The Justice Department late last month handed corporate executives new guidelines on when contracts between manufacturers and distributors are likely to bring on a government antitrust suit. "A reduction in antitrust uncertainty will assist business planning," predicted Attorney General William French Smith. But the truth is, the real importance of the 46-page Justice document will depend on how it influences another audience entirely.
The guidelines lay out in objective detail the standards the antitrusters will use in deciding to bring cases about exclusive dealing arrangements, territorial restrictions and the like. But the effort "is really intended to be a way of persuading the courts to adopt these standards," says a Chicago lawyer who specializes in the area. And he, like others who counsel corporations, is telling managers to be very cautious in applying the Justice analysis to their own decision making.
That's because the Justice Department simply is not an important player in this game; that differs from say, antimerger suits, in which Washington plays a major role. The Justice Department has brought only seven antitrust cases based on distribution arrangements in the past decade -- and some of those were abandoned along the way. It is private litigants -- most often a distributor who has had a falling out with a prime supplier -- who typically file these cases, and they certainly are not bound by the views of Smith or antitrust chief J. Paul McGrath.
The new guidelines are timely because the law has changed rapidly in this area. Once, virtually any anticompetitive strings that a manufacturer tried to put on a distributor were automatically an antitrust violation. But in the wake of a Supreme Court reversal of position in 1977, judges now must consider whether or not the restraint is reasonable. It may still be unlawful for the established manufacturer of the leading brand of a product to dictate which customers a distributor can sell to and which he must leave for another distributor, but a newcomer trying to use that tactic to break into a market would get the green light. Only if the restraint involves price -- if the manufacturer extracts from the distributor a promise not to sell at discount -- is the arrangement automatically unlawful.
Reasonableness, obviously, is a matter of interpretation. What the Justice lawyers have tried to do is watch themselves and codify the situations in which they have been deciding that there are no antitrust problems with the nonprice constraints. For instance, the guidelines say that if the manufacturer has less than 10 percent of the market, the company can do most anything it wants in this area without running afoul of the antitrust laws. A company with a much bigger market share also is free to impose territorial restrictions or location clauses if such demands are not common in the industry, so that distributors who do not like the constraints can turn to other suppliers.
All this permissiveness presents a problem for corporations: While the guidelines clearly reflect the direction courts are going on these issues, on many points they reach beyond existing judicial precedents. And while the company defending a practice allowed by the guidelines is sure to point out to a judge that its actions were approved by the Justice Department's antitrust division, "the court could say, 'I don't care what the Justice Department says,' " points out Barbara A. Reeves, a former Justice antitruster now in private practice in Los Angeles.
Lawyers say, in particular, that the part of the guidelines dealing with "tying" is more permissive than the courts can be counted on to be. This is the practice -- always of cloudy legality -- in which a manufacturer insists that in order for a buyer to handle a popular line or model, it also must handle a second line that may have considerably less sales potential. The Justice guidelines say that the only time "tying" is unlawful is when the manufacturer has something akin to a monopoly in the sought-after line.
There's no question that the Justice guidelines will find lots of takers among those wearing the black robes. But company executives trying to decide on a distribution strategy have no way of knowing in advance who will try a resulting lawsuit -- whether it will be a judge profoundly influenced by the guidelines or one who chooses to ignore them. The concepts may well become enshrined in appellate court opinions and, therefore, followed by trial courts. But that will take time, and a company that tries to push its new freedom to restrain customers to the outer limits might have to pay out a lot in damages before that happens.