Vertical Restraints in the United States

by | Jan 23, 2023 | Insights

Vertical restraints are terms in a distribution agreement with imposes a restraint on a business practice of a firm in a different level of the distribution system. A distributor, for example, will use vertical price restraints, to tell retailers what retail prices they may charge. Horizontal restraints, by contrast, are restraints a horizontal agreement may impose on competitors who are part of the competition at the same level of distribution, such as two distributors.

Unlike in the European Union and other jurisdictions, there is no document comparable to a block exemption of European competition law which grants legal protection to some terms in a vertical agreement. Some vertical agreement terms, as another post describes, courts will generally find to be per se violations of antitrust law, comparable to a hardcore restriction of a block exemption of European competition law. Such terms of distribution agreements courts will, in actual practice, never allow.

Courts in the United States will carefully analyze other terms of vertical agreements to determine their pro and anti-competitive effects. American antitrust law, and in particular Section 1 of the Sherman Act, will allow vertical restraints which do not impose an unreasonable restraint on trade. See Rule of Reason post. American antitrust law and EU competition law therefore do not treat even the same vertical restraint the same.

The European Commission, for example, in its block exemption, severely restricts vertical price restraints, allowing an exemption in only limited circumstances. Under the Sherman Act, by contrast, courts in the United States apply the Rule the Reason and balance the pro and anti competitive effects of such a resale price restraint.

The court will also apply the Rule of Reason to an exclusive dealing or similar restraint. An exclusive dealing restraint requires the distributor to only sell the contract goods of one manufacturer. If that manufacturer has market power, then it could use an exclusive dealing restraint to stop its competitors from creating an effective distribution system, thus excluding rivals from the market.

That same manufacturer may also try to use its market power to imposing a selective distribution system on a manufacturer. A selective distribution system requires exclusive distributors to sell contract goods only in a specific territory or to a particular group of customers. If the selective distribution system excludes the manufacturer’s competitors from the market the court will find they are improper restrictive agreements.

In Continental TV v. GTE Sylvania the United States Supreme Court recognized that if a manufacturer has monopoly power then it could use such vertical restraints to restrict competition. But on the other hand, such a restraint could encourage a distributor to sell the contract goods. It would thus facilitate interbrand competition among rivals.

This case shows why the Supreme Court requires all courts to analyze the pro and anti competitive effects of almost all vertical agreements. The effect on competition of every distribution system will be different. Rule of Reason analysis requires courts to consider these complexities. But while it effectively determines if restrictive agreements truly harm competition, it does so, particularly when compared to the block exemption regulations of EU competition law, at the cost of providing less legal certainty.

To try to provide some clarity the American Department of Justice and Federal Trade Commission issue non-legally binding guidelines on various aspects of antitrust law. The two antitrust law enforcers had issued what are commonly called the vertical guidelines, which deal mainly with mergers between firms at different levels of the distribution system. The Federal Trade Commission has since withdrawn its support for these vertical guidelines and both enforcement agencies are in developing new vertical guidelines. These new guidelines will more aggressively enforce antitrust law. These new vertical guidelines show that the enforcement agencies will more aggressively enforce the antitrust laws regarding not just vertical mergers, but vertical restraints generally.