Abstract

Intrabrand restraints limit the discretion of one or more sellers-usually dealers-with respect to the disposition of a product sold under a single brand. While most scholars believe that such contracts can help assure optimal promotion of a manufacturer's products, there is disagreement about the exact manner in which such restraints accomplish this objective. Many scholars believe that such restraints themselves induce dealers to engage in promotional activities desired by the manufacturer. Others believe that such restraints merely serve as "performance bonds," which dealers will forfeit if they fail to follow the manufacturer's precise promotional instructions. Some scholars reject both approaches, arguing that manufacturers are in no position to "plan" dealers' promotional agendas and that manufacturers could in any event rely upon less restrictive means to achieve the same objectives. These scholars argue that these restraints are generally anticompetitive. This Article argues that reliance upon the theory of property rights provides the most plausible account of these agreements. For one thing, a focus on property rights helps explain why manufacturers choose to rely upon the market to distribute their products in the first place, a decision that other scholars have taken for granted. A manufacturer or joint venture that relied upon its own employees to distribute its product would incur significant costs gathering and processing the information required to direct employee activities. By relying upon the market, that is, independent dealers, firms avoid these costs and delegate promotional decisionmaking to those actors with access to localized knowledge and the incentives to acquire it. Reliance on the market entails problems of its own, however. In particular, dealers may not be able to capture the benefits of local promotional expenditures that induce consumers to purchase the manufacturer's product. Instead, cut rate dealers may decline to expend resources on promotion, free riding on the efforts of their fellow dealers. Thus, reliance upon independent dealers to distribute a manufacturer's product may result in a market failure, attenuating the benefits that decentralized distribution might otherwise produce. Intrabrand restraints help overcome this market failure and thus faciltitate a strategy of decentralized distribution by granting dealers an effective property right over the promotional information they produce, thus perfecting dealers' incentives to identify and pursue optimal promotional strategies. Far from ensuring that dealers pursue a particular promotional agenda "desired by the manufacturer," as some have argued, such restraints actually further the strategy of decentralization by perfecting dealers' ability to pursue whichever agenda they should choose. Moreover, because manufacturers and joint ventures adopt such restraints to avoid planing dealers' promotional activities, such restraints are superior to so-called less restrictive alternatives that inevitably require manufacturers to announce and enforce detailed promotional strategies. This property rights interpretation of these restraints bolsters the scholarly presumption in their favor and should compel courts to analyze all such agreements under a lenient Rule of Reason.

Document Type

Article

Publication Date

2004

Publication Information

89 Cornell Law Review 553-620 (2004)

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