Export Trading Company Vertical Restraints Examples

Rubber-King, a U.S. manufacturer of automobile tires accounting for 50 percent of U.S. domestic sales of tires, wishes to appoint ETC, a non-manufacturing U.S. export intermediary familiar with European markets, as its exclusive distributor for Europe. For the last five years, Rubber-King has used Blooper, another U.S. based export intermediary, as its exclusive distributor for Europe.  

Now Rubber-King has become dissatisfied with Blooper’s efforts and has decided not to renew its distributorship agreement with Blooper at the expiration of its term. In its proposed exclusive distributorship agreement with FTC, Rubber-King intends to include provisions

(i) preventing ETC from reselling Rubber-King’s tires except in Europe;

(ii) preventing ETC from selling Rubber-King’s tires at a price lower than a specified minimum price in certain European countries;

(iii) requiring ETC to purchase a full line of automobile tires for export to Europe; and

(iv) requiring ETC not to purchase or deal in automobile tires for sale to Europe except from Rubber-King.  

Finally, the proposed agreement would obligate Rubber-King to impose restrictions on its other distributors to prevent their shipment of its automobile tires to Europe. Rubber-King and ETC have jointly applied for a Certificate of review covering the restrictions described above as well as Rubber-King’s refusal to renew its distributorship agreement with Blooper or to supply Blooper with tires.

Discussion

A Certificate of Review would likely be granted to the applicant in the circumstances outlined above because none of the vertical restraints would be likely to substantially restrain competition in the United States. Thus, even though Rubber-King has a significant market share, the grant of exclusive rights to ETC and the refusal to renew Blooper’s distributorship agreement or to supply it with tires would be consistent with Title III’s standards, since these actions would have no substantial anti-competitive effects within the United States.  

The refusal to renew the agreement with Blooper or to sell tires to it might limit Blooper’s export of tires. Such a limitation, however, would not be inconsistent with the Title III standards.   Rubber-King seems to have a reasonable business justification for replacing Blooper and, more importantly, any resulting damage to Blooper would be unlikely to substantially lessen competition in domestic markets. The restriction that prohibits ETC from selling in the U.S. does not substantially lessen competition in the U.S.: such territorial restrictions are usually unobjectionable vertical restraints. Also, the territorial and price restraints that apply to ETC’s sales in foreign markets would not have any anti-competitive effect in the United States.

Finally, the exclusive dealing and full-line purchase obligations imposed on ETC would not be inconsistent with Title III’s standards. These obligations would have the effect of preventing U.S. tire manufacturers other than Rubber-King from using ETC as a European distributor. Nevertheless, the fact that the proposed conduct might result in such a limitation would not violate the Title III standards if, as would be true normally in the case of exclusive dealing obligations, the conduct would not be expected to result in a substantial restraint on competition within the United States. It is unlikely that the restriction in this case would significantly limit the ability of Rubber-King’s competitors to export.

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Erektor is a U.S. manufacturer of electric motors that accounts for 5% of sales of such motors in the U.S. market. Erektor is capable of producing the entire range of such motors currently used but has concentrated on sales of smaller sizes of motors.  Erektor is currently exporting motors but is hampered in its export sales by its lack of a complete line of sizes: therefore, it wishes to enter into exclusive or nonexclusive agreements with other U.S. manufacturers of motors under which it would distribute their motors in foreign markets.  Without identifying particular suppliers, Erektor has asked that a Certificate of Review covering such conduct be issued. The electric motor markets in the United States are not particularly susceptible to coordination of domestic prices or output. Entry barriers are not significant and manufacturing economies of scale can be achieved at a production level of one percent of current industry output.  The industry is relatively unconcentrated; in any relevant product market, the largest firm accounts for 10% of sales, two other firms each account for 8%, four firms each account for 5% and 30 other firms account for the remainder of sales.

Discussion

In these circumstances, a certificate of review would likely be granted to Erektor for its individual export distribution agreements with other suppliers of electric motors. It is conceivable that the existence of exclusive export distribution agreements between producers accounting for a large percentage of industry sales and one of their competitors could adversely affect domestic competition in certain product markets.

However, entry into the relevant product markets in this example is easy, and the markets are unconcentrated and appear to be competitive. These factors make it unlikely that coordination among the firms could effectively raise U.S. prices. Thus, these factors minimize the risk that the exclusive arrangements in this case will have a substantial anti-competitive effect. Furthermore, if Erektor considered that the disclosure to its suppliers of specific types of information (e.g., information relating to bid requirements or purchase specifications) obtained by Erektor from any of them to be reasonably necessary to success in distribution, it could request that it be certified to make such specific disclosures. If the exchange of the specified information would be unlikely to risk anti-competitive domestic effects, certification could be granted.

Erektor conceivably could enter into individual exclusive distribution agreements with manufacturers accounting for a large percentage of industry sales of electric motors.  In such a case an issue would be raised as to whether the exclusive arrangements, which would deny other export intermediaries handling exports of electric motors access to one possible source of supply, would violate the standards of the statute by producing a substantial anti-competitive effect in the United States. Since these standards encompass the antitrust laws and those laws protect competition, not competitors, the mere fact that some exporters would be disadvantaged would not be sufficient to demonstrate an inconsistency with the standards.  These exclusive export agreements appear unlikely to affect competition in the sale of electric motors within the United States.  Accordingly, they likely would be certified.

Because only Erektor sought certification, the protections of the certificate would extend only to Erektor. Erektor would be protected for its agreements with others as specified in the certificate, but the other parties to such agreements would not be protected, unless they ask for protection as an applicant or member.

IPORT is a newly-formed export trading company that intends to export a variety of products purchased from a number of suppliers, including competing domestic suppliers. IPORT does not at present know who its U.S. suppliers or foreign distributors will be. Nonetheless, it would like to obtain a Certificate of Review covering its entering into agreements under which it would be an exclusive distributor for any supplier and would agree not to deal in export trade in the products of that supplier’s competitors unless authorized by the supplier.   In addition, it would enter into agreements under which it would grant exclusive distributorship to foreign entities and oblige such entities not to deal in goods competing with those supplied by IPORT.

Discussion

Exclusive arrangements such as those described above involving a company such as IPORT would not normally have a substantial anti-competitive impact in any U.S. market. In light of the fact that IPORT is a small, new export intermediary, it seems unlikely that its entering into exclusive arrangements with any individual supplier or with any export distributor would substantially restrain U.S. competition through effects on competing suppliers.

The certification of IPORT to represent a number of suppliers, however, raises the possibility that IPORT could become the exclusive export distributor for competing manufacturers. To clarify that IPORT is not certified to engage in joint discussions with competing producers, the Certificate will be limited to only individual negotiations and agreements between IPORT and its suppliers unless IPORT can demonstrate that in particular product markets broader certification would be appropriate.  

In addition, in order to avoid the possibility that IPORT could disclose competitively sensitive information obtained from one supplier to competing suppliers, the Certificate would normally contain a condition stating that IPORT will not intentionally make such disclosures. If IPORT needed to exchange certain sensitive business information in order to engaged in export trade, it might be possible to grant a Certificate of Review for such exchanges if IPORT specifically described the products or suppliers involved and if the domestic market for the product were competitive and had structural features indicating that successful price or output coordination would not be likely to occur. In such cases, the agencies may place in the Certificate limitations on the nature of information to be disclosed and the manner in which it would be exchanged.

Bubbles, Blossom, Buttercup and Utonium are manufacturers of a particular chemical, chemical X, accounting for 45 percent of U.S. domestic sales of the product, who wish to enter into an agreement to form an export association, Chem-X. One of the provisions of the proposed agreement would require Bubbles, Blossom, Buttercup and Utonium to sell the chemical for export only through Chem. X and would prevent them from independently exporting the chemical either directly or indirectly through other U.S. export intermediaries.  Exports of the chemical have been minimal because of strong competition in the consumer countries from non-U.S. firms.  Joint export marketing is expected to provide significant transportation and distribution cost savings. Bubbles, Blossom, Buttercup,Utonium and Chem-X have applied for a Certificate of Review covering their agreement to export exclusively through Chem-X and to refrain from directly or indirectly exporting chemical X independently.

Discussion

It seems likely that a Certificate of Review could be granted covering the proposed restriction. The grants of exclusivity to Chem-X, in themselves, would not be likely to have any anti-competitive effects in the U.S. market.  It would seem that the exclusivity granted to Chem-X would be reasonably necessary for Chem-X to prevent the firms from individually obtaining a free ride from Chem-X’s marketing efforts.[20]

B. Horizontal Restraints

The analysis under Title III’s certification standards of joint export activity among competitors will focus or whether the conduct is likely to have a substantial anti-competitive effect in a U.S. market. This is essentially a two-part test. First, the agencies will analyze whether the joint activity is likely to have any anti-competitive effect on U.S. commerce.  If it is incapable of having any anti-competitive impact in the United States, the collective export activity will be certified.  Examples of such conduct include the joint setting of prices and quantities at which products are sold in export markets if the products by law cannot be sold in the United States and the exchange among competing U.S. sellers of information relating exclusively to exporting or export markets (e.g. identification of customers in any export market).  Second, if there is potential for anti-competitive spillover affecting U.S. markets, then the agencies will analyze whether the formation or contemplated operation of the joint entity is likely to substantially restrain or lessen competition within U.S. commerce.  Generally, anti-competitive spillover may occur if competitors, in the process of engaging in export trade, share price or other sensitive business information relating to their respective U.S. sales or if competitors manipulate domestic prices through the manipulation of domestic supply.

The framework for analyzing whether there is likely to be a substantial anti-competitive effect in the United States is similar to that for analyzing joint ventures or mergers.[21] In analyzing the export conduct sought to be certified, the agencies will evaluate the economic characteristics of the domestic market in order to assess whether a market is likely to be conducive to domestic price or output coordination.

In evaluating the domestic market structure, the agencies will first undertake to define the relevant product and geographic markets in which to assess the anti-competitive effects of the joint export activity.

After determining the relevant market, the agencies will examine the market’s structure in order to assess whether its economic characteristics are conducive to developing and maintaining a consensus on domestic price levels and output rates.  As a first step, the agencies will assume that the competitors merged and focus on the post-merger market concentration, a function of the number of firms in a market and their respective market shares.  Treating the participants in a joint export venture as a merged entity is a useful threshold test, because for joint ventures with small market shares in markets with a low degree of market concentration (e.g. 20 approximately equal-sized firms in the market and the four joint venture participants have a total market share of 20%), the agencies will be able to determine without a detailed examination of other economic characteristics that the joint venture poses no substantial threat to competition in the United States.  In other cases, however, the agencies will proceed to examine a variety of other economic characteristics relevant to determining whether the market is predisposed to effect coordination of domestic price levels and output rates and, therefore, whether the joint export entity is likely to be a substantial restraint on domestic competition.  Such characteristics include; (1) The ease of entry into the market by other firms, (2) the ease with which firms in an industry can expand supply; (3) the homogeneity of a product across producers: (4) the existence of large buyers; (5) whether the participants have in the past effectively coordinated domestic price levels or output rates: and (8) whether domestic demand is stable or variable.

If an assessment of domestic market concentration in light of these other structural characteristics leads the agencies to conclude that the joint export entity is likely to have substantial restraining effects in domestic competition, the agencies may find it necessary either to limit significantly the activities that may be certified or to impose safeguards on certified activities, such as an information exchange limitation.  However, even in a concentrated market, the absence of certain other characteristics listed above may lead to the conclusion that successful price and output coordination would be unlikely and that, therefore, certification would be possible for joint export activities with few or no limitations.  Particularly where competitors intend to cooperate only on a single contractor where contacts among them are to be infrequent, the likelihood of a substantial anti-competitive impact is reduced because there would be no continuing opportunity for coordinating domestic price levels or output rates.

An issue of particular concern for applications involving domestic competitors is the possibility of sharing price and other sensitive business information in connection with export conduct.  In some situations, such exchanges are likely to have anti-competitive effects because the information can be used for coordinating domestic price levels or output rates, In other situations, however, sharing such information is not conducive to coordination of domestic prices or output and, thus, is likely not to have an anti-competitive effect.

In determining whether to certify exchanges of such information among domestic competitors, the agencies wilt carefully scrutinize the application in a manner similar to other joint activities. The agencies will ordinarily place a condition in the Certificate stating that the certified parties will not intentionally make exchanges of competitively sensitive information except as explicitly certified. The agencies would certify such exchanges if it can be shown that the sharing of information is in the course of export trade and is unlikely to have a substantial anti-competitive effect in U.S. markets either because the nature of the information is incapable of affecting US. competition or because the economic characteristics of the relevant markets indicate that the exchange is likely to have a pro-competitive or competitively neutral effect.  If they have insufficient information about the proposed conduct or about the specific product markets or domestic competitors to make a determination about whether the exchange is likely to have a pro-competitive, competitively neutral or anti-competitive effect, the agencies wilt not certify the exchange. If they determine that such an exchange is likely to substantially restrain or lessen domestic competition. the agencies will not certify the exchange. In some instances, however, safeguards on the nature of information shared and the manner in which it is exchanged may eliminate the likely effect on domestic competition, thus permitting the agencies to certify it. Such safeguards would be placed in the Certificate as a condition.