Four Questions to Ask Before Worrying About the Antitrust Risks of New Restraints on Your Distributors
While I was the in-house antitrust lawyer for General Motors, outside counsel on several occasions suggested to me that GM should “institute a Colgate program” or “a minimum advertised price (MAP) program.” I am confident that all those lawyers could have helped build a fine Colgate program or another method that would restrict how GM dealers and distributors priced and marketed GM products – but the suggestion was still wrong for a few reasons.
First, it vastly overestimated the control that I or any other lawyer had over GM pricing decisions. More importantly, it assumed that the suggested restraint was right for that GM product at that time, an unsafe assumption given the wide variety of products and services that GM sells in different regulatory and competitive environments. Before suggesting a tool to use, the attorney should have helped me determine if it was right for GM’s business situation.
As I have helped other manufacturers in the automotive and other industries implement go-to-market strategies, I have developed four questions that the client should ask first to help determine which, if any, vertical restraints make sense for its products. Once the questions are answered, we can then jointly decide which tools are best for a particular situation.
Summary of the tools and the antitrust risks
Before getting to the questions, a short summary of the antitrust background of these vertical restraints on distributors is helpful. Further details on these issues can be found at past articles, hyperlinked below.
For about 100 years, antitrust law made agreements between a manufacturer and its distributors on the resale price of the products per se or automatically illegal. The Leegin case changed that standard to the rule of reason under federal antitrust law, the same standard used for non-price vertical restraints for decades; however, the antitrust laws of several key states, including California, still treat such agreements as per se illegal. As a result, manufacturers still use the same pre-Leegin tools to direct or influence the price and other marketing aspects of the resale of their products.
Those tools include non-price restraints, like requiring distributors to have well-trained salespeople, well-stocked shelves and parts inventory, and nice showrooms. Manufacturers can also suggest a resale price and even inform the ultimate purchasers of its MSRP. Manufacturers can consign products to a distributor and then require that they are priced at the manufacturer’s chosen price. Manufacturers can direct distributors on how they advertise the products, including using a minimum advertised pricing (MAP) programs. Finally, manufacturers under a Colgate program can announce that they will only sell to distributors who resell at the “right” price and terminate those who resell at different prices.
As detailed in the linked blog posts, these potential tools pose varying risks and the details are crucial. But before even getting to the alphabet soup of MAP, MSRP and the like, the business should step back and ask these four questions.
What problem are you really trying to solve?
If the problem is that the distributor stocks an inadequate inventory of replacement parts to handle customer needs, using tools to increase the distributor’s price and margin will be an indirect way to solve the problem, at best—why not just specify and require a proper parts inventory? Similarly, a MAP program might not be right if the real problem you want to solve is the damage to your brand caused by the distributor’s late-night TV ads with the screaming spokesperson. Using the right tool can not only reduce antitrust risk but, more importantly, increase the chances of solving the business problem.
Can your brand sustain these restraints?
A dedicated spot for your brand’s products in the distributor’s online or brick-and-mortar store sounds great—but can your brand really drive enough customer traffic to justify the distributor’s expense? Some products and brands can command higher prices than their competitors because of higher perceived quality of various sorts—have you built your brand’s reputation to a level that justifies the use of tools that result in higher resale prices? Not every product is a luxury good.
Are you really smarter than your distributors?
Local distributors should have good local knowledge on how your products are used and what sales and marketing techniques work best in that area—is your national knowledge really better? If the strategy or resale price worked well in New York, will it work as well in Minnesota? While you might be a design and manufacturing whiz, do you really know more about marketing and sales than the distributor who does nothing else? The answer to all these questions might be “yes”—but if you use these tools and take some discretion out of your distributors’ hands, you had better be sure it is.
Do these vertical restraints support the rest of your marketing and sales strategy?
Some of these restraints can help support a better brand image—but does your own packaging, advertising, and other marketing elements also support that image? These tools can lead to higher margins but also lower volumes—do the compensation schemes for your distributors or your own field salespeople instead reward pushing the product and even channel-stuffing? All elements of your strategy should be consistent and the people implementing it should understand and support it.
Many antitrust lawyers can explain a MAP program. The better ones can help you answer the right questions to determine which antitrust tool is right for you.