Fortiline LLC distributes ductile iron pipe. It competes with the manufacturer which somewhat regularly undercuts its distributor in the market. Fortiline on several occasions asked the manufacturer not to do so. Fortiline emailed the manufacturer complaining that the manufacturer was not keeping its numbers up compared to other manufacturers. Fortiline also stated that “[w]ith this approach we will be at a .22 [margin] soon instead of a needed .42.” Fortiline later complained that the manufacturer was pricing at a 0.31 margin, “20% below market.”
The FTC sued under Section 5 of the FTC Act, and Fortiline entered into a consent agreement. The FTC alleged that Fortiline had invited the manufacturer to collude in price to the end consumers. The consent prohibits Fortiline from attempting to enter into an agreement to fix prices among other things. It allows Fortiline to discuss “procompetitive aspects” of the manufacturer-distributor relationship The order lasts for 20 years. Commissioner Ohlhausen dissented.
With regard to that “exception,” the Order states:
PROVIDED, HOWEVER, that it shall not, of itself, constitute a violation of Paragraph II. of this Order for Respondent to engage in any conduct that is (1) reasonably related to a lawful manufacturer-distributor relationship, lawful joint venture agreement, or lawful merger, acquisition or sale agreement; and (2) reasonably necessary to achieve the procompetitive benefits of such manufacturer-distributor relationship or of such agreement. For the avoidance of doubt, it shall not constitute a violation of Paragraph II of this Order for Respondent: (i) to communicate with a Manufacturer regarding Respondent’s desire to receive prices or rates (including rebates and discounts) at least as favorable as those granted by that Manufacturer to a Competitor or Contractor; (ii) to request, negotiate, or enter into an agreement with a Manufacturer under which Respondent shall be that Manufacturer’s exclusive or quasi-exclusive distributor; or (iii) to request or enter into an agreement with a Manufacturer under which Respondent distributes that Manufacturer’s ductile iron pipe to a Contractor previously or potentially served by that Manufacturer.
[Emphasis mine.] A “Manufacturer” is “any Person engaged in the business of manufacturing or fabricating ductile iron pipe, and any such Person’s employees, agents, and representatives.”
Fortiline sells the manufacturers’ product. It is invested in understanding and promoting the product and developing the brand. This is a case where Fortiline’s own vendor is free riding off Fortiline’s investment in the local market. It is outrageous to think that Fortiline would have to sit by and take that. And the consent itself embraces this fundamental circularity. The exception allows the very behavior the complaint condemns. The only thing this complaint achieves is to raise Fortiline’s costs by imposing a regulatory burden on it that no other competitor otherwise has. It also causes them to incur needless legal fees as they will assuredly have to pass by their lawyers each missive they write to the manufacturer. If anything this process has distorted this market.
The real lesson from this case is never enter into an agreement where your supplier can target the market directly. As soon as you complain about their free riding, you’ll be sued by the FTC.