Explain the legal ramifications of attempts to control distribution functions.

Question

What will be an ideal response?

Answer 1

The following practices are among those frequently subject to legal restraint. The courts have deemed restricted sales territories a restraint of trade among intermediaries handling the same brands (except for small or newly established companies). They have also held that exclusive territories can actually promote competition among dealers handling different brands. At present, the producer's intent in establishing restricted territories and the overall effect of doing so on the market must be evaluated for each individual case. When a supplier (usually a manufacturer or franchisor) furnishes a product to a channel member with the stipulation that the channel member must purchase other products as well, it has negotiated a tying agreement. The courts accept tying agreements when the supplier is the only firm able to provide products of a certain quality, when the intermediary is free to carry competing products as well, and when a company has just entered the market. Most other tying agreements are considered illegal.When a manufacturer forbids an intermediary to carry products of competing manufacturers, the arrangement is called exclusive dealing. The legality of an exclusive-dealing contract is determined by applying three tests. If the exclusive dealing blocks competitors from as much as 15% of the market, the sales volume is large, and the producer is considerably larger than the retailer, then the arrangement is considered anticompetitive. If dealers and customers in a given market have access to similar products or if the exclusive-dealing contract strengthens an otherwise weak competitor, the arrangement is allowed. For nearly a century, courts have held that producers have the right to choose or reject the channel members with which they will do business. Within existing distribution channels, however, suppliers may not legally refuse to deal with wholesalers or dealers merely because these wholesalers or dealers resist policies that are anticompetitive or in restraint of trade. Suppliers are further prohibited from organizing some channel members in refusal-to-deal actions against other members that choose not to comply with illegal policies.