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The parent companies of a joint venture cannot make side agreements not to compete with the joint venture, even with the goal of making the joint venture more successful, the U.S. Circuit Court for the District of Columbia has ruled, upholding a Federal Trade Commission (FTC) decision. Polygram Holding Inc. v. Federal Trade Commission, No. 03-1293. The long-awaited “Three Tenors” decision grew out of the most popular compact disc release in classical music, and the follow-up recordings and releases. At issue was a joint venture formed by record companies PolyGram Holding Inc. and Warner Communications Inc. to distribute a recording of a July 1998 performance of opera greats Jos� Carreras, Pl�cido Domingo and Luciano Pavarotti. The parent companies made a side agreement, the court explained, “to suspend, for 10 weeks, advertising and discounting of two earlier Three Tenors concert albums, one distributed by PolyGram and the other by Warner.” It was that side agreement that the FTC found to be illegal. The record company and several affiliates petitioned for a review of the FTC order, which held that the record company violated 15 U.S.C. 45 of the Federal Trade Commission Act by entering an agreement with a competitor to suspend advertising and discounting of two record albums, one distributed by the company and the other by the competitor. The D.C. Circuit upheld the commission, and the process by which it had decided the matter. Though the FTC did not treat the agreement as a “per se” violation of antitrust law-illegal in all circumstances-it treated it as suspect and conducted an abbreviated investigation rather than an in-depth, so-called “rule of reason” analysis that would have weighed all the possible justifications. The appellate opinion was written by Chief Judge Douglas A. Ginsburg, who once ran the Justice Department’s Antitrust Division. According to the opinion, although the FTC had used the term “inherently suspect,” the applied framework gave rise to a rebuttable presumption of illegality based on the close family resemblance between the suspect practice and another practice that already stood convicted in the court of consumer welfare. The company’s agreement with its competitor had a deleterious effect upon consumers as it looked suspiciously like a naked price-fixing agreement between competitors. Although the temporary moratorium appeared likely to mitigate the spillover effects that could have been expected to follow the company’s aggressive launch of an album, the “free riding” to be eliminated was nothing more than the competition of products that were not part of the joint undertaking. The company was unable to identify any competitive justification for the agreement. The remedy was reasonable as the finding of a significant risk for similar, future arrangements was supported by substantial evidence. “At bottom, the Sherman Act requires the court to ascertain whether the challenged restraint hinders competition,” Ginsburg wrote. “The Commission’s framework, at least as the Commission applied it in this case, does just that.”

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