Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Can My Supplier Refuse to Sell Products to Me?

Supply Chain

Wholesalers, distributors, and retailers are dependent upon their suppliers for a supply of products. What happens when your supplier decides it no longer wants to deal with you? Is that lawful?

The answer, of course, depends on the facts. Let’s break the question down into various possibilities. The main dividing line is between unilateral actions by the supplier and “concerted” actions (that is, actions in furtherance of an agreement or understanding with other firms or companies).

I’ll cover basic competition law here; keep in mind that you may also have contract or promissory estoppel claims.

Unilateral action

If your supplier decides all by itself that it no longer wants to do business with you, it is generally within its rights to do so under the competition laws if it does not have “market power.” The concept of market power can become technically complicated, but it essentially means the power to raise prices above competitive levels for some significant period of time. Market power may not be immediately obvious, so we often use market share as a simple proxy for market power, at least to obtain a quick sense of the situation.

So how does this work in practice? If you are buying widgets, your supplier accounts for 90% of the widget market, and it suddenly decides to stop selling to you, it is possible you are looking at an anti-competitive action that might violate the special rules that apply to monopolists or would-be monopolists. You would have to develop more facts to assess the strength of any such argument.

If your supplier’s market share is less than 40%, it is very unlikely that you have such a claim. Above 60% to 70%, you may, and in between 40% and 60% is a bit of a grey area (although some courts have held that certain percentages in this range either are, or are not, sufficient). Details of the market structure (are there significant barriers to entry? are there significant barriers to other firms’ expansion?) may be important.

Just because your supplier has market power and has terminated you, however, does not necessarily mean that you have a good claim. You would still need to prove that the termination has harmed competition; harm to your business is not by itself enough. For example, all things being equal, the termination of one of many distributors may not be competitively significant. On the other hand, if a supplier terminates all distributors that carry products of the supplier’s competitor – and the supplier has market power – then a claim is in theory possible. But again, proving harm to competition can require a detailed understanding of the marketplace and the distribution system.

Lacking market power, however, a supplier generally has the right to do business with whom it pleases. That’s the “American way.”

Concerted action

What if your supplier terminates you because your competitors complain to the supplier? For example, they might complain that your pricing is “too low” and is hurting the market or their business.

The central principle remains that a supplier can do business with whom it likes. It can terminate a distributor for pricing reasons – even if it has previously received complaints from other distributors. Such a sequence of events is not by itself sufficient to establish an unlawful agreement or concerted action.

But if there is evidence of an actual agreement between a supplier and some distributors to terminate another price-cutting distributor in order to raise, maintain, or stabilize pricing, such an agreement may be illegal. Developing the evidence of such an agreement in order to establish something more than dealer complaints followed by a termination can be challenging, but it is not impossible.

Concerted action involving multiple suppliers can also pose competition law issues. Such an agreement may amount to a “group boycott” that could be challenged under federal or state antitrust law.

Summary

Most supplier terminations are entirely lawful. But occasionally some cross the line, either because the supplier has market power and the supplier is exercising it to harm competition, or because the supplier has agreed with other firms to terminate a price-cutting distributor. In such cases, a careful analysis of the facts is required.

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Comments

  1. we are a roofing company, a supplier lobbies architects to specify their product on a large job. The company only allows two companies to bid the project where they control the bid pricing. You approach the supplier and ask them to sell to you so that you can bid on the job and they refuse, further, they won’t allow you to get certified to install the product because they only want to deal with the two companies already certified to do the installation. The jobs were for a public entity like a County Purchasing there is no Department which requires strict competitive rules which need to be followed to ensure that there is no price fixing. There could be several problems with this as I see it. What would you think? Are there problems here?

    • Howard Ullman says:

      I think your scenario raises potential issues, but I don’t have enough facts to be certain. Also, I intend this blog to be an educational resource, but I can’t offer specific legal advice through it, for a variety of reasons — for one thing I can’t do work or offer particular opinions before running conflicts checks. If you’re interested in specific advice, feel free to e-mail me.

  2. My wive was refused service by her drapery hardware supplier, the XYZ company (company name is changed). Their owner told my wife that he did not want to serve her and that she should look for another supplier. She did not do anything wrong, either in or outside his store, to warrant such treatment. I believe that the reason he refused her service is that she used to work for the ABC company (company name is changed) run by his wife, and he either wants to get rid of her as possible unwanted competition for his wife’s business, or punish her for quitting her job with his wife, where she was one of the best seamstresses.

    My wife would be happy to shop at another drapery hardware store. However, the XYZ company is a monopolist on the local drapery hardware market. Many hardware companies, like RollEase, sell their products through their local distributors only, and the XYZ company is the only one in our city.

    Is there anything she can reasonably do about this?

    • Howard Ullman says:

      I can’t give legal advice about particular cases here. I can say that antitrust lawsuits are expensive and probably not well-suited to a relatively small (in $$) dispute such as you describe. However, you may wish to consult an attorney re other possible avenues — e.g., approaching some consumer protection agency about the problem, for example.

  3. Joseph Fabiano says:

    I have a store that sells beauty products. My competition is “Ulta” a large beauty store chain. One of the hair products lines I am trying to obtain sells to Ulta, but won’t sell to me, claiming that my store has to be 80% salon services and 20% retail to sell the hair line. Problem is, Ulta is NOT 80% salon and 20% retail and they have the line. Seens unfair that they are placing this rule on me to get the line, yet Ulta does not have to meet the requirement. They will not sell me the product line for that reason. Is this legal. My store is exactly like Ulta in every way. I am just a smaller business. Also, my store is 8 miles from Ulta, not across the street. Seems to be this is so unfair to have one set of rules for me store and none for Ulta. How does that happen?

    • Howard Ullman says:

      Sorry to hear about your difficulties, but this is an informational blog and I can’t give specific legal advice here. You may want to discuss with an attorney.

  4. I sell beds, my competition told my supplier if they didn’t drop me as a customer they would pull their bigger account away from the supplier.

  5. I am a distributor for a particular barn owl nesting box company. I’ve been spending thousands of dollars on advertising in the last year and a half and it is finally paying off. My problem is that customers are going directly to my supplier’s web site and he is selling directly to them cutting me out.. How do I protect myself and stop him him from selling to people from my area??

    • Howard Ullman says:

      This blog is informational only . . . I can’t provide legal advice here. You may want to talk to an attorney in your jurisdiction to see if you have any potential contract or other claims.

  6. Jeff Blake says:

    I have a distributor that sells alcoholic beverages to my establishment. The distributor claims I owe for 2 invoices but they cannot provide a signed invoice to back up this claim. I also do not have any history of the delivery. I refused to pay the invoices and the distributor refuses to sell to me now.

    In Florida liquor distributors have 100% market share of the products they sell. A vendor is legally required by the state to buy from the vendor in his area. They are exclusive distributors for the line of the products they carry. The state also requires by law that distributors notify the state of any delinquent invoices by vendors at which point the state issues a no-sale status and no other distributor is allowed to sell to that vendor until all delinquent invoices are paid. . My distributor violated this requirement for whatever reason (lack of documentation) and has decided to take the situation into their own hands by not servicing my account. 30% of my inventory was from them and it is hurting my business because I can no longer offer their products.

    I don’t see how any of this can be legal especially since they violated the state laws and have 100% market share. What are your thoughts?

    Jeff

    • Howard Ullman says:

      Thanks for your question. This blog is informational only — I can’t offer legal advice here. Also, you would likely want to contact an attorney who can practice in Florida. If you do so, you may want to ask whether what the distributor is doing is actually authorized under Florida liquor laws. If not, you might have a claim under those laws. It’s a bit harder for me to see an antitrust issue here — but again I can’t really evaluate the specifics. Good luck.

  7. We have a local smoked and fresh fish business. We get our smoked trout from a supplier and sell it as is. Our competitor, Kolapore Springs, buys it and puts their own label on it. Kolapore has made a name for itself because the owner, Sean Brady, owns a small run down hatchery that could not possibly supply all his customers so he gets it elsewhere and rebrands it as his own. Recently, Kolapore convinced our supplier (North Shore Specialties) to not sell to us anymore because we were selling the same fish at a lower price, and it was obvious to anyone who saw the packaging. As Kolapore is our supplier’s main customer, our supplier sent us an email that he will no longer supply us. No notice to find another product, and an immediate cut off our bottom line as the smoked trout was one of our main products.

    • Howard Ullman says:

      Thanks for your question. This blog is informational only — I can’t offer legal advice here. You may wish to consult an attorney in your jurisdiction.

    • Roy Galbraith says:

      Hey Visionmom, I can’t help you out with your legal question, but Milford Bay Trout Farm makes an awesome smoked trout, and they do lots of wholesale in Ontario. Roy G.

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