Author: Jarod Bona
Have you ever considered the idea that your business would be much more profitable if you didn’t have to compete so hard with that pesky competitor or group of competitors?
Unless you have no competition—which is great for profits, read Peter Thiel’s book—this notion has probably crossed your mind. And that’s okay—the government doesn’t indict and prosecute the antitrust laws for what is solely in your mind, at least not yet.
But, except in limited instances, you should definitely not divide markets or customers with your competitors. Indeed, you shouldn’t even discuss the idea with your competitors, or, really, anyone (many antitrust cases are made on inconveniently worded internal emails).
The reason that you shouldn’t discuss it is that market-allocation agreements are one of the few types of conduct that the antitrust laws consider so bad they attach the label “per se antitrust violation.” The other per se antitrust offenses are price-fixing, bid-rigging, maybe tying, and sometimes group boycotts.
What is a Market-Allocation Agreement?
When competitors divide a market in which they can compete into sections in which one or more competitors decline to compete in favor of others, they have entered into a market-allocation agreement.
The antitrust problem with a market-allocation agreement is that a group of customers experience a reduction in the number of suppliers that serve them. The companies dividing the markets benefit, of course, because they have less competition for at least some of the market, which means that it is easier to raise prices or reduce quality.
It doesn’t matter, from an antitrust perspective, how the competitors divide the markets or even whether they both end up competing for that product or service after the agreement.
For an obvious example, ponder a small town with two large real-estate brokerage businesses—Northern Real Estate Brokers and Southern Real Estate Brokers. A river flows through the town, roughly dividing it into northern and southern regions. The Northern Real Estate Brokers mostly attract clients north of the river and the Southern Real Estate Brokers usually service clients south of the river. But the river is passable; there is a bridge and it isn’t that big of a river anyway. So sometimes agents of each brokerage will participate in transactions on the other side river from their normal client base.
Late one evening, in the middle of the bridge, the leaders of the two companies meet and agree that from that point on, each company would only represent sellers for properties on their side of the river.
This is a market-allocation agreement and the leaders could find themselves in antitrust litigation, or even jail (the Department of Justice will often prosecute per se antitrust violations).
While the geographic boundary created an obvious method for the two companies to divide markets, they also could have agreed not to steal each other’s existing customers (market allocation based upon incumbency, which is common). So if a real estate agent from the northern brokerage firm won a customer, no agent from the southern brokerage firm would compete for that customer’s business in the future.
This customer allocation agreement is also a per se antitrust violation. To see how this type of antitrust offense can develop in a seemingly innocent way, read our article on the anatomy of a per se antitrust violation.
In this way, the antitrust laws actually encourage stealing customers.
These antitrust-offending real-estate agents could also have divided customers by street address—maybe one company owns clients with even number street addresses and the other odd? Or even height: If you are over 5 foot 10 inches, the Southern Real Estate Brokers won’t even try to obtain your business.
No matter how competitors divide the market, they will likely implicate per se antitrust prohibitions. This is true even if one company receives a payoff to stay out of a market to do something else. So if the Northern Real Estate Brokers paid the Southern Real Estate Brokers to stick with commercial real estate or even mortgage originations, they’ve created a market-allocation agreement.
Exceptions to Per Se Treatment for Market-Allocation Agreements
But there are a couple special situations in which a market-allocation agreement is not necessarily an antitrust violation.
In the first situation, two or more companies form an agreement, joint venture, or some other structure that is pro-competitive in and of itself. If there is a market-allocation agreement that is part of this larger structure or agreement and it is both necessary and ancillary to the larger pro-competitive purpose, courts and agencies will sometimes evaluate it under the rule of reason rather than the per se standard.
If this is your situation, you should read our article on ancillary restraints and antitrust. You should also read this article on joint ventures.
The second situation involves non-compete agreements or restrictive covenants. These sorts of agreements can arise in either an employment or business sale situation.
So, for example, a company may hire a sales person, but make him or her sign a non-compete agreement that forbids him or her from working for a competitor within a certain time period and geographic region after the employment ends.
California takes a strong stand on these agreements and doesn’t typically enforce them in an employment context. For Bona Law, the non-compete issue often arises when a company in a state other than California seeks to enforce a non-compete clause against an employee that is either in California or wants to accept employment within California.
Anyway, some states will allow their courts to enforce non-compete agreements that are reasonably limited in time and geography. The reason they enforce them is at least in part because these agreements can help to protect trade secrets.
Sometimes, however, a business owner will want to sell the business and the buyer will insist that as part of the sale, the seller agree to a limited non-compete agreements. Even California courts will often enforce this type of non-compete agreement.
In any event, if you are considering an agreement with a competitor that limits competition in any capacity, you should consult an antitrust attorney because you are playing with dynamite.