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9 Law Notes Gen. Prac. 1 (1972-1973)

handle is hein.journals/lwntgen9 and id is 1 raw text is: Volume 9, page 1 The Making and Selling of an Antireciprocity Program by DAVID FORSYTH ZOLL Bureau of Competition Federal Trade Commission Washington, D.C. EDITOR'S NOTE: The views expressed in this article are solely those of the author and are not necessarily the views of the Federal Trade Commission. A LARGE PART OF INDUSTRY has apparently not taken the Government's attacks on reciprocity very seriously. Despite warnings and investigations by the Federal Trade Commission and the Depart- ment of Justice,1 the practice remains prevalent. In addition to firms which engage in the practice, there are many others, competing and dealing with reciprocity-minded firms or in reciprocity-prone in- dustries, which have simply not protected them- selves from suspicion with more than token anti- reciprocity efforts. An effective antireciprocity program, publicized to employees as well as customers and suppliers, may prevent or shorten a Government investi- gation. Furthermore, an antireciprocity program is salable to management; the tools of reciprocity are relatively easy to eliminate, and a Government investigation may be costly. Why, then, have not even well-intentioned firms eliminated the practice in fact and appearance? There seem to be two answers. First, industry may be looking at its own conduct in terms of a static, legal definition of reciprocity, rather than a defini- tion which can serve as a guide in the pressures of the marketplace. Secondly, industry seems to be- lieve that it is sufficient protection to issue policy statements against reciprocity rather than to take steps to prevent it. A Reciprocity Definition for the Client The reciprocity definition problem does not occur with respect to either coercive or mutual patronage reciprocity.2 These are clearly subject to attack un- der Section 1 of the Sherman Act,3 Section 5 of the Federal Trade Commission Act,4 and Section 7 of the Clayton Act5 The problem begins when a firm asserts its right to do business with its friends- meaning that it will, if possible, purchase from those who are customers. Government does not object to the fact that a firm does business with a friend as long as the friend offered superior price, quality or service, and as long as the fact that the supplier was a customer was not a reason for awarding business. A variation of the problem oc- curs when a firm announces that if price, quality and service are equal, it will favor as suppliers those who are customers. Industry has long consid- ered such conduct commonplace and natural. But by engaging in it, industry brings its conduct to the edge of a legal precipice. First of all, once a supplier knows that another firm favors certain suppliers because they are cus- tomers, that is all it needs to know to engage in reciprocity. It knows that to make sales it must make purchases. No formal agreements are needed. And the Government does not have to prove Sherman Act agreements in order to chal- lenge such conduct. Section 5 of the Federal Trade Commission Act permits the Commission to attack practices in their incipiency, before they become full-blown violations of the Sherman Act,6 and it can even attack, as unfair methods of competition, practices which are beyond the letter or spirit of the antitrust laws.7 With the Government clearly en- gaged in a campaign against reciprocity, it is foolhardy for a company to engage in sup- plier-customer favoritism. Furthermore, a firm should not rely upon the fact that it receives equal price, quality and service offerings from other suppliers. There may be sub- stantial anticompetitive effects even under these circumstances, as will be discussed later. At the very least, a firm is prevented from having a ran- dom chance of obtaining business. In any event, all factors of price, quality and service are so rarely, if ever, exactly equal that such a policy has the ap- pearance of an invitation to exchange business and invites Government investigation. © 1972 American Bar Association ( General permission to republish but not for profit, all or part of this material is granted, provided that reference is made to this publication, its date of issue, and that reprinting privileges were granted by permission of the American Bar Association Sections of General Practice and Young Lawyers. Law Notes, Fall, 1972 ANTITRUST

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