Duhaime's Law Dictionary


Vertical Restraint Definition:

Special condition or term offered to select distributors by a supplier in order to manipulate trade.

Related Terms: Exclusive Dealing, Abuse of Dominant Position, Tied Selling

Facey and Assaf write:

"Vertical restraints involve terms, conditions or arrangements imposed upon or offered to downstream distributors by upstream suppliers.

"Vertical restraints can be divided into restraints relating to price, such as price maintenance and price discrimination, or non-price vertical restraints such as refusals to deal, exclusive dealing, tying arrangements, market-access arrangements, and consignment selling. vertical restraints may also constitute an anti-competitive act for purposes of abuse of dominance....

"An example of a vertical restraint ... would be a situation where a soft drink supplier enters into an exclusive deal with a university that prohibits the university from selling any competitive soft drink on campus."

Vertical restraints of trade are not limited to those which are price-related. In fact, those which are not are called non-price related vertical restraints.

In many cases, vertical restraints help rather than hurt consumers by encouraging the creation and development of efficient streams of product distribution from manufacturer or distributor to the consumer, streams which can reduce the price to the consumer, but streams which would be compromised if leeched onto by competitors.

Hence, a judicial hesitancy to outright condemn vertical restraints of trade. This reality finds expression in many judicial expressions of legal theory in this area such as in Continental TV, Inc. v. GTE Sylvania Inc., where Justice Powell of the United States Supreme Court wrote:
 

"The market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intra-brand competition and stimulation of inter-brand competition.....

"(T)he notion in many of our cases involving vertical restraints (is) that independent businessmen should have the freedom to dispose of the goods they own as they see fit."

In footnote #14 to the United States Supreme Court's subsequent decision in Business Electronics Corp. v. Sharp Electronics, the Court adopted these words:
 

"... because vertical non-price restrictions imposed by manufacturers may serve to advance inter-brand competition, the restriction on intra-brand competition should be subject only to a rule of reason analysis.

"Economists also have argued that manufacturers have an economic interest in maintaining as much intra-brand competition as is consistent with the efficient distribution of their products.... Fostering intra-brand competition has been recognized as an important goal of antitrust law, and although a manufacturer's efficiency-enhancing vertical non-price restraints may subject a reduction of intra-brand competition only to a rule of reason analysis, a similar reduction without the pro-competitive redeeming virtues of manufacturer-imposed vertical non-price restraints, causes nothing but economic harm.

"Intra-brand competition can benefit the consumer, and it is therefore important to insure that a manufacturer's motive for a vertical restriction is not simply to acquiesce in his distributors' desires to limit competition among themselves."

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