• Joint Venturers Cannot Agree on Distribution of Non-Venture Products to Promote Venture Products, D.C. Circuit Rules
  • December 21, 2005
  • Law Firm: Orrick, Herrington & Sutcliffe LLP - San Francisco Office
  • Agreements between joint venturers to suspend the advertising and discounting of competing products are properly condemned under the FTC's "inherently suspect" approach, the D.C. Circuit recently ruled.

    The "Three Tenors" (Jose Carreras, Placido Domingo, and Luciano Pavarotti) put on concerts in 1990, 1994, and 1998. PolyGram Holding, Inc. distributed the recording of the 1990 concert; Warner Communications, Inc. distributed the 1994 concert album. Both were very successful. In 1997 and 1998, PolyGram and Warner agreed jointly to distribute the 1998 concert recording. Warner, which had the worldwide rights, retained the United States rights, but licensed PolyGram the exclusive right to distribute the 1998 album outside the United States. The companies agreed to share equally the worldwide profit or loss on the project. They also agreed they would not advertise or discount the 1990 and 1994 albums during the 1998 album marketing campaign.

    The FTC challenged the latter agreement under Section 5 of the FTC Act, which prohibits unfair methods of competition. The Commission determined that it was "obvious" from the nature of the agreement that it would likely harm consumers, and therefore determined that the agreement was "inherently suspect." Finding that Polygram and Warner did not come forward with a plausible and legally cognizable competitive justification for the restraint, the FTC condemned the agreement.

    The D.C. Circuit agreed with the FTC's "inherently suspect" analysis, finding that the case law no longer requires pigeonholing antitrust analysis either into the per se rule or the Rule of Reason. The court also rejected PolyGram's sole justification for the restraint, namely, that it enhanced the long-term profitability of all three concert albums and promoted the "Three Tenors" brand by preventing each company from "free-riding" on the promotional activities of the joint venture by promoting its own earlier concert album. According to the court, the "free-riding" to be eliminated was nothing more than competition of products that were not part of the joint undertaking. Such a restraint cannot be justified, the court concluded, on the ground that it increases the profitability of the enterprise that introduces the new product.

    PolyGram Holdings, Inc. v. FTC, ___ F.3d ___, 2005 WL 1704732 (D.C. Cir. July 22, 2005).