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Nov 2004
29
November 29, 2004

E-Commerce Distribution: Avoiding Antitrust Liability

In the early days of e-commerce, some wondered whether the "rules of the game" had been fundamentally altered forever. This led to considerable uncertainty on the part of both suppliers and distributors faced with the prospect of offering products for sale on the internet. How much control could suppliers exert over distributors' e-commerce Web sites? Could suppliers refuse to permit internet sales altogether? Could they limit discounting by internet resellers? Can a supplier offer price discounts or other promotional allowances to internet distributors that it doesn't offer to its "brick and mortar" customers?

Now that some of the initial excitement has worn off, however, it has become clear that—at least from an antitrust compliance perspective—the more things change, the more they stay the same. The basic principles that have guided the conduct between suppliers and distributors have remained largely unchanged by the rise of the internet as a major distribution channel. Here are a few key points to keep in mind:

  • Suppliers Must Act Independently. Decades of case law have established that a supplier may refuse to deal with any distributor, for any number of reasons, so long as the supplier is acting independently. A supplier, acting unilaterally, can decide that it simply will not do business with any dealer that offers product for sale via the internet. Problems can arise, however, where the supplier terminates an internet distributor in response to complaints from other distributors.
     
  • Agreements Not To Sell Via E-Commerce Must Be Reviewed Carefully. As a general rule, an agreement between a supplier and a distributor in which the distributor agrees not to sell product over the internet likely will be upheld by courts. Although this does operate, to same extent, as a restraint on trade, courts evaluate such agreements under the "rule of reason." Although courts have not directly addressed this issue in the context of e-commerce distribution, they have upheld similar prohibitions on mail order distribution (which really is nothing more than a low-tech version of e-commerce).

    Such agreements may sometimes, however, run afoul of the antitrust laws. For example, if the supplier is engaged in "dual distribution" (i.e., it sells product to customers directly in addition to selling to distributors), a prohibition on internet sales by distributors may be deemed an illegal restraint on trade. For that reason, it is essential to have qualified counsel review your distributor agreements to protect against antitrust exposure.
     
  • A Supplier Should Be Cautious About Attempting To Control The Price At Which Its Distributors Sell Goods On The Internet. Price fixing and retail price maintenance always have been, and continue to be, hot button issues under the antitrust laws. Before any supplier institutes a policy whereby it seeks to directly or indirectly control the prices at which its distributors resell its goods (whether on the internet or elsewhere), it should consult counsel to determine whether its proposed conduct will comply with the antitrust laws.
     
  • A Supplier Generally Should Avoid Price Discrimination Between Internet and Non-Internet Distributors. The federal Robinson-Patman Act prohibits suppliers from offering the same goods at the same time—but at different prices or with different promotional or advertising benefits—to different competitors. Accordingly, a supplier generally should not offer an internet distributor pricing that is more or less favorable than it offers to its other, non-internet distributors. There are, however, important exceptions to the Robinson-Patman Act that can be used to justify such a differential. For example, it would be permissible for a supplier to sell at a lower price to an internet distributor than its "brick and mortar" competitor if the supplier could somehow prove that the price differential is justified by its reduced costs in dealing with the internet distributor.

Although the legal principles applicable to e-commerce distribution are time-tested, they remain complex and highly dependent on the facts of each situation. Both suppliers and distributors that are involved in e-commerce can avoid serious problems down the road by making sure that they fully understand the antitrust principles that apply to their conduct.

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Brian J. Masternak, is a partner with Warner Norcross & Judd LLP and he focuses his practice in business, commercial, contract and securities litigation; antitrust and unfair competition law and criminal defense/white-collar crime. Brian may be reached in the Grand Rapids office at 616.752.2205. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.
 

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