Key Takeaways

  • The exclusive dealing definition involves an agreement where a manufacturer sells exclusively to a dealer, or a dealer purchases exclusively from one supplier.
  • These contracts are generally lawful under U.S. antitrust laws unless they substantially lessen competition or create a monopoly.
  • Courts analyze factors such as market share, barriers to entry, foreclosure of competition, and business justifications when determining legality.
  • Exclusive dealing contracts differ from unlawful covenants not to compete, though some states, like California, have stricter prohibitions.
  • These agreements can benefit competition by promoting new products or securing supply reliability, but they may also harm competition if they lock competitors out of the market.

An exclusive dealing contract is an undertaking between a producer and a dealer in which the dealer agrees to only make purchases from the producer and is prohibited from dealing with makers of competing products. In a few cases, this agreement may also favor the dealer, because it limits the number of dealers to whom the producer may sell products. Essentially, in an exclusive dealing agreement, one or both of these happen:

  • A manufacturer agrees to sell a specified quantity of its goods or services to a particular dealer.
  • A dealer agrees to purchase a specified quantity of goods or services from a particular manufacturer.

Are Exclusive Dealing Contracts Legal? 

Exclusive dealing contracts are legal under the provisions of the Sherman Act and the Clayton Act. The legality of the agreement is tested by the court in the following ways:

  • Does the agreement encourage or stifle competition?
  • What was the state of the business before the agreement was made?
  • What are the possible effects of the agreement on the business?
  • What is the state of the business after the agreement is enforced?

Generally, an exclusive dealing contract will be upheld if the contract does not negatively affect trade and competition. This determination is made based on the court's evaluation of the product target market and location.

Can a Manufacturer Refuse to Sell Without an Exclusive Dealing Agreement?

It is common for a producer to refuse to do business with a dealer in the absence of this contract. It is not illegal to draw up an exclusive dealing contract, except when a prior dealership agreement is dissolved due to refusal to undertake such a contract, especially if the contract will restrict trade. Not all exclusive dealing arrangements stifle competition. In fact, many of these agreements set out to encourage competition, and they fulfill this aim.

Practical Examples of Exclusive Dealing

Exclusive dealing contracts can arise in many industries, from consumer goods to technology and healthcare. For example:

  • A soft drink manufacturer may require restaurants or stadiums to sell only its brand, excluding competitors from shelf or fountain space.
  • A technology company may provide software at discounted rates if the buyer agrees not to purchase from competing providers.
  • A pharmaceutical distributor might agree to carry only one manufacturer’s drugs for a specific category.

These examples highlight how exclusive dealing can limit choices for customers and competitors, but they can also ensure consistent supply, encourage promotional investment, or reduce costs for buyers.

An Antitrust Analysis of Exclusive Dealing

There are some anti-trust concerns with the creation of exclusive dealing agreements. Four provisions of the United States Laws on Antitrust have challenged exclusive dealing contracts. They are:

  • Section 1 of the Sherman Act, which disallows agreements “in restraint of trade”
  • Section 2 of the Sherman Act, which proscribes “attempt[s] to monopolize” and monopolization
  • Section 3 of the Clayton Act, which disallows exclusivity contracts that may "substantially lessen competition” or tend to create a monopoly
  • Section 5 of the FTC Act, which forbids "unfair methods of competition"

In United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), the D.C. Circuit addressed the differences between exclusive dealing under Section 1 of the Sherman Act and Section 2. The court held that the “basic prudential concerns relevant to §§ 1 and 2 are admittedly the same… [but] a monopolist's use of exclusive contracts, in certain circumstances, may give rise to a § 2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually required in order to establish a § 1 violation.”

Recent “rule of reason” studies of exclusive dealing contracts center on a number of elements, including:

  • The dealer's market power
  • The level of foreclosure from the market
  • Barriers to entry
  • The length of the contracts
  • The potential of exclusivity to raise competitors' costs
  • The probability of anti-competitive outcomes
  • Valid business justifications

Although most exclusive dealing contracts do not raise issues with competition, a careful examination of the elements highlighted above should be carried out before entering into such an agreement, particularly if one party has considerable market power.

Examples of prohibited contracts include:

  • Contracts forbidding a dealer from purchasing goods or services from a manufacturer's competitors
  • Contracts preventing a dealer from selling the products of a different producer
  • Contracts mandating a dealer to purchase all, or a substantial quantity of, its total requirements of specific products from one specific producer

Exclusive Dealing Under U.S. Antitrust Law

Under U.S. law, exclusive dealing is not automatically illegal. The Sherman Act, Clayton Act, and FTC Act are applied using a “rule of reason” approach. Courts and regulators consider:

  • Duration of the contract (short-term agreements are less concerning than long-term lock-ins).
  • Extent of market foreclosure (whether rivals lose access to a substantial share of the market).
  • Market power of the parties (a dominant supplier faces more scrutiny).
  • Business justifications (such as quality control, guaranteed supply, or efficiency gains).

According to the Federal Trade Commission (FTC), exclusive dealing or requirements contracts are “common and generally lawful” unless they significantly reduce competition or harm consumers.

Is An Exclusive Dealing Contract an Unlawful Covenant Not to Compete?

The State of California possesses a strict code which states that any contracts that prohibit competition are unlawful. The code specifies that any agreement in which a party is prevented from carrying out legal business is prohibited. There are some exceptions to this rule, as provided by the code.According to the Dayton Time Lock Court, exclusive dealing contracts encourage the promotion of new products. To determine the legality or illegality of the agreement, the following criteria are considered:

  • The product line
  • The target market
  • The affected market share.

Benefits and Risks of Exclusive Dealing

Exclusive dealing arrangements can provide pro-competitive benefits, including:

  • Encouraging suppliers to invest in marketing or distribution.
  • Helping new products gain traction by guaranteeing shelf space.
  • Providing stability in supply chains by securing reliable purchasing commitments.

However, risks include:

  • Foreclosure of competition, where rival suppliers cannot reach customers.
  • Higher costs for buyers and consumers if competition is reduced.
  • Barriers to entry, as smaller or new businesses may find it difficult to compete against established exclusivity contracts.

Courts weigh these benefits and risks carefully to determine legality.

Frequently Asked Questions

1. What is the exclusive dealing definition in business law?

It refers to an arrangement where a buyer agrees to purchase goods only from a specific supplier, or a supplier agrees to sell only to a particular buyer.

2. Are exclusive dealing contracts always illegal?

No. They are generally lawful unless they substantially lessen competition or create a monopoly.

3. How do courts analyze exclusive dealing?

Courts apply a “rule of reason,” considering contract length, market share affected, barriers to entry, and valid business justifications.

4. Can exclusive dealing benefit consumers?

Yes. These contracts can lower costs, ensure reliable supply, and promote new product launches, but they may also limit consumer choice.

5. How do exclusive dealing contracts differ from non-compete agreements?

Exclusive dealing regulates purchasing or selling relationships, while non-compete agreements restrict an individual or business from engaging in competitive activities.

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