NAW Legal Advisory
Manufacturer's Exclusive Advertising Incentive Contracts with Distributors Survive Antitrust Challenge
Updated April 2012
On a pre-trial motion to dismiss, an Ohio federal district court has ruled that an equipment manufacturer’s exclusive advertising incentive contracts with its distributors do not violate the antitrust laws or unlawfully restrain competition. The antitrust claim was asserted as a counterclaim by the defendant in a patent infringement action brought by the manufacturer. (SPX Corp. vs. Mastercool U.S.A., Inc.).
SPX manufactures automotive refrigerant recovery equipment and sells the product through a network of independent distributors. The counterclaim alleged that SPX controls 85-90% of the equipment market and used its dominant market position “to reduce competition, innovation and consumer choice” in violation of the anti-monopoly provision in section 2 of the Sherman Act.
Through its distributor contracts, SPX provides advertising funds to distributors in exchange for their exclusive advertisement of certain SPX products. If a distributor advertises competitive products produced by an SPX rival, that distributor forfeits incentive funds. The agreement also prohibits a distributor from servicing a competitor’s equipment without SPX’s consent. However, the SPX agreements did not prohibit a distributor from selling a competitive product although doing so would result in forfeiture of advertising incentive funds.
Each distributor contract has a one-year term and either party may terminate the agreement “for any reason” by providing the other party with 30 days’ notice. In addition, either the distributor or SPX may terminate the contract without cause by providing 90 days’ notice of termination.
In dismissing the antitrust action against SPX, the court found that the facts as alleged in this case did not state a plausible claim of antitrust law violation. According to the court, such short-term terminable contracts with distributors do not approach the threshold of foreclosing competition. An SPX competitor is free to compete for SPX distributors by offering them terms more favorable than those offered by SPX, either at the conclusion of the one-year term or enticing an SPX distributor to exercise early termination.
This decision does not necessarily immunize a manufacturer with monopoly power to impose any sort of exclusive dealing requirements, or incentives to deal exclusively, on its distributor network. In each case the legality of an arrangement requires an analysis of whether the arrangement has substantially lessened competition in the market for the product or services. This requires taking into account all relevant factors, including the nature of the arrangement, the share of market foreclosed by the arrangement, the effect on potential new market entrants, the time period covered by the arrangement, the market power of the seller, and the seller’s ability to increase prices.
For discussion of a case where a manufacturer’s exclusivity arrangements with its dealership network did violate the anti-monopoly provision in the Sherman Act, go to www.naw.org/govrelations/advisory.php?articleid=485&print=print for an NAW Advisory reviewing U.S. v. Dentsply International, Inc. (“Manufacturer’s Exclusive Dealership Network May Violate Monopoly Law”).