Antitrust Law Applied to Market Allocation Agreements

Author: Kristen Harris

One of the ways the antitrust laws seek to protect consumer welfare is by categorizing certain types of conduct as per se illegal. The per se rule applies to restraints with which courts have had considerable experience and can predict with confidence that the restraint would be invalidated in all or almost all instances. In other words, restraints courts have found are so likely to harm competition that further analysis of business justifications or procompetitive benefits is unwarranted. Per se condemnation is most common in cases involving price fixing, bid rigging, and market allocation. This article describes general antitrust concepts associated with naked market allocation agreements.

The primary ways competing firms allocate markets are (1) by territory, where competitors divide the map and agree to only make sales in their designated area; (2) by product, where competitors agree not to sell a designated product that is sold by their rivals; or (3) by customer, where competitors agree not to compete for one another’s customers.

These naked market-division agreements allow firms collectively to reap the benefits of monopoly pricing and profits—in an artificially created market, free from the competition the firms would face in the absence of such an agreement.

Indeed, when competitors collude in this way, consumers are cheated. That is why each of these types of agreements to divide markets between competitors are generally treated as per se antitrust violations. And firms that engage in this type of anticompetitive collusion are subject to criminal prosecution by the Department of Justice’s Antitrust Division.

The determination that a particular restraint merits per se condemnation will, however, only get a plaintiff so far. Even when the challenged conduct is deemed per se illegal, a plaintiff still must demonstrate antitrust standing (which also requires showing antitrust injury). For example, competitors of companies that are allocating markets would not typically have antitrust standing to challenge a per se illegal restraint that results in increased prices, because the competitors would benefit from the higher prices in the market. By contrast, where the market allocation agreement is part of a larger group boycott scheme, competitors targeted by the boycott more likely could demonstrate antitrust injury and antitrust standing.

Usually per se, but not Always

Not all market allocation agreements are subject to the per se standard. The most common example of such conduct arises where the restraint is necessary to achieve a larger procompetitive outcome. Should a court determine this is the case with regard to a particular allocation agreement, that agreement will instead be assessed under the rule of reason framework. For example, a patent-licensing deal may include a territorial restriction granting the licensee the right to exercise the patent in certain territories while reserving other territories for the patent holder. That restraint would be considered ancillary and subject to a rule of reason analysis.

Regardless of the version of market allocation employed, companies should seek experienced antitrust counsel to ensure their conduct falls within the contours of defensible, procompetitive restraints rather than naked horizontal agreements to restrain competition.