Vertical Restraints

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CHAPTER III

VERTICAL RESTRAINTS

Vertical restraints are agreements between firms at different stages of

the chain of distribution. These restraints can involve products and

services, intellectual property, or technologies. Examples include

territorial restrictions, exclusivity arrangements, and tying arrangements.

Vertical restraints are pervasive through all aspects of the economy and

are generally evaluated more leniently than horizontal restraints among

competitors.

In most respects, the same basic antitrust principles govern vertical

restraints in technology industries as elsewhere in the economy.

Nevertheless, unique and challenging issues have arisen in technology

industries. For example, courts have analyzed how to apply tying law—

which limits the ability of a firm to condition the sale of one product on

the purchase of another—to technology industries where products evolve

over time to integrate and incorporate new features that were once only

offered as standalone products. “Technological tying” issues have arisen

in a variety of context. Courts and enforcement agencies also have

addressed complex vertical issues that have arisen in connection with the

licensing of intellectual property, which shares many similarities with

other types of property, but also has other unique characteristics (like

ease of misappropriation).

This chapter provides a general overview of the law of vertical

restraints and then examines some specific categories of vertical

restraints that arise frequently in technology industries, including tying

arrangements, exclusive dealing arrangements, and resale price

maintenance. This chapter also provides an overview of vertical issues

relating to technology outside of the United States in Europe and Asia.

142 Handbook on Antitrust in Technology Industries

A. Fundamentals

1. What Is a Vertical Agreement or Restraint?

Section 1 of the Sherman Act prohibits “every contract,

combination . . . or conspiracy in restraint of trade or commerce.”1 In

analyzing a restraint of trade, the first step is determining whether an

agreement has “horizontal” or “vertical” components. Horizontal

agreements are agreements between or among actual or potential

competitors. In contrast, vertical agreements are agreements between or

among entities at different levels in the chain of distribution, such as a

manufacturer and a wholesaler or a wholesaler and a retailer.

In the context of licensing, “a licensing arrangement has a vertical

component when it affects activities that are in a complementary

relationship.”2 A licensing arrangement may also have an additional

horizontal element between a licensor and its licensees, or between

licensees, if “they would have been actual or potential competitors in a

relevant market in the absence of the license.”3

Accurate characterization generally depends on the nature of the

parties’ relationships and can require a detailed factual analysis.4 An

agreement between multiple dealers and a single supplier, or between a

single dealer and multiple suppliers, could be considered horizontal

because there are multiple parties at the same level of distribution.

Similarly, a seemingly vertical agreement between a manufacturer and

distributor could be deemed horizontal when a group of distributors

control the manufacturer or jointly prevail on the manufacturer to impose

the restrictions at issue.5

1. 15 U.S.C. §1 (2012). For the sake of brevity, the discussion below will

reference “agreements” rather than “contracts, combinations, or restraints

of trade.”

2. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES

FOR THE LICENSING OF INTELLECTUAL PROPERTY, § 3.4 (2017)

[hereinafter 2017 IP GUIDELINES], available at http://www.justice.gov

/atr/antitrust-guidelines-licensing-intellectual-property.

3. Id.

4. See Business Elecs. v. Sharp Elecs., 485 U.S. 717, 730-31 n.4 (1988).

5. See, e.g., United States v. Topco Assocs., 405 U.S. 596, 612 (1972)

(finding territorial licensing rules and veto power of existing licensees to

be horizontal where licensees owned and controlled licensor entity);

United States v. Sealy, Inc., 388 U.S. 350, 353-54 (1967) (territorial

restrictions to licensing agreement are horizontal where licensees owned

Vertical Restraints 143

Although courts typically apply more scrutiny to horizontal

agreements, a horizontal agreement does not necessarily denote

anticompetitive harm. Similarly, purely vertical agreements are not

immunized from antitrust liability. Vertical arrangements may also pose

anticompetitive effects, and thus may violate the Sherman Act. Below is

a discussion of how various vertical relationships may be examined

under the antitrust laws.

2. Per Se vs. Rule of Reason vs. Quick Look

Under U.S. antitrust law, courts generally evaluate the legality of

arrangements among firms in one of three ways. (1) under the “per se”

rule; (2) under a “rule of reason” analysis; or (3) under a “quick look.”

As discussed below, vertical restraints are most typically evaluated under

the more lenient rule of reason standard, although there may be some

limited circumstances where they are evaluated under a quick look

approach or even under a version of the per se rule.

Under the per se rule, the restraint on competition is deemed

inherently illegal under the Sherman Act without regard to any market or

competitive circumstances. This approach “is reserved only for those

agreements that are so plainly anticompetitive that no elaborate study of

the industry is needed to establish their illegality.”6

In contrast, under a rule of reason analysis, the court investigates the

industry at hand, weighs the procompetitive justifications and

anticompetitive effects of the restraint, and considers whether the

putative benefits can be achieved by less restrictive means. This form of

review is reserved for restraints that may be expected to have

procompetitive effects or efficiency-related justifications.7 Courts tend to

substantially all licensor’s stock); Toys “R” Us, Inc. v. FTC, 221 F.3d

928, 929 (7th Cir. 2000) (finding a horizontal agreement where

manufacturers agreed with retailer not to sell to a group of the retailer’s

competitors on the condition that the retailer obtain same commitments

from other manufacturers); see also United States v. Singer Co., 374 U.S.

174, 194 (1963) (patent cross licensing agreement settling patent

interference litigation constituted unlawful horizontal arrangement).

6. Texaco v. Dagher, 546 U.S. 1, 5 (2006).

7. See, e.g., Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36, 49-50

(1977); Paladin Assocs. v. Mont. Power Co., 328 F.3d 1145, 1158 (9th

Cir. 2003); see also Roger D. Blair & D. Daniel Sokol, The Rule of