Exclusive Dealing Contracts

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 What Is Business Law?

Business law, which is also known as commercial law, is an umbrella term for the body of laws that govern entities and commercial transactions. An example of this would be how if you wanted to start a retail clothing company, business law would instruct you how to organize and register your company. These laws would also dictate how to pay your employees, as well as how to legally ship your clothing merchandise to customers ordering from overseas.

As such, business law applies to many different aspects of a business. Additionally, business laws vary based on:

  • The type of business, such as private vs. public, for-profit vs. not-for-profit, etc.;
  • Its structure, such as a corporation vs. a general partnership; and
  • By jurisdiction.

Some specific examples of business law include:

  • The Sherman Antitrust Act of 1890: The majority of modern antitrust laws originated from this Act. Antitrust laws are implemented in order to regulate the organization and conduct of businesses, as well as to ensure fair competition and protect consumers from oppressive business practices. The Sherman Act specifically is used to prevent monopolies and to restrict business activities that affect interstate commerce; which, in turn, could hurt consumers;
  • The Lanham Act: The Lanham Act, which is also known as the Trademark Act of 1946, is a federal law that regulates trademarks, service marks, and unfair competition. What this means is that if you created a trademark for your clothing company, you could register your unique trademark in order to receive certain legal protections under this Act;
  • The Securities Act of 1933: The Securities Act of 1933 requires that businesses provide investors with specific financial information before they invest in a company. Additionally, this Act applies when a company wants to go public with initial public offerings, or “IPOs;”
  • The Federal Tax Code: The Federal Tax Code applies to standard tax law, and not only business law. This addresses everything from how to tax your employees, to how to file federal income taxes for your business; and
  • The Fair Labor Standards Act (“FLSA”): The FLSA sets the standards for employee wages, as well as overtime pay. The Act applies to the majority of both public and private businesses; as such, if your clothing company from the previous example has nonexempt employees, you will need to pay them at least the federal minimum wage. You will also need to pay them one-and-one-half times their normal rate of pay for overtime under this Act.

As was discussed above, there are many different types of business law that address various aspects of a business. An example of this would be how if a business must determine how to pay its employees, provide employee work benefits, or arrange employee work schedules, these tasks would all be governed by the specific area of business law known as employment law.

If a business owner was beginning and needed to register and set-up their business, this would involve business laws such as:

  • State statutes governing business formation and structures;
  • State tax laws; and
  • The Federal Tax Code.

Additionally, both federal and state laws will apply if at this time, the business owner wishes to register intellectual property such as copyrights or trademarks of the business.

A significant portion of business law governs commercial and contract law, which cover everything from business deals to employee non-disclosure agreements. Because of the wide variety of aspects that contract laws regulate in business, this is largely considered to be the most important area of business law.

Other examples of business transactions that are governed by contract law include, but are not limited:

  • When a company wants to merge with another business;
  • When forming an agreement with a certain distributor to sell their products; and
  • When providing a service to its customers.

To reiterate, each state may have specific business laws that are unique to that region. This is why it is generally best to consult with an attorney if you have questions about the specific laws in your area. An example of this would be how South Dakota business litigation laws vary significantly from Montana business laws.

What Are Antitrust Laws?

Antitrust laws are intended to ensure free competition in the U.S. marketplace by regulating the ways in which companies conduct their business. These laws prohibit practices that stifle free competition, such as:

As was previously mentioned, much of the antitrust law is found in the Sherman Act which prohibits “every contract, combination, or conspiracy in restraint of trade,” as well as any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.”

However, the Supreme Court determined that the Sherman Act does not prohibit every restraint on trade; rather, it only prohibits those that are considered to be unreasonable. Unreasonable restraints of trade include:

  • Forcing or coercing someone to quit doing business, or to change their business so that they will not compete in the market;
  • Agreeing to fix prices in order to force other competitors out of business;
  • Creating a monopoly;
  • Creating a non-compete clause or other contract provision specifically to keep another out of business; and
  • Tortious interference with a contract or business agreement that negatively affects another’s ability to do business freely.

Antitrust laws are largely enforced through both the government and the people. Additionally, there are criminal and civil penalties for any violation of antitrust laws. Those who are found in violation of antitrust laws can face various penalties such as fines, damage awards, and even prison time. The government encourages private individuals to report and take action when they see an antitrust violation, which is why they allow people and companies to bring suit; additionally, federal and state antitrust laws provide for triple damages.

Some examples of antitrust law violations include, but may not be limited to:

  • Large price changes of a very similar product;
  • Suspicious statements from the seller;
  • The company having a suspiciously low bidder on all contracts; and
  • Having large, unexplainable dollar differences between bids.

Are Exclusive Dealing Contracts Legal?

An exclusive dealing contract is an agreement between a manufacturer and a distributor. The distributor only buys from the manufacturer, and is contractually prevented from dealing with the manufacturer’s competitors. It is also common for there to be some agreement limiting the distributors that the manufacturer can sell to in the area, so that the distributor benefits as the only seller in the area for the brand.

Exclusive dealing contracts are regulated by the Clayton Act, and largely depend on the effect of the agreement on competition. They are also subject to the Sherman Ant-Trust Act, as well as state regulations on fair business practices. Generally speaking, an exclusive dealing contract will be held legal if the agreement does not have a negative effect on trade and competition. However, this determination largely depends on a court’s evaluation of the product market, as well as the geographic area.

A manufacturer can refuse to sell their product without such an agreement, because the law regulates business dealings in the market. As such, if a manufacturer does not sell their product, it is not yet a part of the market. In other words, an exclusive dealing agreement cannot be illegal before it is agreed to by the parties and takes effect.

However, there are instances in which a refusal to deal or the termination of a distributorship because of the refusal to agree to an exclusive dealing contract can be illegal. An example of this would be if the action has the effect of restricting trade.

Do I Need A Lawyer For Help With Exclusive Dealing Contracts?

The laws governing exclusive dealing contracts and fair business practices will differ drastically based on the circumstances of each case.

You should consult with a contract attorney who can assist you with creating an exclusive dealing contract, or with challenging an existing contract if you feel that it restricts your ability to compete in the market. Additionally, an experienced business attorney will also be able to represent you in court, as needed.

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