompetitive effects are deemed “inherently suspect.” The enforcers and courts will consider arguments that the arrangement is pro-competitive, but the evidence must be very convincing to persuade them that inherently suspect agreements can be lawful. As such, these “inherently suspect” agreements are difficult to defend.

Horizontal agreements examined with a detailed market analysis. An agreement with plausible efficiency justifications is analyzed under the more flexible rule of reason to determine the agreement’s overall competitive effect. In their published guidelines, the enforcement agencies note that 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.”

The relevant factors considered under a rule of reason analysis include foreclosure of competition; increased market power; high barriers to entry; and the potential for facilitation of collusion outside the joint venture. Market shares will be measured for the markets. A combined market share of 50% or more is susceptible to antitrust challenge, whereas the enforcement agencies are unlikely to challenge a venture with market shares below 20%.

Rule of reason analysis also assesses the collaboration’s potentially procompetitive benefits. Some examples of these benefits include combining resources to provide goods or services; sharing risks; pooling resources; sharing complementary resources or know-how; reducing costs; enhancing production or quality; improving marketing or distribution; achieving economies of scale; creating new products or services; and providing competitors with access to a necessary facility.

A “full blown” rule of reason analysis provides the parties room to explain why a venture should be permitted. Importantly, however, enforcement agencies will give little weight to claimed efficiencies that they believe were developed only after the venture is challenged.

Joint activities

Collaboration in the energy sector is common and can take many forms. Following are a few of the more common structures.

Joint bidding. Joint bidding arrangements may or may not raise antitrust concerns. If competing bidders agree not to bid against one another for particular parcels, this may be considered to be bid-rigging and is potentially per se unlawful. Published reports indicate that DOJ is investigating allegations of bid rigging for leases in Michigan, and DOJ recently sued bidders for federal leases in Colorado. At least one civil lawsuit has been brought alleging bid rigging for Michigan leases.

On the other hand, joint bidding arrangements can be pro-competitive. Joint bidding can enhance competition by allowing companies to bid that could not bid alone or against one another. Joint bidding also allows parties to share risks, technical data, and complementary skills, so as to offer a more competitive bid.

If the joint bidding can be justified, a detailed analysis of the market, bidders and competitors should be considered before entering into a joint bidding arrangement to ensure it passes muster under the rule of reason. In any case, discussions regarding the joint bid should not involve sharing information regarding the bid level for each firm, absent the joint bid, in order to preserve each company’s ability to bid independently if the joint bid discussions do not result in an agreement. And, bidders should inform the lease owner of the joint bid, giving the leaseholder the opportunity to object.

Jointly owned capital-intensive facilities. Jointly owned capital-intensive facilities (e.g., pipelines, fractionators, processors, liquefied natural gas facilities) are common collaborations in the energy industry. Generally, the creation of a new pipeline or plant is precompetitive, because it creates a new facility to serve and expands market capacity. They are generally analyzed under the rule of reason or under a merger analysis.

Issues may arise, however, where but for the joint arrangement, the owners of the new pipeline or facility would have built separate, competing pipelines. In that circumstance, a jointly-owned facility could harm competition by reducing market capacity.

Often, a pipeline is structured such that all competitive decisions of the pipeline—such as tariffs and capacity additions—are made by the joint-venture entity. Because the venture is structured as a single entity, the per se rule will not apply to operational decisions and the antitrust risk is generally low.

Where the parent companies will compete with the joint venture, the joint venture must be treated as a competitor even though the owner needs to manage its asset. To do this, the joint venture and parents should not share competitively sensitive information with each other or coordinate competitive decisions, absent careful antitrust analysis.

Non-competition clauses. Many joint-venture agreements prohibit parents from competing with the joint venture. Such non-competition agreements are generally judged under the rule of reason, but can be considered inherently suspect.

The fundamental question is whether a non-competition agreement is reasonably necessary to achieve a pro-competitive result and is no broader than necessary. For example, a limited non-competition clause would be lawful if it allows a new competitor or product to enter the market.

Undivided interest facilities. Another example of an energy industry joint venture is an “undivided interest” facility. These are structured to allocate capacity to each of the owners or partners, who are then free to market their capacity in competition against one another. To the extent capacity goes unused, others may use or market the excess.

The formation of an undivided interest facility is likely pro-competitive, because it allows parties to pool resources to build a new facility. However, each of the owners must continue to compete after creating the venture.

Accordingly, competitive decisions on prices and customers should not be coordinated, and joint decisions should not be based on shared information regarding prices. Particularly where capacity decisions result in reductions, the parties must assess the reasons for the reductions, the market share of the venture, and the potential competitive effects. Information firewalls should be erected to ensure that competitively sensitive information is not shared among the competing partners.

Conclusion

There are many forms of joint ventures, most of which will comply with the antitrust laws. To minimize antitrust risk, the parties to a joint venture should plan early by identifying the pro-competitive benefits and legitimate business goals of the collaboration. From the start, they should analyze competition between the parties, the collaboration’s effect on that competition, market shares, and any entry barriers.

The arrangement should be structured to avoid anticompetitive behavior and highlight pro-competitive benefits. Early planning and analysis can help avoid and manage antitrust risk.

Alden L. Atkins is a complex commercial litigation partner, William R. Vigdor is a partner focusing on antitrust law, and Hannah Carrigg Wilson is an associate, with Vinson & Elkins LLP’s Washington, D.C. office.