Locking up the market can be illegal

[LIGHTNING]

Basic Antitrust Rules and Principles Applicable to Exclusive Dealing Contracts
Alan P. Sherbrooke

Exclusive dealing arrangements can violate the antitrust laws, but not all of them do. In general, a requirements contract, output contract, or other exclusive dealing arrangement will not violate the antitrust laws unless it locks up "too much" of the relevant market for "too long." In most cases, a contract which locks up less than twenty percent of the market for three years or less probably will not violate the antitrust laws. A contract which locks up more than thirty percent of the market for more than five years is likely to raise antitrust concerns, unless there are good business justifications for the long term commitment. For example, a long term commitment may be justified (or required) in order to make a long term investment in a new plant or facility. In that situation, even a contract which locks up a substantial part of the market for a long time is likely to be permitted.

Locking Up the Market

In general, an exclusive dealing arrangement will not violate the antitrust laws unless it has the effect of blocking a competitor's access to potential customers. For example, in the Microsoft case the Government argued that Microsoft had agreed with Compaq, AOL, and others to offer Microsoft's Internet Explorer and not Netscape's Navigator, and that those agreements were illegal exclusive contracts. The Government lost on that argument -- one of the few points on which Judge Jackson agreed with Microsoft -- primarily because Judge Jackson concluded that Microsoft's agreements did not block Netscape's access to customers. Navigator was available on the Internet and was distributed through other retailers, as well as being mailed directly to many consumers. Because Netscape could had many alternative ways of putting Navigator into consumers' hands, Microsoft's agreements did not lock up the market and did not violate the antitrust laws.

Thus the more effective an exclusive arrangement is at freezing competitors out of the market, the more likely it is to violate the antitrust laws. An exclusive dealing contract does not violate the antitrust laws "unless the court believes it probable that performance of the contract will foreclose competition in a substantial share of the line of commerce affected." Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). For there to be a violation, "the opportunities for other traders to enter into or remain in that market must be significantly limited." 365 U.S. at 328.

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Most exclusive dealing arrangements will pass muster under the antitrust laws. As long plenty of business remains in play after the exclusive, an antitrust violation is not likely. However, if an exclusive sucks the oxygen out of the market, making it very difficult for your competitors to survive, then there is substantial antitrust risk. When in doubt, restructure the arrangement so customers have incentives to deal with you, instead of iron clad requirements; shorten the duration of the exclusive (or allow the customer to terminate on six months' notice); make sure there are legitimate justifications for the exclusive; or do all of the above.