Exclusive Dealing Agreements: Ease of Termination on Par With Duration

by Snell & Wilmer
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As a general principle, exclusive dealing agreements spanning less than one year in duration do not violate state or federal antitrust laws, regardless of the parties’ market power. However, a recent decision from a federal court in California suggests that this principle should be expanded to require ease of termination. In Pro Search Plus, LLC v. VFM Leonardo, Inc., the U.S. District Court addressed what is “easily terminable” for the purposes of exclusive dealing agreements.

Pro Search Plus (Pro Search) and VFM Leonardo (VFML) are competitors in the market for the management and distribution of “photographs in rich media content for hotels.” Pro Search’s first complaint alleged that VFML holds a market share between 70% and 90% and that its exclusive dealing agreements exclude Pro Search from participation in the market. While VFML is indeed a party to exclusive agreements ranging from two to five years, the court granted VFML’s first motion to dismiss because Pro Search failed to allege that the agreements were not easily terminable upon short notice. Leave to amend the complaint was granted.

In response, Pro Search filed an amended complaint, this time alleging extensive coercive acts that impede parties’ ability to terminate exclusive agreements with VFML, including:

  • continually renewing contracts and precluding Pro Search from bidding for contracts despite repeated requests to do so;
  • withdrawing access to content from customers in response to multi-sourcing from competing distributors; and
  • demanding tying arrangements with customers.

Unlike the first complaint, the court denied VFML’s motion to dismiss because Pro Search’s amended complaint alleged facts demonstrating that VFML could plausibly be liable under state and federal antitrust laws because it limited parties’ ability to easily terminate its exclusive dealing agreements.

The court explained that exclusive dealing agreements will generally run afoul of antitrust laws only when a defendant holds significant power in a concentrated market and coerces another market player into an exclusive arrangement that substantially forecloses competition. In fact, even an exclusive dealing agreement involving a dominant share of the market does not foreclose competition when the contract is open to frequent rebidding, making the contract easily terminable. Likewise, according to the Pro Search court, multiyear contracts—even those spanning up to five years—are legal when they are easily terminable.

There is no reason to doubt the Pro Search court’s reasoning. Thus, the expanded general principle for exclusive dealing agreements is now that if the agreement spans less than one year or, if longer than one year, is easily terminable, the agreement does not violate state or federal antitrust laws, regardless of market power.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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