Antitrust Basics Brown Bag Series
Lesson XII: Vertical Restraints
Stacey Anne Mahoney
Constantine Cannon LLP
Wednesday, August 15, 2007
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Types of Vertical Restraints of Trade
Vertical Non-Price Restraints on Distribution
• Distribution Restrictions
• Dealer Terminations
• Refusals to Deal
Vertical Non-Price Restraints on Purchasing
• Tying Arrangements
• Exclusive Dealing
• Reciprocal Dealing
Vertical Price Restraints
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Minimum Resale Price Maintenance
Maximum Resale Price Maintenance
Consignment Arrangements
Suggested Resale Prices
Most Favored Nation Clauses
Promotional Programs
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Governing Statutory Law
Sherman Act § 1
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States, or with foreign nations, is declared to be illegal.”
Sherman Act § 2
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any
other person or persons, to monopolize any part of the trade or commerce among the several
States, or with foreign nations, shall be deemed guilty of a felony . . . .”
FTC Act § 5
“The Commission is hereby empowered and directed to prevent persons, partnerships, or
corporations . . . from using unfair methods of competition in or affecting commerce and unfair or
deceptive acts or practices in or affecting commerce.”
Clayton Act § 3
“It shall be unlawful for any person engaged in commerce, in the course of such commerce, to
lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies, or
other commodities . . . for use, consumption, or resale . . . or fix a price charged therefor, or
discount from, or rebate upon, such price, on the condition, agreement, or understanding that the
lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery,
supplies, or other commodities of a competitor or competitors of the lessor or seller, where the
effect of such lease, sale, or contract for sale or such condition, agreement, or understanding may
be to substantially lessen competition or tend to create a monopoly in any line of commerce.”
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Vertical Restraints are Generally Subject to Rule of Reason Analysis
• “The finder of fact must decide whether the questioned practice
imposes an unreasonable restraint on competition, taking into account
a variety of factors including specific information about the relevant
business, its condition before and after the restraint was imposed, and
the restraint’s history, nature, and effect.”
State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
• The basic inquiry under the Rule of Reason is whether the vertical
restraint in question “is one that promotes competition or one that
suppresses competition.”
National Society of Professional Engineers v. United States,
435 U.S. 679, 691 (1978).
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Vertical Restraints are Generally Subject to Rule of Reason Analysis (cont.)
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Interbrand, rather than intrabrand, competition is the “primary concern of
antitrust law.”
Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51-52 (1977). See also Volvo
Trucks N. Am. v. Reeder-Simco GMC, Inc., 546 U.S. 164, __, 126 S. Ct. 860, 872
(2006).
• Generally speaking, negative effects on intrabrand competition of vertical nonprice restraints are insufficient to establish liability pursuant to § 1.
See, e.g., Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 726-27, 728-29
(1988).
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A key analytical issue is whether the restraint provides the “[p]otential for
simultaneous restriction of intrabrand competition and stimulation of interbrand
competition.”
Sylvania, 433 U.S. at 51-52.
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Vertical Restraints are Generally Subject to Rule of Reason Analysis (cont.)
Ultimately, the question is whether the
anticompetitive effect of the vertical restraint in
question substantially outweighs the procompetitive
effect for which the restraint is reasonably necessary.
It is a very fact specific inquiry.
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Vertical Restraints are Generally Subject to Rule of Reason Analysis (cont.)
Recent Supreme Court cases confirm application of the Rule of
Reason even for vertical price-based restraint claims.
State Oil Co. v. Khan, 552 U.S. 3 (1997)
• (holding that maximum resale price maintenance is subject to rule of
reason analysis) (unanimous decision) (overruling Albrecht v. Herald
Co., 390 U.S. 145 (1968)).
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct.
2705 (2007)
• (holding that minimum resale price maintenance is subject to rule of
reason analysis) (5-4 decision) (overruling Dr. Miles Medical Co. v.
John D. Park & Sons Co., 220 U.S. 373 (1911)).
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Vertical Restraints are Generally Subject to Rule of Reason Analysis (cont.)
Dual Distribution Systems
In an interesting analytical anomaly, where a manufacturer
simultaneously supplies product to a distributor pursuant to a nonprice vertical distribution restraint, e.g., a customer restriction, and
competes with that distributor in selling the same product to the
purchaser population, courts have applied a vertical restraint rule of
reason analysis despite the apparent horizontal aspect of the
challenged restraint.
See, e.g.,
• White Motor Co. v. United States, 372 U.S. 253 (1963).
• United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967),
overruled on other grounds by Continental T.V., Inc. v. GTE
Sylvania Inc., 433 U.S. 36 (1977).
• And, more recently, AT&T Corp. v. JMC Telecom, 470 F.3d 525
(3d Cir. 2006).
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Exceptions to Rule of Reason Analysis of Vertical Restraints
Price restrictions related to customer or territorial restraints have
been generally deemed to be per se illegal.
• See, e.g., United States v. Sealy, Inc., 388 U.S. 350 (1967);
United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944).
The other exception to the rule of reason analysis, at least in theory if
not in practice, is tying. Courts continue to say that there are certain
tying arrangements that “pose an unacceptable risk of stifling
competition and therefore are unreasonable per se.”
• Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 9 (1984).
See also Eastman Kodak Co. v. Image Technical Services, 504 U.S.
451 (1992).
Certain courts apply tying analysis to reciprocal dealing
arrangements as well, but no reported decision since the mid-1980s
has sustained this claim.
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Exceptions to Rule of Reason Analysis of Vertical Restraints (cont.)
Per Se Elements
A judicial finding of per se unlawful tying requires:
• Two separate products or services;
• The sale of one product (the tied product) is conditioned on the purchase of
the other (the tying product);
• The seller has market power in the tying product such that it can restrain
trade in the tied product market; and
• A not insubstantial amount of interstate commerce in the tied product market
is affected.
See, e.g., Fortner Enters. v. United States Steel Corp., 394 U.S. 495 (1969); In re
Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124 (2d Cir. 2001).
And maybe:
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An anticompetitive effect in the market for the tied product.
See, e.g., U.S. Phillips Corp. v. International Trade Comm’n, 424 F.3d 1179 (Fed.
Cir. 2005).
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Rule of Reason Analysis: Guidance from Leegin
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“[C]ertain factors are relevant to the inquiry of whether minimum resale price maintenance is
procompetitive or anticompetitive. For example, the number of manufacturers that make use of the
practice in a given industry can provide important instruction. When only a few manufacturers
lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer
cartel, for a cartel then can be undercut by rival manufacturers.”
• “Likewise, a retailer cartel is unlikely when only a single manufacturer in a competitive market
uses resale price maintenance.”
• “Resale price maintenance should be subject to more careful scrutiny, by contrast, if many
competing manufacturers adopt the practice.”
• “The source of the restraint may also be an important consideration. If there is evidence
retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint
facilitates a retailer cartel or supports a dominant, inefficient retailer.”
• “If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint
is less likely to promote anticompetitive conduct.”
• “A manufacturer also has an incentive to protest inefficient retailer-induced price restraints
because they can harm its competitive position.”
• “As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance
for anticompetitive purposes may not be a serious concern unless the relevant entity has market
power.”
Leegin, 127 S. Ct. at 2719-20.
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Rule of Reason Analysis: Guidance from Leegin (cont.)
Market Characteristics of Pro-Competitive Minimum Resale Price
Maintenance
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Lower prices
Increases consumer choice
Facilitates entry and/or innovation
Overcomes free rider problem/facilitates additional services
Provides prestige value
Facilitates demand and/or inventory stabilization
Increases sales of product subject to restraint
Market is characterized by highly differentiated products
Market is characterized by low barriers to entry
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Rule of Reason Analysis: Guidance from Leegin (cont.)
Market Characteristics of Anticompetitive Minimum Resale Price
Maintenance
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Higher prices
Imposer of restraint has market power
The industry is highly concentrated
The restraint is a widespread practice
The restraint is driven by retailers (as opposed to manufacturers)
The restraint facilitates cartel-like conduct
Sales of product subject to restraint would not benefit from increased
services
• Market is characterized by homogeneous product
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Rule of Reason Analysis: Guidance from Leegin (cont.)
Leegin May Not Completely Change the Minimum Resale Price
Maintenance Law
• Congress or the States may legislatively overrule Leegin.
• States may not follow Leegin:
• 37 states filed amicus curiae with the Supreme Court urging the
Court to uphold Dr. Miles and maintain the per se rule against
minimum resale price maintenance.
• Resale price maintenance remains illegal in some foreign jurisdictions.
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