From the antitrust mailbag: refusals to deal

Here’s a very common question, and the writer is usually a retailer who sells products from different manufacturers.

Q: I received notice from my supplier that the company will no longer provide its products for me to sell. Is it a violation of the antitrust laws for my supplier to cut me off?

Typically, the answer is no, it is not a violation of antitrust law for a supplier to refuse to sell to a dealer. In our free market economy, a seller generally has the right to choose its business partners, just as a dealer has the freedom to choose to sell the products of only certain manufacturers. But in a few circumstances, there may be limits on this freedom.

What’s the law on refusals to deal?

Back in 1919, the United States Supreme Court made clear that the antitrust laws ordinarily do not interfere with the freedom to choose business partners. The case involved Colgate & Co., and the products Colgate threatened to withhold included soap and other toiletries. Colgate announced a policy of terminating any wholesaler or retailer that did not comply with certain Colgate policies.

Here’s what the Supreme Court said:

The purpose of the Sherman Act is to ... preserve the right of freedom of trade. In the absence of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of a trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.

This is known as the Colgate Doctrine, and it remains a fundamental rule of federal antitrust law.

As the Supreme Court noted, there can be additional facts beyond a mere refusal to deal that together could raise antitrust concerns.  For instance, antitrust concerns may arise in certain situations if a dominant firm refuses to deal with customers or suppliers who deal with its competitors in order to deny those competitors access to important supply or outlets. 

Here are two examples from the FTC’s antitrust enforcement archives to illustrate when a refusal to deal by a dominant firm may violate the antitrust laws. 

Refusal to Deal that Creates or Maintains a Monopoly. Manufacturers use distributors to sell swimming pool products such as pumps, chemicals, and diving boards to owners of residential and commercial pools. Several years ago, PoolCorp, the nation’s largest distributor of swimming pool products, announced a policy that it would refuse to deal with any pool product manufacturer that also sold products to new distributors looking to compete with PoolCorp. According to the FTC, PoolCorp’s implementation of this policy over an eight-year period unreasonably impeded competition from new distributors in numerous local markets where PoolCorp enjoyed monopoly power. The FTC contended that, because of this policy, manufacturers making more than 70 percent of all pool products sales refused to sell to any new distributor that wanted to compete with PoolCorp. In antitrust terms, the FTC alleged that PoolCorp used illegal means—the refusal to deal—to exclude new competition, thereby maintaining its monopoly position in local markets. Pool Corp. agreed to end this policy by signing a settlement with the FTC. 

Refusal to Deal that Organizes a Boycott. Back in the 1990’s when it was the nation’s largest toy retailer, Toys “R” Us announced a policy to stop carrying toys made by any manufacturer that sold the same toys to discount club stores, such as Costco. After a long trial, the FTC proved that the toy retailer overstepped the bounds of independent decision-making by organizing a boycott of club stores by toy manufacturers. The FTC found that Toys “R” Us used its dominant position as a toy retailer to coerce unlawful agreements from toy manufacturers to stop selling the same toys to club stores. This concerted boycott prevented consumers from comparing the price and quality of toys in the club stores to the price and quality of the products displayed in Toys “R” Us stores, and reduced the effectiveness of the club stores as competitors. The FTC ordered Toys “R” Us to stop pressuring its suppliers to limit supply or refuse to sell to toy discounters.  

But note that the Commission recently lifted some restrictions on Toys “R” Us. The Commission modified its order because Toys “R” Us no longer has significant market power as a toy retailer, facing significant competition from other toy retailers such as Walmart and Target, as well as online vendors. 

The long-recognized freedom to select business partners is part-and-parcel of our free market system and is one method by which companies compete. But where a refusal to deal is used to create or maintain a monopoly position or to organize collusion, antitrust problems can arise. For more information about the line between the freedom to select business partners on the one hand and illegal joint or monopolistic activity on the other, please see our Antitrust Guides on these topics: Dealings in the Supply Chain, Group Boycotts, and Single Firm Conduct.