In A Fix

Know Your Rights

One exception concerns manufacturers who sell through dealerships. While competing companies may not conspire together to set prices or standardize products and services, it's not illegal for a manufacturer to set a suggested retail price and offer incentives for following it. The U.S. Supreme Court established this principle in 1919 in a case called United States v. Colgate & Co., ruling that the Sherman Act "did not restrict the long-recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal; and of course, he may announce in advance the circumstances under which he will refuse to sell." Later case law would decide what manufacturers may and may not do in this area. In general, though, if a dealer refuses to follow a suggested retail price, the manufacturer is free to terminate the dealership.

For example, in one case decided last November, a manufacturer of products for horses told its dealers that it would stop working with any dealer who sells its products for less than 90 percent of the established retail price. When a dis-tributor issued a catalog listing the company's horse blankets and sheets for less, the manufacturer promptly sent a letter terminating the dealership. The distributor filed a complaint accusing the manufacturer of price-fixing. But the U.S. District Court for the Middle District of Alabama, southern division, ruled in favor of the manufacturer because it stated in its letter to dealers that it had established the pricing policy unilaterally, and was not seeking either the approval or agreement of the dealers. When customers called with complaints, company employees would listen but explain that they could not debate the policy. The company would help dealers work out the math if requested, but wouldn't discuss it. And when the terminated dealer tried to talk with someone at the company to "work something out," they refused. The manufacturer knew its legal obligations and was very careful not to get on the wrong side of the Sherman Act.

What's the lesson? Don't talk about prices or policies with your competitors. If you sell through dealers, you may establish a pricing policy and terminate those who fail to comply, but don't discuss it or debate it with your dealers. Otherwise, you risk legal trouble for conspiring to restrain trade.

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This article was originally published in the May 2000 print edition of Entrepreneur with the headline: In A Fix.

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