August 24 2000
Business-to-business (B2B) exchanges are drawing considerable interest among investors. However, since the efficiencies promised by these ventures also means bringing competitors together, the exchanges are also drawing the attention of antitrust regulators. The Federal Trade Commission (FTC) reportedly is investigating Covisint, a procurement exchange planned by automobile manufacturers. Also, the Justice Department's Antitrust Division is investigating both a B2B venture among meatpacking firms and Orbitz, a planned business-to-consumer (B2C) exchange among five major airlines. In addition, last month the FTC held a two-day workshop to explore the ways in which B2B ventures operate, the efficiencies they offer, and the antitrust risks they present.
While these activities have caused some to worry whether B2B ventures are too risky, the message from the FTC workshop is that B2B ventures are not inherently suspect under the antitrust laws. Moreover, the risks that exist can be minimized by paying close attention to structure, information flow and membership criteria.
In creating an exchange, joint venture partners will eventually establish membership rules and determine whether members will be allowed to join other similar exchanges. When evaluating these issues, companies need to recognize that the exchange could become a vehicle for exercising market power. The business models of many B2B exchanges anticipate the exchange becoming more valuable as its user base expands, a phenomenon known as 'network effects'. In some of these network situations, access to the exchange's network (or the lack of access) can affect the viability of a competitor in that industry. Ventures need to be careful about membership decisions in these situations. When access to an exchange has little effect on a competitor's viability, the exchange has greater leeway in determining who may join.
The existence of market power is also relevant to the question of a venture's exclusivity rules. Especially at formation, exchanges may have valid business reasons for requiring participants to conduct all or much of their business through the exchange. But such requirements may limit the ability of those participants to join other exchanges. If the first exchange becomes the dominant exchange, its exclusive dealing requirements may later be viewed as having unlawfully hampered the development of other exchanges.
Other features of an exchange could be viewed as implicitly creating exclusivity. Fee structures could create entry barriers for start-up enterprises trying to compete against an exchange's existing members. Fee structures could also reduce incentives for current members to use competing exchanges or to compete through non-exchange methods.
Looking at other structural issues, exchanges that intend to aggregate the purchases of multiple buyers raise the antitrust concern of 'monopsony', or buyer-side market power. A widely perceived B2B efficiency is the opportunity for buyers to lower procurement costs by aggregating their purchases through the Internet. Despite this opportunity, antitrust enforcers may not acknowledge as an efficiency the procurement cost savings resulting from aggregated buyer-market power. As the antitrust agencies' Guidelines for Collaboration Among Competitors suggest, when aggregated purchases may account for more than about 20% of sales of a particular good or service in a relevant geographic area, exchanges need to assess whether such aggregation is appropriate from an antitrust perspective. Similar concerns exist when jointly purchased items account for more than 20% of the input costs of buyers who compete in downstream markets.
When creating a B2B venture, parties should consider Hart-Scott-Rodino (HSR) pre-merger notification requirements. For example, choosing the corporate form can trigger the need to submit HSR filings to the FTC and Justice Department, while the formation of a limited liability company ordinarily will not require notification. If HSR filings are required, HSR rules preclude parties from implementing plans until the HSR review process is concluded, which, given time pressures on internet businesses, could derail a proposed venture.
While managing vast amounts of information is a key to the success of B2B ventures, that information creates potential antitrust risks. Companies buying and selling through B2B ventures may be direct competitors. In processing transactions, the venture may obtain from those companies competitively sensitive information about customers, suppliers, prices, costs, sales volumes and inventory. Exchanges should ensure that such information is provided and accessible only on a need-to-know basis for the reasonable functioning of the venture. Creating firewalls and confidentiality rules is the first step of an appropriate antitrust compliance programme. Rules covering information sharing should be addressed in other contexts as well.
Formation and focus group discussions
Founders of a B2B venture will discuss those features the venture will provide, and will want to collect information (eg, projected transaction volumes) that will allow them to design the site with the proper technical infrastructure. Before such discussions, as with all meetings among competitors, agendas should be prepared and reviewed by counsel in advance of the meeting and should be followed during the meeting. If participants determine that sharing sensitive information with the exchange is necessary, they should provide information directly to independent exchange employees or technology providers, rather than in settings involving multiple competitors.
Many B2B ventures are initially staffed with seconded employees from the founding companies. Those employees should sign confidentiality agreements before they are given access to confidential information of other companies. In addition, the employees and their employers should understand that a seconded employee's role in the venture may limit the scope of his duties when he returns to the founding company.
Board and investor access
Board members and investors (who in the B2B context may be competitors of companies transacting business through the venture) will need to receive reports of a venture's operations (eg, for audit or accounting purposes). However, their access to such information should not circumvent firewall protections. In most contexts the data required can be aggregated to preserve confidentiality. Where data cannot be aggregated, parties should consider using a third party (eg, an accountant) to review detailed data and report on its findings.
A B2B's business model may involve marketing the data generated by the exchange. As with accounting and audit requirements, the use of this data should not circumvent appropriate firewalls. As a basic guide in this area, ventures should consider the safe harbours for information exchanges in the FTC/Department of Justice Statements of Antitrust Enforcement Policy in Health Care. With respect to fee-related information, the document suggests that:
FTC participants at the recent workshop made it clear that the agency does not want to stifle the tremendous potential efficiencies of B2B ventures. To benefit from this receptive stance, parties should fully explore a venture's potential efficiencies. As early as the first meeting, participants should discuss and document the efficiencies they believe will result from the B2B exchange. In particular, they should identify efficiencies resulting from joint arrangements that could not be achieved if the companies had established their own exchanges.
By documenting efficiencies early on and by continually refining their analysis of efficiencies, participants can establish a record supporting their reasons for meeting, forming the alliance, and determining that the alliance may benefit consumers (eg, by reducing their costs). Those efficiencies can make the difference between agency condemnation and agency acceptance of a given venture's practices.
For further information on this topic please contact Richard Rosen, William Baer or Bertrand Lanciault at Arnold & Porter by telephone (+1 202 942 5000) or by fax (+1 202 942 5999) or by e-mail (Richard_Rosen@aporter.com, William_Baer@aporter.com or Bertrand_Lanciault@aporter.com).
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