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

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                               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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