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Sherman Act - Vertical Territorial Agreements - Explained

What are Vertical Territorial Agreements?

Written by Jason Gordon

Updated at April 6th, 2023

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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. 

Next Article: Sherman Act - Monopolization Back to: ANTITRUST



Discussion Question

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?

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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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Related Topics

  • Antitrust Law (Intro)
  • What is Antitrust Law?
  • What are the Major Antitrust Laws?
  • What government agency enforces antitrust law?
  • What Sanctions are available under antitrust law?
  • What is the Sherman Act of 1890 (Sherman Act)?
  • What is a Contract, Combination, of Conspiracy in restraint of trade?
  • What is Per Se Illegality and the Rule of Reason?
  • What is a Monopoly?
  • Herfindahl Hirschman Index (HHI) Definition
  • What businesses are exempt from the Sherman Act?
  • Horizontal Restraint Sherman Act?
  • Sharing Information?
  • Refusal to Deal?
  • Territorial Agreement?
  • Price Fixing?
  • Resale restraint?
  • Exclusive dealing?
  • Tying products?
  • Territorial agreements?
  • What is Monopolization under the Sherman Act?
  • What is the Clayton Act of 1914 (Clayton Act)?
  • What is price discrimination under the Clayton Act?
  • What are special arrangements prohibited under the Clayton Act?
  • When are tying contracts an illegal restraint under the Clayton Act?
  • When are reciprocal dealing contracts an illegal restraint under the Clayton Act?
  • How does the Clayton Act regulate mergers and acquisition?
  • FTC Act Antitrust Law
sherman act vertical territorial agreements

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