Exclusive Dealing Policies Can Face Scrutiny

Exclusive dealing policies are not necessarily illegal under federal antitrust laws, but as one case illustrates, companies face pitfalls when using such agreements to squeeze out competitors.

In early 2005, the 3rd U.S. Circuit Court of Appeals ruled that Dentsply International violated federal antitrust law by requiring its dealers to comply with an exclusivity policy. The case, which dragged on for more than five years, offers insight for other companies that control a large share of the market.

Facts of the case: Dentsply International Inc. designs, develops, manufactures and markets a broad range of products for the dental market. The York, Pennsylvania-based company enjoys a 75 to 80 percent total revenue market share in the artificial tooth industry. The Department of Justice sued Dentsply for “maintaining its monopoly by restricting most of the nation’s tooth distributors from selling products made by its competitors” in violation of the Sherman Act.

At issue was a distribution policy that prohibited authorized dealers from adding other tooth lines to their product offerings. Under the policy, which was adopted by Dentsply in 1993, the only competing products that dealers could carry were those that were already part of their product lines. In the intervening years, the company raised prices several times.

According to court papers, Dentsply actively monitored compliance with its exclusivity policy, enforced it with warnings, and terminated dealers that did add new product lines. When terminating a dealer, Dentsply refused to sell the dealer not only its artificial teeth but also other merchandise, some of which was frequently sought by dental laboratories from their dealers.

Although the court noted that Dentsply operated “on a purchase order basis with its distributors and, therefore, the relationship (was) essentially terminable at will,” it found that the company “rebuffed attempts by those particular distributors to expand their lines of competing products beyond the grandfathered ones.”

In essence, the dealers had no choice except to carry Dentsply’s products given its position in the marketplace. And ultimately, the Justice Department argued, the policy “deprived consumers of the benefits of competition among artificial tooth manufacturers and resulted in higher prices, fewer choices, less market information, and lower quality for artificial teeth.”

The three-judge appeals court panel agreed and overturned a lower court ruling. The judges stated they came to their decision “because of the nature of the relevant market and the established effectiveness of the restraint.” (U.S. v. Dentsply International Inc., No. 03-4097, 2/24/05)

Important: Exclusive distribution arrangements can be considered legal and pro-competitive. Courts look at a variety of factors. But the Dentsply case makes it clear that companies with such policies risk coming under scrutiny from federal prosecutors — especially if they have a dominant market share. Consult with your attorney for more information on how to protect your company from antitrust violations.