Manufacturer’s Exclusive Dealership Network May Violate Monopoly Law
NAW Legal Advisory - October 2007
The Department of Justice (“DOJ”) sued Dentsply International, Inc., a dominant manufacturer of artificial teeth, claiming that the manufacturer’s distribution policies violated the antitrust laws. Specifically at issue were Dentsply’s policy that (1) an authorized dealer will lose their Dentsply account if the dealer adds a product line that competes with Dentsply, and (2) in order to become an authorized Dentsply dealer, the prospective dealer had to agree to drop some or all competing lines. The DOJ charged that Dentsply’s exclusive-dealing agreements with its 23 dealers in the U.S., coupled with its monopoly power, was unlawful because they substantially lessened competition in the artificial teeth market. (U.S. v. Dentsply International, Inc., Del. Dist. Ct., No. 99-005).
Following a district court bench trial, judgment was entered in favor of the manufacturer. In finding the absence of the necessary level of anticompetitive effect, the court noted that rival manufacturers were not prevented from competing with Dentsply because hundreds of dealers, other than the 23 exclusive dealers used by Dentsply, were available to market competing product lines. The court added that even these 23 exclusive dealers were free to leave Dentsply at any time and go with another manufacturer who offered the dealer a more financially attractive product line. In addition, the court found that direct distribution by a manufacturer was an optional market channel for the sale of artificial teeth.
The Justice Department appealed the district court’s ruling on the monopolization charge to the U.S. Court of Appeals for the Third Circuit. The appeal court reversed, and found Dentsply had monopoly power and had engaged in conduct to foreclose competition that is impermissibly exclusionary when practiced by a monopolist. (U.S. v. Dentsply International, Inc., No. 03-4097, 3rd Cir.)
Dentsply possessed monopoly power because it had 80% market share based on revenue, 67% on a unit basis, it was 15 times larger than its next closest competitor, and it had held this dominant position for over 10 years. It also exercised that power with aggressive price increases and growing profit margins, showing little concern with its competitors’ pricing.
According to the court, Dentsply’s monopoly power was maintained in large part by its exclusive dealing arrangements with its dealer network. Although not illegal in themselves, such exclusive dealing arrangements, when orchestrated by a monopolist, can be an unlawful means to maintain a monopoly. Dentsply was motivated by an explicitly anticompetitive intent - - reserve for itself the key dealers in the industry thus foreclosing its competitors from also using this vital market channel to reach customers. The same type of arrangement with dealers may pass antitrust scrutiny where the manufacturer does not have monopoly power.