United States: Vertical Restraints

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This article reviews developments in vertical restraints law in the United States since 1 June 2017, the most important of which, the Supreme Court's decision in State of Ohio v American Express Co,1 is discussed below. For an overview of the law of vertical restraints generally, the reader should consult the chapter on US vertical restraints in The Antitrust Review of the Americas 2014.

Price restraints

The past year saw no reported decisions analysing minimum resale price maintenance (RPM) claims under either federal or state antitrust laws. The United States District Court for the District of Connecticut had occasion, however, in Connecticut Fine Wine & Spirits, LLC v Harris2 to consider whether RPM should be per se illegal in the alcoholic beverages market. An alcoholic beverage retailer, Total Wine, sought a declaratory judgment that section 1 of the Sherman Act3 preempted a Connecticut statutory requirement that a retailer sell alcoholic beverages at or above a 'bottle' price set by the wholesaler from which it sourced the beverages. In determining whether the provision was preempted, the court had to determine, as a threshold matter, whether it was per se illegal or should be subject to the rule of reason. Rejecting arguments that an earlier Supreme Court decision4 recognising per se treatment for RPM in the distribution of alcoholic beverages had not been overruled by the court's decision in Leegin5 and that Leegin could be distinguished on various grounds, the court held that the statutory requirement was subject to the rule of reason.6 Since the provision was not per se illegal under the Sherman Act, preemption was foreclosed, and the court dismissed the complaint.

Non-price restraints on distribution

Channel and territorial restraints

In decisions analysing restraints on the channel into which distributors resell products and on the geographic area in which products can be resold, courts applied the rule of reason to dismiss claims under Section 1 of the Sherman Act.

The United States District Court for the Eastern District of New York considered in Abbott Labs v Adelphia Supply USA7 a claim that a manufacturer had violated Section 1 by prohibiting its domestic distributors from selling into the retail market. Abbott Laboratories (Abbott) barred distributors from selling FreeStyle diabetes test strips to firms that would sell them at retail and did so by including 'no-diversion clauses' in its distributor agreements. In response to a trademark infringement claim brought by Abbott, a retailer, H&H Wholesale Services (H&H), counterclaimed that the restriction operated to maintain retail prices for the strips at an artificially high level for US consumers. A purpose for the no-diversion policy was to shield the test strips from intra-brand price competition and to prevent arbitrage by discounters – ie, buying strips at the wholesale price in order to undercut the retail market price.

The court dismissed the claim. It was undisputed that Abbott lacked market power, and the court therefore considered whether H&H adequately alleged that the policy had actual anticompetitive effects. The court rejected conclusory allegations that the policy removed competitive pressure on the market as a whole and thereby led to increased prices,8 and it held that allegations of price discrimination likewise failed to establish actual anticompetitive effects. The fact that the no-diversion policy had the effect of preventing retail discounting was not evidence of anticompetitive effects, since 'price discrimination by a firm that is not a monopolist and is not colluding with its competitors is generally not an antitrust violation' and neither, therefore, are 'efforts to prevent arbitrage'.9

In a decision upholding a manufacturer's export prohibition, Baar v Jaguar Land Rover N Am, LLC,10 the United States District Court for the District of New Jersey similarly approved a vertical restraint aimed at preventing arbitrage. Jaguar Land Rover North America (Jaguar) implemented a policy barring domestic customers from reselling vehicles to foreign purchasers. It did so to prevent customers 'from taking advantage of an arbitrage opportunity that exists in foreign countries, such as China, to obtain and maintain higher profits abroad'.11 As a vertical restraint, the policy was subject to evaluation under the rule of reason. The court dismissed the complaint after holding that the policy had been unilaterally implemented by Jaguar and that plaintiffs had alleged no conspiracy between Jaguar and its dealers. Even assuming that a conspiracy had been alleged, the court held that there was no section 1 violation, because plaintiffs' allegation of a relevant market consisting solely of Jaguar-Land Rover vehicles was facially implausible.12

Anti-steering provisions

In the Supreme Court's first consideration of vertical restraints since Leegin13 in 2007, the court affirmed the Second Circuit's holding that American Express's anti-steering provisions do not violate section 1. In State of Ohio v American Express Co,14 the Supreme Court agreed with the court of appeals that the relevant market for analysing the competitive effect of the provisions was the two-sided credit card market as a whole, not the side for merchant services alone.

American Express (Amex) prohibits merchants with which it has agreements from informing a customer that the merchant may prefer another card (Visa, MasterCard or Discover) and 'steering' the customer to use that card. The fee Amex charges a merchant is typically higher than that charged by other credit card networks, and Amex deemed these anti-steering provisions, called non-discrimination provisions (NDPs), necessary to preserve its premium brand positioning. The government, joined by a number of states, challenged the NDPs on the ground that they unreasonably restricted merchants from offering lower-priced card alternatives to customers. Following a trial on the merits, the district court agreed, holding that the NDPs violated section 1 under the rule of reason.15 The court of appeals reversed and directed the district court to enter judgment for Amex.16

The Supreme Court granted the states' petition for certiorari and ruled, five-to-four, in favour of Amex. In an opinion by Justice Thomas, the court began its analysis by observing that, as a vertical restraint, the NDPs were subject to evaluation under the rule of reason.17 It stated that, under the rule of reason, a 'three-step, burden-shifting framework applies'.18 The plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in a relevant market. If the plaintiff carries this burden, the defendant must then show that the restraint has a 'pro-competitive rationale'.19 If the defendant carries this burden, the plaintiff then must show that 'the pro-competitive efficiencies could be reasonably achieved through less anticompetitive means'.20

The court confined its attention to whether the plaintiffs had carried their initial burden of proving substantial anticompetitive effects. Noting that anticompetitive effects could be proved through either direct or indirect evidence, the court observed that plaintiffs had relied exclusively on direct evidence. Direct evidence, according to the court, would be proof of actual detrimental effects in the relevant market, such as 'reduced output, increased prices, or decreased quality'.21 Before evaluating plaintiffs' evidence that the NDPs caused anticompetitive effects, the court set out to determine the relevant market. Plaintiffs urged that there was no need to define a relevant market, because evidence of actual adverse effects on competition had been proved at trial. The court disagreed, holding that, in a vertical case, the relevant market must always be defined.22

Relying exclusively on economic literature, the court deemed credit card networks 'two-sided platforms' and held that 'courts must include both sides of the platform – merchants and cardholders – when defining the credit-card market'.23 A two-sided platform 'facilitate[s] a single, simultaneous transaction between participants',24 and such platforms supply only one product – a transaction.25 The relevant market was, thus, 'the two-sided market for credit card transactions'.26

The court held that plaintiffs had failed to prove anticompetitive effects in the relevant market. First, there was no proof that the price of credit card transactions was 'higher than the price one would expect to find in a competitive market'.27 Second, there was no evidence that Amex's price increases over time led to, or were the result of, output restrictions.28 Third, there was no evidence that the NDPs had 'stifled competition among credit-card companies'.29 The court observed that 'fierce competition between networks' has constrained Amex's ability to raise merchant fees,30 and it noted that the NDPs 'do not prevent Visa, MasterCard or Discover from competing against Amex by offering lower merchant fees or promoting their broader merchant acceptance'.31

In dissent, Justice Breyer took issue with much of the majority's analysis, including its view that a relevant market has to be defined even when actual adverse competitive effects are proved. According to Justice Breyer, evidence of anticompetitive effects is, standing alone, proof of market power, and there is no need 'to require a separate showing of market definition and market power under such circumstances'.32 He disputed why, as an economic proposition, there is any justification for combining the merchant-related and shopper-related services of a two-sided transaction platform into a single market.33 In his view, they are, in economic parlance, complements, not substitutes, and grouping complementary goods into the same market is 'economic nonsense'.34

The American Express decision is significant for multiple reasons. We will mention three of them:

• recognition of allocation of the burden of proof in a vertical case;

• rejection of truncated analysis in a vertical case; and

• recognition of a two-sided transaction platform as a single relevant market.

First, the Supreme Court recognised the burden of proof allocation in vertical rule of reason cases that has long been settled in the lower federal courts. The plaintiff must first prove that the restraint has caused anticompetitive effects in a relevant market. The defendant may then introduce evidence of the pro-competitive justifications for the restraint, and the plaintiff may thereafter introduce evidence that the defendant's competitive goals could be achieved by less restrictive alternatives.35 There had been no conflict among the lower courts on this analytical approach, but the Supreme Court had not previously employed it.

Second, the court's decision eliminates any possibility that proof of a section 1 violation in a vertical case can be established without definition of the relevant market and full rule of reason analysis. In its discussion of the rule of reason in FTC v Actavis, Inc,36 the court expressed the view, in an opinion by Justice Breyer, that there is 'always something of a sliding scale in appraising reasonableness' and that 'the quality of proof should vary with the circumstances'.37 It did so after rejecting the Federal Trade Commission's (FTC) plea for application of the per se rule in reverse-payment settlement litigation involving pharmaceutical patents, and the statement was intended to allay the FTC's fear that future rule of reason litigation would entail 'consideration of every possible fact or theory irrespective of the minimal light it may shed on the basis question – that of the presence of significant unjustified anticompetitive consequences'.38 In American Express, the Supreme Court shut the door on a sliding scale or evidentiary short-cuts in vertical cases, preserving opportunities for the very evidentiary meanderings it had acknowledged in Actavis to be the bane of rule of reason litigation.39

Drawing upon truncated rule of reason analysis applied by the Supreme Court in FTC v Indiana Federation of Dentists,40 lower federal courts have held that there is no need to prove market power in a vertical case if a plaintiff can show actual adverse effects on competition, such as reduced output.41 Market power can be inferred from evidence of such effects, they have reasoned, and the court recognised as much in Eastman Kodak co v Image Technical Services, Inc.42 The plaintiffs in American Express argued for the same inference. The Supreme Court barred it, distinguishing the use of truncated analysis in cases involving horizontal conspiracies, such as Indiana Federation of Dentists, from those involving vertical restraints. Since vertical restraints 'pose no risk to competition unless the entity imposing them has market power', the court declined to dispense with proof of market power and held that market power 'cannot be evaluated unless the court first defines the relevant market'.43 In every vertical restraints case, a plaintiff, thus, will need to be prepared to prove both the metes and bounds of a relevant market and, separately, the defendant's power in the market.

Third, the Supreme Court's decision establishes that a two-sided transaction platform constitutes a single market, foreclosing treatment of either side of the platform as an independent market. While this is one of the few cases to have addressed two-sided markets,44 network platforms are not confined to the credit card industry. The court's market definition may have implications across a range of applications in which network platforms are utilised, such as purchasing airline reservations online45 or purchasing goods through an online platform such as Amazon or eBay. Proof that restraints affecting operation of such a platform violate Section 1 can be expected to be difficult, if only because, as the dissent in America Express recognised, it would entail evidence that output was restricted as a result of the restraint:

[B]ecause the relevant question is a comparison between reality and a hypothetical state of affairs, to require actual proof of reduced output [caused by the restraint] is often to require the impossible – tantamount to saying that the Sherman Act does not apply at all.46

Non-price restraints on purchasing

Tying arrangements

In two appellate decisions, courts looked at whether plaintiffs in tying cases had shown foreclosure in the tied product market, reaching different conclusions.

The Court of Appeals for the Tenth Circuit considered in Healy v Cox Communs, Inc (In re Cox Enters)47 whether plaintiffs had proved foreclosure of a substantial volume of commerce in the market for a tied product. Plaintiffs alleged that Cox Communications (Cox) had tied the lease of set-top boxes to the sale of cable service in violation of section 1. Cox required each subscriber to its cable services to have a set-top box, which unscrambled the signal from content providers, such as HBO, for reception by the subscriber. The evidence showed that Cox required subscribers to lease a set-top box from Cox and that Cox earned substantial revenue from leasing the boxes. Plaintiffs contended that this evidence satisfied the requirement, for proof of a per se unlawful tying arrangement, that the arrangement had foreclosed a not insubstantial volume of commerce in the tied product market.

Affirming the district court, the court of appeals held that more than this was required. It held that the plaintiffs had to demonstrate that the revenue flowed from an unlawful tie and that the tie was 'the reason its [Cox's] customers leased set-top boxes from Cox'.48 There was no evidence of any foreclosure, however. No manufacturers of set-top boxes sold boxes directly to consumers, so there was no evidence that the tie barred rival sellers from access to the market for the tied product. The evidence showed that all cable companies rent set-top boxes to their subscribers, and this suggested that tying box rentals to premium cable service is more efficient than offering the service and box separately.49 Since there was no evidence of foreclosure, the tie failed to meet the 'threshold requirements to trigger the per se rule against tying'.50

In contrast to no foreclosure in the market for the tied product in Healy, the Court of Appeals for the Sixth Circuit held in Cates v Crystal Clear Techs, LLC51 that plaintiffs had adequately alleged a substantial impact on the tied product market. The plaintiffs, homeowners in three neighbourhood developments in Tennessee, alleged that the developers tied the sale of homes to the purchase of telecommunication services from Crystal Clear Technologies. The court reversed the district court's holding that the plaintiffs had failed to allege a substantial impact on the relevant tied market. Since the plaintiffs had alleged that over 1,000 homeowners had each been forced to pay a one-time infrastructure fee of at least US$1,500, plus monthly assessment fees, for Crystal Clear's services, the court of appeals concluded that plaintiffs had 'pleaded a substantial impact on the relevant tied market'.52

Exclusive dealing arrangements

Antitrust challenges to exclusive dealing arrangements remain a constant in the courts. The principal targets in the cases discussed below are manufacturer agreements with distributors that are claimed to block competitor access to downstream markets.

Pure exclusive dealing

In a case challenging exclusive dealing agreements between Carfax, Inc, on the one hand, and used car listing websites and car manufacturers, on the other hand, Maxon Hyundai Mazda v Carfax, Inc,53 the Court of Appeals for the Second Circuit held that the plaintiffs, a class of 450 used car dealers, had failed to show that the agreements caused substantial foreclosure of competition in the market for vehicle history reports (VHRs). Affirming summary judgment for Carfax, the court noted that there was no showing that barriers to entry were high and no showing that the agreements caused increased VHR prices in the market as a whole. (The plaintiffs' damages expert had failed to demonstrate market-wide price increases attributable to the agreements.) Additionally, the relatively short duration of the website agreements – three to five years – was not sufficient to raise antitrust concerns.54 There was, thus, no showing of anticompetitive conduct that would have warranted a trial under either section 1 or section 255 of the Sherman Act.

The United States District Court for the District of Delaware considered in GN Netcom, Inc v Plantronics, Inc56 whether a manufacturer of telephone headsets for call centres and other enterprises had foreclosed market access by means of exclusive-dealing agreements with distributors. The evidence showed that the defendant, Plantronics, had agreements with its distributors that they would not purchase headsets from competitors and not promote competing brands. Plantronics contended, in support of a motion for summary judgment, that the plaintiff, GN Netcom (GN), could sell directly to end users and that denial of access by GN to Plantronics' distributors was no barrier to effective competition.

Plantronics argued that its exclusive dealing arrangements had no adverse competitive effects, because there was no evidence that end-users felt coerced into buying Plantronics headsets or were otherwise unable to acquire alternate brands, including GN headsets.57 The court held that the record was not clear as to whether 'end-users were reasonably free to choose between alternative products', and it noted, in cases involving claims of monopolisation, that a court must consider whether the restraints at issue have helped to keep a firm's sales 'below the critical level necessary for any rival to pose a real threat' to the defendant's market share.58

Even though the evidence showed that GN had its own distribution network, GN pointed to foreclosure of 47 per cent of the market as a result of Plantronics' exclusive dealing arrangements. Because there remained a question as to whether other avenues of distribution open to GN – either through direct sales to end users or sales to end users through non-Plantronics distributors – were 'practical or feasible'59 and would pose a 'real threat' to Plantronics' market share,60 the court denied the motion for summary judgment and set the case for trial.

Another manufacturer's exclusive dealing arrangement with distributors was reviewed by the same Delaware court in Roxul USA Inc v Armstrong World Indus.61 The products at issue were acoustic ceiling tiles, the majority of which (85 per cent) are sold in the United States and Canada through distributors specialising in building projects materials. Armstrong World Industries (Armstrong) has at least 55 per cent of the market for ceiling tiles, and it has agreements with its distributors that bar them from handling competing brands. Roxul USA, Inc (Roxul), one of three direct competitors of Armstrong in the US and Canadian market, alleged that the exclusive dealing arrangement violated sections 1 and 2 of the Sherman Act.

In denying Armstrong's motion to dismiss, the court held that Roxul adequately alleged that Armstrong had wilfully acquired monopoly power in the ceiling tile market through use of the exclusivity agreements. Roxul alleged that alternate distribution channels, such as selling directly to contractors or selling through big-box retailers, were not viable options by which to reach ceiling tile consumers, and the court held that Roxul had adequately alleged that the exclusivity agreements had the effect of substantially foreclosing the market to Armstrong's competitors.62 In response, Armstrong contended that exclusive dealing serves legitimate pro-competitive objectives, such as eliminating free riding by other manufacturers on Armstrong's substantial investment in distributors that promote its products, but the court held that weighing pro-competitive against anticompetitive effects would need to await completion of discovery.63

Partial exclusive dealing

A rebate programme was alleged to function as a de facto exclusive dealing arrangement in In re EpePen (Epinephrine Injection, USP) Mktg, Sales Practices & Antitrust Litigation.64 Sanofi-Aventis US LLC (Sanofi) alleged that Mylan, Inc (Mylan) had entered into agreements with third-party payors, such as commercial insurance companies, under which Mylan paid the insurers generous rebates of 30 per cent or more if they offered Mylan's product to their insureds and agreed not to offer Sanofi's competing product. Sanofi alleged that conditioning the rebates on exclusivity substantially foreclosed the market for epinephrine auto-injector (EAI) drug devices in furtherance of monopolization of the market in violation of section 2.

Mylan moved to dismiss the complaint on the ground that its sales of EAI devices were above cost and therefore protected under Brooke Group.65 The court disagreed, holding that the price-cost test approved in Brooke Group for predatory pricing claims does not apply to an exclusive dealing claim when price itself is not the clearly predominant mechanism of exclusion.66 Sanofi alleged that Mylan leveraged its 90 per cent market share to exclude Sanofi's product from insurers' drug formularies and to require insurers to offer only Mylan's product, EpiPen. It claimed that this arrangement effectively blocked Sanofi's product, Auvi-Q, from nearly 50 per cent of the market and unlawfully raised Sanofi's costs of entry. The price-cost test did not apply, because: 'Mylan's rebate programme involved anticompetitive conduct – beyond pricing itself – that was designed to block customer access to Auvi-Q and protect Mylan's monopoly in the EAI drug market'.67

The court held that Sanofi had adequately alleged that the probable effect of Mylan's rebate programme would be to foreclose competition in a substantial share of the relevant market, and it rejected Mylan's argument that an exclusive dealing claim could not be based on a single product rebate. To state a viable exclusive dealing claim based on a rebate program, according to Mylan's argument, a plaintiff must allege other exclusionary conduct that produces a substantial foreclosure of completion, such as bundling or tying the rebates to the sale of other products, threatening to terminate supply or imposing long-term agreements.68


1 2018 US LEXIS 3845 (2018).

2 255 F Supp. 3d 355 (D Conn. 2017).

3 15 USC Section 1.

4 324 Liquor Corp v Duffy, 479 US 335 (1987).

5 Leegin Creative Leather Prods v PSKS, Inc, 551 US 877 (2007).

6 255 F Supp 3d at 376–78.

7 2017 US Dist LEXIS 205321 (EDNY 2017).

8 Id at *28–31.

9 Id at *33 (citation omitted).

10 2018 US Dist. LEXIS 3867 (DNJ 2018).

11 Id at *4.

12 Id at *14–15 ('consumer preference [for Jaguar vehicles] does not transform an otherwise dynamic market with dozens of interchangeable and cross-elastic products into a single market').

13 Leegin Creative Leather Prods v PSKS, Inc, 551 US 877 (2007).

14 2018 US LEXIS 3845 (2018).

15 United States v American Express Co, 88 F.Supp.3d 143 (EDNY 2015).

16 838 F3d 179 (2d Cir. 2016).

17 2018 US LEXIS 3845, at *17.

18 Id.

19 Id at *18.

20 Id.

21 Id.

22 Id at *19 n.7.

23 Id at *20.

24 Id at *21.

25 Id at *22 (citing B Klein et al, 'Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees', 73 Antitrust L J 571, 580 (2006)).

26 Id at *23-24.

27 Id at *25.

28 Id at *27.

29 Id.

30 Id at *28.

31 Id at *30.

32 Id at *50 (dissent).

33 Id at *52 (dissent).

34 Id at *46 (citation omitted) (dissent).

35 See, eg, Capital Imaging Assocs v Mohawk Valley Medical Assocs, 996 F2d 537, 543 (2d Cir. 1993); Bhan v NME Hospitals, Inc, 929 F2d 1404, 1413 (9th Cir. 1991); US Airways Inc v Sabre Holdings Corp, 2017 US Dist LEXIS 40932, at *9–10 (SDNY 2017).

36 570 US 136 (2013).

37 Id at 159 (citation omitted).

38 Id at 160 (citation omitted).

39 As Judge Posner aptly explained in Valley Liquors v Renfield Imps, 678 F2d 742, 745 (7th Cir. 1982), full-blown rule of reason litigation in a vertical case necessitates 'trundling out the great machinery of antitrust enforcement'.

40 476 US 447, 460–61 (1986).

41 Eg, Geneva Pharmaceuticals Technology Corp v Barr Labs., Inc, 386 F3d 485, 509 (2d Cir. 2004) (vertical restraint case alleging unlawful exclusive dealing arrangement); Republic Tobacco Co v North Atlantic Trading Co, 381 F3d 717, 736-37 (7th Cir. 2004) (recognising that, 'in a proper case alleging vertical restraints, a direct anticompetitive effects analysis could be used to show market power').

42 504 US 451, 477 (1992) ('It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so.' (footnote omitted)).

43 2018 US LEXIS 3845, at *19 n.7.

44 See US Airways Inc v Sabre Holdings Corp, 2017 US Dist. LEXIS 40932, at *32 (SDNY 2017) ('Amex is one of the few cases that explicitly addresses two-sided markets').

45 See id at *23–34 (defendant provided computer services allowing airlines and other travel providers to distribute schedule, fare and booking information to travel agents, but jury found that the travel agent side of the platform and the airline side of the market were not interdependent for purposes of claim by airline that defendant charged it supra-competitive prices).

46 2018 US LEXIS 3845 at *64–65 (dissent).

47 871 F3d 1093 (10th Cir. 2017).

48 Id at 1106.

49 Id at 1109.

50 Id at 1111–12 (citing Jefferson Parish Hospital Dist No. 2 v Hyde, 466 US 2 (1984)).

51 874 F3d 530 (6th Cir. 2017).

52 Id at 535.

53 2018 US App. LEXIS 15466 (2d Cir. 2018).

54 Id at *8.

55 15 USC Section 2.

56 278 F Supp 3d 824 (D Del 2017).

57 Id at 829.

58 Id at 830 (quoting United States v Dentsply Int'l, Inc, 399 F3d 181, 191 (3d Cir. 2005)).

59 Id at 829 (quoting Dentsply Int'l, 399 F3d at 196).

60 Id at 831 (quoting Dentsply Int'l, 399 F3d at 193).

61 2018 US Dist. LEXIS 21513 (D Del 2018).

62 Id at *15–16.

63 Id at *16–17.

64 2017 US Dist LEXIS 209710 (D Kan 2017).

65 Brooke Group, Ltd v Brown & Williamson Tobacco Corp, 509 US 209 (1993).

66 2017 US Dist LEXIS 209710, at *37 (citing Dial Corp v News Corp, 165 F Supp 3d 25 (SDNY 2016)).

67 Id at *39.

68 Id at *44.

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