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Are Exclusive Distribution Agreements Lawful?

Distributorship agreements where the distributor agrees to deal exclusively with a particular supplier
are generally viewed as lawful under the antitrust laws. There are some exceptions.

Are Exclusive Distribution Agreements Lawful?

In an exclusive distributor agreement, the supplier and wholesaler-distributor agree that the wholesaler-distributor will deal exclusively with the supplier for certain products. Such agreements foreclose the supplier's competitors from accessing the marketplace through the exclusive distribution network. The antitrust laws view these agreed-to restrictions between non-competitors as vertical non-price restrictions. The restrictions are classified as "vertical" because the agreement is between non-competitors (the supplier and its wholesaler-distributor).

Since 1977 the courts have held that vertical non-price restrictions - - such as exclusive distributorship agreements - - are not per se (or always) illegal under the antitrust laws. Instead, these arrangements violate the antitrust laws if their effect may be to substantially lessen interbrand competition or tend to create a monopoly in any line of commerce. This requires an analysis of several factors, including:

• whether the supplier has substantial market power to unreasonably restrain trade in the relevant market (i.e., the power to raise prices significantly above the competitive level without losing all of one's business);

• the effects of the restrictions on interbrand competition; and

• the justification for imposing the restrictions.

Some exclusive distribution networks may violate the antitrust laws. For example, a leading manufacturer of false teeth in the United States has been sued by the Justice Department in Delaware for unlawfully maintaining its monopoly power by entering into exclusive distributor agreements with most of the nation's tooth distributors. (U.S. v. Dentsply International, Inc., Civil Action No. 99-005).

The Justice Department alleges that Dentsply has maintained a 70 percent share of the artificial tooth market for over ten years, and has tried to restrict competition by depriving its rivals of effective distribution networks through its exclusive distributor agreements. According to the complaint, independent distributors are the primary channel of distribution of artificial teeth to dental laboratories. Dentsply's control over 80 percent of U.S. distributors has deprived Dentsply competitors of access to an adequate distribution network, thus preventing them from competing effectively, according to the complaint. Its conduct has also deterred other firms from entering the U.S. market, the Department alleges.

In response, Dentsply maintains that its actions are lawful under the antitrust laws. No trial date has been set.

 

Keeley, Kuenn & Reid, a Chicago based law firm with government relations affiliates in Washington, D.C., is engaged in the practice of business law, commercial litigation, employment law, taxation, antitrust, product liability, estate planning and legislative matters. Through its affiliates, the firm also meets its clients' needs in protecting intellectual property rights and international commercial law matters.

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