Customer Restrictions in Distribution Essay
History of Antitrust Laws
Many acts are the fundamental laws that lay down antitrust regulations. Before these acts were passed, the Interstate Commerce Act was in force. The Sherman Act was passed in 1890, which outlawed contracts and conspiracies about restrictive trade practices that aimed to monopolize the markets. In 1914, the Congress enforced the Federal Trade Commission Act, banning trade practices that were unfair and deceptive. In 2020, the Federal Trade Commission or FTC was responsible for or enforcing the federal antitrust laws.
Meaning of Customer Restriction in Distribution
A product goes through various stages before reaching the final consumer. First, raw materials are supplied to the manufacturers through a supplier. Second, the manufacturer then creates a product using such raw material. Third, the distributors and wholesale suppliers are then hired to let the product reach the retailers. Finally, it is the retailer from whom the customer purchases the products. This link of various stages is called the supply chain. Most of the time, manufacturers and many manufacturing firms research their final consumer through a middleman such as a franchised dealer or a distributor. Thus, an association is formed between the dealer and the distributor. This association is frequently signed under a contract that includes clauses restricting the distributor’s territory and customers.
Manufacturers sometime limit the reach of the product to selective customers to whom they want to sell their product. The manufacturer can restrict its distribution to customers by limiting the product in various levels of supply chains that are not doing the same function, which is considered as customer restriction. For example, customer restriction is imposed by a manufacturer by limiting the person to whom their distributors may sell the product. It is done to arrive at the desired profits by selling the products to a targeted consumer base. Until recent times, generally, customer restrictions were upheld as legal as they were tested under the rule of reason. As a result, only some customer restrictions, categorized as price-fixing schemes, were considered illegal. In the case of United States v. Arnold Schwinn & Co., the test of the rule of reason was not considered an appropriate test for the legality of vertical customer restrictions. In this case, the partiality has been done by the manufacturer to sell their products only to those distributors who sell only to the manufacturer-approved customers. Arnold Schwinn argued that the McGuire act permitted such contracts. The McGuire act has specific restrictions by providing exemption to the fair trade contracts from the antitrust laws.
The Legality of Customer Restrictions in Distribution
Schwinn’s case does not provide any clarity regarding the safety of wholesalers to sell only to those retailers who have contracted an agreement with the manufacturer to restrict the distribution. The rule of “per se illegality” is frequently applied. The expression “customer restrictions” is not expressly permitted by the McGuire Act. The customer restriction can check legally by finding that if the manufacturer is abode by the federal trade laws or not because there are certain restrictions allowed by them. If trade with distribution restriction is not permitted by any specific state or federal laws, such agreements lose their immunity to antitrust laws.
