Exclusive Dealing: An Antitrust Analysis

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Exclusive dealing is the term used to describe vertical arrangements in which a buyer is effectively obligated to purchase most or all products or services from one seller, usually for a set period of time.  Exclusive dealing arrangements are widespread and can take many forms.  Some common examples include agreements forbidding a buyer from purchasing products or services from a seller’s competitors, contracts preventing a distributor from selling the products of a different manufacturer, and requirements contracts obligating a buyer to purchase all, or a substantial portion of, its total requirements of specific goods or services from one supplier. 

Antitrust Challenges to Exclusive Dealing Arrangements

            Not all exclusive dealing arrangements are anticompetitive and many are in fact found to have pro-competitive effects and/or be motivated by goals that are not anticompetitive.  Exclusive dealing arrangements that potentially foreclose competitors of the supplier from the market, however, may raise competition concerns and can give rise to liability under various antitrust and competition theories of laws.  Specifically, exclusive dealing arrangements have been challenged under four provisions of the United States antitrust laws:  (1) Section 1 of the Sherman Act, which prohibits contracts “in restraint of trade”[1]; (2) Section 2 of the Sherman Act, which prohibits “attempt[s] to monopolize” and monopolization[2]; (3) Section 3 of the Clayton Act, which prohibits exclusivity arrangements that may "substantially lessen competition” or tend to create a monopoly[3]; and (4) section 5 of the FTC Act, which prohibits "[u]nfair methods of competition."[4]          

Rule of Reason Analysis Applies

Exclusive dealing arrangements are analyzed under the rule of reason.  In Standard Oil Co. v. United States, 337 U.S. 293 (1949), the U.S. Supreme Court analyzed the exclusive dealing arrangements between gasoline refiners and service stations and introduced what became known as the “quantitative substantiality” test, which measured whether the foreclosure of competition was substantial by looking almost entirely at the percentage of the market foreclosed to competitors as a result of the arrangement.  In Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961), the Court changed course and introduced what became known as the “qualitative substantiality” test, which requires a more detailed analysis of the market and the particular circumstances surrounding the arrangement.  Modern “rule of reason” analyses of exclusive dealing arrangements focus on a number of factors, including:  the defendant’s market power; the degree of foreclosure from the market; barriers to entry; the duration of the contracts; whether exclusivity has the potential to raise competitors’ costs; the presence of actual or likely anticompetitive effects; and legitimate business justifications. 

Beware:  Dominant Firms May Be Held to a Higher Standard Under Section 2

            While the analysis of exclusive dealing arrangements is generally the same whether the arrangements are challenged under Section 1 or 2 of the Sherman Act or Section 3 of the Clayton Act, there is growing support for the view that conduct that does not constitute an illegal exclusive dealing arrangement under Section 1 of the Sherman Act or Section 3 of the Clayton Act can still violate Section 2 of the Sherman Act.  Courts have held that a monopolist may be held to a different standard than a non-dominant firm in the context of exclusive dealing arrangements.  This view finds support in the Supreme Court’s decision in Tampa Electric, 365 U.S. at 329, which states that the “relative strength of the parties” is a factor to consider in determining whether there is substantial foreclosure from the market.  In United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), the D.C. Circuit addressed the differences between exclusive dealing under Section 1 and Section 2, and held that the “basic prudential concerns relevant to §§ 1 and 2 are admittedly the same… [but] a monopolist’s use of exclusive contracts, in certain circumstances, may give rise to a § 2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually required in order to establish a § 1 violation.”  Courts have subsequently held that exclusive dealing arrangements upheld under Section 1 or Section 3 of the Clayton Act may still violate Section 2.  See, e.g., LePage’s Inc. v. 3M Co., 324 F.3d 141 (3d Cir. 2003);

United States v. Dentsply Int’l, 399 F.3d 181 (3d Cir. 2005); and NicSand, Inc. v. 3M Co., 457 F.3d 534 (6th Cir. 2006). 

Conclusion

            While many exclusive dealing arrangements do not raise competitive concerns, a careful analysis of the factors discussed above should be undertaken prior to entering into such an agreement, particularly if a firm has dominant market power. 

[1] 15 U.S.C. § 1. 

[1] 15 U.S.C. § 2.

[1] 15 U.S.C. § 14.  Section 3 is limited to arrangements dealing with “goods, wares, merchandise, machinery, supplies, or other commodities.”

[1] 15 U.S.C. § 45(a).

 

 

 

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