“No Export” Provision in Sales Agreement Survives Antitrust Challenge
Late last week, the New Jersey federal court dismissed with prejudice a case where a customer challenged under the antitrust laws a car manufacturer’s requirement that he agree not to export a Jaguar Land Rover shortly after buying it. These so-called “no export” or “no sales for resale” provisions are commonly imposed on dealers – though not usually on customers – in the automotive industry. They are increasingly popular in other industries to help companies control product distribution in the era of online marketplaces. This opinion confirms that such policies, if designed and implemented properly, can help many companies legally meet their business goals.
In Baar v. Jaguar Land Rover, the plaintiff sued on behalf of a purported class of buyers who were prevented from buying the defendant’s cars and SUVs and then immediately reselling them in China for a higher price. The defendant admitted that it requires its U.S. dealers to perform due diligence on the dealer’s customers to try to eliminate such arbitrage attempts. Also, the defendant admitted that it requires the dealer to obtain an agreement from every prospective customer that the customer will not sell the vehicle in another country within one year of the original sale. Penalties for customers who break that promise include thousands of dollars in liquidated damages and the voiding of the warranty on the vehicle.
Plaintiff claimed that such policies violated Sherman Act Section 1, along with various state antitrust and consumer protection laws, by harming competition in a U.S. market for exporting defendant’s vehicles for resale. Defendant moved to dismiss.
In evaluating defendant’s motion, the court found that all the state claims would survive only if the Sherman Act claim survived. While the plaintiff made what the court called a “half-hearted attempt” to describe the policies as horizontal agreements that should be deemed per se unreasonable, the court found the restraints to be clearly vertical and subject to the rule of reason. While many companies with such policies often defend them by claiming that they protect the integrity of the distribution channels to provide many benefits to consumers, the court noted that the defendant admitted that the goal of the policies was to stifle “an arbitrage opportunity … to obtain and maintain higher profits abroad.”
The court found that, under the rule of reason, the plaintiff had to plausibly assert that the policies produced anticompetitive effects within a relevant product and geographic market. The court found that plaintiff’s asserted market – “the U.S. market for exporting [defendant’s vehicles] for export” – was implausible. The court noted “dozens of interchangeable and cross-elastic products” that compete with defendant’s vehicles and that plaintiff did not even mention, let alone attempt to distinguish, them in his complaint. As a result, the court granted defendant’s motion to dismiss.
Other automotive manufacturers have had similar “no export” or broader “no sales for resale” provisions in their dealer agreements for decades, although most impose the burdens only on dealers and not directly on consumers. These provisions work with other provisions requiring dealers to focus their sales efforts in certain geographic areas and make enough money to provide necessary pre- and post-sale customer service. They also reduce the export of vehicles to countries where service expertise and parts might not be available.
Manufacturers in other industries also use such policies to try to prevent the sale of their products in physical or virtual “marketplaces,” often in ways and at prices that the manufacturers believe harm their brands. If such provisions are in place and the products can be traced back to an offending dealer, the manufacturer can try to choke off the supply to such unwanted distributors. These provisions can be a part of a company’s successful distribution and brand protection programs along with policies like intellectual property enforcement and compensation schemes tied more closely to long-term brand strength than to this quarter’s sales. Assuming the opinion survives any appeal, the court’s skepticism about any anticompetitive effects of such provisions when clearly made independent of competitors in a competitive market can only help other manufacturers defend properly implemented programs.