{"id":338,"date":"2012-07-10T01:17:53","date_gmt":"2012-07-10T01:17:53","guid":{"rendered":"https:\/\/comptonantitrust.com\/?p=338"},"modified":"2012-07-11T00:40:20","modified_gmt":"2012-07-11T00:40:20","slug":"channel-conflict-is-an-antitrust-problem-is-it-inevitable","status":"publish","type":"post","link":"https:\/\/comptonantitrust.com\/?p=338","title":{"rendered":"Channel Conflict is an Antitrust Problem. Is it Inevitable?"},"content":{"rendered":"

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

The good news is that there are various ways to minimize channel conflict without wholesale restructuring. (Sorry, couldn’t resist).\u00a0 Let\u2019s consider the situation.<\/p>\n

Our Hypothetical<\/strong>: “Joe’s Organic Weather Compiler, “JOWCO,” sells cute little techie modules (\u201cLTMs\u201d) 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. \u00a0JOWCO 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\u2019 profit margins). \u00a0 JOWCO has reserved 7-8 \u201cnational\u201d 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 \u201cbig box\u201d retailers often sell not just to consumers, but also to smaller retailers who can\u2019t get the attention of the distributors.\u00a0 Smart or large end-users press for \u2018wholesale\u2019 pricing from both retailers and distributors.<\/p>\n

The Problem:\u00a0 <\/strong>Channel Conflict, with elevated antitrust risk.<\/p>\n

First\u2014All three levels of distribution are competing, at times, with one another.\u00a0 If and when they do, they are acting as \u201chorizontal competitors,\u201d for whom any kind of price collusion or customer allocation may be deemed a per se violation of the Sherman Act.\u00a0 No proof of competitive harm needed and no evidence of \u201chere\u2019s why we did this\u201d permitted.\u00a0 Do it and lose. \u00a0Trebled.<\/p>\n

Second\u2014The channel gets angry faced with customer poaching by other tiers\u2014especially by the supplier JOWCO itself, which is supposed to be loyal and appreciate what the resellers do for it.\u00a0 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.<\/p>\n

Third\u2014Channel conflict is a virtual petri dish for a swarm of antitrust malefactions, which blossom from perfectly natural and predictable efforts to resolve those conflicts.\u00a0 Resale price maintenance that fixes the distributor\u2019s minimum price is an obvious \u201csolution\u201d where retailers get discounts that facilitate their internecine competition with distributors.\u00a0 Claims of collusion and conspiracy invariably echo when a distributor is not renewed after selling directly to end-users.\u00a0\u00a0 Per se price fixing is charged when the enterprise customer is told that a Big Box retailer\u2019s bid has been withdrawn at the urging of the regional distributor.\u00a0 Examples are almost endless, but they all revolve around \u201cconcerted action\u201d by erstwhile competitors as they plaintively ask: \u201cCan\u2019t we all just get along?\u201d<\/p>\n

Seduced and Abandoned\u2014If all this weren\u2019t distressing enough, JOWCO\u2019s sales start to slide as disgruntled channel members brandish their version of an Uzi in the workplace:\u00a0 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.<\/p>\n

What\u2019s a JOWCO to Do?\u00a0 <\/strong>The newly anointed Sales VP, or CEO who just can\u2019t stand it anymore, may indeed tear down the house and start over with a new and more elegant distribution model.\u00a0 Call your antitrust architect when that happens, because the teardown will present a target-rich environment for plaintiffs and their lawyers.\u00a0\u00a0 But sometimes major restructuring is the best alternative.<\/p>\n

Short of that, here is a sampling of the tools available to minimize channel conflict\u2014i.e.,<\/em> competition among your resellers\u2014and with it your antirust exposure:<\/p>\n