When two or more companies agree to combine some of their operations as a means of sharing costs and reducing operating expenses, they enter into a joint operating agreement (JOA). Benefits involve cost savings and economies of scale. Joint operating agreements enable the participating companies to operate with fewer employees; eliminate duplicate facilities, equipment, and functions; and save through bulk purchases of supplies and materials.
Joint operating agreements typically take one of two forms. In some cases a joint venture is formed. The companies involved in the JOA form a third company that is jointly owned. The joint venture is capitalized by the participating companies and managed by a board of directors consisting of executives from, or individuals selected by, each of the participating companies. If all of the companies contribute equal amounts of capital, they generally share equally in ownership and profits of the joint venture.
This type of integrated JOA was being used by health-care systems that wanted to integrate operations but that also wanted to maintain their separate corporate existences. Two or more health-care systems would form a jointly managed organization, with governance shared among the new entity and the existing entities. Under a contractual agreement, revenues were shared and capital expenditures were made according to a predetermined formula. Such a JOA did not violate antitrust laws, because it was viewed as an integrated joint venture, with each partner sharing the risk. As a result, the affiliated entities could engage in joint negotiations and strategic planning through the jointly managed organization. The Internal Revenue Service (IRS) ruled in 1996 that such integrated joint ventures among nonprofit healthcare providers could retain their nonprofit status. That is, the IRS considered the joint venture an extension of the tax-exempt affiliated entities, rather than as a new entity subject to taxation.
The second form of a joint operating agreement involves an operating partnership. One of the companies acts as the operating partner for the other firms, providing shared services on a contract basis. Secondary partners may contribute facilities, equipments, cash, and other items to the operating partner. Under this type of joint operating agreement, no third-party joint venture is created.
JOAs should be distinguished from mergers. In the case of mergers and acquisitions, ownership is combined in the new corporate entity. When one company merges with another, the result is single ownership. In the case of joint operating agreements, the two or more companies involved remain separately owned.
Joint operating agreements do not necessarily involve antitrust violations. It is only when joint operating agreements involve price fixing, market allocation, and profit sharing that they violate the antitrust laws of the United States. JOAs that are limited to combined operations for the purpose of cost savings and economies of scale are permitted.
In some cases special legislation has been passed by Congress to provide antitrust exemptions for joint operating agreements in specific industries. In 1970 Congress passed the Newspaper Preservation Act, which granted antitrust exemption to joint operating agreements established by two daily newspapers that competed in the same geographic markets.
Perhaps the most widely known, discussed, and analyzed JOAs are those involving newspapers. The first-known JOA between two competing newspaper was formed in 1933 in Albuquerque, New Mexico. Three other newspaper JOAs were established in the 1930s, four in the 1940s, 16 in the 1950s, and four in the 1960s. In 1965 the U.S. Department of Justice challenged the JOA between the Star and Citizen in Tucson, Arizona, on the grounds that it violated federal antitrust laws. In 1969 the U.S. Supreme Court upheld that challenge.
The Newspaper Preservation Act (NPA) was passed by Congress as a result of extensive lobbying on the part of the newspaper industry. Under the NPA, antitrust exemption was granted to JOAs established by competing newspapers. That meant that under an approved JOA, which included all JOAs currently in existence, newspapers could engage in antitrust practices such as price fixing, profit pooling, and market allocation.
Under the NPA, newspapers that desired to establish new JOAs needed to obtain approval from the attorney general of the United States and the U.S. Department of Justice. In order for a newspaper JOA to be approved, one of the newspapers must be failing. Among the criteria that are considered when determining whether or not a newspaper is failing, are degree of market share disparity between the two newspapers, a downward circulation spiral, and the extent of the failing newspaper's financial losses.
Some newspaper JOAs were not affected by the NPA. These included newspapers in different geographic markets that established centralized facilities to handle operations. Joint newspaper monopolies, where a single company owns two newspapers in a single geographic market, were also not affected by the NPA. In addition there were joint operations that did not violate antitrust laws. For example, newspapers are allowed to combine advertising and circulation operations. They may share printing and production facilities. They may also merge administrative functions, such as accounting and human resources. These types of joint operations do not require an antitrust exemption.
Essentially two factors make it difficult for more than one daily newspaper to publish successfully in a single market. One is that economies of scale heavily favor the larger of the two newspapers. Secondly, many advertisers place ads only in the largest circulating newspapers in any one market, making it difficult for smaller newspapers to compete with larger ones for advertising dollars. Newspaper JOAs offer a way to reduce the high costs associated with newspaper production and distribution as well as the marketing and promotion costs associated with commercial competition.
Following passage of the NPA, two newspaper JOAs were created in the 1970s, three in the 1980s, and several have been established in the 1990s. While newspaper JOAs are designed to preserve editorial competition between two daily newspapers in a single market, whether or not they have been successful has remained a matter of controversy. The number of newspaper JOAs in effect declined from 34 in 1997 to 15 in 1998. As has been noted, several types of joint operations do not require antitrust exemptions, and the benefit of granting specific antitrust exemptions has been questioned by some experts. In addition other market forces appear to be at work against struggling newspapers. These include the growth of television viewing and overall declining readerships for many newspapers. Many newspaper JOAs have been dissolved, resulting in only one daily newspaper serving a particular geographic market.
[ David P. Bianco ]
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