Exclusive purchasing

 

Author Definition

 

Definition

An exclusive purchasing agreement is a contract through which a buyer - commonly a distributor – promises to buy all or specific goods and services only from a particular seller, being prohibited to buy those products from any other competitor (inter-brand competition restriction) during the exclusivity period. Most of these agreements would lead to a “single-branding” strategy, in which a company targets a specific market sector with each of its brands. Antitrust concerns about these vertical agreements are related to the possibility of affecting substantially inter-branding competition in the relevant market.

 

Commentary

According to TFEU, agreements that have as the object or effect to restrict competition are prohibited. Abuse of a dominant position is also prohibited. The EU case law has developed a doctrine (Delimitis test) on abuse of dominant position which started with Delimitis v Henninger Bräu AG (1991). In this case, there was a brew supply contract between Henninger Brau AG and Mr. Delimitis, which stipulated that Mr. Delimitis, to maintain the tenure of the tavern, must buy a certain amount of beer and soft drinks each year from the brewery. There was a preliminary request before the ECJ about the interpretation of Art 101 TFEU and its compatibility with the referred agreement. The Court analysis aimed to determine the existence of possible cumulative foreclosure effects, due to the combination of this agreement with others similar in the same relevant market. The Court judgment was based on the consideration of three components: (1) market shares of the contracting parties and proportion of outlets tied to the manufacturer, (2) the duration of the agreement, and (3) other factors related to barriers to entry on the relevant market. The doctrine of Delimitis has been applied in several following cases by the CFI (currently, the General Court). In Langnese (1995), the Court upheld the decision of the Commission, considering that the agreement between the parties infringed the Article 85(1) of the EEC Treaty, now Art. 101 TFEU, based on the determination of the cumulative effects of the network of similar agreements – for which the CFI considered the rate of outlets tied to the other fundamental ice-cream producer in Germany, which was more than 10%-. Another case that continued the application of the Delimitis test was Van der Bergh Foods (1998). Through this case, it is possible to point out that when the level of entry barrier is high, the importance of the contract duration is reduced. In other words, when there is a significant participant in the network involved in the agreement, the cumulative effect of the exclusivity contract becomes the main factor to analyze the legality of the agreement.

In general terms, exclusive contracts between manufacturers and suppliers are lawful in the US legal system. Nevertheless, exclusive purchasing agreements have the potential to violate the prescriptions of Section 2 of the US Sherman Act 1980 – which prohibits the acquisition or maintenance of monopoly power or the attempts to monopolize the relevant market through improper ways, such as exclusionary conducts- and Section 5 of the FTC Act– which prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce’’-, when a monopolist firm through an exclusive contract prevents the entry of new competitors for sales, blocking the smaller rivals. Therefore, to violate Section 2 of the Sherman Act the agreement must harm consumers. For example, in the case In the Matter of McWane, Inc, and Star Pipe Products, Ltd., the FTC actioned against McWane Inc, due to it unlawfully maintained its monopoly in the domestic pipe fittings market by the implementation of an exclusive dealing policy called “Full Support Program”, as a response to Star’s forthcoming entry in the market. Before Star entered into the market in 2009, McWane was the only manufacturer of domestic fittings and by 2010 Star rapidly gained a 5% market share. The policy implemented by McWane was considered a threat for the distributors who would not be able to buy any more domestic fittings from McWane if they purchased those items from McWane’s competitor, Star. As a result of the implementation of the Full Support Program, several distributors decided to cancel orders or to not purchase domestic fittings from Star. The FTC concluded that the Full Support Program harmed competition and lacked offsetting procompetitive benefits for the consumers, violating Section 5 of the FTC Act, based on: (1) McWane possessed monopoly power in the relevant market (ductile iron pipe fittings) and (2) McWane’s Full Support Program McWane produced the maintenance of that power illegally. Furthermore, the Commission’s Final Order prohibited McWane to require exclusivity from its customers, which was upheld by the Eleventh Circuit. Considering this case, it is possible to conclude that although exclusive purchasing agreements are not unlawful in themselves, in the case of monopolist firms abusing their dominant situation in the market, they can impose obligations and conditions downstream that significantly reduce the competition and prevent the entry of new competitors. The case United States of America, Appellant, v. Dentsply International, Inc (2005), contains an interesting analysis in which the US Court of Appeals for the Third Circuit concluded that the monopolist manufacturer-supplier of dental supplies, Dentsply, violated Section 2 of the Sherman Act. Dentsply enjoyed a dominant position in the relevant market of sale of prefabricated artificial teeth in the US, with a 75% to 80% market share on a revenue basis. In 1993 this manufacturer adopted an exclusive dealing agreement called Dealer Criterion 6 which the Third Court considered anti-competitive, due to “(…) Dealer Criterion 6 has a significant effect in preserving Dentsply’s monopoly. It helps keep sales of competing teeth below the critical level necessary for any rival to pose a real threat to Dentsply’s market share. As such, Dealer Criterion 6 is a solid pillar of harm to competition” (399 F.3d at 191). Regarding the legality of exclusive purchasing agreements, the Third Court affirmed that they are not illegal per se and the prerequisites that must be met are: (1) “a finding that monopoly power exists” and (2) “the exclusionary conduct must have anti-competitive effect” (399 F.3d at 187). In conclusion, through the application of Dealer Criterion 6, Dentsply was able to exclude rivals from the dealer’s network.

The US courts have adopted for the analysis of these cases the effects analysis and the rule of reason. The harm experienced by consumers in the cited cases from the US (the anti-competitive effects) is related to the acquisition or maintenance of monopolist power which impeded and prevented the entry of more competition into the market, through exclusive contracts, excluding the possibility to benefit the society from lower prices and better goods and services.

In conclusion, through the cases previously analysed, it is possible to distinguish a slight difference between the EU and the US regulation of exclusive purchasing agreements to consider them anticompetitive. On the one hand, Article 102 TFEU requires a “dominant position”, on the other hand, Section 2 of the Sherman Act refers to the conduct of any competitor who has the effect of “monopolization”.

 

Bibliography

Areeda, Phillip and Herbert Hovenkamp. Antitrust Law: An Analysis of Antitrust Principles and their Application. Tercera. Vol. 3. 14 vols. Nueva York: Wolters Kluwer Law and Business, 2008.

Baker, Jonathan, Exclusion as a Core Competition Concern, Antitrust Law Journal 78, nº 3 (2013):527-89.

Elhauge, Einer, Defining Better Monopolization Standards, Standford Law Review 56 (Noviembre 2003): 253-344.

Frank Montag, Joanna Goyder, Exclusive dealing: Presumptions and bright lines, December 2013, Concurrences N° 4-2013, Art. N° 58815.

Innes, Robert, and Richard Sexton, Strategic Buyers and Exclusionary Contracts, The American Economic Review 84, nº 3 (1994): 566-84.

Author

Quotation

María Luisa Ilharreborde Illanes, Exclusive purchasing agreements, Global Dictionary of Competition Law, Concurrences, Art. N° 86064

Visites 8962

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

"In exclusive purchasing agreements, the reseller agrees to purchase the contract goods only from the other party and not from any other supplier. The supplier is entitled to supply other resellers in the same sales area and at the same level of distribution. Unlike an exclusive distributor, the tied reseller is not protected against competition from other resellers who, like himself, receive the contract goods direct from the supplier. On the other hand, he is free of restrictions as to the area over which he may make his sales effort." The Commission notice concerning Commission Regulations (EEC) No 1983/83 and (EEC) No 1984/83 of 22 June 1983 on the application of Article 85 (3) of the Treaty to categories of exclusive distribution and exclusive purchasing agreements

 
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