Author: Jarod Bona
Have you ever wished your business could be more profitable without having to constantly compete with your rivals? The idea of reducing competition may have crossed your mind, but when it comes to dividing markets or customers with your competitors, it's a different story. Market-allocation agreements, in most cases, are considered per se antitrust violations – a label reserved for the most severe violations of antitrust laws.
What is a Market-Allocation Agreement?
When competitors divide a market into sections, where some choose not to compete in favor of others, they enter into a market-allocation agreement. The problem arises when customers in those markets have fewer suppliers to choose from, leading to reduced competition. This benefits the companies involved, as they face less competition for a portion of the market, making it easier to raise prices or compromise on quality.
The specifics of how competitors divide the markets, or whether they end up competing for the same product or service after the agreement, doesn't matter from an antitrust perspective. To illustrate, imagine a small town with two real estate brokerage firms: Northern Real Estate Brokers and Southern Real Estate Brokers. The river divides the town into northern and southern regions, with each firm mainly serving their respective areas. However, agents from both firms occasionally participate in transactions on opposite sides of the river.
Suppose the leaders of both companies meet one evening on the bridge and agree that each firm will solely represent sellers on their side of the river. This market-allocation agreement could lead to antitrust litigation or worse – criminal charges.
Apart from geographic boundaries, market allocation can also be based on a non-compete agreement. For example, the companies could agree not to steal each other's existing customers. This type of agreement is also considered a per se antitrust violation. It's important to note that the antitrust laws, in a way, encourage the practice of "stealing" customers.
Whether competitors divide markets based on street addresses, height requirements, or even through financial transactions, they are likely to implicate per se antitrust prohibitions. Even if one company pays another to stay out of a market to pursue other endeavors, it still qualifies as a market-allocation agreement.
Exceptions to Per Se Treatment for Market-Allocation Agreements
However, there are a few exceptional situations where a market-allocation agreement may not be deemed an antitrust violation. The first scenario involves two or more companies forming an agreement or joint venture that is inherently pro-competitive. If a market-allocation agreement is part of this larger structure and is both necessary and ancillary to the pro-competitive purpose, it may be evaluated under the rule of reason instead of the per se standard.
In the second situation, non-compete agreements or restrictive covenants come into play. These agreements can arise in employment or business sale situations. Some states enforce non-compete agreements that are reasonably limited in time and geography, especially when they help protect trade secrets. Business owners may also encounter non-compete agreements when selling their business, as buyers often request such agreements as part of the sale.
If you are considering any agreement with a competitor that limits competition in any capacity, it is crucial to consult an antitrust attorney. Engaging in such agreements without proper legal guidance can be risky.
Remember, even if reducing competition seems enticing, market-allocation agreements are generally considered severe violations of antitrust laws. To ensure the longevity and success of your business, it's best to focus on providing exceptional products or services within a competitive market landscape.
Image Caption: Market-Allocation-Agreement-Per-Se-Antitrust-Violation-300x133 (Source: saigonintela.vn)
