Sales Territory Restriction Clauses

Summary

The sales territory restriction clauses are clauses restricting the geographic area within which, or the customers to whom, a reseller can resell the company’s product. Such clauses may be included in a company’s contracts with its resale customers (i.e. distributors, dealers and retailers). If your client wishes to restrict its customers freedom over where or to whom they can resell its products, your client will need to include that restriction in its contract and can do so in the different ways set out below. If you represent a customer, and your client does not wish to accept the clause offered by the seller, you can negotiate to have one of the alternatives adopted. You should advise your client that these restrictions all carry some antitrust risk. Courts employ the rule of reason to assess the legality of vertical agreements restricting the geographic areas and customers to whom a supplier or manufacturer’s distributors, dealers, and/or retailers may sell. The rule of reason allows a court to consider the procompetitive justifications or reason behind such an agreement, including whether the agreement promotes interbrand competition even while restricting intrabrand competition. Most such provisions survive antitrust scrutiny, even when imposed by a supplier with a dominant market position. Where, however, the restrictions are imposed at the request of the customers, a court can find the manufacturer or supplier has participated in a horizontal agreement among the customers. For a discussion of these issues, see the practice note, Resale Price Restraints in Vertical Agreements. This template contains drafting notes.