Question:Can a manufacturer restrict the sales of repair parts for its equipment to only its designated dealers? I heard that in the automotive business this question was settled out of court. The settlement enabled independent auto repair businesses to have access to not only parts sales, but also to technical bulletins and other diagnostic information. Have there been any precedents in the HVAC industry?

Reply: This question raises issues that are primarily dealt with under the federal and state antitrust laws under the heading of a “refusal to deal.” As a matter of federal law, the general rule is that a company has the right to determine who it will do business with and which customers it will sell its products to.

As the U.S. Supreme Court has observed, under the federal antitrust laws (primarily the Sherman Act) a business generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently. As a result, a manufacturer’s refusal to sell parts to a particular dealer is generally not, in and of itself, illegal. For example, a manufacturer may generally announce a policy regarding who it will and will not sell its products to and the conditions on which it will sell, and it is generally free to refuse to sell to customers that do not comply with its stated conditions.

Moreover, a number of courts have stated that a manufacturer is entitled to maintain a monopoly over its own products so long as the manufacturer does not thereby monopolize the entire market. As this last point suggests, there are a number of limitations on this general right of a business to decide who it will deal with.

Among other things, the Supreme Court has stated that a business can refuse to deal with whomever it wishes as long as the manufacturer has a legitimate business reason for its refusal to deal. For example, a manufacturer cannot conspire with certain dealers or distributors to exclude other dealers from doing business with the manufacturer. In addition, a manufacturer cannot refuse to do business with dealers if its intent in doing so is to achieve or maintain a monopoly.

Moreover, a manufacturer that has achieved monopoly status within a particular market cannot refuse to let others have access to an “essential facility,” i.e., some type of system or equipment access to which is necessary to compete in a particular market and which cannot easily be duplicated.

HVAC Implications

In applying these principles, the courts have often found that a manufacturer can establish arrangements whereby it will sell replacement parts only to approved dealers without running afoul of the law. At least one such case involved heating, ventilating, and air conditioning equipment.

In the 1980s, Trane sold genuine parts for its commercial HVAC systems primarily through commercial sales offices (CSOs). Tarrant Service Agency was a mail-order business that sold genuine and duplicator parts for the service and repair of Trane equipment, purchasing the genuine parts from Trane CSOs and then competing with the CSOs for the business of service contractors and Trane equipment owners.

However, in 1990 Trane instituted a policy of prohibiting the CSOs from selling parts to anyone Trane deemed to be a broker. Trane determined Tarrant to be a broker (meaning the CSOs could not sell parts to Tarrant) and refused to sell parts directly to Tarrant because it believed that Tarrant was passing off duplicator parts as genuine Trane parts.

The U.S. Court of Appeals for the Sixth Circuit held that Trane’s refusal to sell parts to Tarrant did not constitute a violation of the federal antitrust laws. The court found that while in some cases a manufacturer’s monopoly over its own products can constitute a monopoly of a market where a product is unique and no reasonable substitutes exist, this was not a case of that type because Trane equipment could be serviced with genuine parts, duplicator parts, or generic parts, and Trane controlled access only to the genuine parts.

The courts have reached similar conclusions in cases involving sales of other types of parts, such as parts for aircraft engines, but have occasionally found that a manufacturer’s refusal to sell parts to a dealer or service provider violates federal antitrust laws where the manufacturer had a monopoly on the particular market in question.

Refusal To Deal

In light of all of the above information, manufacturers generally have significant latitude to sell parts only to certain dealers, but in a particular case such a “refusal to deal” could constitute a violation of federal antitrust laws. Whether a particular manufacturer’s refusal to sell parts to a particular dealer is legal will depend on the particular circumstances involved and will involve, among other things, a determination of what the relevant market is (e.g., is it the market for genuine Trane parts or the market for all parts that can be used to service Trane equipment?).

These types of determinations can be very complex. The legality of a particular refusal to deal may also depend on the state in which the events occur. Many states have their own antitrust laws, and while many of these laws are patterned on the federal law, some state laws are written and interpreted in different ways.

Tom Jackson is an attorney with the Washington law firm of Kelley, Drye & Warren, LLP.

Note: This feature is intended only as a forum for information and general discussion. Information provided is not in the nature of legal representation and is not intended to establish any attorney-client relationship. Any information provided should not be relied on without consulting an attorney to discuss the specific facts relevant to your situation.

Publication date: 08/18/2003