FTC Staff Comment to the Hon. William P. Te Winkle Concerning Wisconsin S.B. 466 to Amend the Fair Dealership Law

FEDERAL TkADE COMM!SSIOS
WASHINGTO!'\. DC. 20S~O
February 	19, 	1988
The 	Honorable 	\o:illiam 	P. 	Te 	\o:inkle
St.ate 	Senate
136 	Sout.h, 	State 	Capitol
P.o. 	Box 	7882
~adison, Wisconsin 	53707-7862
Dear ~r: Te 	Winkle:
The 	staff 	of 	the 	Federal 	Trade 	Comrr.ission 	is 	pleased 	to 	pro-
vide 	these 	comments 	on 	Senate 	Bill 	No. 	466, 	An 	bct 	Relating 	t.o
Various 	Changes 	to 	the 	Fair 	Dealership 	law. 	~I 	The 	proposed
legislation, 	if 	enacted, 	would 	amend 	Wisconsin's 	fair 	dealership
law, 	which 	prohibits 	~grantors~ of 	dealerships 	II 	f~om terminat-
ing 	any dealer without 	good 	cause. 	Under 	the 	bill, 	the 	good
causereguirement 	for 	terminations 	would 	not 	be 	satisfied 	even
when 	a 	grantor 	wit.hdraws 	from 	a 	product 	or 	geographical 	market.,
changes 	its 	distribution 	syst.em, 	sells 	real 	estate 	occupied 	by
the 	dealer, 	or 	discont.inues 	business 	in whole 	or 	in 	part.
We 	believe 	that 	enactment 	of 	S.B. 	466 	could 	harm 	consumers
by 	increasing 	the 	costs 	associated 	with 	terminations 	that 	are
made 	for 	sound business 	reasons. 	These 	cost 	increases 	may 	deter
suppliers 	from 	est.ablishing 	additional 	dealerships 	in 	Wisconsin
or 	from 	entering 	into 	any 	dealership.agreements 	with 	Wisconsin
~I 	These 	comments 	represent 	t.he 	views 	of 	the 	Federal 	Trade 	Com-
mission'S 	Bureaus 	of 	Competition, 	Consumer 	Protect.ion, 	and 	Eco-
nomics, 	and 	do 	not 	necessarily 	represent 	the 	views 	of 	the 	Commis-
sion 	it.self 	or 	any 	individual 	Comrr.issioner. 	The 	Commission 	has
vot.ed, 	however, 	t.o 	authorize 	us 	to 	submit 	these 	comment.s 	for 	your
considerat.ion.
~I 	"Grantor" 	is 	defined 	as 	"a person 	who 	grant.s 	a 	dealership."
~~sc. 	Stat.. 	§ 	135.02(3). 	~Dealership" i~ defined 	in 	turn 	as 	"a
cont.ract. 	or 	agreement 	. 	. 	. 	by which 	a 	person 	is 	grantee 	the
richt. 	to 	sell 	or 	distrib~te aocds 	or 	services, 	or 	use 	a 	trade
name, 	t.rade 	mark, 	se=,~ice ma=k, 	logot)~e, advert.ising 	or 	ot~er
commercial 	s)~ol, 	in 	which 	t.here 	is 	a 	community 	of 	interest. 	in
t.he 	busineEs 	of 	offering, 	selling 	or 	dist.ributing 	goods 	or 	ser-
,,-iceE 	at 	",'holesc.le, 	re't.ail, 	by 	lease, 	agreement., 	or 	ot.her\oo-ise."
·1>:i5=, 	St.et., 	§ 	135.02 (2). 	The 	st.e'tut.e 	defines 	"comrnu;-.~t.y 	of 	in-
terest" 	as 	a 	"cont.inuing 	finansial 	interest 	bet.ween 	t.~e grant.or
and 	grant.ee 	in 	eit.her 	t.he 	operat.ion 	of 	the 	business 	or 	t.he 	mar-
ke-:.ing 	0: 	5uchgoods 	or 	services." 	\o:isc. 	St.at. 	S 135.02(4).
See! 	g.g.! 	Lc.ke:ield 	Tele':lhone 	CO, 	Y. 	Northern 	~'eleC"om! 	!nc.! 	£56
'l:' 	c·,...,..., 	C>1 3 	(~D 	'L'~ s,... 	~ C87)	... 	-"':::'1:"'- 	c_ 	_ •• 	P\woIoo. -- 	.... ." 	•

The 	Honorable 	\.;'illiam 	P. 	Te 	\.;'inkl~
Page 	2 " '.
firms. 	This 	state-created 	entry 	be:-rier, 	in 	turn, 	may 	give 	ex-
isting 	dealers 	a 	deg:-ee 	of 	market 	power 	to 	increa~e prlces 	0:-
reduce 	services 	to 	\00,' i scons in 	conSUITlers 	,",' j t.hout 	f ear 	of 	ne .. 	cr.try
and 	incr~ased competition.
Interest 	end 	Experience 	of 	the 	Fedetcl 	T;-ade 	Commis-sion
The Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with 	pre-
venting 	unfair 	methods 	of 	competition 	and 	unfair 	or 	deceptive
practices 	in 	or 	affecting 	commerce. 	15 	U.S.C. 	~ 	45. 	Under 	this
statutory mandate, 	the 	Commission 	seeks 	to 	identify-and 	comment
upon 	restrictions 	that 	impede 	competition 	or 	increase 	costs 	with-
out 	offering 	countervailing 	benefits 	to 	consumers. 	The 	Commis-
sion 	and 	its 	staff 	have 	provided 	comments 	to 	federal, 	state, 	and
local 	legislatures 	and 	administrative 	agencies 	on 	matters 	that
raise 	issues 	of 	competition 	or 	consumer 	protection 	policy. 	In
1987, 	the 	Commission's 	staff 	provided 	comments 	to 	your 	legisla-
ture 	concerning 	a 	bill 	to 	repeal 	the 	state's 	relevant 	market 	area
law. 	We 	have 	also 	commented 	on 	legislation 	limiting 	suppliers'
ability 	to 	terminate 	dealers 	or 	restricting 	entry 	into 	markets.
In 	1984, 	for 	example, 	the 	Commission 	presented 	testimony 	against
proposed 	federal 	legislation 	that 	would 	have 	restricted 	the
abili~y of 	suppliers 	of 	office 	machines 	and 	equipment 	to 	termi-
nate 	dealers. 	In 	1987, 	the 	Commission's 	staff 	commented 	to 	the
Georgia 	and 	Nevada 	legislatures 	on bills 	to 	restrict 	the 	market-
ing 	of 	gasoline 	by 	refiners.
The 	Proposed 	Lecislation
Under 	the 	Wisconsin 	Fair 	Dealership 	Law, 	~isc. 	Stat. 	§135.01
~ ~., 	grantors 	are 	prohibited 	from 	terminating, 	canceling,
failing 	to 	renew, 	or 	substantially 	changing 	the 	competitive 	cir-
cumstances 	of 	a 	dealership 	without 	-good 	cause.- 	Wise. 	Stat.
§135.03. 	"Good 	cause- 	is 	defined 	as 	the 	failure 	of 	a 	dealer 	to
comply"'':' th 	"essential, 	reasonable, 	and 	nondiscriminatory 	re-
~uirements" of 	the 	grantor 	or 	bad 	faith 	by 	the 	dealer. 	~isc.
Stat~ 	§ 	135.02(6). 	S.B. 	466 	would 	amend 	the 	statute 	by 	providing
that 	the 	followin~ justifications 	would 	not 	provide 	good 	cause
for 	dealer 	terminations:
1. 	The 	grantor's 	withdrawal 	from 	a 	product 	or 	geographical
rna:::}~et .
2. 	A change 	in 	~he 	~=an~c='s cis~=ibu~ion Eys~effi.
~. 	A sale 	by 	the 	~=an~o::: o~ 	real 	e5~ate occupied 	by 	a
dealer.

Trle 	Honora:"'le 	l,;'illiam 	P. 	';'e 	\o:i.n};}e
Pbge 	3
~. 	Discon~inua~ion 	of 	a 	;r~ntor's 	business 	in 	whole 	or 	in
part..
S.B. 	466, 	Section 	1.
In 	addition, 	the 	bill 	would 	prohibit 	a 	grantor 	~rom 	"[s)ub-
stantially 	changing 	the 	competitive 	circumstances 	of 	a 	dealer's
business 	without 	good 	cause." 	S.B. 	466, 	Section 	3. 	Under 	this
provision, 	grantors 	may 	be 	prohibited 	from 	establishing 	new 	deal-
erships 	or 	integrating 	forward 	in~o retail 	distribution. 	The
bill 	also 	would 	prohibit 	grantors 	from 	preventing 	a 	dealer 	from
transferring 	or 	assigning 	all 	or part 	of 	the 	property 	thet 	con-
stitutes 	the 	dealer's 	business, 	or 	from 	changing 	its 	capital
structure. 	S.B. 	466, 	Section 	4.
Effects 	of 	S.E. 	~66 	on 	Competition 	and 	Consumer 	Welfare
Enactment 	of 	S.B. 	466 	could 	freeze 	certain 	business 	rela-
tionships 	for 	long 	periods 	of 	time, 	without 	any 	regard 	to 	changes
in 	market 	or 	other 	economic 	conditions. 	l/ 	The 	bill 	could 	be
read 	to 	prohibit 	suppliers 	from 	terminating 	the 	supply 	of 	unsuc-
cessful 	or 	obsolete 	products 	to 	dealers 	who 	insis~ on 	the 	con-
tinuation 	of 	the 	supply 	relationship. 	~/ 	For 	ex~rr.ple, a 	supplier
who 	wished 	to 	stop 	selling 	home 	movie 	cameras 	because 	of 	the 	suc-
cess 	of 	video 	recorders, 	could 	be 	compelled 	to 	continue marketing
this 	obsolete 	product. 	The 	~ill also 	would 	prohibit 	suppliers
from 	withdrawing 	from 	geo;raphical 	markets. 	Thus, 	a 	supplier 	who
wished 	to 	stop marketing 	a 	poorly-selling 	product 	in 	the 	Y.idwest
would 	be 	prohibited 	from 	withdrawing 	from 	the 	Wisconsin 	market.
Indeed, 	the 	bill 	could 	be 	read 	to 	prohibit 	a 	supplier 	who 	wished
to 	go 	out 	of 	business 	from 	doing 	so.
The 	conduct 	that 	S.B. 	~::6 seeks 	to 	prohibit 	is 	the 	very
essence 	of 	a 	market 	economy. 	In 	a 	market 	economy, 	market 	forces
continually 	reshape 	the 	composition 	of 	goods 	and 	se.!"'"ices 	that
are 	availab~e to 	consumers. 	~s 	consumer 	demand 	for 	bugqy whips
l/ 	Dealers 	currently 	possess 	ether 	legal 	remedies 	for 	wron;ful
terrninatior:s. 	In 	the 	first 	place, 	dealers 	may 	ent€::r 	into 	con-
tracts 	that 	Drotect 	their 	businesses 	from 	termination. 	In 	addi-
tion, 	common- law 	and 	the 	existin~ Fair 	Dea:ership Law 	give 	deal-
ers 	prote=tion 	from 	terrriinations, 	even 	in 	instances 	in 	wtich
dealers 	have 	failed 	to 	nego~iate contract 	provisions 	guaranteein~
a 	long-term 	supply 	rela~ions~ip.
1/ 	we 	use 	the 	term 	"su?~~ier" ra~her than 	"grantor" 	because 	the
te=rn 	has 	a 	more 	readily 	understood 	meaninc. 	We 	recognize 	that
not 	eve~r supply 	rela~ionship ~ill render 	th~ supplier 	a 	hq=an~
cr" 	of 	c. 	,. dealers:-.ip·' 	fc= 	pu=poses 	of 	"the 	statute.

The 	Honorable 	~i:liarn P. 	~e ~inkle
Page 	4
sags 	and 	demand 	for 	a~Lomobi)e h~adlj9hts r 	se~, 	b 	ffibrke~ 	economy
£ h.i f 1.s 	i nve!':tn,ent 	away 	f :!"orr 	buggy 	""f; i? JT,anu 	act ure 	C\.Jld 	t. oloia:..-d
h~odl i ght 	milnu! bcture. 	Tn::'s 	c.jju~:.nlent r!""oc~ss 	tJroduces. ~hp
t.ypes 	of 	goods 	and 	serviCb5 	LhaL 	consun~rs d~sire. 	SLaL~ in~er
ference 	with 	t.his 	process 	can 	thwart 	the 	realignment 	of 	invest-
ment 	necessary 	for 	the 	production 	of 	the 	goods 	and 	services 	that
consumers 	ldsh 	to 	buy.
Under 	S.B. 	466, 	suppliers 	could 	be 	required 	to 	invest 	in 	the
production 	or distribution 	of 	goods 	and 	services 	that 	consumers
do 	not 	wish 	to 	buy. 	This 	distortion 	of 	business 	investment 	deci-
sions 	likely would 	result 	in 	the 	overallocation 	of 	resources 	to
products 	or markets 	with 	declining 	demand 	and 	the 	underalloc~tion
of 	resources 	to 	products 	or markets 	with 	rising 	demand. 	The
mar~et's ability 	to 	respond 	quickly 	to 	shifts 	in 	consumer 	pre-
ferences 	consequently 	would 	be 	undermined.
In 	addition, 	enactment 	of 	S.B. 	466 	could 	injure 	Wisconsin
consumers 	by 	discouraging 	the 	establishment 	of 	new 	dealerships
and 	thereby 	giving 	some 	dealers 	market 	pO""er 	to 	charge 	sup:=acom-
pet.itive 	prices. 	The 	bill 	would 	discourage 	the 	establishment 	of
new 	dealerships 	in 	Wisconsin 	in 	two 	ways. 	First, 	~he bill 	would
require 	suppliers 	to 	maintain 	every 	supply 	relationship 	that 	a
dealer 	wishes 	to 	continue 	unless 	they 	can 	prove 	dea2er 	miscon-
duct. 	The 	knowledge 	that 	it 	will 	be 	difficult 	or 	extremely 	cost-
ly 	to 	terminate 	deale:=ships 	is 	likely 	to 	deter 	suppliers 	from
granting 	new 	deale:=ships 	in 	the 	first 	place. 	Second, 	proposed
section 	135.03(1)(b) 	appears 	to 	prohibit 	suppliers 	from 	estab-
lishing 	new 	dealerships 	cr 	integrating 	forward 	into 	retail 	di~
tribution 	if 	such 	action 	would 	M[s]ubstantially 	change 	the 	com-
petitive 	circumstances 	of 	a 	dealer's 	business 	without 	good
cause. M 	By 	erect.ing 	these 	artificial 	entry 	ba::-riers, 	t.he 	p:=o-
posed 	legislat.ion may 	enable 	existing 	dealers 	to 	charge 	higher
prices 	to 	~isconsin consume:=s. 	~/ 	In 	addition, 	~isconsin cit.i-
zens 	might 	find 	it 	diffic~~t to 	er.t.er 	business 	in 	growing 	:=etail
ffiarkets 	because 	supplie:=s 	may 	be 	:=eluctant 	t.o 	grant. 	dealerships
in 	the 	state.
if 	A recent. 	study 	by 	a 	Corr~ission economist 	showed 	tha~ relevant
ma:=ke~ a:=ea 	laws, 	which 	:=es~=ict ent:::')? 	into 	~he 	aut.omobil~ deal-
e:=ship 	business, 	increased 	~he price 	paid 	by 	co~sume=s =0:= 	ne~
aut.om8~iles 	by 	a~ ave=age 	0: 	6.1~ 	pe:=cent.. 	R. 	Roge:=s, 	The 	E:fec~
of 	State 	Ent~· Regulation 	C~ Ret.ail 	~~~omcbile ~a=kets ~ 	(:58£).
Unde:= 	:=elevant 	ma:=ket. 	area 	:a~s, 	existing 	deale== 	may 	b~ 	a~le 	t.o
p:=event 	aman~:actu=e= from 	g:=anting 	addit.ional 	deale:=stipE 	i~
thei:= 	ge8g:=aphical 	ffiarket 	a:=eas. 	Similar 	effects 	coule 	be 	e>;-
pected 	i~ 	ct.he:= 	p:=oeuct 	ma:=kets 	in 	which 	rest=ic~ions O~ 	t.he
g:=antin; 	of 	new 	deale=stips 	a~~ 	imposed.

The 	Honorable 	~illiare P. 	Te 	~inlle
Page 	5
To 	avoid 	~hc cos~s imposed 	by 	~he r~opo~ed JegiEJaLio~, EUp-
pliers 	IT.ay 	grant. 	addiUoni::J 	declerst:ips 	in 	nE::ighboring 	SLc:<:E
t.ha~ rlavenot 	erJacted 	Ule 	rest.ric~ior.s o~ 	S.B. 	~66. 	Some 	SUj'-
pliers 	may 	choose 	1.0 	sell 	t.o 	;;isconsin cOJlsun,ers 	1.hrougtl 	OUL-of-
state 	dealers, 	even 	where 	this 	form 	of 	distribution 	is 	less 	effi-
cient 	than 	establishing 	additional 	dealers 	in 	Wisconsin. 	As 	a
result, 	Wisconsin 	consumers 	may 	have 	to 	travel 	farther 	and 	pay
more 	for 	products.
Conclusion
The 	enactment 	of 	S.B~ 	466 	is 	likely 	to 	harm 	Wisconsin 	con-
sumers 	by 	reducing 	the 	number 	of 	dealers 	with 	whom 	suppliers 	will
deal. 	The 	legislation may 	lead 	to 	higher 	prices 	for 	Wisconsin
consumers 	and 	could 	reduce 	the 	availability 	of 	new 	products 	with-
.in 	the 	state.
Sincerely,
;5~-4" 	tI 	tid} 	t1 ebj
~effrey 	I. 	Zuckerman
Director