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Exclusive distributorships

Exclusive distributorships: commitment by a supplier to limit the competition faced by a distributor (presumptively lawful, almost always legal)—treated basically the same way as within-brand restraints

  • Upstream firm commits to establish downstream firm as the sole distributor with respect to a particular area/customer/product (e.g., restriction on McDonald's to only establish one franchise in an area)
  • Limit placed on supplier: contrast with limits on distributor's freedom of action, where the distributor could only sell from a particular area/to a particular customer/one type of goods (Schwinn/Sylvania)
    • Vertical within-brand restraint restrains the downstream firm; exclusive distributorship is a restraint on the upstream firm
Procompetitive justification:
  • Giving a downstream firm extra market power incentivizes them to provide higher-quality services (doesn't spread the upstream firm's resources over so many downstream firms)

Caselaw​

E&L Consulting v. Doman (2d Cir. 2006)​

  • Holding: this exclusive distributorship is not illegal
    • Nothing in the complaint suggests an adverse effect on competition
      • No collusion: there is only one firm, D
      • No exclusion: the consolidation of distributors doesn't limit rival firms' access to inputs
    • Exclusive distributorship provides no advantage to D (in exercising its market power) that it did not already have
      • D gave lumber to distributors on consignment, so it had the same power to set price with three or one distributors
    • An exclusive distributorship that conveys market power to Sherwood is against D's interests unless it provides other benefits
  • Facts: P was lumber distributor for D (upstream firm) from 1990–2004. D supplies 95% of green hem-fir lumber in some northeastern states. P took lumber on delivery (not sale) and sold it at prices set by D. D terminated its arrangements with three of its distributors (including P) and replaced them with another distributor, Sherwood.
  • Prof. Note: this case is analogous to McDonald's reducing the number of franchisees in an area from three to one—this might be a loss to consumers, but antitrust law says the upstream firm can set the number of distributors