Malcolm Rivera
Vertical restraints refer to restrictions of competition contained in vertical agreements between firms or individuals at different levels of the production and distribution process. They are generally judged by the rule of reason, which weighs the harm to competition against the pro-competitive justifications behind the restraint. Vertical restraints can be distinguished from horizontal restraints, which are found in agreements between competitors at the same level of production, distribution, or supply. Vertical restraints can take many forms, such as requirements that dealers accept returns of a manufacturer's product or resale price maintenance agreements.
| Characteristics | Values |
|---|---|
| Type of agreement | Vertical restraints are agreements between firms or individuals at different levels of the production and distribution process |
| Nature of agreement | Anti-competitive measures that restrain trade |
| Impact | Can increase or decrease competition between competitors, raise prices, limit output, restrain or exclude competitors, or decrease the available variety of products or services |
| Price-based restraints | Price-fixing agreements, resale price maintenance agreements, minimum RPM, provisions that confer absolute territorial protection on a distributor |
| Non-price-based restraints | Requirements that dealers accept returns of a manufacturer's product, tying contracts, English clauses |
| Legality | Governed by Section 1 of the Sherman Antitrust Act, Section 3 of the Clayton Act, and Section 2 of the Sherman Act in the US; Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) in the EU; Anti-Monopoly Law (AML) in the People's Republic of China |
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What You'll Learn
- Vertical restraints are agreements between firms at different levels of the production and distribution chain
- They can be distinguished from horizontal restraints, which are agreements between competitors
- Vertical restraints can be price-based or non-price-based
- They are judged by the rule of reason, weighing harm to competition against pro-competitive justifications
- Examples include resale price maintenance agreements and English clauses
Vertical restraints are agreements between firms at different levels of the production and distribution chain
Vertical restraints refer to restrictions of competition between firms or individuals at different levels of the production and distribution chain. They are typically found in agreements between a manufacturer and distributor, or a supplier and retailer, rather than between competitors. Vertical restraints can take many forms, such as requiring dealers to accept returns of a manufacturer's product, or resale price maintenance agreements that set minimum or maximum prices for a manufacturer's product.
These types of agreements can be distinguished from horizontal restraints, which are found between competitors at the same level of production or distribution. Vertical restraints can be further categorized into price-based restraints, such as price-fixing agreements, and non-price-based restraints, like exclusive dealing. Price-fixing agreements are considered per se violations of the Sherman Act, which governs antitrust law in the United States.
The legality of vertical restraints is determined by the rule of reason, which weighs the harm to competition against any pro-competitive justifications. Courts consider whether the agreement is likely to harm competition by increasing prices or reducing output, quality, service, or innovation. Vertical restraints that are found to be anti-competitive and harmful to consumers may be deemed unlawful.
In the European Union, vertical restraints may fall under the scrutiny of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). Certain restrictions, such as minimum resale price maintenance and absolute territorial protection, are considered anti-competitive by their very nature. The basic EU rules regarding vertical restraints are outlined in the block exemption regulation for vertical agreements (VBER).
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They can be distinguished from horizontal restraints, which are agreements between competitors
Vertical restraints refer to restrictions on competition contained in vertical agreements between firms or individuals at different levels of the production, distribution, or supply chain. These can include agreements between a manufacturer and distributor or reseller, for example. Vertical restraints can be distinguished from horizontal restraints, which are agreements between competitors or horizontal competitors at the same level of production, distribution, or supply. Horizontal restraints involve restraints of trade between competitors, such as competing manufacturers, wholesalers, or retailers, and can impact the natural flow of interstate commerce.
An example of a vertical restraint is a requirement that dealers accept returns of a manufacturer's product or a resale price maintenance agreement setting the minimum or maximum price that dealers can charge for the product. These are known as "intrabrand restraints" and "interbrand restraints", respectively. Interbrand restraints, such as tying contracts, regulate a dealer's relationship with its trading partners' rivals. On the other hand, horizontal restraints can take the form of price-fixing agreements, where competitors agree to establish and adhere to a price schedule, which is a per se violation of the Sherman Act in the United States.
The distinction between vertical and horizontal restraints is important in antitrust law. Vertical restraints can be anti-competitive, raising prices, limiting output, restraining competitors, or reducing product variety. However, they can also increase competition in some cases. The legality of vertical restraints is determined through a rule of reason analysis, which weighs the harm to competition against any pro-competitive justifications. In contrast, horizontal restraints have historically been viewed with hostility by courts and often deemed unlawful per se, although this stance has softened in recent years.
The classification of restraints as vertical or horizontal is not always straightforward. For instance, an agreement between a manufacturer and its resellers (vertical) may be designed to facilitate a horizontal agreement among the resellers, leading courts to treat the manufacturer-reseller agreement as a horizontal restraint. Additionally, certain restrictions, such as exclusive dealing or resale price maintenance, were once considered per se illegal but are now analyzed under the rule of reason.
In conclusion, vertical restraints and horizontal restraints differ in the nature of the parties involved and their impact on competition. Vertical restraints occur between firms at different levels of the production or distribution chain and can have complex effects on competition, while horizontal restraints involve agreements between competitors at the same level and directly restrain trade between them. The legal treatment of these restraints varies, with vertical restraints evaluated through a rule of reason analysis and horizontal restraints historically facing stricter scrutiny.
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Vertical restraints can be price-based or non-price-based
Vertical restraints refer to restrictions of competition contained in vertical agreements between firms or individuals at different levels of the production and distribution chain. Vertical restraints can be price-based or non-price-based.
Price-based vertical restraints involve agreements that directly or indirectly control the prices that companies may charge for their products or services. For example, a resale price maintenance agreement between a manufacturer and a reseller that sets the minimum or maximum price that can be charged for a product is a price-based vertical restraint. In the United States, price-fixing agreements are considered per se violations of the Sherman Act, as they are deemed to have a clear anti-competitive effect.
Non-price-based vertical restraints, on the other hand, involve restrictions on aspects other than pricing. These may include limitations on the number of buyers a seller can trade with, the suppliers a buyer is allowed to purchase from, or the conditions under which goods can be resold, such as location and customers. Non-price-based vertical restraints can still have an impact on competition and may be subject to antitrust laws if they are deemed to unreasonably restrain trade.
The distinction between price-based and non-price-based vertical restraints is important because it can determine the legal analysis and potential violations involved. While price-fixing agreements are often considered illegal per se, non-price-based vertical restraints may be evaluated under a rule of reason analysis, which weighs the harm to competition against any pro-competitive justifications for the restraint.
It is worth noting that the categorization of vertical restraints as price-based or non-price-based is not always clear-cut, and some restraints may have elements of both. Additionally, the legality of vertical restraints can vary depending on the jurisdiction and specific circumstances of each case.
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They are judged by the rule of reason, weighing harm to competition against pro-competitive justifications
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. They are distinguished from horizontal restraints, which are found in agreements between competitors. Vertical restraints can take many forms, such as requiring dealers to accept returns of a manufacturer's product or setting minimum or maximum prices for the manufacturer's product.
The legality of vertical restraints is determined by antitrust laws, which aim to prevent anti-competitive behaviour. Vertical restraints can be judged as anti-competitive if they hurt competition more than they help it. They can raise prices, limit output, restrain or exclude competitors, or decrease the available variety of products or services.
In the United States, vertical restraints involving interstate commerce are governed by Section 1 of the Sherman Antitrust Act. For decades, courts were hostile to vertical restraints, but more recently, they have held that most restraints should be analysed under the rule of reason. This rule weighs the harm to competition against the pro-competitive justifications behind the restraint. It asks whether the agreement is likely to harm competition by increasing the ability or incentive to raise prices, reduce output, or decrease quality, service, or innovation.
The rule of reason analysis considers the relevant product and geographic market, the market power of those reaching the agreement, and the existence of anti-competitive effects. If these elements indicate potential harm, the defendant must demonstrate pro-competitive justifications.
In the European Union, vertical restraints may violate Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). Most cases require an effects analysis to determine the impact on competition, but certain restrictions are considered anti-competitive 'by object', such as minimum resale price maintenance (RPM) and absolute territorial protection for distributors.
Determining the legality of vertical restraints can be complex, and it is essential to consider the specific circumstances and the potential impact on competition.
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Examples include resale price maintenance agreements and English clauses
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. They are to be distinguished from "horizontal restraints", which are found in agreements between horizontal competitors. Vertical restraints can take many forms, including resale price maintenance agreements and English clauses.
Resale price maintenance agreements are vertical restraints that set the minimum or maximum price that dealers can charge for a manufacturer's product. They are intrabrand restraints that govern products made by a particular manufacturer. In 1915, tyre manufacturer Dunlop signed an agreement with a dealer to receive £5 per tyre in liquidated damages if the product was sold below the list price. This agreement was upheld by the House of Lords, who found that it was not a penalty clause and was therefore enforceable. However, in the United States, resale price maintenance agreements were deemed unlawful for several decades, directly conflicting with the Sherman Antitrust Act. During the Great Depression in the 1930s, many U.S. states passed fair trade laws that authorized resale price maintenance to protect independent retailers from the price-cutting competition of large chain stores.
In 2007, the Supreme Court overruled this decision, holding that vertical price restraints such as Minimum Advertised Pricing are not per se unlawful but must be judged under the "rule of reason". This shift essentially allowed the reestablishment of resale price maintenance in the United States in most commercial situations. Despite this, resale price maintenance remains highly controversial, and courts continue to analyze these agreements under federal antitrust law.
English clauses are contractual provisions that require a buyer to report any better offer to their supplier and allow them to accept such an offer only when the supplier does not match it. They are considered interbrand restraints, which regulate a dealer's or manufacturer's relationship with its trading partner's rivals. English clauses can be expected to have the same effect as a single branding obligation, especially when the buyer must reveal who made the better offer.
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Frequently asked questions
Vertical restraints are restrictions of competition in agreements between firms or individuals at different levels of the production and distribution process.
Horizontal restraints are found in agreements between competitors at the same level of production, distribution, or supply. Vertical restraints, on the other hand, are agreements between firms at different levels in the manufacturing and distribution process.
Vertical restraints can take many forms, such as requiring dealers to accept returns of a manufacturer's product, or resale price maintenance agreements setting the minimum or maximum price that dealers can charge.
In the US, vertical restraints are generally judged by the rule of reason, which weighs the harm to competition against the pro-competitive justifications behind the restraint. The Department of Justice assesses whether the agreement is likely to harm competition by increasing the ability to profitably raise prices or reduce output, quality, service, or innovation.
