Does an Exclusive-Dealing Agreement Violate the Antitrust Laws?

Happy New YearSometimes parties will enter a contract whereby one agrees to buy (or supply) all of its needs (or product) to the other. For example, maybe a supplier and retailer agree that only the supplier’s product will be sold in the retailer’s stores? This usually isn’t free as the supplier will offer something—better services, better prices, etc.—to obtain the exclusivity.

If you compete with the party that receives the benefit of the exclusive deal, this sort of contract can seem quite aggravating. After all, you have a great product, you offer a competitive price, and you know that your service is better. Then why is the retailer only buying from your competitor? Shouldn’t you deserve at least a chance? Isn’t that what the antitrust laws are for?

Maybe. But most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws. That doesn’t mean that you can’t bring an antitrust action and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws.

You can read our article about exclusive dealing at the Bona Law website here.

It is important that I deflate your expectations a little bit at the beginning like this because if you are on the outside looking in at an exclusive dealing agreement, you are probably quite angry and feel helpless. From your perspective, it will certainly seem like an antitrust violation. And your gut feeling about certain conduct is a good first filter about whether you have an antitrust claim. What I am trying to tell you is that with regard to exclusive dealing, your gut may give you some false positives.

So what is an exclusive dealing agreement?

It occurs when a seller agrees to sell all or most of its output of a product or service exclusively to a particular buyer. It can also occur in the reverse situation: when a buyer agrees to purchase all or most of its requirements from a particular seller. Importantly, although the term used in the doctrine is “exclusive” dealing, the agreement need not be literally exclusive. Courts will often apply exclusive dealing to partial or de facto exclusive dealing agreements, where the contract involves a substantial portion of the other party’s output or requirements.

Indeed, loyalty-discount agreements and exclusive dealing agreements are, under the law, sometimes indistinguishable.

Before going further, you should understand that antitrust and competition law in the US and the European Union (and throughout the world) is currently in flux. Great controversy surrounds issues relating to anticompetitive effects, substantial foreclosure, and de facto exclusive dealing, for example. This article won’t delve into those issues, but if you call me about an exclusive dealing case, there is a good chance that we will need to confront into them. If you are interested, you can review the International Competition Network’s Workbook Chapter on Exclusive Dealing here, which I helped to draft a few years ago.

If you do have an exclusive-dealing antitrust claim, you may be able to bring it under multiple antitrust provisions. The claim assuredly would fit under Section 1 of the Sherman Act, which requires in agreement. In this case, it would be a vertical agreement. If the restraint involves a good or other physical commodity, you can also bring the claim under Section 3 of the Clayton Act. And if you are suing a monopolist or near monopolist, you might even assert a claim under Section 2 of the Sherman Act, alleging that the exclusive-dealing agreement is exclusionary conduct that your powerful adversary is using to unlawfully acquire or maintain a monopoly.

The vehicle you utilize for your exclusive-dealing claim may affect the precise approach the court takes in analyzing your claim. But the relevant issues are similar enough that we won’t make such fine distinctions here. We will instead examine the claim from the perspective of Section 1 of the Sherman Act.

Although some claims under Sherman Act, Section 1 are per se illegal under the antitrust laws, exclusive dealing is not. Instead, courts analyze these claims under the rule of reason. That means that the court won’t allow any shortcuts. An exclusive-dealing plaintiff must put in the hard work of showing that the anticompetitive aspects of the agreement exceed the pro-competitive benefits.

If you are defending against or considering an exclusive-dealing claim, below are the factors that are likely relevant to your case:

Market Definition and Market Power: Like most rule-of-reason claims, you must properly define the product (or service) and geographic boundaries of the market and demonstrate that the defendant (likely your competitor) has market power within that market. This is often but not always an area of great dispute. Some markets are obvious, but others are not.

Foreclosure: This is a hot-button, controversial issue. To prevail on an exclusive-dealing claim, you must generally show that the restraint substantially foreclosed you from competing in the market. The economics of foreclosure are at least slightly ahead of the law of foreclosure. So I would expect that the definition of substantial foreclosure will change over the next several years. If you are interested in this topic, I suggest that you read FTC Commissioner Joshua Wright’s article, “Moving Beyond Naïve Foreclosure Analysis.” Just keep in mind that not everyone agrees with his analysis.

Harm to Competition: Like any rule-of-reason claim, you must show actual harm to competition. Although market power combined with substantial foreclosure may suggest likely harm to competition, there are many factors that may negate such harm. The plaintiff has the burden of showing this harm and you shouldn’t forget about this element (as some seem to do).

Competitive Justifications: Anticompetitive harm is not enough to prevail. If a defendant can show competitive justifications, a plaintiff might lose if those justifications outweigh the anticompetitive harm.

The Duration and Terminability of the Agreement: This factor is really part of the harm to competition or substantial foreclosure issue, but I am separating it out because it commonly impacts an exclusive-dealing claim analysis. If the challenged contract is short term (typically a year or less) or either side can terminate it within that time, it is unlikely that it violates the antitrust laws. That is because courts will conclude that the competitors have the opportunity to “compete for the contract,” within a short period of time, so there is either no harm to competition or no substantial foreclosure of the market. As a practical matter, this factor often makes all the difference.

Anticompetitive Intent: Although anticompetitive intent is not strictly required, it is persuasive and, regardless of what anyone might say, it matters. If the documents show that defendant sought the exclusive deal to foreclose its competitors from the market in hopes they will wither away and die, there is a good chance that a court or jury will be persuaded.

Antitrust Injury: As a general matter, you must show antitrust injury no matter what the claim. An exclusive dealing case is no different. Antitrust injury requires both harm to competition and injury to the plaintiff of the type the antitrust laws were designed to prevent.

Every antitrust case is unique and that is certainly true for cases involving exclusive dealing. So other factors might affect the analysis. And it is not uncommon that exclusive dealing may form part of a broader parade of anticompetitive allegations. In any event, if you think you have an exclusive dealing claim or need to defend against one, I suggest you contact an antitrust attorney.