The balance of legal power between manufacturers and their distributors is shifting.
Just a few years ago, a company that was dissatisfied with a franchised outlet of a middleman would be most hesitant about stopping doing business with the firm. The reason: an unhappy former distributor would almost surely slap the manufacturer with an antitrust suit claiming the termination was part of an illegal conspiracy with other dealers intended to stifle competition--and would usually win significant damages with the claim.
Now, manufacturers are winning more often, and as a result are being tougher with distributors who do not toe the line.
Typical is the case of a Frederick, Md., tire dealer--Donald B. Rice Tire Co.--that refused to go along with Michelin Tire Corp. curbs on where and how it could sell the tires it bought from the rubber company. Michelin dropped Rice as a customer, and prevailed in the inevitable lawsuit.
Michelin's restraints on competition among its dealers are okay, the U.S. Court of Appeals in Richmond ruled, because they make the dealers stronger and therefore sharper competitors to outlets selling other brands. The Supreme Court this term decided to let the Richmond ruling stand.
The new legal attitude "at least gives manufacturers a fighting chance," says Philip F. Zeidman, a Washington antitrust attorney and authority on dealings between franchisees and franchisors. "Before, they had to just throw their hands up."
In the mid-1970s, he remembers, if a distributor could win the initial legal skirmishing, manufacturers felt they "might as well throw in the sponge."
Many elements came together to bring about the change:
* Defense lawyers have learned to make effective arguments for the manufacturers accused of using their power over dealers unlawfully. And as defendant victories have become more common, companies are more willing to spend the money to fight a case.
* A general suspicion of the motives of business--particularly the kind of big companies that are usually the defendants in dealer termination cases often brought by faltering small firms--is on the wane.
* Most significantly, courts have shifted the way they look at antitrust cases. Judges have moved away from a schematic approach in which they looked at companies as though they were models dreamed up by an economist.
Now controversies over curbs on distributors are viewed as what the senior counsel for one big drug company calls "market reality" cases. Judges probe the actual working of the marketplace and motivations behind marketing choices. Business is tough, the judges are deciding, and a strategy isn't unlawful just because someone gets hurt.
The twists and turns of a long-running feud between Eli Lilly & Co., the drug manufacturer, and H. L. Moore Drug Exchange, a distributor, show the shift clearly.
In the 1960s, Lilly refused to deal with Moore until the distributor used an antitrust suit to force Lilly to sell to it. But the relationship was rocky, particularly since a lot of other Lilly distributors complained about Moore.
Lilly had a policy of not selling to distributors that had ownership ties to retail pharmacies, but decided not to risk dropping Moore despite the discovery that the wholesaler was owned by a company that also owned a chain of discount health and beauty aid stores. But when the corporate parent also bought a chain of regular drugstores, Lilly decided in 1976 not to renew its contract. Moore sued, and convinced the jury that Lilly's action was really part of an illegal plot to control prices.
Last year, in the new climate towards such charges, the U.S. Court of Appeals in New York threw out the jury verdict. Lilly has a right to refuse to sell to distributors affiliated with drugstores, the judges ruled, and the jury was simply wrong to find the practice unlawful.
The turning point to judicial attitudes came when the Supreme Court took the unusual step of overturning a ruling that was just 10 years old. In 1967, the justices had said it is always unlawful for a company to try to confine dealers to a particular sales territory. In 1977, the high court reversed that stand, and in a case involving stores selling Sylvania television sets, told judges to weigh the pluses and minuses of any restrictions in a distribution policy.
The underlying rationale of the opinion was that in at least some cases, a small company can take on a better-established brand by picking its distributors carefully and making sure that each outlet spends all of its energy building up sales in an assigned territory.
The lower federal court took that reasoning and ran with it. The thinking is being applied to all sorts of controls manufacturers put on dealers, not just those involving assigned geographic markets.
Even where outlets have special laws to help them in fights with suppliers, the courts are taking a tougher line. Service station operators have such a statute on the books, but this year, the U.S. District Court in Baltimore allowed Crown Central Petroleum Corp. to kick out a gas station operator because it thought he was devoting too much of his time to other business ventures.
And on the same day, in an unrelated case, the U.S. District Court in Hartford, Conn., cut back even more on the reach of the special protective statute. It doesn't bar oil companies from making arbitrary and unreasonable decisions about their dealers, Judge T. Emmett Clarie ruled.
The increasing chance a defendant has to win a case brought by a terminated distributor doesn't mean that manufacturers need not have good reason for dropping an outlet that won't go along with marketing policies. But it does mean that it is easier to shuck poor performers for more promising ones. And that, insists Zeidman, "is a salutary development not just for defendants, but for business in general."