Yes, probably– if you’re among the majority of traditional suppliers who rely on resellers to penetrate and expand their markets.

The good news is that there are various ways to minimize channel conflict without wholesale restructuring. (Sorry, couldn’t resist).  Let’s consider the situation.

Our Hypothetical: “Joe’s Organic Weather Compiler, “JOWCO,” sells cute little techie modules (“LTMs”) that consumers wear on their wrists to track worldwide climate change. OEMs incorporate these LTMs into more powerful industrial data display systems for large enterprises and government users.  JOWCO has the classic go-to-market model with two tiers of resellers: distributors (who get the best pricing) and retailers (who pay more to cover the distis’ profit margins).   JOWCO has reserved 7-8 “national” accounts for itself, prices and sells directly to the OEMs, and even sells direct when other important customers come to them; the distributors sometimes sell to consumers, when the opportunity presents itself; and the larger “big box” retailers often sell not just to consumers, but also to smaller retailers who can’t get the attention of the distributors.  Smart or large end-users press for ‘wholesale’ pricing from both retailers and distributors.

The Problem:  Channel Conflict, with elevated antitrust risk.

First—All three levels of distribution are competing, at times, with one another.  If and when they do, they are acting as “horizontal competitors,” for whom any kind of price collusion or customer allocation may be deemed a per se violation of the Sherman Act.  No proof of competitive harm needed and no evidence of “here’s why we did this” permitted.  Do it and lose.  Trebled.

Second—The channel gets angry faced with customer poaching by other tiers—especially by the supplier JOWCO itself, which is supposed to be loyal and appreciate what the resellers do for it.  Contentious relationships lead to reseller terminations and intra-brand lawsuits, any of which escalate naturally into claims of concerted action in violation of section 1 of the Sherman Act.

Third—Channel conflict is a virtual petri dish for a swarm of antitrust malefactions, which blossom from perfectly natural and predictable efforts to resolve those conflicts.  Resale price maintenance that fixes the distributor’s minimum price is an obvious “solution” where retailers get discounts that facilitate their internecine competition with distributors.  Claims of collusion and conspiracy invariably echo when a distributor is not renewed after selling directly to end-users.   Per se price fixing is charged when the enterprise customer is told that a Big Box retailer’s bid has been withdrawn at the urging of the regional distributor.  Examples are almost endless, but they all revolve around “concerted action” by erstwhile competitors as they plaintively ask: “Can’t we all just get along?”

Seduced and Abandoned—If all this weren’t distressing enough, JOWCO’s sales start to slide as disgruntled channel members brandish their version of an Uzi in the workplace:  Traitorous abandonment of their posts, rushing into the arms of competing LTM suppliers, taking with them all manner of trade secrets, shadow receivables and customer allegiances.

What’s a JOWCO to Do?  The newly anointed Sales VP, or CEO who just can’t stand it anymore, may indeed tear down the house and start over with a new and more elegant distribution model.  Call your antitrust architect when that happens, because the teardown will present a target-rich environment for plaintiffs and their lawyers.   But sometimes major restructuring is the best alternative.

Short of that, here is a sampling of the tools available to minimize channel conflict—i.e., competition among your resellers—and with it your antirust exposure:

• Rationalize the channel structure and the pricing within it.  Are margins creating the wrong incentives?  Can or should online resales be permitted?
• Look again at which, if any, accounts should be the exclusive province of you as the supplier.
• Eliminate as much overlap as possible among sellers in each tier.
• Start to prune your resellers down to the number you really need, not renewing those that are underperformers, carry competing lines, dilute the brand or simply fail to add much value.
• Consider various vertical restrictions that are well accepted as usually pro-competitive and as enhancing interbrand competition.  Assigning exclusive territories is a classic example.  Another is allocating certain customers or customer categories to one or a few resellers that are most qualified to serve them, prohibiting others not so certified or designated.  “Gold,” “Silver” and “Copper” qualification levels are often used for this purpose, each with its own reasonable and objective set of qualifying criteria.
• Implement a MAP program whereby resellers may be unilaterally terminated or sanctioned for selling at below prices set by the supplier.
• Have written contracts with all your first tier resellers, which have fixed expiration dates that require conscious decisions to renew.  Administer those contracts so that informed decisions are in fact made each year, or upon expiration.

Summary:  Channel conflict is often an early outcome of exuberant sales growth.  Attention is not paid until the dispute, the claim, the lawsuit or the lost sales start to surface.  Even startups should make the lessening of channel conflict a priority; indeed, they have a unique opportunity to “do it right” from the outset.  Established companies would do well to audit their channel structure if conflicts are appearing—and tune reseller relationships periodically.   A little 10W/40, applied with care, can go a long way in maximizing sales through a well-functioning channel.

Some conflict may be inevitable.  But even if endemic to the beast, channel conflict can be minimized by aligning the resellers’ incentives and rewards with your own.  Prudent application of the right tools can go a long way in this direction, bringing with it the felicitous consequence of lessened antitrust risk.