On November 21, 2011, the Federal Trade Commission ("FTC") announced its negotiation of a consent decree with Pool Corporation, Inc. ("Pool Corp.") to resolve an investigation into alleged anticompetitive conduct in the pool supplies industry. Companies doing business in distribution markets should remember the FTC's action in this case when deciding when and how to negotiate exclusive or near-exclusive distribution agreements with suppliers.
According to the FTC's Complaint and related documents, Pool Corp. distributes (usually through local dealers) a range of products used by homeowners, country clubs, and other owners of pools to build and maintain swimming pools. Those products are manufactured by one of three large, full-line manufacturers or a number of other smaller manufacturers. Pool Corp. is the only nationwide distributor of pool products, accounting for approximately half of the pool products distribution centers in the U.S., and accounting for 30 to 50 percent of manufacturers' sales. In certain local markets, the FTC alleged that Pool Corp. held an 80 percent or greater market share.
Because of its large share of the distribution market, the FTC alleges that Pool Corp. wields enormous power with manufacturers of pool supplies. With this power, the FTC alleges that Pool Corp. was able to successfully impose a restriction on manufacturers that prohibited them from selling pool supplies to new entrant distributors in certain markets where Pool Corp. did business. By threatening to suspend all of its purchases nationwide from a manufacturer that chose to do business with a local distributor targeted by Pool Corp., Pool Corp.'s suppliers faced "catastrophic" financial consequences if they failed to comply with the demand for exclusivity.
Notably, the alleged demand for exclusivity did not restrict manufacturers from selling pool supplies to Pool Corp.'s existing competitors. The demand was allegedly made with regard to only certain new entrants into the pool products distribution market.
The FTC alleges that Pool Corp.'s conduct had the effect of raising prices and reducing output in the pool supplies market, including by excluding new competitors from the distribution market and raising its rivals' costs. The FTC found no efficiency-enhancing benefits from the alleged exclusivity.
The consent decree entered into by the FTC and Pool Corp. prohibits Pool Corp. from conditioning the sale or purchase of pool products, or participation in a preferred vendor program, on the sale of pool products to any other distributor; from pressuring manufacturers not to do business with other distributors; or from discriminating against manufacturers who sell pool products to other distributors.
This case serves as an important reminder to businesses engaged in distribution markets that exclusivity provisions cannot generally be used to induce a boycott of one's rival distributors by suppliers. Today's action by the FTC is similar to its action in Toys "R" Us v. FTC, 221 F.3d 928 (7th Cir. 2000), in which the FTC challenged the toy store chain's effort to convince toy manufacturers to restrict the distribution of their products to low-price warehouse club stores. While there is certainly a pro-competitive role for exclusivity arrangements in distribution markets under some circumstances, care should be taken to design such arrangements in compliance with antitrust laws.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
