Buying and marketing groups are becoming more common and widely accepted in products distribution industries, as well as even in some service industries. The missions of these groups vary. Buying groups or co-ops focus upon reducing the acquisition cost of products, thereby enhancing the ability of their members to compete with larger players. Marketing groups focus upon developing programs to assist their members in the promotion and sale of products. Usually, these marketing programs are far superior to what an individual member could produce and are provided at a much lower cost. Some groups focus equally in the purchasing and marketing areas. Whatever its mission, a well-run group creates economies of scale which not only benefit its members, but also benefit the public by reducing the pressure to increase prices, and, in many instances, result in lowering the prices. Sometimes the benefits a member receives from his group can mean the difference between survival or failure.
As much good as these groups do, they have always been viewed with some degree of suspicion by the federal and state agencies charged with the responsibility for enforcing the antitrust laws. Federal scrutiny has increased under the Obama Administration. This article will discuss a few of the antitrust issues that confront many of these groups and will provide recommendations that will help minimize the exposure of the group and its members.
Territorial Restraints. Just how do the antitrust laws relate to the operations of a buying or marketing group? Perhaps the problem area most frequently encountered by groups arises when applicants for membership are turned down on the basis of geographical location. Members of a group generally do not want the group to admit a new member that is in direct competition with one of them for several reasons. They include:
Group discussions of industry issues are more open if competitors are not present.
Less likelihood of an antitrust violation arising within the membership of the group if none of them are competitors.
One competitor might get a “free ride” on the marketing efforts of another in his same area.
The use of the same marketing materials of two competitors in the same territory could create confusion, particularly if they are using different prices on those materials.
All of the above are legitimate concerns. However, significant antitrust issues can also arise if territorial restrictions are not handled correctly. The following antitrust principals should be taken into account
It is illegal per se for competitors to agree upon the geographical territories within which they will limit the sale of their products.
If members of the group are receiving better prices from vendors than competitors who are excluded from the group, the excluded competitors may have a claim under the Robinson-Patman Act and perhaps under state law as well.
A solution to the first issue is to limit only the use of group’s marketing materials to designated geographic locations. Each member would therefore be free to sell its products anywhere outside of the designated territory, so long as the marketing materials are not used outside that territory.
With regard to the Robinson-Patman Act problem, there are numerous defenses that may be applicable. In addition, the problem might be avoided by allowing the competitor to participate in the purchasing program, but not in the marketing program. Before any group undertakes any territorial restrictions with regard to its activities, it should consult with legal counsel.
Price Fixing. One of the most dangerous areas of antitrust law that confronts buying groups is the prohibition against price fixing. What makes this area of antitrust law so dangerous is that these types of violations can easily occur, sometimes almost unknowingly. Whether done intentionally or unintentionally, price-fixing violations are at the very top of the list of priorities of the governmental enforcement agencies. In fact, the enforcement agencies are more likely to seek incarceration for price-fixing offenders than they are for any other type of violation of the antitrust laws.
The most common price-fixing concern among marketing groups arises when a group uses common advertising and includes the same prices in those advertisements. Safeguards can be implemented to reduce the risk of a price-fixing charge being brought in this situation. The most important one would be to have the manufacturers determine what the prices should be, after receiving input from the members on an individual basis. The amount of market share that the group has in its industry would also be an important factor to consider in evaluating its exposure to a price-fixing charge. This is another area where legal counsel should be closely involved in establishing the safeguards.
A second price-fixing concern arises when a group enters into a contract to service a national account. For instance, small distributors might join together in an effort to service a large retail account. Frequently in such arrangements, the members of the group agree to sell to the national account within each of their individual locations for a uniform price.
While this is literally a form of price-fixing, the government has given favorable business review letters when appropriate safeguards are included. One important safeguard would be to avoid a group discussion among competitors in selecting the prices to be charged to the national account. Legal counsel can assist a group in minimizing price-fixing concerns.
A third potential problem area exists for groups that hold meetings for their membership. Adam Smith once said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public on some contrivance to raise prices." While discussion of prices in and of itself is not against the law, such discussions quite often do lead to either an implicit or sometimes an explicit understanding among the participants of that conversation as to how they will set their prices.
What measures can a group take to protect itself and its members from charges of price fixing? The answer lies in the establishment of an effective antitrust law compliance program. Such a program would include written guidelines that would include basic ground rules as to what can and cannot be discussed at meetings. The group should also have legal counsel present at its membership meetings.
Despite the potential legal pitfalls that confront buying and marketing groups, there is no denying that these groups can and do serve a useful and legitimate purpose in our society. A group that is aware of what these pitfalls are and how to avoid them has already won half of the battle. Those groups who establish well-designed antitrust compliance programs and carefully adhere to their guidelines will win the rest of the battle.
In almost all cases, when businessmen have a legitimate objective in mind, there is a way to accomplish it, even if a slightly different path is required to be followed. So it is when a group travels through the obstacle course of antitrust law. Hopefully, this article will help groups identify and negotiate the obstacles.
©Harry Ray, Harry B. Ray & Associates, PLLC, Chattanooga, TN. September, 2012. All rights reserved. This article may not be reprinted nor reproduced in any manner without prior written permission by the author.
Certification as an Antitrust & Commercial Law Specialist is not currently available in Tennessee.
This article provides general coverage of its subject area. It is provided free, for informational purposes only, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. Readers should not act upon this information without seeking professional counsel. If legal advice is sought or required, the services of a competent professional licensed should be sought. The author and/or publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication
Harry B. Ray is the owner of Harry B. Ray & Associates, PLLC and practices in Chattanooga, Tennessee. For more information, visit www.BuyingGroups.com or www.hbrlaw.com.