United States: D.C. Circuit Condemns Collaboration in Support of Three Tenors Joint Venture

Recently, the U.S. Court of Appeals for the D.C. Circuit affirmed a Federal Trade Commission (FTC) ruling that two major record companies violated antitrust laws in connection with their lawful joint venture to market and distribute the 1998 "Three Tenors" album in Polygram Holdings, Inc. v. Federal Trade Commission, Slip. Op. No. 03-1203 (July 22, 2005). While the conduct of the joint venture itself was not the subject of scrutiny by the FTC, a subsequent agreement to limit advertising and discounts on earlier Three Tenors albums subjected the record companies to antitrust liability. The FTC recognizes the pro-competitive aspects of joint ventures, but the Three Tenors case indicates federal regulators will scrutinize and punish conduct that exceeds the limits of lawful joint-venture collaboration.

Polygram and Warner marketed and distributed the popular recordings of the live performances by the Three Tenors—José Carreras, Plácido Domingo and Luciano Pavarotti—at the World Cup Finals in 1990, 1994 and 1998. Polygram distributed the 1990 album and Warner distributed the 1994 album. The companies agreed to jointly sell the 1998 recording, giving Warner the U.S. rights and Polygram the international rights. Consistent with recognized principles of lawful joint ventures, they agreed to equally share worldwide profits or losses on the 1998 project. The companies ran afoul of antitrust laws when, after executing their joint-venture agreement, they agreed to a follow-on "moratorium agreement" whereby Polygram and Warner would limit advertising and end discounts on their respective 1990 and 1994 albums. In 2001, the FTC issued complaints against Polygram and Warner charging that, by entering into an agreement to stop advertising and discounts on the earlier albums, the companies had engaged in unfair competition in violation of §5 of the FTC Act. By settlement agreement, Warner agreed to refrain from the alleged unlawful conduct. However, Polygram contested the allegation and eventually lost its case before an administrative law judge and the commission. On appeal, the D.C. Circuit affirmed the FTC decision.

The court accepted the FTC’s conclusion that the agreement to limit advertising and discounting was "inherently suspect" because "such constraints by their nature tend to raise prices and to reduce output." The court found Polygram failed to prove the agreement had a sufficiently plausible pro-competitive justification to overcome its "inherently suspect" status. Polygram had argued the suspension on advertising and discounting of the earlier albums was necessary to prevent the companies from free-riding on the joint marketing investment in the 1998 album, and Polygram reasoned the moratorium agreement was necessary to encourage the parties to invest in selling the joint-venture album. The D.C. Circuit rejected this justification concluding that "the ‘free riding’ to be eliminated by the moratorium agreement…was nothing more than the competition of products that were not part of the joint undertaking" (italics added). In other words, the court agreed with the FTC that the purpose and effect of the moratorium agreement was to shield the 1998 album from the competition of the two earlier albums.

Given the "inherently suspect" nature of the moratorium agreement, the D.C. Circuit agreed the FTC did not need to prove anticompetitive effects of the agreement or that Three Tenors albums even constitute a relevant product market. Significantly, the FTC did not challenge the joint venture itself, and the D.C. Circuit’s opinion suggests it would have been difficult for the FTC to challenge the companies’ agreement to limit advertising and discounting if all three albums had been included in the original joint-venture agreement. To challenge such a comprehensive joint-venture agreement, the FTC would have likely faced the task of proving that Three Tenors albums constitute a product market and that the joint venture caused competitive harm to this market.

The D.C. Circuit’s decision suggests prospective joint-venture participants can benefit from carefully preparing comprehensive agreements. Corporations contemplating prospective joint ventures, or already involved in their operation, should thoroughly scrutinize any additional related or supporting agreements.

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