Sole distributor definition, in simple terms, is what happens when a supplier gives a distributor the exclusive right to sell his or her products, goods, or services to a select group of consumers or in a specific market territory.

What Is Exclusive Distribution?

Exclusive distribution is what happens when a supplier gives a single distributor the exclusive right to sell his or her products, goods, or services in a given territory or to a specific consumer base. In exchange for these exclusive rights, the distributor normally agrees to also sell the goods, products, or services offered by companies that are competing with the supplier. Exclusive distribution can be categorized under what is known as "non-price vertical restraints."

The Thinking Behind Exclusive Distribution

Exclusive distribution is common when dealing with high-quality or technically complex goods that require a high degree of knowledge and expertise. Employees might need special training to be allowed to sell the products in question. A good example of this concept is pharmaceutical goods. In addition, when customers purchase something such as a car or electronic device, they may need special services after the sale has been completed, such as repairs or maintenance.

The restraints that exclusive distribution agreements impose are normally pro-competitive. For instance:

  • The cost of contracting is reduced, making distribution less expensive and more efficient.
  • The supplier has more freedom to exercise quality control measures when dealing with a smaller number of distributors.

This is because having fewer distributors is easier in terms of overseeing compliance of activities, such as required promotional campaigns.

  • Distributors are protected from what is known as "free riders," who might try to take advantage of the investments the dealer has made on the products or services they are selling and offer them at a lower price.

Regardless, business practices of this nature often raise concerns pertaining to competition.

The Sherman Act, Section One

Taking into account that exclusive distribution rights are granted to only one distributor in a given area, competition among the products of competing brands can be enhanced. On the other hand, however, competition between different distributors is all but eliminated. This can have unintended and indirect consequences on the price of goods and could potentially be cause for concern under the Sherman Act, Section One. Because of these potential concerns, the U.S. Supreme Court used to treat these restraints as what is known as "per se illegal."

The "per se" rule, which was originally established in the case of Dr. Miles, was used to apply to all cases involving exclusive distribution until 1977. As areas of study in anti-trust progressed, however, the courts have become increasingly more aware of the benefits associated with exclusive distributor agreements. As a result, the ruling on Sylvania in 1977 extended the application of what is known as "the rule of reason" to all restraints pertaining to on-price vertical agreements.

Certain representatives in the Chicago School, particularly Judge Richard Posner, even went so far as to argue exclusive distribution should not be considered "per se illegal," but should, in fact, be considered "per se legal." Regardless, the courts haven't completely accepted this idea. As a result, they will examine the specific conditions as they pertain to every concern that arises in exclusive distribution cases, such as:

  • How long the exclusivity has lasted or will last
  • The geographic location involved
  • Interbrand competition

The courts will thoroughly consider these things before making any decisions regarding the legality of the exclusive distribution agreement in question. Simply put, intrabrand restrictions may be tolerated as long as:

  • Competition either remains unaffected or is in some way enhanced.
  • The length of the exclusive distribution agreement can be considered reasonable.
  • The exclusive territory is not too large.

The Sherman Act, Section Two

It's not common for a distribution agreement to be considered part of a larger attempt to create a monopoly, which would be in direct violation of the Sherman Act, Section Two. If, however, it can be proven that an exclusive distribution agreement places either the distributor or the supplier in a dominant position in his or her market, it is possible for the agreement to be deemed as unlawful.

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