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This year, the business community has confirmed that an essential requirement for the continued expansion of electronic commercial practices is the formation of suitable electronic marketplaces — “B2B marketplaces” — in which buyers and sellers trading in similar goods or services can efficiently conduct transactions. History indicates these types of exchanges formed among businesses have proven value, whether merchants are dealing in manufactured goods, commodities, shipping, securities or insurance. Indeed, industry analysts now predict that more than 10,000 new electronic marketplaces for businesses will be launched on the Internet in the next few years. In 2004, nearly 40 percent of $7.3 trillion in annual global commercial electronic transactions are expected to be concluded on these marketplaces. Virtually any company, whether as buyer or seller-or both-will need to determine when (not if) to participate in these emerging venues, and in which marketplaces they will do so. B2B marketplaces were first launched by new dot-com entrepreneurs, using venture capital to establish innovative solutions to attract established companies onto their operating platforms. But the past few months have seen the world’s largest corporations enter into new strategic alliances that align institutional players to respond to the upstarts. Fiercely competitive, dominant manufacturers in the automotive, chemical, aircraft and metal industries, to name a few, have combined forces to establish new B2B venues. In contrast to the dot-com enterprises, the founders of these new marketplaces commit both equity investments and future purchasing transactions, as well as provide, on occasion, the staffing and facilities for the new initiative. Control of the marketplace becomes a vital variable: Those founding the marketplaces may retain control of the venue’s operations; membership criteria; information assets; technology architecture or other important features. A proposed B2B marketplace in the automotive industry, Covisint, exemplifies the emerging business model. In early 2000, General Motors, Ford and DaimlerChrysler announced they were combining forces to establish Covisint as a new marketplace for automotive purchasing. They have proposed to operate a single, integrated portal on the Internet through which a business-to-business integrated supplier exchange will be conducted. Together, these three companies alone spend nearly $250 billion in purchasing. Chris Isidore, “GM, Ford in B2B Web pact, CNNfn” (Feb. 25, 2000). In addition, Renault, Nissan Motor and Toyota Motor have announced their plans to participate with their competitors. Generally, the announced intention for these B2B industrial marketplaces is to provide a common marketplace for the founders, their competitors and their suppliers (who often supply the competitors with similar components or raw materials). One can envision significant benefits to competition-lower prices, greater competition among suppliers, and faster delivery schedules resulting from the adoption of electronic commercial practices. But the combined, strategic actions of competitors in establishing B2B marketplaces has introduced into cyberspace serious legal and public policy concerns regarding the potential anticompetitive impact of these marketplaces on traditional industries. The concerns are domestic and international-both the Federal Trade Commission and the European Commission have asserted their respective jurisdictional authority to oversee the formation and operation of B2B marketplaces. Suddenly, the continuing momentum of electronic commerce is being slowed by antitrust concerns affecting B2B marketplaces at many levels: � Companies being asked by their competitors to commit dollars, transactions or resources are concerned about regulatory actions questioning their investments and their efforts to control the implementation path for electronic commercial practices in their industries. � Companies being invited to trade on the exchanges are concerned about the privacy and security of their transactions and the impact of the exchanges on their traditional pricing structures and competitiveness. � Companies that traditionally provide market research and information services are concerned that the aggregated data collected by the B2B exchanges will displace their role in facilitating competitive activity in the marketplace (and their customers are concerned that the marketplaces, once in control of the information, will charge higher prices for the market data they possess). � Regulators are concerned for the potential of these marketplaces to provide venues for price-fixing, restraints on trade and lower product quality and are extremely nervous about the global reach of these marketplaces extending beyond their jurisdictional authority to regulate improper conduct. The first part of this article surveys the essential legal bases of the antitrust concerns. The article then discusses recent FTC and EU activities and provides a practical checklist to assist counsel in attempting to evaluate the antitrust dimensions of invitations to join B2B marketplaces. UNITED STATES Two general categories of concerns arise under U.S. antitrust laws when evaluating the structure of B2B marketplaces established among competitors: � Under � 7 of the Clayton Act, which prohibits mergers that may lessen competition or tend to create a monopoly, structural questions arise regarding the funding, control and impact of the joint venture aspects of the B2B marketplace. � Under � 1 of the Sherman Act, which prohibits conspiracies that result in unreasonable restraints of trade, operational aspects can be challenged, particularly relating to membership, information access and operating control. The Internet, by its essential architecture, functions through collaboration. Computers, networks and databases are achieving their revolutionary potential through the widespread commitment of companies to particular standards, business processes and protocols. These collaborative activities touch all aspects of electronic commerce-data structures, communications infrastructure, application designs and interfaces and financial systems. In the opinion of the FTC many of these collaborations can actually be procompetitive. In April, the FTC and the Department of Justice issued new “Antitrust Guidelines for Collaborations Among Competitors.” The guidelines were prepared to provide a better explanation of how competitor collaborations and market conditions are evaluated by the regulators. The guidelines –published with full awareness of the presence and growth of B2B marketplaces on the Internet — identify many of the procompetitive benefits to be realized through collaboration. At the same time, they constructively identify key variables that can adversely define a marketplace’s impact on competition. Some arrangements are per se illegal — these include agreements among competitors to fix prices or output, rig bids, or share or divide markets, suppliers, customers or lines of commerce. But when participants in efficiency-enhancing integrations of economic activity can demonstrate that their rules are reasonably necessary to achieve procompetitive goals, the federal government is willing to evaluate the arrangements under a “rule of reason,” even if the arrangements might otherwise be per se illegal. “Rule of reason” analyses evaluate both procompetitive and anticompetitive impacts of the proposed collaboration. Generally, if anticompetitive impacts are possible, the collaboration may still be permissible if the procompetitive benefits substantially outweigh the risks of anticompetitive impacts. The guidelines emphasize that the labels assigned to a transaction — “joint venture,” “strategic alliance,” “merger” — do not control the analysis; instead, the practical impacts on competition are what matter. As a practical matter, many of the corporate structures selected for B2B marketplaces will meet the criteria under the Hart-Scott-Rodino Act for premerger filing notifications. As discussed below, some do not, and the result is that the same transaction may require regulatory approval in Europe when U.S. authorities have no jurisdiction to review. EUROPEAN UNION Competition law in Europe is young and dynamic. Article 3 of the Treaty of Rome in 1957 provided that “the activities of the community shall include … (g) a system ensuring that competition in the internal market [of Europe] is not distorted.” Much of the priority for Europe in forming and maturing the European Union under the treaty has focused on achieving open competition among the national economies. Articles 81 and 82 of the treaty provided the legal principles giving substance to the mandate of Article 3. Under Article 81, collusive behavior between companies that could affect the competitive process was regulated both in horizontal and vertical views of the market. Under Article 83, conduct by those with a dominant position in the marketplace, whether acting individually or in combination with others, was regulated-conduct that could distort competition or exploit customers was suspect. Traditionally, existing EU competition law provided few decisive penalties or sanctions and centralized enforcement at the commission level, leaving national authorities with little capability. However, in March, the Competition Act 1998 became effective, which called for the creation of a Competition Commission as a new regulatory authority of the EU. Under the act, the Competition Commission is provided strong powers of investigation, including assuming responsibilities for inquiring into mergers, monopolies and similar transactions. In many respects, the Competition Act merely extends traditional European competition law principles. But the act establishes penalties, sanctions and enforcement powers, and national competition law authorities are encouraged to also exercise greater enforcement autonomy. The EU also has the Merger Control Act in force. This legislation is similar in many respects to Hart-Scott-Rodino and requires regulatory approval of certain types of joint ventures, mergers and acquisitions. Under the Merger Control regulations, joint ventures in which parent corporations retain control of operations are particularly subject to prior approval. These regulations affect the B2B marketplaces when the founders, as large institutions within the industry, continue to retain such controls in the structure of the operating agreements. EU law, by its own jurisdictional limits, regulates only trade between EU Member States; no specific authority exists to oversee commercial transactions between Europe and other regional economies. However, as indicated by the conduct of those establishing B2B marketplaces, the intended scope and operations of any of these industry-wide exchanges will clearly embrace intra-European transactions. Accordingly, most global enterprises committing to B2B marketplaces have the requisite trade volume in Europe to require them to be cognizant of the Competition Act and related applicable law. RECENT ACTIVITY IN THE B2B MARKETPLACE The rapid emergence of our awareness of European competition law and its impact on the formation and operation of B2B marketplaces underscores the shifting challenges in practicing electronic commerce law. Quite simply, the competent, ethical representation of our clients will continue to demand that attorneys develop the ability to anticipate and understand different legal systems with often dramatically different governing rules. Competition law is emerging as one of the first true global legal dimensions in which electronic commerce innovation is forcing attorneys to practice law differently. In the future, other areas of law will become equally critical to be mastered; conducting effective triage on the antitrust dimensions of today’s B2B marketplaces will likely empower counsel to be better prepared for those future challenges. Earlier this year, both the Federal Trade Commission and the Competition Commission began receiving applications from B2B marketplaces seeking regulatory approval for their existence and operations. In early August, the Competition Commission issued its first approval of a B2B marketplace, myaircraft.com. European Commission Document Number IP/00/912, Date: 2000-08-07. Myaircraft.com is a joint venture established among three companies — United Technologies Corp. and Honeywell International, the two dominant suppliers in the aircraft parts aftermarket; and i2Technologies, a supplier of the technologies used in marketplace and exchange platforms. myaircraft.com structured its formation in a way to avoid the filing requirements under Hart-Scott-Rodino in the United States. However, application in Europe was required under the Merger Control aspects of European law, which requires approval of a fully functional joint venture in which the parents retained control. Id. In issuing its approval, European authorities concluded myaircraft.com did not raise competition concerns despite the retained control. The opinion emphasized that other exchanges had been established in the aircraft industry, whether announced or already in operation. Accordingly, myaircraft.com could face significant competition. As well, the proposed B2B marketplace was perceived as just one of several methods by which the participants and others would continue to conduct purchasing activities. The announcement clarified the European view on the need for B2B marketplaces to obtain regulatory approval. Marketplaces operated by single companies did not require preapproval, since no concentration among competitors was occurring. In addition, if the parent corporations would not exercise strategic control over the operations of the marketplace, then the Merger Control laws were not triggered since there would be no regulatory “concentration” occurring. However, other laws against restrictive practices continue to apply, though regulatory approval under those laws is not required. CONDUCTING TRIAGE Businesses are going to be asked to participate in B2B marketplaces. Here are some of the current scenarios that are demanding real-time legal assessments regarding antitrust considerations: � A company seeks to organize its key competitors into a strategic alliance to establish a new B2B marketplace. Founders are asked to contribute capital, technology, staff and facility resources (for start-up purposes) as well as commit to use the marketplace for a certain percentage of their own purchasing activities. � A consortium has already been established among key competitors and remaining participants in the industry receive invitations to commit to the critical mass that has been established. Similar commitments of resources may be requested, but operating control is less likely to be shared with the second-tier members. � Suppliers in an industry witness the formation of a B2B initiative by many of their key customers and are invited to commit to participate. Obviously, whether directly or indirectly, suppliers fear that a lack of commitment will eventually result in the loss of the associated revenue. � Technology companies offering marketplace platforms are essential participants; many of the “upstarts” are now becoming invaluable business partners to the new marketplaces. However, they must be cautious about committing to strategic alliances that face significant regulatory scrutiny or vulnerability because of their structure, operating rules or participation guidelines. What are some of the criteria that suggest a marketplace is potentially a “high-risk” situation from a competition law perspective? What are some possible guidelines counsel may use to conduct immediate assessments of potential B2B marketplace opportunities? Though not an inclusive list, the following guidelines appear particularly useful in helping to disqualify poorly constructed situations: TWENTY PERCENT RULE The collective market share of the marketplace collaborators and its participants should account for no more than 20 percent of the defined market in which competition may be affected. This standard has been articulated by the FTC as the general “safety zone” for competitor collaborations. Of course, as with nearly any antitrust analysis, how the boundaries of a market are defined can be manipulated endlessly; but a significant market share demands a higher level of scrutiny. NO JOINT DECISIONS Decisions regarding pricing, output or other competitively sensitive variables should not be made jointly. Whenever possible, transaction participants should act independently on all such decisions; the management of the marketplace should be independent of the ownership control. INDEPENDENT COMPETITION The B2B marketplace should not decrease any participant’s ability or incentive to compete independently in the market. Minimum-transaction volume requirements, exclusivity rules (limiting participants from investing in other marketplaces) and limitations on using other marketplaces can attract regulatory scrutiny and potentially compromise the success of the marketplace. The balance to be struck is difficult to achieve, since many of these types of requirements provide the assurances of sufficient volume to enable a marketplace to successfully launch itself. OPEN MEMBERSHIP A B2B marketplace should have “open” membership criteria, through which any businesses meeting objective suitability criteria are permitted to join. Membership fees should be structured on a proportionate basis; flat fees that are substantial in size have potentially anticompetitive impacts on smaller businesses and should be avoided. Other types of membership criteria can “disguise” potentially illegal conduct that has the effect of excluding certain competitors from participation, including requirements for the acquisition of expensive technology, minimum transaction volume rules, etc. INTEROPERABILITY The technologies of the B2B marketplace should be based on widely available technologies and not impose particular requirements that could have a “lock-in” effect on participants. A particularly difficult area relates to the structure and format of data elements used within the marketplace. Lawyers must learn how to ask about the origin of the technology standards being adopted and be confident there is no underlying motivation of anti-Competitive effect. SECURITY Critical to the trustworthiness of a B2B marketplace are the procedures and controls adopted to protect from disclosure between competitors the sensitive proprietary information that is included in transactional messages — purchase orders, invoices, shipping notices, etc. B2B marketplaces must adopt strong, clear policies regarding the confidentiality of such data, avoid the posting or exchange of competitively sensitive information (except when transaction-related in nature) and commit to well-defined sanctions for violations of appropriate policies. Jeffrey B. Ritter is of counsel in the Washington, D.C., office of Kirkpatrick & Lockhart LLP, where he co-chairs the firm’s national electronic commerce practice. Laura D. Yens is an associate in the same office, where she practices corporate and electronic commerce law.

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