Dealer groups and dealer councils can serve invaluable pro-competitive purposes but – if not staying within legal bounds – they can create significant antitrust risk. What’s more, that risk may extend beyond the participating dealers and cause the manufacturer that created or facilitated the dealer group to share that antitrust risk. Recognizing and staying within the permissible bounds of activity by dealer groups and dealer councils benefits both the manufacturer and its participating dealers or distributors.
For a manufacturer using an independent distribution chain, the dealers not only sell and service the company’s products but also provide invaluable competitive information and feedback to enable the manufacturer to understand what customers value and to compete more effectively in the marketplace. Who better to report on your competitors, market trends, and the market’s perception of the products than the dealer or distributor who interacts directly with customers and hears what they like (and don’t like) about competing products? If the product is not functioning well in certain contexts or if the dealer is losing sales because your competitor’s dealer has a product priced 15% lower than your product, the dealer will let you know.
Dealer councils can provide a more formalized method of collecting this valuable information and exchanging ideas on how best to address a problem or to compete more effectively against the products of competing manufacturers. A dealer council also frequently serves as a focus group to address possible new product offerings or changes in strategy. A manufacturer typically invites some of its most successful dealers to participate in that discussion and to provide feedback and input. An effective dealer council can provide useful insight and information regarding, among other things, market trends, interbrand competitor strategies, product quality, marketing, research and development opportunities, safety issues, supply logistics, and warranty repairs or replacements. Dealers likewise benefit from the exchange of such information and can use this platform to collaborate with the manufacturer to increase sales. All good, all pro-competitive. But without appropriate rules and oversight, a dealer council can quickly transform to place itself (and the manufacturer) in an antitrust bull’s-eye.
The sometimes underappreciated antitrust risk created through a dealer group or dealer council arises due to the different antitrust treatment the law imposes depending on whether entities have a vertical or horizontal relationship. Because a manufacturer has a vertical relationship with each of its dealers, courts typically apply the more relaxed rule of reason approach when evaluating whether a non-price agreement between the manufacturer and its dealers unreasonably restrains trade (i.e., violates the antitrust laws).1 Manufacturers with relatively small market shares (<30%) face little antitrust risk from unilaterally imposing territorial or customer limitations on their distributors, requiring product or parts inventories or suggesting resale prices. In discussions with an individual dealer, the manufacturer’s territory representative can discuss the dealer’s customer prospects, pricing strategies, advertising initiatives, and territory limitations.
In contrast to the vertical manufacturer-dealer relationship, dealers are at the same level of distribution and may be competitors. As online sales increase, even dealers located great distances apart may compete for the same potential customers. This dealer-to-dealer competition increases the legal risks risk of assembling dealers because courts apply a much more stringent “per se” approach to agreements among horizontal competitors to establish territories, prices or other aspects of potential competition. Few would be surprised that adjacent dealers cannot agree on the prices they will charge their customers, but the antitrust limits on horizontal competitors reach even broader. Agreements among competitors on such aspects of competition as hours of operation, discounts or return policies also can violate the antitrust laws. Further, if a manufacturer’s representative elects to bring together two dealers to resolve how they will handle given customers or accounts, not only can the dealers violate the antitrust laws by agreeing to limit competition but the manufacturer, by joining the dealers’ agreement, exposes itself to potential antitrust liability as well.
A challenging aspect for the manufacturer is that policies that the manufacturer could lawfully impose vertically become illegal if adopted first among the dealers and then enforced by the manufacturer. For example, consider a map that sets forth exclusive territories for all dealers across the U.S. If employees of the manufacturer independently created the territories on the map and then imposed those territories on the distribution network, the policy is vertical, the rule of reason applies and (absent a large market share for the manufacturer) the exclusive territories easily survive an antitrust challenge. But assume that a group of dealers drew and agreed to an identical map and brought it to the manufacturer, which then used the map to define territories for the distributors. In that latter case, the agreement is horizontal, the per se rule applies and the manufacturer, having joined in the agreement, also faces potential antitrust liability.2
A few examples illustrate this risk. In U.S. v. General Motors Corp.,3 the Supreme Court held that collaborative action by the defendant auto dealers, the dealer association, and General Motors to eliminate a group of discount dealers from the market was per se or automatically illegal. There, certain dealers had partnered with discount houses, selling Chevrolets to the discount houses that then resold the cars to consumers at purportedly discounted prices. Other Chevrolet dealers learned of this partnership and, through their local dealer association, engaged General Motors to assist in eliciting promises from each dealer not to do business with discounters. General Motors also worked with the complaining dealers and the association to police dealers suspected of working with the discount houses. The Supreme Court deemed the actions “a classic conspiracy in restraint of trade,” and General Motors, having joined the conspiracy among the competing dealers, violated the Sherman Act.
In Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc.,4 the U.S. Court of Appeals for the Third Circuit allowed a former Mack Truck dealer to pursue an antitrust claim alleging that Mack Truck conspired with its dealers to prevent competition by the plaintiff dealer. Mack Truck’s dealer agreement assigned dealers areas of responsibility but did not limit dealers to specific sales territories. The terminated dealer alleged that, consistent with the dealer agreement terms, it had aggressively competed against other Mack Truck dealers throughout the country (often offering customers lower prices) and refused to participate in a “gentlemen’s agreement” among other Mack Truck dealers not to compete with one another on pricing and not to sell in each other’s areas of responsibility. Mack Truck allegedly supported this dealer conspiracy by agreeing to delay or deny sales assistance for dealers that made sales out their area of responsibility. Reversing the lower court’s decision granting summary judgment in favor of Mack Trucks, the Third Circuit held that the terminated dealer had offered sufficient evidence to present its antitrust conspiracy claim to a jury.
The lesson from these and other cases is that a manufacturer’s ability to impose restrictions or take certain remedial actions may be more limited if the impetus for that restriction or action is an agreement among dealers rather than the unilateral act of the manufacturer. Moreover, the fact that the manufacturer initially resisted the dealers’ horizontally generated limits on competition does not save the manufacturer from antitrust liability. As one court explained:
In this case, an association of dealers reached an agreement to restrict access to the market. Their agreement was plainly horizontal, plainly anticompetitive, and plainly illegal per se. This horizontal agreement to restrict the market, however, was feasible only with the cooperation of [manufacturer]. If [manufacturer] acceded to the pressure of the dealers' association, it joined the conspiracy and incurred the attendant per se liability.5
Dealers will complain about a variety of issues and the fact that a dealer (or more than one dealer) complains about a “price-cutting” dealer or one that sells outside its territory should not by itself create an illegal agreement between the manufacturer and the complaining distributor.6 But when there is an agreement among dealers that violates the Sherman Act and the manufacturer agrees to join or enforce that illegal agreement, the manufacturer’s vertical relationship with its dealers does not allow the manufacturer to escape liability.7 Those who join an illegal horizontal conspiracy become jointly and severally liable for the damage that conspiracy causes.
Manufacturers should proactively evaluate and address antitrust risks created by dealer councils. In order to minimize risk, manufacturers should consider the following strategies:
A manufacturer, and competition more generally, can benefit greatly from the information and feedback gathered through dealer meetings or dealer councils, but such meetings require proper management to avoid antitrust risks. Following the simple guidelines outlined above can help minimize such risks.
1 See Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 886, (2007) (to violate the Sherman Act, vertical agreement must create an unreasonable restraint on trade “with anticompetitive effect[s] that are harmful to the consumer”).
2 Aunyx Corp. v. Canon U.S.A., Inc., 1990 WL 150009 (D. Mass. 1990) (denying summary judgment for defendant because evidence that territorial restraints in supplier’s dealer agreements were created with participation or approval of dealer advisory council).
3 384 U.S. 127, 140 (1966).
4 530 F.3d 204, 211 (3d Cir. 2008).
5Arnold Pontiac-GMC, Inc. v. General Motors Corp., 700 F. Supp. 838, (W.D. Pa. 1988).
7 Notably, the manufacturer also could be the victim of a conspiracy among dealers if, for example, the dealers agreed among themselves to force the manufacturer to charge them lower prices or to grant better terms.