Fair Allocation System, Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0065]

Fair Allocation System, Inc.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before October 13, 1998.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

William Baer, FTC/H-374, Washington, D.C. 20580, (202) 326-2932; or

Charles Harwood, Federal Trade Commission, Seattle Regional Office, 915

Second Avenue, Suite 2896, Seattle, WA 98174, (206) 220-4480.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for August 5, 1998), on the World Wide Web, at ``http://www.ftc.gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, N.W.,

Washington, D.C. 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Such comments or views will be considered

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by the Commission and will be available for inspection and copying at

its principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted a proposed consent order

from Fair Allocation System, Incorporated (``FAS''). FAS is an

organization of twenty-five automobile dealerships from five Northwest

states that was formed to address dealer concerns over the marketing

practices of automobile manufacturers. In particular, FAS members were

concerned about an automobile dealership--Dave Smith Motors of Kellogg,

Idaho--which was attracting customers from around the Northwest and

taking substantial sales from FAS members by selling cars for low

prices and marketing them on the Internet.

According to the complaint, because of these concerns, the members

of FAS collectively attempted to force Chrysler to change its vehicle

allocation system. Chrysler allocates vehicles based on the dealer's

total sales; FAS members wanted Chrysler to allocate vehicles based on

the expected number of sales from a dealer's local area, which would

have substantially reduced the number of cars available to a dealership

like Dave Smith Motors that drew customers from a wider geographic

area. According to the complaint, the members of FAS threatened to

refuse to sell certain Chrysler vehicles and to limit the warranty

service they would provide to particular customers unless Chrysler

changed its allocation system so as to disadvantage dealers that sold

large quantities of vehicles outside of their local geographic areas.

The compliant charges that FAS's agreements or attempts to agree

with its dealer members to coerce Chrysler violate Section 5 of the FTC

Act, as amended, 15 U.S.C. 45. According to the complaint, FAS members

constitute a substantial percentage of the Chrysler, Plymouth, Dodge,

Jeep and Eagle dealerships in eastern Washington, Idaho, and western

Montana, and FAS's threats would have harmed competition and consumers

in those areas. In particular, FAS's efforts would have deprived

consumers of local access to certain Chrysler models and to warranty

service, and would have reduced competition among automobile

dealerships, including rivalry based on price or via the Internet.

The goal of the boycott was to limit the sales of a car dealer that

sells cars at low prices and via a new and innovative channel--the

Internet. FAS's threatened action against Chrysler is a per se illegal

group boycott. In United States v. General Motors, 384 U.S. 127 (1966),

the Supreme Court held per se illegal a comparable dealer cartel in Los

Angeles that sought to prevent other area dealers from selling

automobiles through discount brokers. Since General Motors, the Supreme

Court has twice cited its per se condemnation of dealer cartels with

approval. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36,

58 n. 28(1977); Business Electronics v. Sharp Electronics, 485 U.S.

717, 734 n. 5 (1988). Such dealer cartels are ``characteristically

likely to result in predominantly anticompetitive effects,'' Northwest

Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S.

284, 295 (1985), because they aim to limit competition while producing

no plausible efficiencies.

Even where an agreement otherwise appears to fall in a category

traditionally analyzed under a per se rule, a more extensive, rule-of-

reason analysis may be necessary if there are plausible efficiency

justifications for the conduct. Broadcast Music, Inc. v. Columbia

Broadcasting System, Inc., 441 U.S. 1 (1979). Here, however, there

appear to be no plausible efficiencies that would justify the dealers'

conduct. Even if there were reason to believe that Dave Smith Motors,

or similarly operated dealerships, were free-riding \1\ on the efforts

of more traditional dealers, no boycott would be needed to deal with

the problem. Manufacturers have strong incentives to prevent free-

riding by a few of their dealers at the expense of the rest, and can be

expected to be responsive to complaints from their dealers acting

individually if the free-riding concerns are genuine. In the absence of

an efficiency justification that plausibly explains why concerted

action is necessary, extensive searches for and investigations of

justifications for such conduct would be unwarranted, and would only

add a layer of complication and delay.

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\1\ ``Free-rider'' concerns may arise where two distributors

sell the same product, but provide different levels of service in

connection with the sale of that product. For example, one

distributor may have a full-service showroom and the other may sell

out of a warehouse that offers no service. Consumers may visit the

showroom, learn all they need to know about the product, and then

purchase the produce from a ``no-service'' discounter. The problem

is that over time the full-service distributor may lose its

incentive or financial ability to provide the services, to the

detriment of both the manufacturer and the consumers who value those

services. Free-rider concerns generally do not exist if the full-

service distributor is compensated for its services.

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In this case, the absence of a justification is especially clear.

Chrysler has previously rejected demands that it change its allocation

system and publicly lauded Dave Smith Mothers. See ``Chrysler Corp.

Will Let Dealers Shoot It Out in Cyberspace,'' Automotive News, p. 1,

January 27, 1997. Indeed, Chrysler's Vice President of Sales and

Marketing has flatly stated that Chrysler believes the best way to

increase its sales penetration is to provide dealers as much product as

they can sell, no matter where the customer comes from. See ``Chrysler

VP Has Calming Effect,'' Automotive News, p. 28, February 10, 1997.

Even if Chrysler had acceded to the boycotters' demands, however, that

would not have justified a horizontal boycott by the dealers.

The proposed consent order would prohibit FAS from participating

in, facilitating, or threatening any boycott of or concerted refusal to

deal with any automobile manufacturer or consumer. There is nothing in

the proposed order, however, that would prohibit FAS from informing

automobile manufacturers about the views and opinions of FAS members.

The proposed consent order has been placed on the public record for

sixty (60) days for reception of comments from interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received, and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

order.

The purpose of this analysis is to facilitate public comment on the

proposed order. It is not intended to constitute an official

interpretation of the agreement containing the proposed consent order

to modify in any way its terms.

By direction of the Commission.

Benjamin I. Berman,

Acting Secretary.

[FR Doc. 98-21613 Filed 8-11-98; 8:45 am]

BILLING CODE 6750-01-M