What Companies Don't Know Can Hurt Them: Antitrust Law Developments In Vertical Restraints*

1. Background

   Antitrust compliance properly focuses on agreements and communications between competitors because of the heightened risk associated with such conduct. Yet overreaching restrictions on distributors or customers can pose antitrust risk as well. This article provides a brief update on developments in the antitrust law of vertical restraints and highlights areas that continue to be complex, or areas where the law appears to be evolving. In-house counsel may wish to consider reviewing corporate compliance policies and distribution agreements to account for these changes.

   In particular, few areas of antitrust law have generated as much uncertainty as the treatment of resale price maintenance. In 2007, for example, the U.S. Supreme Court reversed a century of precedent by holding that minimum resale price maintenance was not per se illegal.1 While Leegin relaxed the antitrust standard at the federal level, no such relief has been available at the state level because antitrust authorities and courts in several states (e.g., California, New York, Illinois, Maryland, Michigan, and Kansas) continue to treat minimum resale price maintenance as per se violations.

   There has also been an evolution, albeit a rather quiet one, with regard to the treatment of exclusive dealing contracts by the Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC"). The changes suggest a more aggressive posture toward vertical restraints at the federal agency level and in the economic literature. We discuss these below.

2. Resale Price Maintenance

   Resale price maintenance is an agreement under which a manufacturer and distributor agree to the price at which the distributor may resell the manufacturer's product. Maximum resale price maintenance prevents resellers from increasing resale prices and such agreements are not unlawful absent some evidence of harm to consumers. Minimum resale price maintenance involves an agreement preventing the reseller from lowering the resale price below a specified level. Before Leegin, minimum resale price maintenance was per se illegal,2 and a plaintiff did not need to show consumer harm.

   Federal courts now recognize that minimum resale price maintenance can promote competition between brands ("interbrand competition") by preventing free-riding and fostering new entry. But minimum resale price maintenance can also harm competition. Courts are likely to be most concerned where minimum resale price maintenance facilitates monopolization or collusion, is used by firms with market power, or is used by many firms in a market. As indicated above, however, several states consider resale price maintenance to be per se unlawful. Thus, engaging in minimum resale price maintenance must balance the risk of facing state antitrust suits alleging the practice is per se unlawful against the benefit of the program. Even under state law holding the practice to be unlawful per se, companies are well advised to be able to demonstrate the resale price maintenance program was designed to be and was, in fact, procompetitive.

3. Exclusive Dealing

   Antitrust law is evolving in the area of exclusive dealing. Exclusive dealing involves one company agreeing to buy or sell all or almost all of its products from another company. Properly employed, exclusive dealing can promote interbrand competition, align manufacturer and distributor incentives...