Although vertical agreements are generally pro-competitive, in certain circumstances they can affect competition if they deprive (or augment) a competitor of a necessary or valuable input – such as. B distribution services. (7) 6. They must be distinguished from horizontal agreements, which are agreements between competitors which limit their rivalry with regard to the purchase or sale of substitute products. Negotiating agreements between rivals, not with other rivals or only on adverse terms, raises questions in addition to the issues raised here. These agreements are sometimes condemned as illegal horizontal agreements without their exclusionary effects being analysed in detail. See e.B. Fashion Originators` Guild v. FTC, 312 U.S. 457 (1941).
The predatory effect may depend not only on the characteristics of each agreement, but also on the overall impact of all those agreements used by the manufacturer. For example, a number of exclusive agreements with many distributors could be exclusive, although none of these agreements alone would have a significant impact on the manufacturer`s competitors. 12. Much of the case-law on vertical predatory agreements concerned the issue of predatory effects, but cases often deal with this issue only indirectly. For example, in tied selling cases, it is often a question of whether the defendant has market power in relation to the binding product, and in exclusive distribution cases, it is often the percentage of wholesale suppliers subject to the restrictions of the exclusive transaction. Although the coupling of product market power and the percentage of crowding out of wholesale suppliers are relevant factors for predicting exclusionary effects, they do not directly measure these effects. In my view, it would be preferable for law enforcement authorities to explicitly focus on excluding competitors, both to keep in mind the purpose of the types of powers of attorney that are often discussed in cases and not to overlook direct evidence of exclusion. See, Jefferson Parish Hosp. Dist. No.
2 v. Hyde, 466 U.S. 2, 16 and 21 n.34 (1984). Fourthly, are not some or all aspects of exclusion from agreements reasonably necessary to achieve market power efficiencies? For example, has the monopoly manufacturer entered into more extensive exclusivity agreements or has it entered into exclusivity agreements with more dealers than necessary to achieve efficiency? If so, unnecessary agreements (or the unnecessary part of agreements) should be illegal. (18) There is more flexibility compared to other vertical agreements. For example, the following types of block exemption agreements are not considered „hardcore” (they are called „non-hardcore”): Susannah Torpey: The Department of Justice has recently focused on price-fixing agreements in resale in the film industry. Last year, the Justice Department announced that it had launched a review of Paramount`s consent decisions that have been in place for decades. Paramount, the film studio, is one of the oldest in Hollywood. In the 1930s, the government began investigating possible antitrust violations in the film industry, and the DOJ eventually sued five major film studios, including Paramount.
The government`s case was settled in 1940 by consent decrees known as Paramount consent decrees. Since we cannot observe the payment of over-competitive profits, we must assess exclusion agreements ourselves without relying on the market to tell us whether they are globally anti-competitive or anti-competitive. Thus, if (i) exclusion, (ii) market power, and (iii) efficiency are inextricably linked, the right solution is a more comprehensive analysis of the rule of reason — one that weighs the anti-competitive consequences of agreements against their pro-competitive or efficiency-enhancing effects. What these agreements have in common is that they are agreements between a company – call it „Company A” – and one or more other companies that limit the ability of those other companies to supply inputs to Company A`s competitors. Restrictions may be explicit and direct, such as those in exclusivity agreements or most-favoured-nation clauses, or implicit and indirect as they result from binding agreements, market share incentives or fine provisions in licensing agreements. Susannah Torpey: On the state side, several states have actually rejected Leegin, such as Maryland and California. Maryland has amended its antitrust law to treat resale price-fixing agreements as illegal per se. California antitrust law has always treated resale price fixing agreements as illegal in themselves.
And since Leegin, the Attorney General of California has always taken the position that Leegin has not changed the law in California. Molly Donovan: Okay, so we talked about vertical restrictions on prices, but I want to use the rest of our time to talk about vertical restraints outside of prices. If a vertical restraint does not limit the prices that can be calculated, what does it limit? Even in cases where a block exemption is not applicable, an individual exemption can still be granted for a vertical agreement. The parties are entitled to carry out a self-assessment to determine whether the restrictive vertical agreement fulfils the conditions for an individual exemption. — the agreement must contribute to improving the production or distribution of goods or to the promotion of technical or economic progress, — it must enable consumers to share fairly in the profits resulting therefrom, — it must not impose any restrictions on the undertakings concerned; (iv) it should not impose restrictions on the parties that are not indispensable for the achievement of those objectives. the possibility of eliminating competition in respect of a substantial part of the products concerned. This is not an alternative test, and all the conditions for an individual exception must be met. Today we speak with Susannah Torpey.
She has extensive experience in the field of vertical restraints. Susannah is also a partner in the New York office. She has more than a decade of experience representing large U.S. corporations and multinationals in high-stakes antitrust litigation, high-tech competitive litigation and international investigations. Susannah also advises companies on the minimization of antitrust risks and evaluates the activities of the board of directors and other activities of the company for antitrust compliance. Susannah joins us today to share her expertise on vertical restraints under U.S. law and recent developments in this area. Susannah, thank you so much for being with us. A vertical agreement is a term used in competition law to refer to agreements between companies at different levels of the supply chain.
For example, a consumer electronics manufacturer could enter into a vertical agreement with a retailer under which the retailer advertises its products in exchange for lower prices. Franchising is a form of vertical agreement that falls within the scope of Article 101 of EU competition law.  The alternative would be to proceed immediately to a market power review. While a market power requirement theoretically makes sense, it might make virtually no sense. A shield of market power would not only entail costs and uncertainty, but would also create a powerful standard rule. Difficulties of proof mean that many cases of market power would not be proven and that, therefore, anti-competitive agreements would escape condemnation in relation to antitrust. There is no need to bear the cost of such false-negative results compared to exclusion agreements for which there is no plausible justification for effectiveness. Susannah Torpey: I say „anti-competitive” because vertical restraints can affect competition in different ways. They may increase competition between competitors or restrict competition. Antitrust law focuses on vertical restraints that are anti-competitive because, on the whole, they affect competition more than competition. But what if the promise doesn`t improve efficiency? What if, for example, the benefits of avoiding parasitism improve efficiency are less than the benefits that the retailer could get by selling other people`s products? If the value created by transactions with other manufacturers were to exceed the value resulting from the benefits of the efficiency-enhancing exclusivity agreement, one would expect the market (and thus the trader) to reject the promise of exclusion and instead choose the other, more efficient companies. .