What is a Vertical Restraint?

Vertical restraint is an arrangement or agreement between members of a supply chain (such as manufacturers, wholesalers, distributors, or retailers) to fix the price or supply of goods.

When is Vertical Price Fixing & Price Maintenance an illegal Resale Restraint?

Under the Sherman Act 1, an agreement among manufacturers or distributors of a product to control the retail price for a product is an illegal restraint of trade. A manufacturer controlling the final price of a product is known as vertical price fixing. A manufacturer controlling the maximum price at which distributors can resale a product is known as price maintenance. Both of these types of agreements have a tendency to reduce competition and harm consumers. Vertical price fixing involving an agreement among competitors is a naked restraint of trade and is per se illegal. Resale price maintenance, on the other hand, is not generally considered a naked restraint of trade. As such, a court examining such a relationship will apply the rule of reason to determine if the restraint is anticompetitive and therefore illegal.

Note: Under the Colgate Doctrine, a manufacturer may simply announce its prices and refuse to deal with those who fail to comply with this price structure. However, a manufacturers attempt at retail price maintenance is illegal if there is coercion or pressure other than the announced policy and its implementation.

Example: ABC Corp Manufactures widgets. 123 Corp is a wholesaler of ABC’s widgets. ABC Corp enters into an agreement to force 123 Corp to resell its widget at a specific price. This is price maintenance and is subject to a rule of reason analysis. If ABC Corp attempts to enter into an agreement with a final retailer regarding the sale price of the good, this would be price fixing and is per se illegal.