Brunswick Makes FTC "Classic Case" Status

Brunswick Makes FTC
Classic Case Status

Brunswick's recent woes of being frequently before the Federal Trade Commision:

Outboard sales anti-trust with the Yamaha / Sanshin venture
Investigation of sales practices to Tracker
FTC investigation of advertising practices of its newly acquired Life Fitness company
Current IBB (Independent Boat Builders cooperative) anti-trust suit concerning Stern Drive sales practices

have recently landed it another position it would rather not have, that of being a "classic case" in the new FTC Anti-trust discussion on the FTC web site. The site discusses the Brunswick-Yamaha joint venture (Sanshin). Portions of the discussion are reproduced below.

When Is Single-Share Analysis Applied to Competitor Collaborations?

Predicting the Market Power of Potential Competitors Who Will Cease Competing Against Each Other and Their Collaboration in the Joint Venture Market"

Another case involving a joint venture between potential competitors was Yamaha Motor Co., Ltd. v. Federal Trade Commission.⁽⁷²⁾ Brunswick, the second-largest manufacturer of outboard boat engines in the United States, established a production joint venture with Yamaha, a Japanese manufacturer that had previously but unsuccessfully attempted to enter the United States market. Under the terms of their agreement, Yamaha and Brunswick formed Sanshin, a joint venture company in which each parent would have a 38% ownership share. Yamaha would appoint six of Sanshin's directors; Brunswick would appoint the remaining five. The joint venture was scheduled to last ten years and would be renewed every three years in the absence of three years' notice that either partner wished to terminate the venture. Under the terms of their agreement, Sanshin would sell all of its production to Yamaha, which would subsequently resell a portion to Brunswick. Brunswick retained the exclusive right to sell Sanshin products in the United States, marketing the venture's production under the "Mariner" logo. Yamaha pledged not to manufacture similar engines outside of the venture. Although the United States market was enjoying rapid growth, it had become very concentrated. The top two producers (including Brunswick) produced 72.9% of new units and controlled 85% of dollar sales.

In the first stage of litigation at the FTC, the Administrative Law Judge concluded that although Yamaha was a potential entrant in the high-horsepower engine market, independent entry was unlikely.⁽⁷³⁾ The ALJ also concluded that the joint venture was procompetitive because it added Brunswick's Mariner line to a concentrated United States market.

The Commission reversed, finding that Yamaha was an actual potential entrant, that Mariner was not a new "entrant," and that three collateral agreements were also anticompetitive.⁽⁷⁴⁾ The Eighth Circuit held that Commission had relied on substantial evidence that the joint venture would substantially lessen competition, agreeing that Yamaha had the means to enter the American market independently, and that its independent entry would have produced significant deconcentration.⁽⁷⁵⁾ The court pointed to evidence that Yamaha had already attempted to enter the United States market, was well-known for its technical expertise, and would not avoid entering the most profitable market in the world in the absence of the joint venture.⁽⁷⁶⁾

Brunswick argued that the joint venture would nevertheless offer significant procompetitive effects. First, it argued that the temporary nature of the agreement limited any potential for anticompetitive effects. The Eighth Circuit, however, found that the joint venture agreement was only "terminable," not temporary.⁽⁷⁷⁾ Second, Brunswick argued that the joint venture would enhance Yamaha's ability to enter and expand in the United States market after the joint venture ended. Once again, the Eighth Circuit disagreed, observing that Sanshin's production capacity existed before the joint venture agreement, and that subjecting Yamaha's capacity to control by Brunswick "did not bring into the market an additional independent decisionmaker, as Brunswick would have us believe, but only added to the productive capacity of the second largest firm in a four-firm-dominated industry."⁽⁷⁸⁾ The court also looked at the nature of the agreement in determining that it would result in anticompetitive effects. The chairman of Mariner (Brunswick's joint venture line) had been the president of Mercury (Brunswick's self-produced North American line), and would presumably maximize the profits of both lines of Brunswick products. Perhaps most significantly, collateral agreements between Yamaha and Brunswick limited the joint venture's cannibalization of Brunswick's North American products.⁽⁷⁹⁾

In Brunswick and Penn-Olin, the Commission and the courts identified the central market power issue raised by joint ventures between potential competitors: the elimination of potential competition may enable incumbent firms to raise or maintain prices above competitive levels in the relevant market. Although the venture in Brunswick appeared to add new production to the United States market, the court and Commission correctly pointed out that the capacity existed before the formation of the joint venture, and that Yamaha probably would have used it to enter the United States market independently. It appears that Brunswick was attempting to protect its dominant position in the United States market by excluding a significant potential entrant and expanding its own share of production. The facts in Penn-Olin, however, were less clear. Neither company was an actual competitor in the market, and neither had constructed additional capacity before the collaboration. Instead, the venture created additional capacity in a heavily concentrated market. Even if the joint venturers were perceived independent potential competitors that stood on the periphery of the market, their actual entry through the joint venture may have been more effective in reducing the ability of incumbent firms to exercise market power. Both cases suggest that courts and agencies should be careful to distinguish joint ventures that permit incumbent firms to expand their market power from collaborations that facilitate entry and expansion in the relevant market.

72. 657 F.2d 971 (8th Cir. 1981), cert. denied, 456 U.S. 915 (1982).

73. Id. at 975.

74. Id.

75. Id. at 977.

76. Id. at 977-78.

77. Id. at 979.

78. Id. at 980.

79. Id. at 981. The court also objected to a collateral agreement prohibiting Yamaha from manufacturing any similar engines outside of the joint venture, which prevented it from marketing products in competition with the Mercury or Mariner lines in the United States.