Antitrust Alert: Court Rejects Per Se Rule for Vertical "Market Allocation" Agreement

A federal district court has dismissed the claim that an agreement between Hewlett-Packard (HP) and its customer Staples office supply stores, under which Staples stopped selling its own ink cartridges for HP printers, was a per se illegal antitrust violation. This new decision provides a helpful precedent for the argument that an agreement between a manufacturer and retailer should be judged under the rule of reason, even if one aspect of the arrangement reduces "horizontal" competition between them. Bedi v. Hewlett-Packard and Staples, Inc., No. 07-12318-RWX (D. Mass., Nov. 17, 2008).

As part of a new strategic relationship agreement with HP, Staples agreed to carry only HP’s ink and toner and to cease selling Staples’ own brand of HP-compatible printer cartridges. A putative class of customers challenged the agreement as "a horizontal agreement between direct competitors" and relied on the claim that it was per se illegal.

Ruling on the defendants’ motion to dismiss, the court focused on the narrow scope of the per se rule, which applies only to those types of agreements that confidently can be said to be always or almost always anticompetitive. While acknowledging that the HP and Staples ink cartridges compete with each other, the court emphasized that the HP-Staples relationship is "primarily vertical" and their strategic agreement involved more than the one aspect challenged by the plaintiff. Noting that vertical agreements typically are analyzed under the rule of reason and that the HP-Staples agreement did not fit into any established per se illegal category, the court dismissed the claim.

This decision reinforces what clearly should be the rule. While it is possible to have a "naked" market allocation agreement that eliminates interbrand competition between firms that otherwise are vertically-related, that would be unexpected in ordinary business arrangements. More likely, other aspects of the vertical agreement will suggest a procompetitive alliance, as the Bedi court found in reviewing the supply and purchase commitments and other aspects of the HP-Staples agreement. If the agreement is on balance possibly anticompetitive, this should be shown under the rule of reason.

Read the text of the court decision and complaint here.

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