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Reagan Administration Proposes Highly Permissive Antitrust Guidelines

October 1988

The Department of Justice will soon finalize new Antitrust Guidelines for International Operations (the “Guidelines”). The last such guidelines were issued by the Justice Department in 1977, during an era when the Administration’s approach to antitrust enforcement was very different from todays. The new Guidelines provide important assistance in understanding how the Justice Department makes prosecutorial decisions regarding not only international business conduct, but domestic conduct as well.

Joint ventures. A joint venture is essentially any collaboration between businesses, short of a merger, regarding production, R & D, distribution or marketing. The legality of joint ventures for antitrust purposes is judged under the “rule-of-reason standard,” which provides that an activity is illegal only if it has an anticompetitive effect that is not outweighed by its pro-competitive benefits.

The Guidelines’ analysis of joint ventures shows that the climate within the Justice Department has become highly tolerant toward this business practice. The Department establishes several objective, often easily-met tests that would make most joint ventures permissible. Interestingly, the Department expressly approves of restrictions on membership in joint ventures, a practice that at one time was viewed as anticompetitive and possibly illegal.

Vertical nonprice restraints. Vertical nonprice restraints are agreements between firms operating at different levels of the manufacturing or distribution chain that restrict the conditions under which firms may resell goods. For example, a restriction on the locations from which a retailer may sell a manufacturer’s product is one form of a vertical nonprice restraint.

As recently as 1977, this practice was illegal per se ; that is, it was impermissible regardless of any economic justification. In 1977, a Supreme Court decision reversed the law by holding that such practices should be judged under the rule-of-reason standard. In the Guidelines, the Justice Department almost goes so far as to state these restraints now are per se legal. The Guidelines suggest that, in the absence of a highly concentrated market at the level that is imposing the restraints, nonprice vertical restraints will not violate the antitrust laws.

Intellectual property licensing. Not long ago, it was thought that a patent, copyright or trade secret created a “monopoly” in its owner, and therefore should be subject to close antitrust scrutiny. The Guidelines follow the modern view that the owner of intellectual property is entitled to whatever market power exclusive ownership of the property itself confers.

The Guidelines provide that intellectual property licenses where the licensor and licensee do not directly compete in the market affected by the license will almost never be challenged. In the case of a horizontal arrangement, where the licensor and licensee do compete in the market for the licensed product, the Guidelines would analyze the license as a joint venture, under the liberal standards referenced above.

TLB Comment: The new antitrust guidelines reflect the “anti-antitrust” attitude of the Reagan Administration Justice Department. Ironically, they are being released at that administration’s 11th hour. If Governor Dukakis is elected to the Presidency in November, the Justice Department may swing back toward the much stricter interpretation of the antitrust laws that has traditionally characterized Democratic administrations.