FTC Staff Comment Before the Maryland House of Delegates Economic Matters Commission Concerning Proposed Wine Cooler Fair Dealing Act to Regulate Business Arrangements Between Suppliers and Wholesalers

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BUREAU Of' COMPETTTlON
UNITED STATES OF AMERlCA
FEDERAL TRADE COMMISSION
WASHINGTON. D.C, 20580
MAR 1 1 19J7
The Honorable 	Juanita D. 	Miller
Economic Matters 	Committee
House 	of 	Delegates
Annapolis, 	Maryland 	21401-1991
Dear 	Delegate 	Miller:
The 	Federal 	Trade 	Commission 	staff 	is 	pleased 	to 	respond 	to
your 	invitation 	for 	comments 	on 	the 	proposed 	"Wine Cooler 	Fair
Dealing 	Act," 	a 	bill 	that 	would 	regulate 	business 	arrangementf
between 	suppliers 	and 	wholesale 	distributors 	of 	wine 	coolers.
We 	recommend 	against 	passage 	of 	this 	bill 	because 	it 	will
introduce 	rigidity 	into 	the 	distribution 	system 	for 	wine 	coolers
and 	ultimately 	raise 	prices 	to 	consumers.
Congress 	has 	charged 	the 	Commission 	with 	enforcing 	the
nation's 	antitrust 	and 	consumer 	protection 	laws. 	Under 	this
mandate, 	the Commission 	or 	its 	staff 	has 	frequently 	appeared
before 	other 	governmental 	bodies 	to 	help 	assess 	the 	competitive
anG 	consumer 	welfare 	implications 	of 	pending 	issues. 	The
Commission 	is 	particularly 	familiar 	with 	competition 	issues 	in
the 	distribution 	of 	alcoholic 	beverages. 	On 	various 	occasions 	in
recent 	years, 	the 	Commission 	staff 	has 	presented 	its 	views 	on
1 	These 	comments 	represent 	the 	views 	of 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics 	of 	the
Federal 	Trade 	Commission 	and 	do 	not 	necessarily 	represent 	the
views 	of 	the 	Commission 	or 	any 	individual 	Commissioner. 	The
Commission, 	however, 	has 	authorized 	the 	submission 	of 	these
comments.

The 	Honorable 	Juanita D. 	Miller
proPosed 	legislation 	governing 	the 	sale 	of 	these 	products. 2
,
Likely 	Effect 	of 	the Wine 	Cooler 	Fair 	Dealing 	Act
1. 	Distribution 	Arrangements
-2-
The 	Wine 	Cooler 	Fair 	Dealing Act 	requires 	the 	supplier 	to
provide 	its 	wholesale 	distributor 	with 	a 	written 	agreement
designating 	a 	spec~fic 	sales 	territory, 	§ 	203.3(9) 	(see 	also
Section 	203.22(A)) 	and 	provides 	that 	a 	distributor 	"may 	not 	sell
or 	deliver 	wine 	coolers 	to 	a 	retail 	licensee 	located 	outside 	the
sales 	territory 	designated 	by 	the 	supplier 	••••" 	.
§ 	203.4(A) (1). 	This 	requirement 	prevents 	the 	supplier 	from
selecting 	what 	it 	considers 	to 	be 	the 	most 	efficient 	distribution
system, 	and 	limits 	the 	supplier's 	ability 	to 	respond 	quickly 	to
changing market 	conditions. 	Moreover, 	the 	enforcement 	provisions
shift 	unnecessarily 	the 	balance 	that 	would 	otherwise 	exist
between 	the 	supplier 	and 	the 	distributor 	under 	existing
principles 	of 	tort 	and 	contract 	law. 	By 	preventing 	the 	supplier
from 	choosing 	the 	way 	it 	thinks 	best 	to 	get 	its 	product 	to
consumers, 	the 	Act 	is 	likely 	to 	increase 	the 	price 	to 	the
consumer.
No 	reason 	exists 	to 	impose 	inflexible 	vertical 	arrangements
between 	suppliers 	and 	distributors 	by 	legislation. 	vertical
restraints 	imposed 	by 	suppliers 	can 	operate 	as 	procompetitive 	and
efficiency 	enhancing 	arrangements, 	which 	will 	withstand 	antitrust
scrutiny. 	However, 	in 	some 	circumstances, 	certain 	vertical
2
3
See, 	~, 	Comments 	of 	the 	Bureaus 	of 	Competition, 	Consumer
ProtectIon, 	and 	Economics 	o~ 	the 	Federal 	Trade 	Commission 	on
the 	District 	of 	Columbia 	Beer 	and 	Spirits 	Franchise 	Act 	(Aug.
29, 	1986); 	Comments 	of 	the 	Bureaus 	of 	Competition, 	Consumer
Protection, 	and 	Economics 	of 	the 	Federal 	Trade 	Commission 	on
the 	California 	Beer 	Distribution 	Bill, 	Senate 	Bill 	No. 	1211
(July 	2, 	1985); 	Comments 	of 	the 	Bureaus 	of 	Competition,
Consumer 	Protection, 	and 	Economics 	of 	the 	Federal 	Trade
Commission 	on 	the 	Rhode 	Island 	Distilled 	Spirits 	and 	Vinous
Beverages 	Fair 	Dealing 	Law 	(Apr. 	3, 	1985); 	Comments 	of 	the
Bureaus 	of 	Competition, 	Consumer 	Protection, 	and 	Economics 	of
the 	Federal 	Trade 	Commission 	on 	(Virginia) 	House 	Bill 	No.
1301, 	Wine 	Franchise 	Act 	(Feb. 	8, 	1985); 	Malt 	Beverage
Interbrand 	Competition 	Act: 	Hearings 	on 	S. 	1215 	Before 	the
Senate 	Comm. 	on 	the 	Judiciary, 	97th 	Cong., 	2d 	Sess. 	(1983).
The 	supplier 	could 	assign more 	than 	one 	distributor 	to 	a
territory. 	S 	203.22(C).

The Honorable 	Juanita 	D. 	Miller 	-3-
restraints 	can 	operate 	to 	impede 	competition, 	in 	which 	case 	they
will 	not 	withstand 	antitrust 	scrutiny. 	The 	activities 	of 	a
competitive marketplace 	and 	the 	enforcement 	of 	the 	antitrust 	laws
will 	deter 	and 	eliminate 	anticompetitive 	restraints. 	If 	Maryland
chooses 	to mandate 	certain 	vertical 	arrangements, 	the 	legislation
may 	lead 	to 	anticompetitive 	effects, 	thereby 	increasing 	costs 	to
consumers.
2. 	Franchise Arrangements
Furthermore, 	the 	bill 	also 	restricts 	the 	supplier's 	ability
to 	withhold 	its 	consent 	to 	any 	transfer 	of 	the 	distributor's
business 	if 	the 	proposed 	transferee 	meets 	the 	material 	and
reasonable 	qualifications 	and 	standards 	required 	by 	the
supplier. 	§ 	203.15. 	"Reasonable 	qualification" 	is 	defined 	as
the 	average 	standard 	of 	the 	criteria 	used 	by 	the 	supplier 	for
distributors 	that 	entered 	into 	or 	renewed 	an 	agreement 	with 	the
supplier 	during 	the 	prior 	two 	years. 	§ 	203.2(H). 	If 	the
proposed 	transferee 	is 	the 	distributor's 	heir, 	the 	supplier 	may
not 	interfere 	at 	all 	with 	the 	transfer 	of 	the 	distributor's
business 	under 	certain 	circumstances. 	s§ 	203.2(D), 	203.l5(D).
These 	provisions 	would 	enable 	distribution 	arrangements 	to
survive 	long 	after 	the 	original 	distributors 	had 	gone 	out 	of
4 	Under 	the 	bill, 	"good 	cause" 	is 	basically 	a 	failure 	by 	the
distributor 	to 	comply 	with 	a 	provision 	of 	the 	agreement 	that
is 	both 	reasonable 	and 	of 	material 	significance 	to 	the
business 	relationship 	with 	the 	supplier. 	S 	203.8. 	Even 	when
the 	supplier 	can 	establish 	the 	requisite 	noncompliance, 	the
distributor 	has 	165 days 	to 	take 	corrective 	action 	and 	cure
its 	noncompl i ance. 	§ 	2 0 3_~ 8.

The Honorable Juanita D. 	Miller 	-4-
business. 	The 	higher 	costs 	caused 	by 	these 	inefficiencies 	would
undoubtedly 	be 	passed 	on 	to 	consumers.
It 	is 	likely 	that 	some 	current 	distributional 	networks 	will,
in 	fact, 	become 	outmoded 	within 	the 	next 	five 	years. 	Published
reports 	indicate 	that 	wine 	coolers 	first 	appeared 	in 	the 	United
States 	in 	1981. 	Today 	there 	are 	more 	than 	100 	brands 	of 	wine
coolers 	in 	the market. 	This 	product, 	which 	was 	not 	available
seven 	years 	ago, 	now 	accounts 	for 	annual 	sales 	of 	more 	than 	$1
billion. 	Companies 	have 	been 	entering 	(and 	ig 	some 	cases
exiting) 	this 	booming market 	at 	a 	rapid 	rate. 	In 	such 	a 	market 7
distribution 	technologies 	and 	patterns 	are 	likely 	to 	change
relatively 	rapidly. 	A law 	that 	failed 	to 	allow 	this 	change 	would
impose 	significant 	costs 	on 	consumers.
The Wine 	Cooler 	Fair 	Dealing Act 	may 	have 	its 	greatest
impact 	on 	suppliers 	whose 	distributors 	have 	already 	been 	allotted
exclusive 	sales 	territories 	that, 	taken 	together, 	cover 	the
entire 	state. 	Since 	the 	bill 	prohibits 	the 	supplier 	from 	failing
to 	renew 	an 	agreement 	or 	refusing 	to 	continue 	under 	an 	agreement
except 	under 	certain 	circumstances 	(see 	S§ 	203.7-203.8), 	once 	a
supplier 	assigns 	an 	exclusive 	sales 	territory 	to 	a 	distributor,
the 	supplier, 	despite 	§ 	203.22(C), 	may 	not 	be 	able 	to 	create 	new
distributorships 	in 	that 	territory 	without 	challenge 	from 	the
existing 	distributor 	for 	terminating 	or 	reducing 	the 	sales
territory.
As 	a 	result 	of 	the 	proposed 	statutory scheme, 	suppliers 	may
find 	it 	difficult 	to 	improve 	their 	distribution 	networks 	by
introducing 	additional 	distributors. 	Even 	though 	a 	supplier 	may
have 	a 	legitimate 	and 	procompetitive 	business 	reason 	for 	wanting
to 	reduce 	or 	eliminate 	a 	distributor's 	territory, 	the 	supplier
may 	be 	reluctant 	to 	face 	the 	threat 	of 	a 	court 	battle 	and 	incur
the 	cost 	of 	proving 	the 	existence 	of 	"good 	cause." 	A supplier
faced 	with 	a 	number 	of 	poorly 	performing 	distributors may 	find 	it
5 	Jobson's 	Wine 	Marketing Handbook 	1986 	(D. 	Hecht 	ed. 	1986);
New Coolers 	Draw 	Lukewarm Response, 	Wall 	Street 	Journal, 	Feb.
20, 	1986, 	at 	27; 	Another 	Coup 	for 	the 	Fighting 	Gallos, 	New
York 	Times, 	July 	6, 	1986, 	§ 	3, 	at 	1, 	22; 	Bartles 	& Jaymes
Winning 	Fierce 	Fight 	for 	No.1, 	Advertising Age, 	Oct. 	6,
1986, 	at 	8-2; 	Regionals 	Scramble 	for 	10% 	of 	Market,
Advertising 	Age, 	Oct. 	6, 	1986, 	at 	8-4; 	Brewers 	Bottle Up
Their 	Entry's 	Double 	Identity, 	Advertising Age, 	Oct. 	6, 	1986,
at 	8-6; 	Predict 	Big 	Chill 	for 	Wine 	Coolers, 	Advertising 	Age,
Aug. 	11, 	1986, 	at 	23; 	Cooler 	Crowd 	Fells 	Coors, 	Schenley,
Advertising 	Age, 	Feb. 	24, 	1986, 	at 	3, 	83.

The Honorable 	Juanita D. 	Miller 	-5-
especially 	difficult 	to 	establish 	"good 	cause," 	since 	"good
cause," 	as 	defined 	in 	S 203.8 	of 	the 	bill, 	is 	not 	necessarily
satisfied 	by 	demonstrating 	a 	sales 	performance 	inferior 	to 	that
of 	other 	distributors 	of 	the 	same 	brand. 	The 	distributor 	is
required 	to maintain 	only 	"reasonable 	sales 	levels." 	§ 	203.14.
In 	the 	absence 	of 	regulation, 	suppliers 	can 	always 	rely 	on
the 	possibility 	of 	bringing 	in 	new 	distributors 	to 	ensure 	that
retailers 	receive 	adequate 	supplies 	of 	their 	wine 	coolers 	at
competitive 	prices. 	If 	the 	existing 	distributors 	attempt 	to
charge 	above 	the 	competitive 	price, 	suppliers 	can 	give 	franchises
to 	new 	distributors 	that 	are 	willing 	to 	charge 	lower 	wholesale
prices. 	Suppliers 	can 	also 	sell 	through 	distributors 	from 	other
territories. 	By 	interfering 	with 	possible 	entry 	into 	the
territory, 	the Wine 	Cooler 	Fair 	Dealing Act 	may 	thereby 	increase
the 	prices 	paid 	by 	consumers.
The Act 	will 	interfere 	unnecessarily 	with 	market 	forces 	by
increasing 	the 	supplier's 	costs 	of 	switching 	from 	one 	distributor
to 	another 	or 	adding 	additional 	distributors. 	The 	stimulus 	to
efficiency 	in 	distribution 	resulting 	from 	competition 	for 	the
supplier's 	patronage 	among 	existing 	and 	potential 	distributors
will 	be 	reduced 	as 	it 	becomes more 	costly 	for 	suppliers 	to 	change
or 	add 	distributors. 	These 	higher 	costs 	will 	also 	reduce 	the
incentives 	of 	existing 	suppliers 	to 	introduce 	new 	brands 	into
Maryland 	and 	of 	new 	suppliers 	to 	enter 	the 	market.
3. 	Prohibitions 	on 	Exclusive Dealing
Another 	potentially 	cost-enhancing 	provision 	of 	the 	Act 	is
Section 	203.3(4). 	This 	section 	prohibits 	a 	supplier 	in most
cases 	from 	requiring 	a 	distributor 	"to 	assent 	to 	any 	condition,
stipulation, 	or 	provision 	limiting 	the 	right 	to 	sell 	the 	brand 	or
brands 	of 	wine 	coolers 	of 	any 	other 	supplier 	•••."
§ 	203.3(4). 	This 	prohibition 	imposes 	costs 	of 	its 	own. 	An
exclusive 	dealing 	arrangement 	could 	be 	of 	considerable 	value 	to 	a
supplier 	that 	finds 	it 	difficult 	to monitor 	the 	efforts 	that 	its

The Honorable Juanita D. 	Miller 	-6-
distributors 	are making 	on 	behalf 	of 	its 	products. 6 By 	confining
a 	distributor 	to 	the 	supplier's 	products, 	the 	supplier 	ensures
that 	it 	is 	in 	the 	distributor's 	own 	interest 	to market 	those
products 	aggressively. 	Such 	a 	contract 	clause 	does 	not 	unfairly
burden 	the 	distributor 	or 	call 	for 	governmental 	intervention,
unless 	the 	firms 	imposing 	the 	contracts 	had 	substantial 	market
power 	and 	distributors 	could 	not 	readily 	turn 	to 	alternative
suppliers. 	In 	a 	competitive 	market, 	a 	supplier 	could 	not 	force
such 	unilateral 	terms 	on 	a 	distributor 	to 	the 	detriment 	of 	the
latter, 	since 	the 	distributor 	could 	turn 	to 	other 	suppliers.
Rather, 	a 	supplier 	would 	have 	to 	induce 	a 	distributor 	to 	agree 	to
an 	exclusive 	dealing 	arrangement 	by 	offering 	the 	distributor
something 	in 	return, 	such 	as 	lo~er prices 	or 	a 	promise 	to 	fill
all 	of 	the 	distributor's 	needs. 	Whatever 	the 	inducement, 	the
distributor 	would 	obtain 	cost 	savings 	that 	could 	be 	passed 	on 	to
consumers 	in 	the 	form 	of 	lower 	prices.
In 	the 	absence 	of 	a 	restrictive 	provision 	like 	Section
203.3(4), 	both 	a 	supplier 	and 	a 	distributor 	could 	benefit 	from 	a
long-term 	contract 	under 	which 	the 	distributor 	agreed 	to 	deal
exclusively 	in 	the 	supplier's 	products, 	and 	the 	supplier 	agreed
to 	fill 	all 	of 	the 	distributor's 	orders. 	The 	distributor 	would
have 	bargaining 	power 	to 	gain 	protection 	from 	the 	possibility of
being 	cut 	off 	by 	the 	supplier 	after 	the 	distributor 	had 	invested
considerable 	resources 	in 	its 	marketing 	effort. 	The 	supplier
would 	not 	have 	to 	worry 	about 	the 	distributor 	suddenly 	shifting
its 	efforts 	to 	other 	brands, 	leaving 	the 	supplier 	without 	a
reliable 	outlet 	in 	the 	area. 8 	Likewise 	the 	supplier 	would
encourage 	the 	distributor 	to 	expend 	the 	effort 	to 	develop demand
6
7
8
See 	R. 	Posner 	& F. 	Easterbrook, 	Antitrust: 	Cases, 	Economic
NOtes, 	and 	Other 	Materials, 	886 	(2d 	ed. 	1981). 	Such
arrangements 	are 	lawful 	under 	federal 	antitrust 	law 	unless
their 	effect 	"may 	be 	to 	substantially 	lessen 	competition 	or
tend 	to 	create 	a 	monopoly 	in 	any 	line 	of 	commerce."
15 	U.S.C. 	§ 	14 	(1982); 	see 	Standard Oil 	Co. 	v. 	United 	States,
337 	U.S. 	293 	(1949). 	[WElle 	the 	quoted 	language 	is 	from
Section 	3 of 	the 	Clayton Act, 	the 	exclusive 	dealing 	doctrine
that 	the 	courts 	apply 	under 	the 	Sherman Act 	is 	essentially
the 	same. 	See R. 	Bork, 	The 	Antitrust 	Paradox, 	299 	(1978).]
R. 	Bork, 	The 	Antitrust 	Paradox, 	309 	(1978).
See R. 	Posner 	& F. 	Easterbrook, 	Antitrust: 	Cases, 	Economic
Notes, 	and 	Other 	Materials, 	886-87 	(2d 	ed. 	1981) 	("long 	term
exclusive 	dealing 	contracts may 	be 	an 	effective 	way 	of
dealing 	with 	opportunistic 	behavior").

The Honorable Juanita D. 	Miller 	-7-
for -the 	brand, 	by 	displaying 	the 	commitment 	to 	provide 	enough
product 	to 	meet 	the 	demand 	created. 	Prohibiting 	such
arrangements 	could 	increase 	the 	risks 	of 	both 	suppliers 	and
distributors 	and 	thereby 	add 	to 	t§e 	costs 	of 	distribution, 	costs
that 	would 	be 	borne 	by 	consumers.
Conclusion
According 	to 	Section 	203.1(A) 	of 	the 	bill, 	the Wine 	Cooler
Fair 	Dealing Act 	is 	designed, 	among 	other 	things, 	to 	promote
temperance, 	encourage 	wholesale 	distributors 	to 	make 	investments- 	._
in 	their 	facilities 	by 	protecting 	them 	against 	the 	termination 	of
their 	distributorships, 	and 	encourage 	fair 	competition 	in 	the
sale 	of 	wine 	coolers. 	In 	fact, 	the 	bill 	is 	special 	interest
legislation. 	It 	would 	harm 	consumers 	who 	would 	be 	forced 	to 	pay
the 	higher 	prices 	caused 	by 	the 	protection 	of 	inefficient
distributors 	from 	new 	entrants, 	and 	the 	preservation 	of 	obsolete
distributional 	arrangements.
If 	the 	Legislature 	is 	interested 	in 	raising 	prices 	for 	wine
coolers 	in 	order 	to 	promote 	temperance, 	a 	tax 	is 	a 	much more
direct 	way 	to 	attempt 	to 	achieve 	that 	goal. 	The 	Legislature
could 	discourage 	wine 	cooler 	consumption 	with 	a 	sales 	tax, 	which
would 	allow 	the 	State, 	not 	suppliers 	or 	distributors, 	to 	capture
the 	extra 	revenue 	produced 	by 	higher 	prices.
In 	the 	absence 	of 	the Wine 	Cooler 	Fair 	Dealing 	legislation,
competition 	will 	compel 	wine 	cooler 	suppliers 	to maintain 	the
most 	efficient, 	lowest-cost 	distributional 	arrangements, 	to
choose 	the most 	efficient methods 	of marketing 	products, 	and 	to
retain 	necessary 	flexibility 	to 	respond 	effectively 	to 	shifting
consumer 	preferences 	and 	demand 	patterns.
By 	substituting 	regulation 	for 	the 	forces 	of 	the
marketplace, 	the 	Act 	would 	protect 	individual 	distributors 	at 	the
9 	Section 	203.3 	also 	imposes 	other 	restrictions 	on 	the
requirements 	that 	suppliers 	can 	impose 	on 	their
wholesalers. 	Like 	the 	exclusive 	dealing 	restriction 	of
Section 	203.3(4), 	some 	of 	these 	restrictions 	could 	lead 	to
increased 	distribution 	costs.

' ..
The Honorable Juanita D. 	Miller
expense 	of 	higher 	prices 	to 	consumers~· The Commission 	staff
therefore 	recommends 	against 	enactment 	of 	the Wine 	Cooler 	Fair
Dealing Act.
Sincerely yours,
96~z«1~ctor
-8-