Exclusive Supply Agreement

Any exclusive supply agreement should be reviewed regarding possible antitrust risks. Vertical restraints of trade involve parties in the chain of distribution, e.g., the manufacturer to the wholesaler to the retailer. Neither sole outlets nor exclusive dealerships are an automatic violation of the Federal Sherman Antitrust Act. The courts use a rule of reason test. The freedom of manufacturers to pick and choose dealers is protected as long as there is sufficient interbrand competition

Courts will also look at the market power of the manufacturer. The more market power, the less interbrand competition you will have. In other words, the consumers will have fewer substitute goods to choose from. The more market power a manufacturer has, the more likely it is that a court will strike down this vertical type restraint.

Before this type of agreement would be declared illegal, it must involve a substantial share of the market. The courts apply the rule of reason analysis in the majority of exclusive supply or distributorship cases, examining the strength of interbrand competition, the duration of the exclusive distributorship, and the geographic extent of the exclusive distributorship. Under the rule of reason, the court must consider all the circumstances of the case to determine if the exclusive arrangement imposes an unreasonable restraint of trade, and the analysis begins with identification of the relevant market.

Under the rule of reason, the court must consider all the circumstances of the case to determine if the exclusive arrangement imposes an unreasonable restraint of trade, and the analysis begins with identification of the relevant market. (more...)