Exclusive Teaming Agreements and Competitor Collaborations: Friends or Foes of Competition?

The Department of Defense has issued guidance on the potential anticompetitive impact of exclusive teaming agreements on federal procurements, and has proposed actions that contracting officers and auditors should take when faced with such agreements. Moreover, the Justice Department and the Federal Trade Commission have jointly published proposed guidelines for collaborations among competitors. These guidelines articulate the government’s proposed antitrust enforcement policy concerning joint ventures among competitors.

In today’s marketplace, competitors often collaborate or team together in pursuit of business opportunities, including federal procurements. Some collaborations can provide competitive benefits to government users, yielding lower overall prices and superior goods and services. Other collaborations, however, can effectively diminish competition, such as where only one company can meet some portion of the government’s requirements, and that company teams exclusively with one prime contractor, effectively eliminating any competition.

Exclusive teaming agreements and other collaborations among competitors, such as joint ventures, have been the subject of increasing scrutiny over the past year-and-a-half. During that period, the Department of Defense (DoD) has issued guidance on exclusive teaming agreements and on the actions federal procurement officials should take in response to anticompetitive exclusive teaming agreements. Additionally, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have issued jointly a draft document entitled "Antitrust Guidelines for Collaborations Among Competitors," which, if ultimately adopted, "will state the antitrust enforcement policy of the Agencies with regard to competition issues raised by collaborations among competitors." The provisions of these documents have significant potential impact on teaming agreements and similar collaborations.

DoD Guidance

DoD has issued two principal documents concerning exclusive teaming agreements:

  1. the January 5, 1999, memorandum on "Anticompetitive Teaming" from Under Secretary of Defense for Acquisition and Technology, Jacques Gansler; and
  2. the July 26, 1999, Defense Contract Audit Agency (DCAA) memorandum on "Audit Guidance on Anticompetitive Exclusive Teaming Agreements."

The latter implements the former, instructing DCAA auditors of the actions they should take when they identify anticompetitive teaming agreements.

The Gansler memo is the seminal document addressing DoD policy on anticompetitive teaming. It defines an "exclusive teaming arrangement" as existing when "[1] two or more companies agree--in writing, through ‘understandings,’ or by any other means--to team together to pursue a DoD procurement program, and [2] further agree not to team with any other competitors for that program." The memo states that exclusive teaming agreements have the "potential" to decrease competition. The Gansler memo advises DoD contracting officers and program managers to "scrutinize" exclusive teaming agreements to determine if they are anticompetitive. If they are, the memo highlights options to pursue, including:

  1. ordering dissolution of the arrangement;
  2. requiring a team member with a unique, necessary capability to make that capability available to all competitors on equitable terms; and
  3. inserting a "consent to subcontract" clause (as prescribed in the Federal Acquisition Regulation Subpart 44.2) to ensure adequate competition at the subcontractor level.

A proposed amendment to the Defense Federal Acquisition Regulation Supplement (DFARS) would implement the Gansler memo [see 64 Fed. Reg. 63002-03 (Nov. 18, 1999)]. Specifically, DFARS ' 203 would be amended to:

  1. add the definition of "exclusive teaming agreement" contained in the Gansler memo; and
  2. indicate that such an agreement may evidence violations of antitrust laws that require the submission of a report to the relevant debarring official if one or more of the companies on the team "is the sole provider of a product or service that is essential for contract performance, and efforts to eliminate the arrangements are not successful."

The DCAA memo, which also implements the Gansler memo, emphasizes that the mere existence of an exclusive teaming agreement does not alone establish anticompetitive activity. Consistent with the Gansler memo, an exclusive teaming agreement is deemed anticompetitive and might violate antitrust laws only where a team member is "the sole provider of a product or service that is essential for contract performance," and the government’s efforts to eliminate the exclusive teaming arrangement are unsuccessful.

The DCAA memo advises auditors that when they receive information from any source indicating an anticompetitive teaming arrangement, they must promptly notify the contracting officer (CO). Then, if the auditor believes the CO’s efforts to resolve such an agreement are not successful, the auditor will consult with DCAA headquarters general counsel for additional guidance. The DCAA memo has been formally implemented in Section 4-705 of the DCAA Audit Manual.

FTC/DOJ Draft Guidelines

On October 6, 1999, FTC and DOJ jointly published for comment in the Federal Register draft "Antitrust Guidelines for Collaborations Among Competitors" (see 64 Fed. Reg. 54,484). The purpose of the guidelines is to provide business persons and government officials alike analytical guidance to evaluate antitrust issues raised by collaborations among competitors, regardless of whether the collaboration involves federal procurement opportunities or is broader in scope.

The guidelines specifically outline a framework for assessing the likelihood of a government antitrust challenge to a collaboration between one or more competitors, such as a joint venture. The guidelines identify two analyses to use in evaluating the competitive impact of competitor collaborations:

  1. per se analysis; and
  2. rule of reason analysis.

A per se analysis involves agreements that are so likely to harm competition and to have no procompetitive benefit that they do not warrant further inquiry into their likely effects. Instead, these collaborations are challenged as per se unlawful. These collaborations include "agreements" that tend to raise prices or reduce outputs. Examples include price-fixing, bid-rigging, production-fixing, and agreements to share or divide markets by (a) customers, (b) suppliers, (c) territories, or (d) lines of commerce.

Under a rule of reason analysis, on the other hand, the government examines all pertinent facts to determine the overall competitive impact of a given collaboration. This is a "flexible inquiry," and its focus and detail vary depending on the nature of the agreement and market circumstances. "The central question is whether the relevant agreement likely harms competition by increasing the ability or incentive profitably [a] to raise price[s] above or [b] reduce output, quality, service, or innovation below what likely would prevail in the absence of the relevant agreement." Ultimately, this analysis devolves to balancing the potential procompetitive benefits against the potential anticompetitive harms to determine the overall competitive impact.

In sum, under DoD’s recently issued guidance, if two companies team exclusively to pursue a DoD contract, and one of those companies is the sole provider of an essential good or service, the exclusive teaming agreement is likely to be challenged by contracting officials. Indeed, there have already been DoD procurements in which exclusive teaming agreements have been prohibited altogether. The proposed FTC/DOJ guidelines, while not limited to federal procurement collaborations among competitors, provide a framework for analyzing the competitive impact of any given collaboration to determine whether the government would be likely to challenge it. Contractors and government officials alike should familiarize themselves with these documents and stay alert for the publication of the proposed DFARS amendment and the proposed FTC/DOJ guidelines in final form.

*article courtesy of Procurement Law Advisor.