Exclusive dealing arrangements with wholesalers have enjoyed increasingly favorable treatment in the courts over the past twenty five years — until the Third Circuit Court of Appeals announced its decision in United States v. Dentsply.1 The court reversed the judgment of a district court, following a bench trial, and ordered an injunction against an exclusive dealing policy adopted by Dentsply International, the nation’s leading manufacturer of false teeth.

Dentsply — which, according to the court’s opinion, commanded a market share of between 67 and 80 percent, depending on the measurement used — refused to continue selling its false teeth to dental product wholesalers that began carrying a competing line. The court held that this unduly foreclosed competing manufacturers from reaching dental laboratories, which were the end users and which used the false teeth to construct dentures. Interestingly, there were no formal bilateral exclusive dealing contracts in effect, and the government based the appeal on a claim of monopolization, which does not require any agreement, rather than on a claim under Section 3 of the Clayton Act, which requires a contract, or Section 1 of the Sherman Act, which requires a contract, combination or conspiracy.

Also, because there were no formal exclusivity agreements, the relationships were essentially at will and the exclusivity had no minimum duration. Nevertheless, the court distinguished cases indicating that exclusive dealing agreements lasting no more than one year are all but presumptively legal, since the wholesalers here had a strong economic incentive to adhere to the exclusivity indefinitely.

The court stressed that the legal test is not whether all competition has been foreclosed, but whether a substantial number of rivals have been barred by the exclusivity. It quoted the Hovenkamp treatise (Areeda & Hovenkamp) on this point: "[E]xclusive dealing contracts may slow [a] rival’s expansion by requiring it to develop alternative outlets for its products or rely at least temporarily on inferior or more expensive outlets. Consumer injury results from the delay . . . ."2 This, the court concluded, helped to preserve Dentsply’s monopoly.

The decision demands attention, both because the appeal was pursued by the present Justice Department and because the decision was unanimous. Nevertheless, as interpreted by the court, the case is distinguishable from many exclusive dealing cases involving wholesalers in several important respects:

  1. Alternate means of distribution were found not to be viable in this market because, although they were theoretically possible, they were not "practical or feasible." The court held that the "undeniable reality" was that the wholesalers had a "controlling degree of access" to the dental laboratories, making the wholesalers the "gateway" and the "critical link" to end users. The wholesalers commanded such loyalty from the end users because they provided services, credit, economies of scale and the convenience of "one stop shopping" for a variety of dental products from multiple manufacturers. According to the court, alternative means of distribution were not equivalent and direct distribution to end users was "impracticable" in this industry.3

  2. The court also concluded that establishment of new wholesalers by other manufacturers was unrealistic because wholesalers needed to carry a broad range of dental products beyond false teeth. Again citing the Hovenkamp treatise, the court analogized this to a bow tie manufacturer needing to establish an entire new department store to sell its bow ties if existing department stores are all bound to exclusive dealing arrangements with a dominant rival manufacturer.4

  3. The court further found that defendant threatened to curtail sales not only of its false teeth, but also of other dental products, injecting a tying-type condition as well.5

  4. Finally, the court agreed with the district court’s conclusion that the business justifications proffered by the defendant were all pretextual. The court said proof of this was the fact that there actually were some Dentsply wholesalers that carried competing lines, which had been "grandfathered" long before, and there was no evidence that these wholesalers were any less efficient than the exclusive ones.6

The bottom line is that few exclusive dealing arrangements will involve the sort of facts cited here by the court in support of its decision: suppliers with 80 percent market shares, wholesalers that command such a high degree of loyalty from end users, and a complete absence of business justifications for exclusivity. Nevertheless, this case cannot be ignored, and needs to be taken into consideration in evaluating every new and existing exclusive dealing program.

Endnotes

1 United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005).

2 Dentsply, 399 F.3d at 191.

3 Id. at 193, 196.

4 Id. at 195.

5 Id. at 195-196.

6 Id. at 196-197.

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