The Majority-Owned Venture: Does Copperweld Provide Immunity After American Needle?

Tuesday, November 2, 2010 - 00:00

A volume of comment has been produced examining the Supreme Court's recent decision in American Needle and contrasting or reconciling it with the Supreme Court's Dagher decision.1Some argue the two opinions are reconcilable as they both leave the examination of the joint venture's conduct anchored in the Rule of Reason. Others find the characterization of the joint venture in Dagher as a single entity, albeit while expressly avoiding the American Needle issue, juxtaposed with the treatment of a similar joint venture in American Needle as a conspiracy among multiple actors. The debate as to how these two opinions mesh will likely continue in the halls of academia and pages of law journals for months, if not years, to come. However, another wrinkle posed by American Needle - how to address majority-owned joint ventures - remains largely unaddressed.

Joint ventures are not always "joint" in the colloquial sense of that word. That is the ownership may not always be divided equally among the participants. For example, a joint venture may be owned 51 percent by one party and 49 percent by another. Prior to American Needle , many antitrust practitioners would have counseled that because the 51 percent or greater owned venture is controlled by the majority stakeholder, the venture is essentially a subsidiary of that company and, as such, subject to the Copperweld doctrine - i.e. , the antitrust decision holding that a parent corporation and its wholly owned subsidiary are not legally capable of conspiring with each other under the Sherman Act § 1. In the wake of American Needle , the venture's fate is not so clear.

Copperweld v. Independence Tube 2

The Copperweld case examined joint conduct between the Copperweld Corp. and its wholly owned subsidiary Regal Tube Co. Copperweld and Regal collectively sought to prevent third parties from doing business with Regal's competitor, Independence Tube Co. Independence sued Copperweld and Regal alleging that their joint conduct constituted a conspiracy in violation of Sherman Act § 1.

On appeal from a jury verdict in Independence's favor, the Seventh Circuit held that a parent and its wholly owned subsidiary could conspire for purposes of violating the Sherman Act:

Two independent corporations can engage in concerted activity that violates Section 1 of the Sherman Act. A corporation and its officers, or a corporation and one of its fully integrated divisions cannot, because the requisite plurality of actors is missing. The hard case lies between these opposites: can a corporation conspire with its wholly owned subsidiary? In a purely formal sense, the answer should be yes: there are two corporations and hence two actors . . . we focus on the practical relationship between the parent and the subsidiary, using a variety of factors to decide when there is enough separation between the two entities to make treating them as two independent actors sensible.3

The Supreme Court reversed. In so doing, the Court held that the divisions within a corporate structure pursue common interests with their parents, rather than interests separate from those of the corporation itself. The Court continued, "[b]ecause coordination between a corporation and its division does not represent a sudden joining of two independent sources of economic power previously pursuing separate interests, it is not an activity that warrants § 1 scrutiny." Similarly, the court found that merely establishing a business line as a separate corporate entity rather than a division does not create a separate independent actor subjecting the parent and its subsidiary to Sherman Act scrutiny. As the Court explained:

A parent and its wholly owned subsidiary have a complete unity of interest They share a common purpose whether or not the parent keeps a tight rein over the subsidiary; the parent may assert full control at any moment if the subsidiary fails to act in the parent's best interests.4

Further, and relevant to the discussion here, the Court recognized that entities may be formed to address other legal requirements and the formation of such entities does not void the unitary nature of the relationship between the parent and the venture:

Rather, a corporation may adopt the subsidiary form of organization for valid management and related purposes Especially in view of the increasing complexity of corporate operations, a business enterprise should be free to structure itself in ways that serve efficiency of control, economy of operations, and other factors dictated by business judgment without increasing its exposure to antitrust liability.5

The Expansion Of The Single Entity Doctrine

Post- Copperweld , courts began to invoke the single entity rationale to find an absence of a conspiracy under a variety of circumstances.6Almost immediately following Copperweld , the Fifth Circuit held that whether the parties were parent and subsidiary or some other structure whereby one party wholly owned the other was not material.7The Fifth Circuit held that so long as there is a "unity of purpose or a common design" the entities have single entity doctrine immunity.8

Courts continually expanded the reach of Copperweld beyond wholly owned subsidiaries: "... the logic of Copperweld reaches beyond its bare result, and it is the reasoning of the Court, not just the particular facts before it, that must guide our determination."9Courts looked to the economic reality, and not the corporate form to determine whether the single entity doctrine should apply.10

One hundred percent ownership no longer became required. Courts broke from 100 percent ownership in cases where they determined that the differential between what the parties owned and 100 percent was de minimis .11Courts held that in either case - that of the wholly owned subsidiary or that of the almost wholly owned subsidiary - complete control by a single party meant the two parties were one economic unit.12

The weight of the cases post- Copperweld holds that common control of the two entities involved is sufficient to invoke the single entity doctrine.13In at least one case, 51 percent ownership was sufficient control to invoke the single entity doctrine.14

The U.S. Department of Justice came to a similar conclusion in its 1988 Antitrust Enforcement Guidelines for International Operations,15stating: "In the Department's view, however, the policies underlying the Sherman Act (as discussed in Copperweld ) support the conclusion that a parent corporation and subsidiary corporation of which the parent owns more than 50 percent of the voting stock are a single economic unit under common control and are thus legally incapable of conspiring with one another within the meaning of section 1."

American Needle v. NFL 1 6

American Needle considered whether a joint venture of the teams in the NFL and the NFL was immune from Sherman Act liability as a single entity.The NFL and the NFL teams pooled certain intellectual property and brought that property to market in a joint venture named NFLP. NFLP licensed the intellectual property to a single vendor and an excluded vendor sued. The Supreme Court held that the NFLP did not possess either the unitary decision making quality or the single aggregation of economic power characteristic of a single entity. Accordingly, the Supreme Court held that NFLP could not be immune from the Sherman Act's reach.

The Court's opinion begins by noting that the intra-enterprise doctrine - a doctrine that "treated cooperation between legally separate entities as necessarily covered by §1" - was defunct. The Court then established that a more functional analysis should be applied, winding through the series of decisions that led to Copperweld . The Court characterized Copperweld as follows:

We explained that although a parent corporation and its wholly owned subsidiary are "separate" for the purposes of incorporation or formal title, they are controlled by a single center of decision making and they control a single aggregation of economic power. Joint conduct by two such entities does not "depriv[e] the marketplace of independent centers of decision making," and as a result, an agreement between them does not constitute a "contract, combination . . . or conspiracy" for the purposes of §1.17

Indeed, the Court leapfrogs from this statement to define the relevant inquiry as "whether there is a 'contract, combination . . . or conspiracy' amongst 'separate economic actors pursuing separate economic interests,' such that the agreement 'deprives the marketplace of independent centers of decision making,' and therefore of 'diversity of entrepreneurial interests.'" The Court put significant emphasis on language in Copperweld alluding to a single center of decision making and a single aggregation of economic power - an emphasis not expressly drawn in Copperweld .

The Court in American Needle did not expressly overturn Copperweld . To the contrary, it expressly re-affirmed Copperweld , but limited it to the narrow proposition of whether a parent and a wholly owned subsidiary can conspire.

The Effect Of American Needle On Majority-Owned Ventures

Copperweld dealt with the ability of a wholly owned subsidiary to conspire with its parent. Nonetheless, the reasoning set out by the Court - that the parent controlled the subsidiary and therefore their interests were one - led many antitrust practitioners to counsel and the courts to hold that a conspiracy could not exist under the Sherman Act between majority-owned ventures and their majority owners because the majority owner and the venture had the same, unitary interest.18That is the same rationale behind finding that a wholly owned subsidiary could not conspire with its parent applied to majority-owned ventures. Modern antitrust analysis, which focuses on economic incentives, supports this conclusion because the incentives of the venture and its majority owner by virtue of the control rights of the majority owner are aligned.

American Needle appears to open a door shut by Copperweld , prompting examination of every instance where the venture is not wholly owned to determine whether the parties are acting in a uniform manner. No longer does the test set forth in Copperweld - whether a parent can dictate the actions of its subsidiary - necessarily and efficiently dispose of the issue. As the Copperweld court noted: "subjecting a single firm's every action to judicial scrutiny for reasonableness would threaten to discourage the competitive enthusiasm that the antitrust laws seek to promote." American Needle is posed to do just that.

While Copperweld offered no guaranteed safe harbor, under the weight of the law, corporations could obtain significant comfort that the controlling majority owner could not conspire with its subsidiary, and every action of the venture was not subject to Rule of Reason analysis. Courts and practitioners did not need to look at the economic incentives of the parties nor the actions of the venture.

American Needle brings a different standard to the table - separate economic actors and independent decision makers. A subsidiary by its very nature is a separate legal actor, and arguably a separate economic entity. The majority-owned venture even more so "joins together 'independent centers of decision making.'" Indeed, the majority-owned venture is by definition formed by at least two independently owned, and independently managed businesses. In many cases, the joining of independents is what allows the venture to capture the core efficiency of the venture and is the core purpose for its formation.

But the venture also has a unified purpose with its majority owner - profitably bringing the venture's product to market. The majority owner, by virtue of the majority stake, controls the venture and the venture has no ability to deviate from the unified purpose. Thus, the majority-owned venture simultaneously passes Copperweld , but fails American Needle .

Whether American Needle becomes a means to challenge majority-owned ventures or whether the Copperweld standard is applied will have to be seen. If the challenge occurs, under American Needle , the venture may face more stormy nights on the legal seas than would have otherwise been afforded by the safe harbor of Copperweld.

 

  1 The Dagher court expressly stated that it was not addressing the question posed by American Needle.  

  2 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).

  3 Independence Tube Corp. v. Copperweld Corp., 691 F.2d 310, 317 (7th Cir. 1982).

  4 Copperweld, 467 U.S. at 771.

  5 Id. at 772-73.

  6 See, e.g., Kentucky Speedway, LLC v. Nat'l Assoc. of Stock Car Auto Racing, Inc., 588 F.3d 908, 920 (6th Cir. 2010) (noting cases).

  7 Century Oil Tool, Inc. v. Production Specialties, Inc., 737 F.2d 1316, 1317 (5th Cir. 1984).

  8 Id.

  9 City of Mt. Pleasant v. Assoc. Elec. Coop., Inc., 838 F.2d 268, 274 (8th Cir. 1988).

  10 Id. at 275.

  11 See, e.g., Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1133 & n.7 (3d Cir. 1995)  (99.2% control was de minimis difference) (citing cases finding that as much as 80% control was considered a de minimis deviation from 100%).   

  12 Id. 

  13 See, e.g., Zachair, Ltd. v. Driggs, No. 97-1811, 1998 WL 211943, at *1-2 (4th Cir. Apr. 20, 1998) ("Although Zachair's complaint fails to articulate the precise business relationship among the various corporate Defendants, one thing is clear: the plain language of the complaint alleges that the corporate Defendants were all controlled and/or owned by Driggs.  Hence we find … the Defendants … incapable of restraining trade."); Livingston Downs racing Assoc., Inc. v. Jefferson Downs Corp., 257 F. Supp.2d 819, 833 (M.D.La. 2002) ("Individuation of conspirators turns on an inquiry into who controls the action and whether there is a unity of interest.") (72.5% ownership sufficient as long as control existed).  But see, e.g., Aspen Title & Escrow, Inc. v. Jeld-Wen, Inc., 677 F. Supp. 1477, 1486 (D. Or. 1987).

  14 Novatel Communs. v. Cellular Telephone Supply, Civ. A. No. C85-2674A, 1986 WL 15507, at *6 (N.D.Ga. Dec. 23, 1986) ("The 51% ownership retained by Novatel-Canada assured it of full control over Carcom and assured it could intervene at any time that Carcom ceased to act in its best interests.").

  15 The 1988 Antitrust Enforcement Guidelines for International Operations were subsequently withdrawn for other reasons.

  16 Am. Needle, Inc. v. Nat'l Football League, 130 S.Ct. 2201 (2010).

  17 Id. at 2211 (internal citation & quotations omitted).

  18 See, e.g., Bell Atlantic Business Sys. Servs. v. Hitachi Data Sys. Corp., 849 F. Supp. 702, 706-07 (N.D.Cal.1994) (80% subsidiary); Novatel, 1986 WL 15507 at *5.

Timothy Cornell recently joined Clifford Chance as Counsel in the U.S. Antitrust Practice. Mr. Cornell brings significant experience in assisting clients through government antitrust investigations, representing targets of governmental investigations and non-parties cooperating with the government. 

Please email the author at timothy.cornell@cliffordchance.com with questions about this article.