E-Commerce: 10 Key Issues in Dealing with
E-Commerce Distribution
By: RICHARD J. WEGENER
March 2004
Most of the antitrust issues relating to the e-commerce distribution of consumer goods involve the application of settled legal principles to a new channel of distribution rather than the establishment of "new law." However, because of the unique nature of the Internet as a distribution channel, care is needed to ensure that all of the antitrust issues are recognized and considered.
For the purpose of cataloguing key issues, we accept a few starting assumptions. First, the manufacturer is not interested in establishing an e-commerce sales site on its own behalf. Second, the manufacturer is not interested in maintaining an e-commerce site for the benefit of its dealers, i.e., a site which would perhaps refer buyers back to dealers in their proximate area for delivery and service. Finally, the list is limited to legal issues; not business issues.
With these thoughts in mind, we list ten "big" issues which need to be recognized across the board by a manufacturer when dealing with its dealers and/or distributors (hereinafter referred to as "dealers" irregardless of whether a "dealer" or "distributor").
1. The Decision To Do Business With An E-Commerce Dealer
The manufacturer should be careful not to agree with other dealers not to do business with an e-commerce dealer. A decision between a manufacturer and two or more dealers not to do business with an e-commerce dealer (or any other dealer, for that matter) could be characterized as a per se horizontal arrangement.
The recent Toys “R” Us case [Toys “R” Us, Inc. v. F.T.C., 221 F.3d 928 (7th Cir. 2000)], highlights the conflict between traditional retailers and new innovative retailers that will be increasingly common in the e-commerce environment. The decision provides important guidance about the analysis of exclusion, and shows that traditional retailers can not legally arrange to boycott a new rival by denying it critical inputs or raising its costs.
2. Restrictions Upon The Dealer's Ability To Operate An E-Commerce Site
Normally, the law permits manufacturers to limit the number of dealers authorized to sell their products in particular places or to certain classes of customers. For example, manufacturers may outlaw mail order and “800 number” sales.
Dealers may not accept such limitation without a fight. If dealers believe that they already have been afforded the right to sell on the Net, they may claim that any restriction of that right amounts to a material change in their relationship with the manufacturer in breach of either their dealership agreement (if they have one) or their state’s dealership law (if there is one). Just as likely, dealers will argue that whatever their dealer agreements provide, “selling” is “selling,” and they should have the right to sell every product they carry by any means that they had not previously agreed to exclude.
To head off such arguments, some manufacturers are including explicit restrictions on Net sales in their dealer agreements as agreements come up for renewal. Such restrictions also may be included in unilateral distribution policies issued by a manufacturer to its dealers.
3. Restrictions Upon The Manufacturer's Ability To Operate An E-Commerce Site
A manufacturer's individual agreements with one or more selected dealers not to operate an e-commerce site should be viewed as a vertical arrangement and be lawful. However, if a manufacturer were to agree with a group of dealers that the manufacturer will not operate an e-commerce site in competition with the dealers, there is a risk that this agreement will be deemed to be a horizontal arrangement that could be characterized as being per se unlawful.
4. Resale Price-Fixing
Just as in a "bricks and mortar" context, a manufacturer should be careful about implementing programs that will affect the resale price of its e-commerce dealers.
For example, an e-commerce policy by which the manufacturer announces that it will only refer customers to those e-commerce dealers that have agreed to sell at or above certain price levels would raise resale price-fixing issues.
5. Manufacturer's Advertised Price (MAP) Programs
The announcement of suggested resale/advertised prices and the subsequent refusal to deal with those who fail to abide by the suggested prices is permissible in certain circumstances. But that result is predicated on the failure to allege and prove “duality,” i.e., a contract, combination or conspiracy between the seller and its customer-reseller. Thus, a manufacturer can suggest minimum advertised prices and refuse to continue to sell to those customers-resellers who have failed to follow its suggestions.
This distinction between a “unilateral” action and “duality” poses significant practical problems. The repentant customer poses an excellent example. Where the customer has sold below the suggested resale price but promises its supplier to reform its way in order to continue to be supplied with product, courts have found subsequent assurances and their acceptance to constitute an agreement. The lesson: show no mercy! Recalcitrant customers should be cut off and pleadings for clemency ignored.
6. The Robinson-Patman (price discrimination) Act
An important element in determining the legality of different discounts, payments and services received by a favored vs. a non-favored dealer is whether or not the two dealers are competing with each other in the resale of the manufacturer's products. In the traditional bricks and mortar environment, this often becomes a question of what geographical area the dealer's resales occur in. Because the Internet's reach is worldwide, this complicates the analysis of whether or not the traditional bricks and mortar dealer competes with an e-commerce dealer. One can argue that because of the Internet's virtually global market, the e-commerce dealer shares the same geographical markets as all of the manufacturer's other bricks and mortar dealers.
7. Sales Leads
Is it permissible for the manufacturer to reward one class of dealer (i.e, e-commerce dealers) with referrals from the manufacturer's website? Without a sound availability defense, legal claims could be raised by other dealers purchasing the same products but not being given such a benefit under Section 2(e) of the Robinson-Patman Act. Liability might be avoided as to the e-commerce dealers if all competing e-commerce dealers were listed or given referrals on a rotating basis.
8. Exclusive Territories
If the manufacturer has made any agreement with a dealer as to the dealer's right to sell in a given area on an exclusive or some other limited basis, that agreement may be affected by the e-commerce sales of other dealers.
9. Exclusive Internet Links
Should the manufacturer limit the ability of its e-commerce dealers to display links to competitor's websites? To the websites of other manufacturers who may not be competing manufacturers in the sense of a traditional product market competition, but so that visitors to the dealer's website - after expressing an interest in the manufacturer's products - will not have their interest diluted by links to other manufacturers' websites?
10. Use of Maximum Suggested Resale Price (MSRP) To Influence Dealer Pricing
One way in which a manufacturer can legally act to influence the retail pricing of its products and hopefully curb price gouging by dealers is to publish a suggested maximum resale price. And in today's world, one of the places where the manufacturer can publish that information is on its website. This publication, with links to dealer sites, means that buyers will be likely to find the MSRP, and dealers who seek to charge more than that price will face the wrath of buyers and be forced to explain why they have elected to have a higher price or bring their pricing in line with the MSRP.
"Plus ca change, plus c'est la meme chose."
The Internet may be the most revolutionary development to impact product distribution and marketing in our lifetimes. However, key antitrust concerns are as relevant in cyberspace as they are to the neighborhood store.
The more things change, the more they are the same.