10 Controlling The Non-Price Conditions Of Product Resale §10.01 MAY A SUPPLIER LEgALLY gRANT EXCLUSIVE DISTRIBUTION RIgHTS TO A CUSTOMER? §10.01(a) generally? Normally, yes. Exclusive distribution is generally believed to promote interbrand competition (between manufacturers of competing products) and to provide efficiency in the distribution of a particular supplier’s product. Such restrictions are evaluated under the rule of reason, in which the risk of liability generally increases only with the supplier’s market share. So long as there is ample interbrand competition for the product in question or the supplier does not dually distribute, i.e., compete for certain accounts on the customer’s level, such exclusive arrangements pass muster. A supplier also may appoint a new exclusive distributor for its products even if the distributor-in-waiting is the one that suggests it. But when such exclusivity is so solicited, the supplier must be particularly careful that the request is not part of a conspiracy among the prospective distributor and its competitors to reduce or eliminate competition—by dividing their sales territories, markets, or resale customers. If that happens, the supplier too would be liable. Likewise, a supplier may replace an existing exclusive distributor with another exclusive distributor, even at the request of the second distributor, and incur no antitrust liability unless it has substantial market power (generally, measured as at least 25 percent of any relevant market). Even then, there may be no antitrust liability if there is no other supplier or customer involved in the decision. Of course, if the ousted distributor happened to have a contract with the supplier, the new distributor still may be liable for interference with that contract (a tort providing at least the possibility of punitive damages against the malefactor). The “exclusivity” restrictions that tend to be the least restrictive and, therefore, the least risky, include: 201 202 • Antitrust Law §10.01(b) 1. Areas of primary responsibility that define a geographic area in which each customer will devote its greatest sales efforts; 2. Focus on a list of primary accounts to which a customer will devote its greatest (but not necessarily only) sales efforts; 3. Quota systems based upon sales within an area of primary responsibility or to a predefined class of resale customers; 4. Pass-over systems that enable a customer to sell outside its area of primary responsibility by agreeing to pay a reasonable fee to the customer in the area where the resale account is located, and to subsidize warranty, after-sale service, or other legitimate post-sale obligations; 5. Not shipping to a customer at a location outside its area of primary responsibility; and 6. Prohibiting a customer from picking up goods at a supplier’s warehouse outside its area of primary responsibility. Stricter territorial or customer restrictions, which prohibit a customer from selling to accounts outside its predefined areas or from a specific list outright, more severely limit that customer’s ability to compete and, therefore, pose somewhat greater, although still not necessarily great, antitrust risk. §10.01(b) From One Location? In general, location exclusivity is the least onerous restraint because dealers remain free to resell to any customer they wish wherever one is found. In the panoply of supplier- instituted resale restrictions, these are thus most often found lawful when weighed under the rule of reason. (See §2.01(d), above.) However, monopolists, near monopolists, and dual distributors should first consult antitrust counsel before employing even these limited restrictions, or any of those that follow. §10.01(c) Within One Territory Only? If a supplier wishes to restrict each customer from selling its product to persons outside the customer’s assigned geographic areas, that, too, will be weighed under the rule of reason. But because it is somewhat more confining than a mere location clause, it is somewhat more difficult to defend. As before, a supplier’s risk of liability generally increases with its market share (with less than 20 percent creating assumable risk and more than 30 percent approaching the amber/red zone). If the intended effect of the territorial restriction is to promote interbrand competition (for example, between Toyota and Nissan) more than harm intrabrand competition (say, between Toyota dealers), and is no more restrictive than required to promote such interbrand competition, it should be legal. But, because no scale has been developed to weigh interbrand versus intrabrand competition, some proxy is needed. Factors helping to establish that territorial restrictions will have the net effect of promoting interbrand competition for the supplier’s product include whether: §10.01(d) Controlling Product Resale Conditions • 203 1. It is new to the market; 2. Its market share is modest; 3. Its market share is declining; and 4. There is active price competition for its product. In each case, the validity of such restrictions depends on the above-mentioned interbrand/intrabrand tradeoff, as well as their purpose and effect, and whether the least restrictive alternative available to serve the purpose was chosen. For example, if the stated purpose of the restriction is to improve warranty service, a supplier must be ready to show that there is no less confining way to meet this objective. Any such strategy, therefore, should not be planned casually. §10.01(d) To One Type Of Customer? A supplier may bar distributors from dealing with particular types of ultimate customers, so long as this is not part of a scheme to maintain resale prices, is not requested by distributors to eliminate or reduce competition among them, and does not involve dual distribution. (See §10.04, below.) An example of such a customer restriction would be barring distributors from selling cosmetics to mass merchandisers, permitting them to sell only to licensed cosmetologists. Another would be a restriction barring the sale of medical supplies to retail outlets or on the Internet, permitting them only to be sold to hospitals. A distributor also may be barred by the supplier from selling to retail outlets known to provide poor service. One of the reasons often given for such customer restrictions is “health and safety.” That is, distributors may not sell to retailers that do not have the requisite training in the proper use of, or facilities to safely sell, the product. For example, hair care products sold in bulk to beauty salons and hairdressers are often packaged without detailed instructions. Sales of such products could properly be confined to those (coincidentally high-margin) outlets because professional users are (theoretically, at least) more familiar with the proper use of those products. If they were made available for home use (then likely to be resold by lower margin outlets), different packaging and instructions might be required. If the manufacturer does not wish to provide such packaging or instructions, it can legally keep its merchandise out of such over-the-counter outlets. These types of justifications are measured under the rule of reason. The supplier should, at a minimum, have a plausible (nonprice-controlling) basis for its decision. If a supplier is a dual distributor, the more it directly sells at its distributors’ customer level, the less it may do to restrict those competing distributors. However, if the customer restrictions imposed (e.g., barring distributors from selling to so-called house accounts) have no impact on the prices at which the products are generally resold, they should be readily defensible.
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