LEGAL
Blockchain, or distributed ledger technology, is poised to move shortly from an enticing idea with great promise to practical implementation across the financial services, healthcare, insurance, and numerous other industries. The excitement is understandable. The technology offers the potential of significantly more efficient interactions between companies without the need for duplicative databases, reconciliation of conflicting information, and the presence and expense of a trusted intermediary. While the potential useful applications of distributed ledger technology are boundless, most share a common characteristic – the collaboration of independent economic actors. Whether the technology is employed in the financial services sector to facilitate clearing and settlement between banks; in the healthcare industry to manage, secure, and exchange patient data among healthcare providers and insurers; or in supply-chain management; each application entails the simultaneous accessibility of the ledger to multiple independent companies.
This collaboration, although essential to unlocking the potential of blockchain technology in the context of permissioned ledgers (as opposed to public ledgers like Bitcoin and Ethereum), can also raise potential issues under antitrust laws. Although many (if not most) distributed ledger use cases likely raise no serious antitrust concerns, participants in blockchain consortia should be attuned to antitrust risks and steer clear of the areas of greatest potential concern. We identify some of these concerns below, but urge companies collaborating with competitors on a distributed ledger application to seek antitrust counsel to identify the risks associated with their specific blockchain implementation.
Companies collaborating with competitors though a blockchain consortium should consider the nature of the information they make available to competitors through a shared ledger. While certain information sharing is regarded by the antitrust laws to be competitively benign, the exchange of current or future prices or other competitively sensitive information can facilitate price fixing and expose participants to potential antitrust liability.
The appeal of distributed ledger technology lies significantly in the untapped efficiency benefits it offers, and not strictly in the opportunities it presents to companies to exchange information, but the technology likely does provide another vehicle that members of a price-fixing cartel could employ to establish industrywide prices and ensure that members adhere to any agreement. Agreements among competitors related to prices are the most serious of antitrust offenses, and can be prosecuted criminally. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 224 n.59 (1940) ("Under the Sherman Act, a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se. ... Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy."). Participants in blockchain consortia should take care to ensure that they are not, or could not be perceived to be, agreeing to eliminate their independent decision making as to any aspect of the prices they charge.
"But the dissemination of price information is not itself a per se violation of the Sherman Act," United States v. Citizens & S. Natl. Bank, 422 U.S. 86, 113 (1975), and the antitrust enforcement agencies and the courts look closely at the nature of the information exchanged and the structural characteristics of the market in evaluating whether the sharing of information is harmful to competition. The exchange of specific data on current and future prices and competitive activities – as opposed to aggregated past information – is likely to attract the greatest antitrust scrutiny. See Todd v. Exxon Corp., 275 F.3d 191, 211-13 (2d Cir. 2001) (Sotomayor, J.).
The antitrust enforcement agencies "recognize that the sharing of information among competitors may be procompetitive and often reasonably necessary to achieve the procompetitive benefits of certain collaborations." See FTC & USDOJ, Antitrust Guidelines for Collaborations Among Competitors, § 3.31(b) (April 2000). Limited information exchanges of price and other competitively sensitive information necessary to advance the collaboration and achieve the efficiency benefits offered by the shared ledger are likely to be permitted by the antitrust laws. Participants should, however, give careful advance consideration to the need for and breadth of the exchange before committing to participate in a blockchain consortium. These factors provide additional incentives to consortia members to make sure that the blockchain protocol that is implemented permits very granular control over what attributes of a transaction can be seen so that only those parties with a legitimate reason can see sensitive information, such as price information.
To the extent that implementation of a distributed ledger application involves the adoption of rules governing the nature of the collaboration, participants should ensure that those rules do not unnecessarily limit competition among them. The antitrust laws tolerate many restrictions on competition among companies collaborating in a joint venture if the limitation on competition is reasonably necessary to allow them to achieve the benefits of the collaboration. But where joint venture restrictions are not necessary and serve only to limit how the members compete, they might be found to violate the antitrust laws.
Courts and antitrust enforcers recognize that independent companies, by collaborating, can achieve outcomes that they could not achieve individually, and that, in some industries, "horizontal restraints on competition are essential if the product is to be available at all." NCAA v. Bd. of Regents, 468 U.S. 85, 101 (1984); see also Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 23 (1979) ("Joint ventures and other cooperative arrangements are also not usually unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all.").
Because the collaborative use of shared ledger technology might unlock efficiencies or opportunities that would otherwise be unavailable, the joint undertakings of blockchain consortia are unlikely to be met with significant suspicion under the antitrust laws. But they will not receive a free pass. The antitrust agencies will consider whether rules that limit the activities of members of the consortium are reasonably necessary to advance the purposes of the collaboration. See Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224, 227 (D.C. Cir. 1986). In many cases, rules of consortia of competitors have been upheld as reasonable efforts to ensure that a joint venture achieves its objectives. See, e.g., id. at 229. In others, courts have invalidated rules found to be unnecessary to accomplishing any legitimate purpose. See, e.g., U.S. v. Visa USA, Inc., 344 F.3d 229, 243 (2d Cir. 2003) (finding that rules adopted by Visa and MasterCard that prohibited their member banks from issuing American Express or Discover cards were not necessary to promote cohesion).
Blockchain consortia will undoubtedly need rules to govern their operations and the interactions of their members. Organizers of these collaborative entities and their participants should consider carefully whether restrictions they impose are necessary to allow the consortia to achieve the promised efficiencies. If they cannot articulate a legitimate basis for any restraints on competition among companies subject to proposed rules, they should think twice before proceeding with their adoption.
Collaborations among users of distributed ledger technology offer to make existing business processes significantly less costly and more efficient. To the extent that the efficiency gains through their collaboration make participation in their consortia essential to the ability to compete meaningfully in the businesses in which the members operate, the members should be aware that they might be required to allow all potential competitors to join the consortia.
As distributed ledger applications evolve from Bitcoin and other public uses of the technology to private shared ledgers, they are likely to encounter concerns about which firms are granted access to the consortium and use of the ledger and which firms are excluded. While the antitrust laws often have little to say about consortia membership, courts have prohibited certain particularly efficient joint ventures from unreasonably excluding competitors. For example, because residential real estate brokers cannot effectively compete without access to their local multiple listing service, real estate brokers are generally not allowed to unreasonably restrict multiple listing service membership and deny access to new entrants. See United States v. Realty Multi-List, Inc., 629 F.2d 1351, 1381 (5th Cir. 1980).
The significant efficiencies available through the collaborative use of blockchain technology makes it reasonably foreseeable that particularly effective consortia will encounter challenges to membership limitations. Use of a shared ledger as a settlement and clearance platform by financial services companies, for instance, could yield such significant benefits that excluded firms might raise objections. Participants should be aware of this possibility and adopt only membership restrictions they can justify as necessary to ensure their efficient collaboration.
As firms establish consortia to explore the incredible opportunities presented by blockchain technology, they will likely encounter circumstances giving rise to potential antitrust concerns. The discussion above identifies some potential issues, but is far from exhaustive. Companies collaborating using shared ledgers should be aware of and thoroughly evaluate these concerns. In addition to potential criminal exposure for the most serious offenses, antitrust violations can result in lengthy and expensive government investigations and litigation and treble damages exposure in private antitrust lawsuits.
The antitrust laws welcome efficient and procompetitive collaborations among competitors. But it is important to understand what might cross the line.
David Kully is a partner in the Washington, D.C. office of Holland & Knight LLP. Mr. Kully joined Holland & Knight in September 2016, after an 18-year career with the Antitrust Division of the U.S. Department of Justice, where he served most recently as Chief of a unit of 25-lawyers responsible for investigating potential antitrust violations and litigating antitrust enforcement actions. Mr. Kully’s work with the Antitrust Division regularly entailed evaluating the permissibility under the antitrust laws of industry consortia or other joint ventures of competitors – organizations like the blockchain consortia discussed in this article.
Josias "Joe" N. Dewey is a partner at Holland & Knight in its Miami office where he represents a diverse portfolio of clients in the banking and finance, real estate, technology and gaming industries. In addition to his legal practice, Joe spends his time developing a smart contract platform called "contractCode." A self-taught coder from a young age, Joe’s intrigue with the brilliance of blockchain technology and its logical intersection with law and business propelled him to be one of the legal industry’s leading experts on the topic. Joe regularly publishes articles on blockchain technology and has been a guest speaker and panelist on the matter at conferences around the world. Joe received both his B.A. and J.D. from the University of Florida.
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