Joint Operating Agreement

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JOINT OPERATING AGREEMENT

Any contract, agreement, joint venture, or other arrangement entered into by two or more businesses in which the operations and the physical facilities of a failing business are merged, although each business retains its status as a separate entity in terms of profits and individual mission.

The purpose of a joint operating agreement (JOA) is to protect a business from failure, yet prevent monopolization within an industry by allowing each party to retain some form of separate operation. JOAs are used in the newspaper, health care, gas and oil, and other industries.

JOAs have been questioned as providing a means of avoiding antitrust problems. With International Shoe Co. v. FTC, 280 U.S. 291, 50 S. Ct. 89, 74 L. Ed. 431 (1930), the Supreme Court created the "failing-company" defense, by which mergers that would ordinarily violate antitrust laws are permitted where one of the businesses faces certain failure if no other action is taken. It was argued that a merger between two competitors, one of which is failing, cannot adversely affect competition because, either way, the failing company will disappear as a competitive entity.

In the newspaper business, JOAs are used so that a failing newspaper can be paired with a parent newspaper and still retain separate editorial and reporting functions. In 1965 the justice department questioned the legality of JOAs by issuing charges of antitrust violations to two publishers of daily newspapers operated under a JOA in Tucson, Arizona. In Citizens Publishing Co. v. United States, 394 U.S. 131, 89 S. Ct. 927, 22 L. Ed. 2d 148 (1969), even though the newspapers used the failing-company defense, the Supreme Court upheld findings of antitrust violations. Its decision narrowed the scope of the failing-company defense. The Court set three strict conditions for claiming failing-company immunity: (1) the failing company must be about to liquidate, and the JOA must be its last chance to survive; (2) the acquiring company must be the only available purchaser; and (3) reorganization prospects in bankruptcy must be dim or nonexistent.

Congress responded to Citizens Publishing by passing the Newspaper Preservation Act (NPA) (15 U.S.C.A. § 1802 et seq.) in 1970. The NPA lets newspapers form a JOA if they pass a less strict test. Under the NPA the attorney general may grant limited exemption from antitrust laws by approving a JOA.

In the health care industry, hospitals may form a JOA to provide a stronger financial structure. The JOA, also known in this industry as a virtual merger, allows the hospitals to retain separate boards of directors but turns over management to a separate company. The hospitals coordinate services, construction needs, and the purchase of major equipment, yet maintain some of their own policies. Religious hospitals gain the benefits of a hospital network and still retain their religious affiliation. For example, a Catholic hospital entering into a JOA can maintain its stand against abortion and continue its individual programs for treating people who are poor.

Two or more gas and oil operators can enter into a JOA to share the risk and expense of gas and oil exploration. One party is given responsibility for day-to-day operations, often charging back expenses to the other participants in the JOA. The operator is able to keep costs down, and the other participants still retain rights to their share of the gas and oil, which they can use at their own discretion. The parties are seldom considered to be in a partnership unless the agreement specifically states that they are.

In all JOAs the parties retain some aspect of their original organization, whether it is editorial voice, religious affiliation, mission statement, or the ability to use the resources of the business as they choose. All the parties share in the financial risks of the joint operation and gain the potential for an increased market presence and thus increased profits.