Home / Summaries / Ch 10: Vertical Restraints in General (Vertical Restraints I) / restraints-competition-vertical

Vertical Restraints in General (Vertical Restraints I)

14 important questions on Vertical Restraints in General (Vertical Restraints I)

Importance of Leegin (US 2007)

After Leegin, all vertical restraints are subject to RoR, with one limited exception (tying arrangements). Thus, the plaintiff must comply with the ordinary RoR under SA 1 and show (1) the challenged restraint occurred, (2) Ds held MP, and (3) as a matter of economic theory, the restraint could actually cause anti-competitive effects (increased price or reduced output)

Exception to RoR for Tying Claims

If a Plaintiff challenging a tying arrangement can show that the defendants held market power in the tying product market, then there will be a rebuttable presumption of anti-competitive effects

Continental TV (US 1977): Two key holdings re. non-price vertical restraints

1. Non-price vertical restraints are subject to the rule of reason. Schwinn (US 1967) (holding that non-price vertical restraints are per se illegal) is REVERSED. The non-price vertical restraints analysis must be based on demonstrable economic effect, rather than formalistic line-drawing.

2. Antitrust law is concerned about interbrand, not intrabrand competition: "interbrand competition is the primary focus of AT." INtra-brand competition is to be given far less concern.
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Interbrand Competition (Continent TV emphasized importance): Defined

Competition between firms that have developed brands or labels for their products in order to distinguish them from other brands sold in the same market segment. Although not perceived as being fully equivalent by consumers, branded products nevertheless compete with each other, but normally to a lesser degree.
  • Coca-Cola versus Pepsi is an example of inter-brand competition.

Intrabrand Competition (Contintenal TV said not important): Defined

Competition among distributors or retailers of the same branded product, be it on price or non-price terms.
  • For example, a pair of Levi’s jeans may be sold at a lower price in a discount store as compared to a department store but often without the amenities in services that the latter provides.

Why did Continental TV eschew strong AT protection for intrabrand competition?

Contrary to Schwinds reasoning, the Continental TV majority thought there might be substantial consumer benefits from limits (restraints) on intrabrand competition. I.e., such restraints might enable manufacturers to give their distributors a small bonus or other incentive in exchange for helping the manufacturer enter a new market or compete more effectively in its current markets.

The Agency Arrangement Exception to SA 1 Liability for Vertical Restraints?

A principal is legally incapable of conspiring with its agent under SA 1. GE (US 1926). Thus,  where the challenged restraint is a common law "agency relationship," not an outright sales arrangement, there will be no SA 1 issue.

Agency Arrangement Exception - General Rule

Where an upstream supplier operates through arrangements that, in their substance, really are agency consignment arrangements, then the restraints set by the supplier on downstream distributors cannot violate SA 1. See Valuepest (4th 2009).

Agency Arrangement Exception: Distinguishing True Agencies form Mere Sales

Factual Inquiry:
  1. Whether there is a formal parting of title? (if yes, points toward mere sales)
  2. Whether the upstream manufacturer or the downstream distributor bears the risk of loss to the goods while they are in the distributor's possession (if manufacturer, points toward agency; if distributor, points toward mere sales).
  3. Who bears the risk of unsold inventory (if manufacturer, points toward agency; if distributor, indicates mere sales)
  4. Whether [A] the distributor deals solely in the manufacturer's goods (this indicates agency), or [B] the distributor carries other products (indicates mere sales).

Two reason to believe that Vertical Price Restraints (RPM) get more scrutiny than vertical non-price restraints

1. It is widely acknowledged that vertical price-restraints could be a component of horizontal price-fixing at either the upstream or downstream level.


2. RPM can be a tool for abuse by either an upstream producer with market power (could use RPM as a tool of market foreclosure; use the benefits of RPM to keep distributors form carrying products made by upstream competitors) or a downstream retailer sight market power (buyer with market power might coerce a supplier into imposing RPM agreements on its other retailers, in order to fend off any risk of price competition against itself)

Leegin (US 2007): The Source of a Vertical Restraint is important b/c

It should be more concerning if the impetus for imposing the restraint came from a downstream retailer (v an upstream supplier). Courts will subject vertical restraints to more searching scrutiny fi they were adopted at the behest of downstream retailers.

According to Leegin, why should RPM  be less concerning when they come at the behest of the upstream manufacturer?

If the manufacturer originated the restraints, they are more likely to have some legitimate purpose because, ordinarily, manufacturers should desire price competition among their competitors. The lower the retail price attached to the manufacturer's goods, the higher the volume of retail sales and, other things equal, the higher the manufacturer's profits.

Distinguishing Horizontal v Vertical Conspiracies: The Overlap

In principle, any vertical arrangement could have horizontal aspects. Two examples.
  1. Either one of the parties (upstream seller or downstream buyer) to a vertical arrangement could be vertically integrated into the other party's market, such that they are simultaneously in both a horizontal and vertical relationship
  2. Upstream buyers and downstream sellers that are not vertically integrated might nevertheless agree to vertical restraints in order to facilitate some other horizontal conspiracy. Most common form: Hub and Spoke Conspiracies

Hub and Spoke Conspiracies

A powerful player (market power) at either the upstream (seller) or downstream (buyer) level orchestrates a series of vertical arrangements with the participants at the other level that facilitates a horizontal conspiracy at that level. Leading case on Hub and Spoke Conspiracies = Toys R Us (7th 2000)

The question on the page originate from the summary of the following study material:

Ch 10: Vertical Restraints in General (Vertical Restraints I)

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