Is Exclusive Dealing Illegal Under the Antitrust Laws?
Are you unable to compete for certain customers because those customers are bound by exclusive-dealing agreements with your competitors? Or are you a competitor who has or is considering an exclusive-dealing agreement?
If your competitor is using exclusive-dealing agreements, you might be aggravated about it, but under most circumstances exclusive-dealing agreements are legal under the antitrust laws. But that doesn’t mean all exclusive-dealing agreements are legal. In fact, if you are the competitor using (or considering) exclusive-dealing agreements, you should consult an experienced antitrust attorney.
An exclusive-dealing agreement occurs when a seller agrees to sell all or substantially all of its output of a particular product or service to a particular buyer or a buyer agrees to buy all or substantially all of its needs for a particular product or service from a particular seller.
Exclusive-dealing arrangements can be challenged under three different provisions of the federal antitrust laws, but most commonly are challenged under Section 1 of the Sherman Act, which requires an agreement between two or more parties. If the agreement concerns a good or other physical commodity, the challenger can bring a claim under Section 3 of the Clayton Act. If one of the parties to the agreement is a monopolist or near-monopolist, a challenger could also assert a claim under Section 2 of the Sherman Act by alleging that the exclusive-dealing agreement is exclusionary conduct used to unlawfully acquire or maintain monopoly power. This usually takes the form of a monopolization or attempted monopolization claim.
Each of these provisions has slightly different requirements of proof, but generally focus on the same inquiries. This article focuses on claims brought under Section 1 of the Sherman Act because it applies in most situations.
How do I prevail in an exclusive-dealing challenge under Section 1?
Some conduct under Section 1 is so anticompetitive that it is per se illegal and carries with it criminal penalties that are enforced by the Antitrust Division of the Department of Justice. Not so for exclusive-dealing agreements. Exclusive-dealing challenges often have redeeming competitive virtues and are therefore judged under the rule of reason. Plaintiffs challenging an exclusive-dealing agreement must thus put in the work to prove that the anticompetitive effects of the agreement at issue exceed any procompetitive benefits.
Whether you are defending or challenging an exclusive-dealing agreement, the following factors will likely be important:
- Market Definition and Market Power. Under any rule of reason claim, the plaintiff must usually define the boundaries of the market in terms of the product/service and geography and demonstrate that the defendant has market power in that market, which often involves a battle of the economist-experts for each side. The term "cross-elasticity of demand" often comes up in the cases.
- Market Foreclosure. To prevail on her claim after defining the market and showing the defendant’s market power, the plaintiff must show that the exclusive-dealing agreement substantially foreclosed her from competing in the market. This is an evolving area of the law, as the economists that study foreclosure are ahead of the courts and agencies that analyze the issue in litigation.
- Harm to Competition. Under any rule of reason claim, the plaintiff must also show harm to competition. The textbook rule is that 30% to 40% or more market foreclosure is likely to have cognizable anticompetitive effects, but there are many other factors that can negate the harm like low barriers to entry, for example.
- Duration and Terminability. The duration and terminability of an exclusive-dealing agreement technically fall under the foreclosure and competitive harm analyses, but these factors commonly impact an exclusive-dealing claim. Shorter term agreements (a year or less) or those that can be terminated easily are more likely to convince a judge, jury, or agency that the market was not harmed or substantially foreclosed.
- Procompetitive Benefits. Even if the plaintiff shows harm to competition, the burden shifts to the defendant to show that the procompetitive benefits outweigh the anticompetitive effects.
- Antitrust Injury. The plaintiff must not only show harm to competition, but an injury related to that harm; that is, the plaintiff must have suffered an injury of the type the antitrust laws were designed to prevent.
- Anticompetitive Intent. Intent is not required in Section 1 cases, but a judge or jury is more likely to find in favor of the plaintiff if the evidence shows the defendant’s purpose was to foreclose its competitors from the market.