FTC Staff Comment to the Hon. Earl Goodwin Concerning Alabama S.B. 401 to Regulate Dealer-Supplier Relations for Certain Power Equipment

8UAEAU OF COMPETITION
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON. D.C. 20580
V900027
COMMISSION AUTHORIZED
June 	12, 	1990
The 	Honorable 	Earl 	Goodwin
State 	Senator
Alabama 	State 	Senate
Montgomery, 	Alabama 	36130
Dear Mr. 	Goodwin:
In 	response 	to 	your 	request, 	the 	staff 	of 	the 	Federal 	Trade
Commission 	is 	pleased 	to 	provide 	these 	comments 	on Senate 	Bill
401, 	a 	bill 	to 	regulate 	relations 	between 	suppliers 	of
agricultural, 	utility, 	industrial 	and 	outdoor power equipment
( "equipment") 	and 	their 	Alabama 	dealers. 1 	Under 	the 	Bill's
provisions, 	termination 	or 	non-renewal 	of 	such dealerships
without 	cause would 	be 	prohibited; 	permissible 	causes, 	notice
periods, 	procedures 	for 	termination, 	and 	rights 	upon 	termination
would 	be 	specified; 	and 	particular practices 	by 	the 	supplier
would be 	proscribed. 2 	We 	believe 	that 	Senate 	Bill 	401 	is 	likely
to 	raise 	the 	costs 	of 	distributing 	the 	specified equipment 	in
Alabama 	without 	providing offsetting benefits. 	Ultimately,
Alabama 	consumers 	can be expected 	to 	bear 	the 	burden 	of 	the
resulting 	increases 	in equipment 	prices 	and 	decreases 	in 	the
quality 	of 	dealership 	services.
I. 	Interest 	and 	Experience 	of 	the 	Staff 	of 	the 	Federal 	Trade
Commission
The 	Federal 	Trade 	Commission 	is 	charged by 	statute 	with
preventing unfair methods 	of 	competition and 	unfair 	or 	deceptive
acts 	or 	practices 	in or 	affecting commerce. 	15 	U.S.C. 	S 	45. 	In
f~rtherance of 	this 	statutory mandate, 	the 	staff 	of 	the
Commission comments, 	upon 	request, 	on 	governmental 	measures 	that
These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Bureau
of 	Competition of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the views 	of 	the 	Federal 	Trade 	Commission 	or 	of 	any
individual 	Commissioner.
2 	The 	Bill 	contains 	a 	wide 	variety of 	proposed constraints
upon 	the 	supplier-dealer relationship, 	many of 	which, 	though
80mewhat 	ambiguous, 	may 	have 	broad 	implications 	for 	Alabama 	law.
This 	comment does 	not 	attempt 	to 	deal 	with 	the 	potential 	impact
of 	each of 	the 	Bill's 	provisions, 	or with an 	assessment of 	the
grounds 	for 	singling out 	for 	state 	regulation 	this 	particular
category of 	private 	contractual 	relationships. 	Rather, 	it
attempts 	to 	evaluate 	the 	implications, 	for 	competition and
consumer welfare, 	of what we 	construe 	as 	the 	principal 	features
of 	the 	proposed 	legislation.

The Honorable 	Earl 	Goodwin
Page 	2
may affect 	competition 	and consumers. 	The 	staff 	has 	provided
~omments to 	federal, 	state, 	and 	local 	legislatures 	and 	federal
and 	state 	administrative 	agencies 	on a 	wide 	range 	of matters 	that
raise 	issues 	of 	competition or consumer protection policy,
including proposed 	legislation 	to 	limit 	suppliers' 	ability 	to
terminate 	dealers. 3
II. 	Brief 	Description 	of Senate 	Bill 	401
Section 	3 of 	S.B. 	401 	includes 	a 	list 	of 	twelve 	unlawful
acts 	and 	practices 	relating 	to 	dealer 	agreements. 4 	Section 	4
treats 	in 	detail 	the 	permissible 	grounds 	for 	termination 	of 	a
dealership 	and ·similar actions, 	and 	the 	procedures 	to 	be
followed. 	Section 	5 requires 	that 	repair 	parts 	for 	equipment 	be
3 	In 	1989, 	for 	example, 	the 	Commission's 	staff 	submitted
comments 	to 	the 	Oregon 	legislature 	on 	a 	Bill 	dealing with
supplier 	and 	dealer 	relationships, 	and 	in 	the 	same year, 	in
response 	to your 	request, 	submitted views 	to 	the Alabama
legislature on House 	Bill 	441, 	entitled 	"The 	Construction_
Equipment 	Franchise Act." 	This 	Bill 	sought 	to 	restrict
suppliers' 	ability 	to 	terminate 	existing dealers 	for 	construction
equipment 	or 	to 	award 	new 	dealerships 	for 	such equipment.
4 	Our comments 	regarding 	Section 	3 are 	limited to
subsections 	3(4) 	(termination of 	a 	dealership, 	and 	similar
actions, 	without 	good cause), 	and 	3(6) 	and 	3(7) 	(supplier price
discrimination 	among 	dealers). 	Of 	the 	remaining 	enumerated
unlawful 	acts 	and 	practices, 	subsections 	(1) 	and 	(2) 	involve
coercive 	dealings, 	(3) 	involves 	refusal 	to make 	timely delivery
of 	promised equipment, 	(5) 	conditioning 	renewal 	on changes 	in 	the
dealer's 	place 	of 	business, 	(8) 	interference with 	changes 	in 	a
dealer's 	capital 	structure which do 	not 	impair 	capital 	or change
the 	dealership's 	control, 	(9) 	other unreasonable 	interference
with 	changes 	in 	the 	dealer's 	ownership, 	(10) 	requiring waivers 	of
liabilities 	established by 	the 	Bill, 	(11) 	taking more 	than 	180
days 	to 	audit 	compliance 	with promotional 	campaigns, 	and 	(12)
unreasonably withholding consent 	to 	transfer of 	ownership upon
the 	death 	of 	a 	dealer 	or 	principal 	owner.
s 	Section 	2(8) 	defines 	"good cause" 	in general 	terms,
apparently 	for 	application 	in 	the 	subsequent 	prohibition, 	at
Section 	3(4), 	of 	termination of 	a 	dealership 	"without qood
cause." 	However, 	Section 	4(b) 	subsequently 	states 	that
"termination by a 	supplier of 	a 	dealer agreement 	shall be with
cause when 	the 	dealer 	has" 	acted or omitted to 	act 	in ten
specified ways. 	The 	relation of 	Section 	2(8) 	to 	Section 	4(b) 	is
not 	entirely clear. 	For purposes 	of 	this 	comment we 	have 	assumed
(continued ... )

The 	Honorable 	Earl Goodwin
Page 	3
made 	available 	by 	the 	supplier 	"throughout 	the 	reasonable 	useful
life" 	of 	the 	equipment, 	and mandates 	in detail 	allowances 	for
periodic 	return 	of 	surplus 	parts 	for 	credit, 	and 	the 	amount 	of
8uch credit. 	Section 	6 	similarly mandates, 	and specifies 	terms
for, 	repurchase 	of 	equipment 	and 	parts 	upon 	termination 	of 	a
dealership.
Section 	7 requires 	compensation 	by 	the 	supplier 	for
dealership 	facilities 	under 	certain 	conditions. 	Section 	9
provides 	for 	court 	actions 	by 	a 	dealer 	against 	a 	supplier, 	for
damages 	and 	injunctive 	relief, 	based upon violations 	of 	the
Bill's 	provisions. 	Section 	13 	provides 	for 	additional 	civil
actions, 	by 	"any person who 	is 	injured 	in 	his 	business 	or
property by 	a 	violation 	of 	this 	act."6
III. 	Restrictions 	on Termination 	and 	Non-Renewal 	of 	Contracts
with 	Dealers
Senate 	Bill 	401, 	if 	enacted, 	would 	significantly 	restrict
the 	ability 	of 	suppliers 	of 	e~uipment to Alabama 	dealers 	to
terminate 	or decline 	to 	renew 	relationships 	with 	dealers. 	The
S 	( ••• continued)
that 	Section 	4(b) 	is 	intended 	as 	an exhaustive 	description 	of
valid 	causes 	for 	termination within 	the 	scheme 	of 	the 	Bill.
6 	Although 	the 	title 	of 	the 	section 	is 	"Civil 	Action by
Dealer," 	its 	terms 	may 	thus 	confer 	standing 	on a 	larger 	group.
Additionally, 	the 	grounds 	for 	such 	actions 	are 	extended 	to 	"the
commission of 	any 	unfair 	and deceptive 	trade 	practices," 	language
similar 	in 	its 	generality 	to 	that 	contained 	in 	the 	FTC 	Act's
Section 	5 	(15 	U.S.C. 	S45). 	This 	comparison 	suggests 	the
possibility 	of 	an 	interpretation extending 	far 	beyond 	the 	Bill's
specific 	prohibitions, 	and even 	beyond 	the 	subject 	matter of
supplier-dealer 	relationships.
The 	relationship between the 	remedies 	provided by 	Section 	13
and 	Section 	9 	is 	not 	indicated.
7 	The 	restrictions 	also 	extend 	to 	actions 	by 	the 	supplier
to 	"change 	the 	dealer's 	competitive 	circumstances," 	a 	concept
that 	the 	Bill 	does 	not 	define 	or otherwise elaborate, 	though 	it
is 	employed 	at 	several 	key points. 	It 	appears 	in Section 	3(4)
(prohibition of 	supplier actions 	relative 	to 	a 	dealer 	·without
good cause"), 	in Section 	4(a) 	(requirement 	of 	notice of
deficiencies 	and opportunity to 	cure), 	in Section 	4(c)
(requirement 	of 	written proof 	of 	performance deficiencies), 	and
in 	Section 	9 	(provision of 	an 	injunctive 	remedy 	for 	dealers).
(continued .•. )

The 	Honorable 	Earl 	Goodwin
Page 	4
most 	severe 	restrictions 	would 	apply to 	the 	termination of 	those
dealers 	the 	supplier 	specifically 	judges 	deficient 	in marketing
its 	products 	and/or providing 	service 	to 	customers.
The 	Bill 	specifies 	ten 	dealer 	actions 	or 	omissions 	that
would 	constitute 	"cause" 	for 	termination or 	non-renewal. 	Which
of 	the 	ten 	specified 	causes 	is 	invoked 	by 	the 	supplier 	as 	the
basis 	for 	ending 	its 	relationship with 	the 	dealer 	has 	very
important 	procedural 	implications. 	If 	the 	action 	is 	supported by
any 	of 	the 	six types 	of 	"cause" 	listed 	in 	Section 	4(b)(1)-(6),
including 	that 	the 	dealer entered bankruptcy or was 	convicted 	of
a 	crime, 	the 	dealer may 	apparently be 	terminated 	summarily. 	If
the 	supply 	relationship 	is 	severed 	for 	one 	of 	the 	four 	other
specified 	reasons, 	however, 	the 	supplier must 	give 	the 	dealer 	90
days 	written 	notice 	of 	an 	intent 	to 	terminate 	and provide 	at
least 	six months 	to 	cure 	the 	asserted deficiency, 	and must 	also
meet 	standards 	of 	documentary proof 	of 	the 	deficiency.
The 	six causes 	for 	which 	summary termination would 	be
permitted clearly 	represent 	serious 	potential 	problems 	for 	a
successful 	supplier-dealer 	relationship. 	But 	the 	causes 	that
would 	trigger 	the 	notice-and-opportunity-to-correct 	procedure
could 	lead 	to 	the 	supplier 	losing 	sales 	and 	consumer 	good will,
if 	the 	supplier cannot 	act 	readily 	to 	remedy 	deficiencies.
Moreover, 	consumer 	harm could 	result 	if 	a 	remedy 	is 	delayed. 	For
example, 	Section 	4(b)(7) 	pertains 	to 	a 	dealer engaging
consistently 	in misleading 	advertising, 	failing 	to 	provide
7 ( ... continued)
In view 	of 	its 	apparent 	breadth, 	this 	phrase may 	include
action 	by 	a 	supplier 	to 	authorize 	a 	new 	dealer 	competing with 	the
existing dealer. 	Such 	an 	interpretation, 	by preventing the
supplier 	from 	appointing 	additional 	dealers, 	may 	grant 	existing
dealers 	exclusive 	territories. 	This 	would 	have 	the 	potential 	for
anticompetitive 	effects.
While the 	courts 	have come 	to 	recognize 	that 	the 	use 	of
exclusive 	dealer 	territories 	or 	lesser 	restraints 	on competition
among a 	given brand's 	dealers 	may 	in 	some 	circumstances 	be 	pro-
competitive, 	the 	reasoning 	of 	the 	decisions 	depends 	on 	the
proposition 	that 	the 	supplier 	involved has 	voluntarily determined
that 	this 	is 	the 	most 	efficient means 	of 	distributing 	its
products 	(rather 	than 	being coerced 	into 	adopting 	it 	by 	a 	dealer
cartel). 	See 	Continental 	TV, 	Inc. 	v. 	GTE 	Sylvania 	Inc., 	433 	u.S.
36, 	51-59 	(1977).

. .
The 	Honorable 	Earl Goodwin
Page 	5
service 	and 	replacement 	parts, 	and 	charging 	-excessive- 	prices;8
Section 	4(b)(8) 	to 	the 	failure 	to meet 	normal 	standards 	of 	sales,
service, 	or warranty performance; 	and 	Section 	4(b)(9) 	to 	the
failure 	to 	provide 	adequate 	sales, 	service, 	or parts 	personnel.
Such dealer 	deficiencies 	could 	cause 	serious 	harm 	to 	consumers 	as
well 	as 	suppliers.
Even 	if 	the 	supplier meets 	the 	"good cause" 	standard 	for
dealer 	termination, 	his 	obligations 	to 	the 	dealer 	under 	the 	Bill
are 	not 	finished. 	Section 	6 of 	the 	Bill 	requires 	the 	supplier 	to
repurchase 	from 	the 	terminated 	dealer 	any 	inventory of 	equipment
or 	repair 	parts 	that 	the 	latter was 	required 	to 	maintain, 	and
imposes 	detailed 	pricing 	terms 	on 	this 	transaction. 	Section 	6(b)
requires 	that 	the 	supplier pay 	the 	dealer 	100 	percent 	of 	the
current 	net 	price 9 of 	new equipment 	and 	of 	unused 	repair 	parts
and 	accessories. 	Unless 	the 	supplier 	performs 	the 	packing 	and
loading 	of 	the 	equipment 	and 	parts, 	it 	is 	also 	required 	to 	pay
the 	dealer 	6% 	of 	the 	current 	net 	price 	for 	performing such
services.
8 	The 	Bill would make 	consistent 	"excessive 	pricing" 	a
potential 	cause 	for 	termination. 	From 	this 	brief 	treatment, 	not
otherwise 	explained, 	it 	is 	unclear 	what 	control 	over 	dealers'
pricing 	the 	Bill 	intends 	to 	confer upon 	suppliers. 	Agreements
between manufacturers 	and 	retailers 	on 	resale 	prices 	constitute
per 	se 	violations 	of 	the 	antitrust 	laws.
9 	Section 	2(7) 	defines 	"current 	net 	price" 	as 	the 	price
. 	listed 	in 	the 	supplier's 	current 	catalog. 	Notably, 	no 	allowance
is 	made 	for 	the 	possibility 	that 	the 	dealer obtained 	a 	discount
or 	other 	terms 	more 	favorable 	than 	this 	list 	price 	when 	it
purchased 	these 	goods, 	so 	the 	dealer may 	actually profit 	on 	this
mandated 	repurchase.
By 	contrast, 	the 	provisions 	of 	Section 	5 of 	the 	Bill, 	which
impose 	a 	detailed obligation on 	the 	supplier 	to 	repurchase
-surplus" 	parts 	during 	the 	term 	of 	a 	continuing dealership
arrangement, 	requires 	payment 	of 	only 	85 	percent 	of 	the 	current
list 	price, 	and 	requires 	the 	dealer 	to 	bear the expense 	of
packing 	and 	shipping.
Even 	if 	the 	imposition of 	these 	repurchase 	obligations 	is
supportable by a 	valid 	legislative purpose, 	it 	seems 	unclear 	why
a 	dealer 	terminated 	for 	cause 	should 	receive more 	favorable
treatment 	than 	a 	dealer 	in a 	viable 	ongoing 	relationship with 	the
supplier, 	unless 	simply to 	increase 	the 	cost 	to 	suppliers 	of
carrying out 	terminations.

The 	Honorable 	Earl 	Goodwin
Page 	6
A supplier need 	not 	repurchase 	equipment 	or 	parts 	that 	are
~ot presently 	resalable,lo are 	not 	demonstrated 	as 	having come
from 	the 	dealer, 11 	are 	not 	in 	new 	condition, 12 or were ordered
after 	receipt 	of 	the 	termination 	notice. 13 However, 	any
equipment 	or 	repair 	parts 	not 	coming within 	these 	exceptions 	must
be paid 	for 	within 	60 	days 	of 	termination. 14 If 	a 	supplier 	fails
to 	make 	such payment, 	it 	becomes 	liable 	for 	115% of 	the 	current
net 	price 	of 	the 	inventory, plus 	freight 	charges, 	court 	costs, 	and
attorney 	fees. 15
Section 	7 of 	the 	Bill 	adds 	further 	conditions 	to 	the
supplier's 	termination of 	an 	equipment 	dealer. 	This 	section
requires 	the 	supplier 	to 	pay 	the 	dealer 	"fair 	and 	reasonable"
compensation 	for 	dealership 	facilities 	where 	the 	dealer 	has 	been
terminated 	without 	good cause.
The 	cumulative 	effect 	of 	the 	various 	restraints 	on 	a
supplier's 	actions 	to 	end 	a 	dealer 	relationship could 	apparently
override 	private 	agreements 	entered 	into 	by 	dealers 	and 	suppliers
in 	two 	principal 	ways. 	First, 	the 	requirement 	that 	a 	seller
renew 	a 	dealer's 	agreement 	unless 	he 	can establish 	"good cause"
for 	not 	doing 	S016 	could 	in effect 	extend 	the 	agreement 	period
indefinitely, 	without 	regard 	to 	the 	parties' 	intentions. 17
Second, 	the 	Bill 	could 	supersede 	private 	contractual 	terms 	going
both 	to 	the 	conduct 	of 	ongoing 	supplier-dealer 	relationships 	and
to 	the 	rights 	upon 	termination 	and upon 	contract 	breach. 	In 	all
of 	these 	respects, 	the 	Bill 	would 	substitute 	legislative views 	of
appropriate 	relationships 	for 	the 	particular provisions 	worked
out 	between 	private 	parties.
10 Section 	6(d) (2).
11 	Section 	6(d) (3).
12 Section 	6(d) (5), (6).
13 Section 	6(d) (7).
14 Section 	6 (e) .
15 Id.
16 	Section 	3(4).
17 	The 	protections 	for 	dealers 	applicable 	to 	refusals 	to
renew 	are 	identical 	to 	those 	for 	termination during 	the 	contract
period, 	so 	that 	at 	least 	in 	this 	respect 	the 	contract 	is
effectively perpetual.

The 	Honorable 	Earl 	Goodwin
Page 	7
As 	a 	general 	matter, 	private 	negotiations 	between suppliers
and dealers 	in competitive markets 	can be 	expected to result 	in
contracts 	that 	provide 	for 	efficient 	terms 	governing duration 	and
termination 	as 	well 	as 	the 	other 	aspects 	of 	the 	relationship.
Dealers 	who value 	the 	stability offered by 	long-term 	supply
relationships 	may 	seek 	long-term contracts 	that 	protect 	their
distribu~orships from 	termination except upon 	specified 	terms.
Suppliers 	who expect 	their, distribution methods 	to 	remain
unchanged 	for 	long 	periods 	similarly may 	choose 	to encourage
dealer 	enterprise 	and 	loyalty by entering 	into 	such 	long-term
contracts 	and 	offering 	dealers 	certain protections 	against
termination. 18 	Consequently, 	regulation 	should be 	unnecessary 	to
protect 	dealers 	from 	arbitrary 	termination 	or 	to 	secure 	long-term
relationships 	in competitive markets 	where 	such 	arrangements
would be 	the most 	efficient means 	of 	distributing 	suppliers'
goods 	to 	consumers.
Such 	regulations 	may, 	however, 	effectively prevent 	suppliers
from 	negotiating distribution contracts 	for 	shorter 	terms 	and
retaining 	the 	flexibility 	to 	modify 	their 	distribution 	systems.
Any 	injury 	from 	imposing 	these 	conditions 	on 	the 	market 	would 	not
be 	confined 	to 	suppliers, 	but, 	if 	inefficient 	distribution
relationships 	result, 	would 	likely extend 	to consumers.
By 	its 	tendency 	to 	freeze 	supply 	relationships, 	the 	Bill
would 	tend 	to 	deprive 	equipment 	suppliers 	of 	the 	flexibility 	to
adapt 	to 	changes 	in market 	or 	other 	conditions. 	For example, 	a
supplier might 	wish 	to withdraw 	from 	distributing 	its 	product 	in
a 	particular 	geographic 	area 	because 	it 	can 	no 	longer 	profitably
operate 	there. 	In other cases, 	a 	supplier might 	seek 	to
reorganize 	its. national 	distribution 	system to 	operate more
efficiently, 	and 	in the 	process 	realign 	its 	dealership 	network.
In 	all 	of 	these 	cases, 	the 	realignment 	of 	the 	distribution 	system
is'likely to 	produce 	cost 	savings 	that 	may ultimately be 	passed
on 	to 	customers 	in 	the 	course of 	competition. 	By 	impeding 	such
realignments, 	Senate 	Bill 	401 may 	increase 	the 	cost 	of 	selling
equipment 	in Alabama 	and thus 	the 	prices 	paid by end-users 	for
such equipment.
The 	rigidity 	that 	the 	Bill would 	bring 	to Alabama 	supplier-
dealer 	relationships 	can best 	be 	appreciated 	in terms 	of 	the
increased costs 	it would 	likely 	impose 	on 	the 	adjustment 	of 	such
relationships. 	These 	costs 	fall 	into 	two 	closely related
categories: 	those 	imposed directly by 	the 	statutory termination
process, 	and 	those which would derive 	from 	the 	delay 	in reaching
a 	new equilibrium.
II 	Of 	course, 	any dealer whose 	distributorship 	is
terminated 	in violation of 	its 	contract may sue 	for 	redress 	of
this 	breach. 	.

The 	Honorable 	Earl 	Goodwin
Page 	8
. 	The 	direct 	process 	costs 	would 	consist 	primarily of 	the
expenses 	incurred by 	the 	supplier 	in establishing the 	evidentiary
record 	called 	for 	by 	Section 	4(c) 	as 	a 	basis 	for 	taking 	action
against 	the 	deficiencies 	described 	in 	Section 	4(b)(7)-(lO). 	The
development 	of 	sufficient 	"written documentation" 	of 	sustained
poor 	performance may well 	be 	costly 	and 	burdensome.
The 	"delay" 	costs 	of 	termination or non-renewal 	under 	the
Bill's 	notice-and-opportunity-to-correct 	procedures 	require 	a
little more 	explanation. 	A supplier undertaking 	to 	use 	these
procedures 	would 	apparently 	have 	to 	retain 	the 	dealer 	for 	not
less 	than 	nine .months l9 after 	discovering 	the 	dealer's
shortcomings 	and 	reaching 	its 	own 	conclusion 	that 	they 	are
unlikely 	to 	be 	remedied, 	and would 	have 	to endure 	the 	losses
these 	shortcomings 	entail 	during 	that 	period. 	Moreover,
termination 	causes 	in 	this 	category, 	which 	includes 	persistent
use 	of 	misleading 	advertising, 	provision of 	inadequate 	service,
and 	failure 	to 	perform warranty obligations, 	may cause 	serious
injury 	to 	consumers 	as 	well 	until 	remedied. 	Further, 	the 	dealer
performance 	deficiencies 	covered 	by 	Section 	4(b)(7)-(10) 	may 	be
frequently 	occurring reasons 	for 	supplier 	dissatisfaction with
dealer 	relationships.
The 	costs 	involved 	in 	ending 	a 	supply 	relationship can
normally 	be 	minimized 	through 	a 	privately 	negotiated 	agreement
setting 	forth 	the 	duration 	of 	the 	arrangement 	and 	appropriate
incentives 	for 	overall 	dealer 	performance. 2o A supplier unhappy
with 	the 	performance 	of 	its 	dealer may choose 	not 	to 	renew 	the
contract 	upon 	its 	expiration, 21 	but 	has 	no 	incentive 	to
discontinue 	a 	well-functioning 	relationship. 	Under 	the 	proposed
legislation, 	however, 	a 	supplier may 	face 	great 	difficulty 	and
expense 	in 	protecting 	itself 	from 	unsatisfactory dealer
performance, 	and 	performance 	incentives 	for 	dealers 	would be
correspondingly 	diminished.
19 	Section 	4(a) 	calls 	for 	ninety days 	written 	notice 	of
intent 	to 	terminate 	and 	the 	provision of 	"not 	less 	than 	six 	(6)
months 	in which 	to 	cure 	any claimed deficiency." 	It 	is 	not
entirely clear 	from 	the 	terms 	of 	this 	section whether 	these 	two
time 	periods 	are 	additive 	or 	not.
20 	Cf. 	Klein 	& Murphy, 	Vertical 	Restraints 	as 	Contract
Enforcement Mechanisms, 	31 	J. 	Law 	& Econ. 	265 	(1988) 	(explicit
enforceable 	contracts 	requiring 	dealers 	to 	supply a 	desired 	level
of 	services 	are 	not 	always 	economically 	feasible).
21 Id.

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The Honorable 	Earl 	Goodwin
Page 	9
In view of 	the 	costs 	of 	establishing grounds 	for 	termination
and 	the 	further 	costs 	incurred even when 	termination has 	been
upheld, 	we 	believe 	suppliers 	may be 	hesitant 	to 	initiate
termination 	proceedings 	regardless 	of 	the 	quality of 	services
provided by 	individual 	dealers 	to 	their customers. 	The
anticipated outcome could well 	be 	the 	provision of 	lower quality
service 	at 	higher prices 	than would occur 	in 	the 	absence 	of 	the
Bill.
Senate 	Bill 	401 	may 	also 	produce 	harmful 	effects 	by
inhibiting 	suppliers 	in 	appointing 	new 	equipment 	dealers 	in
Alabama. 	The 	increased 	costs 	the 	legislation would 	impose 	on
suppliers 	when 	they 	terminate 	a 	distribution 	relationship may
deter 	suppliers 	from 	entering 	such 	relationships, 	and 	over 	time
reduce 	the 	number of 	equipment 	dealerships 	in 	Alabama.
Appointment 	of 	"start-up" 	dealers, 	who 	will 	lack 	"track 	records"
of 	performance, 	could be 	particularly discouraged, 	even 	though
some 	such 	newcomers 	might 	have 	the 	potential 	to 	become
particularly vigorous 	competitors, 	and 	to 	improve 	service 	to
underserved communities. 	A reduction 	in 	the 	number 	of 	available
alternative 	dealers 	would 	likely 	harm Alabama 	consumers.
We 	understand 	that 	many dealers 	may 	desire 	long-term
distributorships. 	Many 	suppliers 	will 	share 	this 	preference,
since 	it 	can enhance 	their 	ability 	to make 	long-range 	plans 	and,
if 	termination 	of 	the 	relationship 	is 	not 	made 	unduly 	difficult,
maximize 	incentives 	for 	dealer 	investment 	in making 	the
distributorship 	succeed. 	As 	noted 	above, 	we would expect 	dealers
and 	suppliers 	with 	such common 	interests 	to 	enter 	into mutually
satisfactory 	relationships. 	But 	those 	dealers 	and 	suppliers 	with
shorter 	time 	horizons 	and a 	different 	balance 	of 	incentives
should 	also 	be 	permitted to 	express 	those 	preferences 	in binding
contracts. 	Enactment 	of 	senate 	Bill 	401 	is 	likely 	to 	impede 	this
process.
IV. 	Other Restrictions 	on Supplier-Dealer Relationships
Senate 	Bill 	401 	contains 	additional 	provisions 	that 	may
impede 	competition 	in equipment markets 	in Alabama. 	We 	discuss
some 	of 	these 	briefly below.
Sections 	3(6) 	and 	3(7) 	of 	the 	Bill 	both 	relate 	to 	suppliers
charging different 	prices 	to 	their 	dealers 	within the 	state.
Section 	3(6), 	in brief, 	forbids 	a 	supplier 	from 	selling or
offering to 	sell 	equipment 	to 	a 	dealer 	at 	a 	lower price than 	that
at which 	it 	sells 	or offers 	to 	sell 	the 	same 	equipment to 	another

, '
The 	Honorable 	Earl 	Goodwin
Page 	10
dealer 	or 	to 	the 	supplier's 	retail 	outlet. 22 	Section 	3(7) 	makes
it 	illegal 	for 	a 	supplier 	"to willfully 	discriminate" 	in 	price 	or
its 	economic 	equivalent 	between 	dealers 	where 	the 	effect may 	be
to 	lessen competition or 	give 	one 	dealer 	an economic 	advantage.
Section 	3(6) 	does 	not 	require 	a 	party alleging 	price
discrimination 	to 	prove 	either of 	these 	effects. 	These 	sections
appear 	to 	be 	inconsistent 	both with each other 	and 	with 	federal
law dealing 	with 	price 	discrimination. 	The 	federal 	price
discrimination 	law, 	the 	Robinson-Patman Act,23 	requires 	proof 	of
effects 	to 	establish 	a 	violation, 	and 	also 	provides 	important
defenses, 	such 	as 	meeting 	in 	good 	faith 	the 	lower-priced 	offer 	of
a 	competing 	seller 	or 	recognizing 	differences 	in 	the 	costs 	of
serving 	different 	dealers. 	Neither 	Section 	3(6) 	nor 	Section 	3(7)
appears 	to 	recognize 	these 	defenses.
Section 	3(6) 	apparently would 	require 	suppliers 	to 	establish
a 	uniform 	statewide wholesale 	price 	for 	equipment. 	This
requirement 	would 	prevent 	a 	supplier 	from 	giving 	savings 	to
dealers 	that 	were 	justified by 	the 	supplier's 	lower cost 	of
serving 	them. 	It 	also 	could 	inhibit 	a 	supplier 	from 	assisting 	an
Alabama 	dealer 	in meeting 	competition 	from 	nearby 	out-of-state
dealers, 	since a 	supplier would 	have 	to 	make 	any 	discount 	given
such 	a 	dealer 	uniform 	throughout 	Alabama. 	In 	addition, 	mandatory
uniform 	statewide 	pricing may 	increase 	the 	ability of 	suppliers
to 	agree 	on 	prices 	by 	limiting 	the 	opportunity 	for 	individual
suppliers 	to 	undercut 	any 	agreed-upon 	price by 	granting
legitimate 	selective discounts 	to 	particular dealers.
Senate 	Bill 	401 	also 	mandates 	that 	suppliers 	provide 	dealers
with 	an 	opportunity 	to 	return 	inventory annually 	during 	the 	term
of 	the 	distributorship.24 	It 	also 	provides 	that 	the 	Bill's
22 	The 	implication 	that 	a 	supplier can place 	its 	wholly
owned 	retail 	outlet 	at 	a 	competitive advantage 	by 	attributing 	a
relatively 	low 	internal 	transfer price 	to 	the 	"sale" 	of 	an 	item
to 	that 	other 	part 	of 	its 	own enterprise 	is 	without 	apparent
support. 	What 	the 	supplier's 	outlet 	facility 	"gains" 	by 	the 	low
transfer 	price 	is 	directly 	offset 	by what 	the 	supplier 	"loses"
from 	the 	price 	at 	which 	it 	could 	have 	sold the 	equipment 	to 	an
outsider. 	Of 	course, 	real 	savings 	may 	result 	from 	efficiencies
attending 	such 	a 	vertical 	integration.
23 	The 	comparison 	here 	is 	to 	Section 	2(a) 	and 	(b) 	(15
u.s.c. 	S 13(a) 	and 	(b» 	of 	the 	Robinson-Patman Act, 	which deal
respectively with 	the 	basic 	price 	discrimination offense 	and 	the
meeting-competition defense.
24 Section 	5.

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The 	Honorable 	Earl 	Goodwin
Page 	11
remedy 	shall 	be 	in addition 	to 	any contractual 	rights.~ 	This
provision, 	too, 	raises 	concerns. 	To 	the 	extent 	that 	the
statutory requirements 	are 	more 	costly than 	those 	afforded
privately, 	such 	increased 	costs 	are 	likely 	to 	be 	translated 	into
higher 	prices 	for 	equipment 	sold 	in Alabama.
v. 	Conclusion
We 	believe 	that, 	if 	enacted, 	Senate 	Bill 	401 	could 	lead 	to 	a
rigid 	system 	for 	the 	distribution of 	the 	specified equipment 	in
Alabama, 	by 	denying 	suppliers 	the 	ability 	to 	respond 	flexibly 	to
changing conditions 	and 	to 	develop 	lawful 	efficient 	incentive
structures 	in 	their 	dealer 	relationships. 	This 	rigidity could
lead 	to 	an 	increase 	in costs 	for 	suppliers 	and, 	in 	turn, 	result
in 	higher 	prices 	and 	decreased 	service 	for 	consumers.
We 	appreciate 	the 	opportunity 	to 	comment 	on 	this 	Bill. 	We
would 	be 	happy 	to 	provide 	additional 	information 	if 	we 	can 	be 	of
any 	further 	assistance.
Section 	5(8).