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I n Continental T.V., Inc., v. GTE Sylvania, Inc., 433 U.S. 36 (1977), the Supreme Court adopted a rule of reason approach for nonprice vertical restraints. Two types of non-price vertical arrangements between a supplier and dealer have unique characteristics that must be understood when attempting to find an antitrust violation. Depending on the arrangement, it may be condemned under the Sherman Act, Clayton Act or both. The subject of this 101 article is to explain the difference between an exclusive dealership agreement and an exclusive dealing agreement.
Exclusive dealerships occur when a supplier decides to have its product marketed and sold by only one dealer in an area. In an exclusive dealership, a supplier and dealer "agree" to this arrangement. From this point on, only that dealer will sell the supplier's products. The other dealers in the area will no longer be able to sell these products. (Only Mike's TV Store in Alexandria will sell Sony TVs, but Mike is free to sell Panasonic and Zenith.) These types of contracts are also called output contracts because it creates a restriction on who the supplier can sell to. Thomas Sullivan, Herbert Hovencamp, Antitrust Law, Policy, and Procedure (Lexis Law Fourth Ed.) at 501.
Why would such an agreement be desired? Without this arrangement, many dealers in an area sell the same product. If many dealers in an area are selling the same product, then some may not aggressively promote or service the product as effectively as others. An exclusive dealership prevents this "free riding" from happening because only one dealer in an area will sell a supplier's product.
Exclusive dealerships reduce intrabrand competition by limiting the number of dealers who sell the same product. Because the restriction is placed on the supplier, only section 1 of the Sherman Act applies. Courts focus on the market power of the supplier and dealer, but also focus on justifications for the agreement. As a result, these agreements are often found valid. See Valley Liquors, Inc. v. Renfield Importers, Ltd., 678 F.2d 742 (7th Cir. 1982).
The exclusive dealership contract places the restriction on the supplier's ability to sell to competitors of the dealer. On the other hand, an exclusive dealing agreement places a restriction on the dealer, limiting their ability to buy from other suppliers. An exclusive dealing contract is different from an exclusive dealership contract because it is a requirements contract rather than an output contract. Exclusive dealing occurs when a contract is entered into between a supplier and dealer whereby the dealer is required to only purchase its product needs from the contracting supplier for a certain period of time. (Mike's TV can only sell Sony at his store).
Similar to exclusive dealerships, there are justifications for these contracts such as avoiding free rider problems from other competitors, or securing a long-term supply source. However, these arrangements reduce interbrand competition, or competition between different competitors. In the Sylvania case, the Court stated that protecting interbrand competition is a primary concern of antitrust laws.
Because these agreements effect interbrand competition, courts pay careful attention to them. Exclusive dealing cases will focus on whether the agreement substantially forecloses competition in a particular market. To answer this question, courts focus on three areas. First, the court will determine the extent of the market that is foreclosed. Second, the court will determine the duration of the contract, making sure it is reasonable in length. Third, the court will analyze the height of entry barriers. Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961); Gellhorn & Kovacic, Antitrust Law and Economics (West Group 4th Ed.) at 345. Because this restriction is placed on the dealers or purchasers and is a requirements contract, section 1 of the Sherman Act and section 3 of the Clayton Act will apply.
These are some of the basic differences between two types of non-price vertical restraints. The distinction between an exclusive dealing contract and an exclusive dealership arrangement has legal significance and it is important to understand the difference between the two.
About the Author
Sam Sheinberg is an attorney with the Federal Trade Commission's Bureau of Competition. The views of this article are the opinion of the author and not the Federal Trade Commission or any one Commissioner.