Sherman Act - Vertical Territorial Agreements
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What are Vertical Territorial Agreements under the Sherman Act?
A vertical territorial agreement is an agreement between a manufacturer and a distributor of a product that grants an exclusive territory in which to distribute the product. The manufacturer agrees not to sell to other distributors in that territory in exchange for the dealer agreeing not to operate outside of her assigned area. These types of arrangements are very common and are not naked restraints on trade. If, however, such an agreement has the effect of restraining trade in the area, it may be illegal. If such actions are challenged, a court will apply the rule of reason in determining whether the conduct is sufficiently anticompetitive to constitute an illegal restraint on trade.
Example: ABC Corp enters into agreements with 123 Corp, 456 Corp, and 789 Corp to distribute its product in specific geographic areas. If ABC Corp is the sole manufacturer of a vital consumer product, these agreements could thwart competitive selling by the distributors. As such, it could have a negative impact on the price customers pay. If ABC Corp cannot generate a pro-competitive justification, it may be deemed illegal. Discussion: How do you feel about vertical territorial agreements? Can you think of situations in which these agreements would restrain trade? Can you think of pro-competitive justifications for such arrangements? Practice Question: ABC Corp manufactures and distributes products across the US. The products that ABC produces require lots of a particular type of precious metal. It is difficult to find suppliers of this material. ABC has agreements with companies throughout the US. ABC entered into exclusive sale and purchase agreements with companies in different regions of the US. What will a court evaluate to determine whether these agreements are legal? What arguments might ABC put forward in defense to these agreements?
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