In December 2012, the Department of Justice, Antitrust Division (DOJ) released a business review letter for STARS Alliance LLC (STARS), an association of several nuclear utility operators, which serves as a reminder for trade associations, joint ventures, and individual companies that group purchasing activities are permissible under the antitrust laws when done properly.1 This is a brief analysis of the STARS letter, along with best practices for entities looking to obtain the cost savings of a joint purchasing arrangement while minimizing the antitrust risk.
Joint Purchasing Under the Antitrust Laws
The DOJ reviewed STARS’s proposal to allow its seven nuclear utility members to jointly procure goods and services, such as turbine maintenance and steam generator services and protective clothing. (STARS had previously received a business review letter approving its proposal to share member resources and best practices, and to coordinate joint planning and operational activities.) The STARS member utilities are in Arizona, California, Kansas, Missouri, and Texas.
The Sherman Act (15 U.S.C. sec.1 et seq.) prohibits “every contract, combination or conspiracy” that unreasonably restrains trade, including, potentially, joint purchasing activities. In this respect, the FTC and the DOJ (the “enforcement agencies”) review joint purchasing under the “rule of reason,” which examines the totality of the circumstances and balances the procompetitive benefits of the conduct against the potential anticompetitive harm to determine the likely overall effect on competition. The concern with joint purchasing is that it may give members monopsony power over vendors and suppliers or facilitate collusion among members by standardizing costs or encouraging the sharing of competitively sensitive information. (“Monopsony power” is a buyer’s power to eliminate suppliers by artificially depressing prices.)
DOJ applied a rule of reason analysis to the STARS facts and concluded that (a) the proposed joint procurement was unlikely to “restrict competition in either the upstream markets for goods and services or the downstream markets for electricity,” and (b) the proposed activities had the potential for procompetitive effects through increased efficiencies and lower costs. Specifically:
- Regarding the upstream market, DOJ noted that the proposed joint procurement qualified for a safety zone set forth in the enforcement agencies’ Antitrust Guidelines for Collaborations Among Competitors. Under this guidance, the agencies will not challenge joint purchasing agreements if “the market shares of the collaboration and its participants collectively account for no more than 20 percent of each relevant market in which competition may be affected” (as was the case).
- DOJ noted that the STARS members are generally located in different geographic areas and do not compete against each other in downstream electricity markets (with the exception of California and Texas). Absent such direct competition, DOJ presumably found that there was limited potential for anticompetitive coordination among the STARS members.
- DOJ noted that STARS had implemented numerous safeguards to limit the potential for anticompetitive coordination among its members, including that the joint purchasing activities would be voluntary for members, that members would not discuss prices for procuring goods and services, and that STARS would require antitrust compliance training for its members.
Suggested Best Practices
The STARS business review letter reinforces that, absent extraordinary circumstances, the enforcement agencies are unlikely to challenge a joint purchasing program where members are not required to purchase a particular product or service, each member makes its own independent decision to participate, and there is significant competition in the relevant market.
Organizations looking to implement a joint purchasing program should implement safeguards, as appropriate, to prevent members from sharing competitively sensitive information, such as downstream sale prices, the timing of price increases or purchase orders, and margins. Suggested precautionary measures include:
- Consult with antitrust counsel prior to establishing a joint purchasing program and periodically throughout the process to ensure compliance with the antitrust laws.
- Monitor the buying group’s market share in the input and output markets to stay within the safeguards set forth in the enforcement agencies’ Antitrust Guidelines for Collaborations Among Competitors (e.g., 35 percent share for total purchases in the relevant input market and 20 percent share in the relevant output market).
- Appoint an independent agent to handle joint buying activity and to negotiate with suppliers on behalf of the purchasing group, or require each member to contract individually with the supplier offering a group discount.
- The program should not impose minimum purchasing requirements on members.
- For trade associations, participation in the joint purchasing arrangement should be available to all association members and should not be limited by the size, type, or location of a member.
- Joint purchasing should not be used to raise, lower, or stabilize prices, or to boycott suppliers.
- Members should not share competitively sensitive information or enter into any agreement or understanding on prices or other competitive conduct in the downstream output market.
- Any meetings of a joint purchasing group should have an agenda and minutes.
- All discussions should be limited to the purposes of the joint purchasing group.
- Antitrust counsel should be present at all meetings where competitively sensitive information is discussed.
Venable LLP welcomes the opportunity to assist you. Please contact Lisa Jose Fales at 202.344.4349 (ljfales@Venable.com) or Andrew E. Bigart at 202.344.4323 (aebigart@Venable.com) for further information and assistance.
1 See Business Review Letter 12-2, www.justice.gov/atr/public/busreview/290492.htm