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
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.”
[hereinafter 2017 IP GUIDELINES], available at
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

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