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Manufacturer Imposed Customer Resale Restrictions –Are They Lawful?

NAW Legal Advisory - October 2007

May a manufacturer sell its products to a wholesaler-distributor on the condition that the wholesaler-distributor not resell those products to a specified class of customers? Frequently, manufacturers and distributors alike reply that the antitrust laws prohibit all such resale restrictions.

This response is not legally accurate. “Customer restrictions” occur when a manufacturer and its wholesaler-distributor agree which customers (or class of customers) the wholesaler-distributor can or cannot sell. The antitrust laws view customer restrictions between non-competitors as vertical nonprice restrictions. These restrictions are classified as “nonprice” because the manufacturer and the wholesaler-distributor don’t agree on the price at which the wholesaler-distributor resells the product. It is unlawful for two or more wholesaler-distributors to agree to a division of markets, territories or customers -- these restrictions are “horizontal” because they involve competitors and are per se illegal under the antitrust laws.

The courts have held that vertical nonprice restrictions, such as customer restrictions, may be lawful under the antitrust laws. The legality of these restrictions is judged under a “rule-of-reason” standard. Reviewing a customer restriction under the rule-of-reason standard requires an analysis of several factors, including:

• whether the manufacturer has substantial market power to unreasonably restrain trade in the relevant market (i.e., the power to raise prices significantly above the competitive level without losing all of one's business);

• the effects of the restrictions on competition; and

• the justification for imposing the restrictions.

Most court decisions have found such restrictions to be reasonable and lawful. However, some courts have ruled to the contrary in cases where the manufacturer has substantial market share and the restraint lessens competition in the relevant market. Conducting an analysis of the restriction's potential effect on competition and the commercial justification for imposing the restriction is a prudent course of action for the parties to take.

Employee Erasing Company’s Computer Files May Violate Federal Law
The U.S. Court of Appeals for the Seventh Circuit recently ruled that an employee who permanently deletes files/data from an employer’s laptop computer violates federal law. (Intl. Airport Centers LLC v. Citrin, No. 05-1522).

The federal Consumer Fraud and Abuse Act (18 USC §1030) provides that whoever knowingly causes the transmission of a program, information, code or command, and as a result intentionally causes damage to a protected computer (broadly defined to include any computer used in interstate commerce) violates the Act. Violating the Act carries civil fines and criminal sanctions.

The defendant in this case was employed to identify properties that his employer might want to acquire, and to assist in the ensuing acquisition. The employer lent him a laptop to use to record data that he collected in the course of his employment. Citrin then decided to quit and go into business for himself, in breach of his employment contract. Before returning the laptop to the employer he deleted all the data in it – not only the data that he had collected but also data that would have revealed to his employer improper conduct in which he had engaged before he decided to quit.

Ordinarily, pressing the “delete” key on a computer (or using a mouse click to delete) does not affect the data sought to be deleted; it merely removes the index entry and pointers to the data file so that the file appears no longer to be there, and the space allocated to that file is made available for future write commands. Such “deleted” files are easily recoverable. But Citrin loaded into the laptop a secure-erasure program, designed (by writing over the deleted files) to prevent their recovery.

The court struggled to determine whether or not simply erasing a file was sufficient to fall within the definition of a “transmission” within the meeting of the statute. Ultimately, it concluded that the loading of the secure-erasure program was sufficient to constitute a transmission within the scope of the statute.