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July 1989 issue of the Technology Law Bulletin: "1988 - The Year of the Consortium"

By
Andrew Updegrove, Esq.

The following article appeared in the July 1989 issue of the Technology Law Bulletin, and is copyrighted by that journal

Late last year, a number of commentators dubbed 1988 the "Year of the Consortium," due to the large number of associations and joint ventures formed by some of the most significant players in the technology marketplace. In 1989 the pace of technological cooperation and collaboration has continued to accelerate.

The importance of the associations now being formed derives from the new directions which American industry is taking to compete more effectively. This competition arises both domestically, where groups of U.S. companies are aligning themselves behind competing technological standards, and internationally, where domestic industries find themselves competing against the aggressive, coordinated marketing efforts of other nations. Gesmer Updegrove LLP has acted as general counsel in the creation and structuring of several of these consortia, some of which have become the models for many other associations.

In some cases, the high technology consortia of the late 1980's have been formed due to the emergence of a global trend towards "open systems." The open systems movement recognizes that a vendor may often gain the largest individual market share by developing and freely sharing new technology rather than by seeking to penetrate a market with a proprietary architecture. In some instances, this has resulted in the formation of associations intended primarily to agree on useful standards.

In other cases (as with the Open Software Foundation, formed by some of the largest computer manufacturers to counter AT&T's dominance of the UNIX operating system), at issue is the control of an already available architecture. The primary goal of other consortia has been to make it economically beneficial to great numbers of software vendors to speedily port software to a new architecture (such as Motorola's new 88000 RISC chip) in order to encourage the rapid market acceptance of that architecture in the marketplace. Finally, some consortia are commercial joint ventures, such as the DRAM chip manufacturing consortium recently announced by IBM and five other major corporations to try to win back part of the semiconductor chip market, which has been increasingly dominated by Japan.

The consortia of 1988 and beyond might, at a simplistic level, be thought of as traditional trade associations. However, this characterization would fail to do justice to the diverse structures, ambitious goals, and revolutionary operations of many of these organizations. In part, this departure from traditional trade association activities has been made possible by the relaxation of antitrust policies under the Reagan administration, which recognized that competing companies can act together in ways which may be essential in order for American business to compete successfully against government supported foreign enterprises.

Although the formation of consortiums can allow the pursuit of ambitious programs, it is essential to carefully tailor the structure of these entities in order to achieve desired ends, and to avoid a number of adverse potential results. The list of important decisions, pitfalls, and constraints to be considered in forming most successful technology consortiums would include the following:

  • Choice of Form . A technology consortium will often be formed as a non-profit membership corporation, but can also be structured as a partnership, stock corporation or strictly contractual relationship, among other possibilities.  
  • Jurisdiction of Formation . Significant variations exist among states as to director liability rules and limits, availability of tax exemptions, rules of operation, and other important factors.  
  • Federal Tax Exemptions . It should be determined whether or not the consortium can qualify as a 501(c)(6) federally tax exempt trade association, and whether or not such an exemption would be useful or unduly restrictive of proposed activities.  
  • Member Accounting and Tax Treatments. Typically, the participants will wish to ensure that their financial contributions to the consortium (which may be very substantial) will be currently deductible as business expenses, and not non-deductible contributions to capital. Both the structure chosen and the activities permitted for the consortium will affect this determination.  
  • Antitrust Ramifications . Most consortia by definition will be associations of competitors. Although current government oversight is more liberal than in the 1970's, the government has not abandoned its regulatory role, and the possibility of private strategic treble damages suits by competitors remains very real. Legal oversight in this area is therefore vital not only at the formation stage, but throughout the operation of a consortium, as the majority of the activities of many consortia will have potential antitrust implications.  
  • Liability Issues . The potential for liability to participants, officers and directors, while not unusually great for most consortia (antitrust mistakes aside), is an important concern for most participants. A combination of structural, jurisdictional, indemnification and insurance approaches can provide significant comfort in this area.  
  • Control and Rules of Operation . In order to create a successful, ongoing enterprise, many operational and control concerns must be satisfied through the crafting of by-laws or by similar means. For example, it is often important to balance the need to provide a voice to small members against the level of control desired by large monetary (and sometimes technical) contributors in order to ensure that all participants will have strong incentives to work towards common goals. Retaining independent counsel and auditors to the consortium is also important to permit members large and small to assume that advice given and actions taken are for the good of the entire group and not for specific members.  
  • Certification . Some consortia will wish to institute technology certification programs. Besides antitrust and other liability concerns, such programs involve arcane and specialized areas of trademark law. Frequently, the protection of rights of tradenames and marks will require registration in multiple countries.  
  • Ownership Issues . If technology is to be developed, ownership and license rights must be determined. At times, the formation of a separate but related organization, subsidiary or joint venture is advisable to own and control technology. In other situations, standards and technology may be made available without charge to all.  
  • Proprietary Information . Participants will often have concerns regarding access to member confidential information. Appropriate safeguards must be instituted which still permit consortium activities to move forward.  

In order to maintain America's worldwide technological and marketing position, American industry will increasingly need to make creative use of joint action to promulgate standards, promote innovations, and undertake important joint research and development projects. Sophisticated consortia and other joint ventures, carefully crafted to meet the needs of diverse participants, will be essential to advance this goal.

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DATE: 07/01/1989

AUTHOR: Andy Updegrove

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