Legal Definitions - vertical restraint

A vertical restraint is an agreement or arrangement between businesses operating at different levels of a supply chain that limits the freedom of one or both parties to compete. These agreements occur between entities that are not direct competitors but rather have a buyer-seller relationship, such as a manufacturer and a wholesaler, or a wholesaler and a retailer.

While vertical restraints can sometimes promote efficiency and inter-brand competition (competition between different brands), they can also be scrutinized under antitrust laws if they significantly harm competition within a market.

Here are some examples:

• Exclusive Dealership Territory: A bicycle manufacturer, "SpeedCycle Inc.," enters into an agreement with a retail bike shop, "Urban Wheels," granting Urban Wheels the exclusive right to sell SpeedCycle bicycles within a specific geographic area, such as a particular city. In return, Urban Wheels agrees not to sell competing brands of bicycles. This is a vertical restraint because it's an agreement between a manufacturer and a retailer (different levels of the supply chain) that restricts Urban Wheels' ability to sell other brands and prevents other retailers from selling SpeedCycle bikes in that territory. It limits competition within that specific area for SpeedCycle products.

• Resale Price Maintenance: A high-end electronics company, "TechInnovate," produces a new line of smart home devices. TechInnovate mandates that all authorized retailers, including large electronics chains and independent stores, must sell these devices at or above a specified minimum price. Retailers are prohibited from offering discounts below this price. This is a vertical restraint because it's an agreement between TechInnovate (manufacturer) and its retailers (different levels) that restricts the retailers' freedom to set their own prices for the product, potentially limiting price competition among retailers.

• Exclusive Supply Agreement: A popular gourmet coffee roaster, "BeanCraft," enters into a contract with a chain of upscale cafes, "Daily Grind," requiring Daily Grind to purchase all of its coffee beans exclusively from BeanCraft for a period of five years. Daily Grind is prohibited from sourcing coffee beans from any other roaster during this time. This is a vertical restraint because it's an agreement between a supplier (BeanCraft) and a buyer (Daily Grind, a retailer) that restricts Daily Grind's ability to purchase from other suppliers, potentially limiting competition among coffee roasters for Daily Grind's business.