Exclusive Contracts: Everything You Need to Know
Exclusive contracts occur when there is a contract created to service manufacturers and retailers that are generally lawful.3 min read
Exclusive contracts occur when there is a contract created to service manufacturers and retailers that are generally lawful. These contracts are also known as:
- Exclusivity Contract
- Exclusivity Agreement Form
These agreements require that a seller sells all or a significant part of products or services to a specified buyer or that a buyer agrees to buy all or a significant part of a product or service that is provided by a defined seller during the term of an agreement.
Note that exclusive contracts often impose certain limits on the parties.
Some exclusive contracts are set up to follow certain antitrust rules. When there is an antitrust issue, Courts will apply the “rule of reason” benchmark, meaning that there is a balance between the pro-competitive and anti-competitive parts of the agreement. However, an exclusive contract cannot legally harm competition in the market. (See the Sherman Act at 15 U.S.C. §§ 1-7 and the Clayton Act at 15 U.S.C. §§ 12-27 that outline the parameters for when exclusive contracts are deemed legal and when such contracts would be unenforceable.)
For a discussion regarding exclusive contracts and illegal restraint on trade, see the opinion of Justice Louis G. Brandeis in the Board of Trade case from 1918.
If you are considering an exclusive contract, seek a qualified expert due to the complexities of exclusive contracts. That person should be able to help to determine whether an agreement passes the test.
Many exclusive contracts provide benefit because it encourages marketing advantages for the brand. By being an expert in specific products, the dealer would be more willing to promote the manufacturer's brand. Such promotion can offer special services that cost money, e.g., an attractive and modern store, salespeople who know the product, extended business hours, large inventory of products, or quick warranty service.
Consumer behavior is often that he or she takes a "free ride" on services offered by one company retailing the product while purchasing that same product at a better price from a different store that does not have an attractive showroom. The consumer may even purchase the product online.
What’s more, if a full-service retailer loses business because of an exclusive contract, it may stop providing that product or service. The result would be losses to the manufacturer and consumer.
Exclusive contracts can also be utilized as a tool to deny competitors' access to certain product distributors. If the competitor is small, it may go out of business if it cannot access those products.
Sometimes, exclusive contracts are a manufacturer’s vehicle to reduce competition, thereby keeping prices high. Certain manufacturers will work with specific retailers while other manufacturers work with other retailers, which keeps the products exclusive.
If the manufacturer invests in training its retailer's staff, it can compel the retailer to selling only the manufacturer’s brand. There would be no antitrust concerns with this because provided that sufficient outlets exist for consumers to purchase such products somewhere else, antitrust will probably not hinder an exclusive contract.
Contracts for Purchase and Sale
It is common to have an exclusive contract for the sale and purchase of goods within a specified region. This is how most car dealerships operate.
A car dealership can also have an exclusive agreement limiting the brands it can sell. The dealership must often create another corporation, with a separate showroom and staff, so it can sell other car brands.
Another example of commonly exclusive contracts is publishing contracts. The exclusive aspect of products, in terms of intellectual property, means different things, contextually. For instance, an author of a book will sell publication rights to a publisher using an exclusive contract.
Under the arrangement, the author retains the copyright, meaning that he or she can publish an excerpt from the book but cannot publish the whole book, which remains with the publisher. Such contracts can also contain clauses that require the author to produce the next manuscript, if any, to the first book’s publisher prior to reaching out to other publishers.
If you need help with drafting an exclusive contract, whether you are involved in retail, automobile,s or anything else, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.