No Parts To Spare

Three independent distributors say Caterpillar unfairly stopped them from buying parts for resale in Latin America.  Their case could affect hundreds of small businesses in South Florida.
By David Poppe, Review Staff

Broward Daily Business Review, The Newspaper of Enterprise, Real Estate and Law, Vol. 35, No. 45, Friday, February 4, 1994

A suit by independent middlemen cut off from their supply of spare parts may help decide how much control a company can have over distribution of its products.

Angel L. Gonzalez can walk into his local Caterpillar Inc. equipment dealer and buy a $500,000 bulldozer.  But he can't pick up a $3 bolt for it.

Gonzalez, owner of Universal Service Co. in Dade County, had built a thriving business buying replacement parts for Caterpillar equipment in the United States and reselling them in Latin America.

For 13 years, he bought from a variety of U.S. Caterpillar dealers who were happy for the business, and sold to Latin American contractors and repair shops who liked the fast service his company provided.  But in 1991, Gonzalez and more than 100 other Dade dealers were cut off when Caterpillar began forbidding sales to unauthorized resellers who were shipping parts overseas.

Though manufacturers generally can refuse to sell parts to unwanted distributors, some independent suppliers have successfully challenged efforts to cut them off.  Gonzalez and two other Dade exporters have sued Caterpillar in federal and state courts, claiming the company tricked them into revealing their customer lists, then shut off their access to parts and began soliciting their clients.  Caterpillar allegedly violated antitrust laws by asking its U.S. dealers to help it identify exporters to be blacklisted.

The stakes in the litigation are potentially enormous: Worldwide trade in Caterpillar spare parts is about $4 billion annually, and the courts' treatment of the exporters' case could affect hundreds of small businesses in South Florida in a variety of industries.

'A damaging channel'

Dade County has become a hub for the export not only of Caterpillar parts, but also of consumer electronic goods and auto, computer and machinery parts by independent distributors.  Big American companies including Xerox, General Motors, Ford and Eastman Kodak have tried to dam such unauthorized distribution channels, claiming they thwart efforts to build dealership networks and damage the value of a brand name.

In internal literature Caterpillar made available to The Daily Business Review, the company says its overseas dealers have lost "several hundred million dollars in parts sales to reseller" in recent years, weakening their competitive position.  If its dealers got those sales, they could use the profits to reinvest in inventory, equipment and training that would benefit Caterpillar equipment owners.

A top Caterpillar official argues in an affidavit that the policy is designed "to eliminate a damaging and unauthorized wholesale distribution channel consisting of resellers who have no contractual relation with Caterpillar and no obligation to provide the essential service on which Caterpillar has based its marketing system."

Kenneth B. Baer, general manager of Caterpillar Export Services, said the company first told it authorized dealers in 1982 not to do business with buyers who resold parts abroad.  The policy was not enforced until about 1990, however, and the company new has a blacklist of 2,500 resellers worldwide.

The policy does not, Caterpillar insists, inhibit competition.  If an overseas customer is unhappy with the local Caterpillar distributor, the customer can buy from authorized distributors elsewhere.

The company also notes that a Chicago-based reseller recently charged the company with violating antitrust laws by forbidding its dealers to sell to exporters, but an Illinois judge ruled in Caterpillar's favor.

Two prominent South Florida antitrust lawyers who aren't involved in the Caterpillar litigation both said that, in general, courts support manufacturers' rights to refuse to sell to resellers.  "This is a heavily litigated area, and the dealers almost always lose," said one of them, Harley Tropin, of Miami's Kozyak Tropin Throckmorton & Humphreys.

'Independents win a few'

But Robert Zarco, the lawyer for the Dade plaintiffs, says the crux of his case isn't that Caterpillar and its dealers have refused to sell parts to his clients.  It's that Caterpillar has ordered its dealers to help it ferret out exporters and put them out of business.

"The company can cut off exporters, but it can't enter into deals with its dealerships to drive out competition," Zarco said.  "That's a conspiracy."

Caterpillar has motions pending to dismiss the suit.

Zarco also notes that several suits in recent years have had some success in challenging manufacturers' rights to limit spare parts sullies. In December, Xerox agreed to settle a class action in Texas federal court for $225 million.  Xerox was accused of suppressing competition in the sale and service of parts for high-volume photocopiers and printers by refusing to sell spare parts to independent shops.

The independents argued that Xerox's attempt to lock them out let it overcharge for parts and service by 10 percent to 15 percent.  The settlement requires Xerox to make parts available in the future.

A closely watched suit is pending against Eastman Kodak, which in 1985 began refusing to sell spare parts to owners of its high-speed copiers unless they agreed not to have the machines serviced by independent shops.  Plaintiffs say Kodak broke antitrust laws by linking sales of parts to service.

In that case, the U.S. Supreme Court limited the number of reasons a manufacturer can give for anti-competitive practices and made it easier for the right to buy and resell-spare parts, enabling the independents to win a right to trial.

Dozens of exporters of Caterpillar parts signed and submitted a complaint to the Federal Trade Commission last year, according to Zarco. A FTC spokesman declined comment.

Caterpillar's restrictive sales policy is also under attack overseas.  A May 1993 report by the European Community said that the company's efforts to eliminate independent parts distributors in Europe amounted to restraint of trade and recommended that EC fine the company and force it to abandon its blacklist.  A final decision is expected this year.

"[The] general policy of Caterpillar and its distributors---leads to a complete orchestration of international trade in Caterpillar's construction machinery and parts.  This restricts competition in the common market and affects trade between the Member Sates," the EC report said.

As for the exporters themselves, they claim to serve an important economic function by creating competition for Caterpillar overseas, where it's authorized dealership networks aren't always efficient and customers don't get good prices or service.

"For years those same dealers ignored those same customers they had in their area," said Fred Dixon, one of the three exporters suing Caterpillar.  "You have to understand that for every country down there, there is usually only one Caterpillar dealer."

Gonzalez, Dixon and exporter Gustavo J. Esteves say that before Caterpillar cut them off, they bought more than $15 million worth of inventory annually.  Now, their businesses are dying.  "I'm basically unemployed," said Esteves, who started Allied Machinery Service, Inc. in 1986 after 15 years of working for Caterpillar dealers.

The dealers liken Caterpillar's ban on independent distributors to General Motors deciding that only GM dealers could sell GM parts, with two key differences.

First, Caterpillar is the dominant seller of heavy equipment in many foreign countries.  It controls an estimated 70 percent of the Latin American market, so equipment buyers don't have ready alternatives.  Second, while dozens of manufacturers make auto parts, there aren't many independent manufacturers of parts for heavy machinery.

"People are a lot more dependent on getting parts from a Caterpillar dealer, and the dealers know it," said Gonzalez.  "If they cut off the supply of parts [to independent dealers], the machinery owners have to come to them."

Second, because most independent repair shops buy from independent parts dealers, the black list helps Caterpillar dealers win more repair business, because only authorized dealers have parts, the exporters allege.

'Quicker than the Cat'

The European Community report said independent exporters provide an important service.  "These [dealers] seem to make a living, in part by being more efficient than Caterpillar and its authorized dealers, in part by profiting from currency fluctuations when Caterpillar is slow to adjust its dollar or non-dollar contacts and a good reputation among some contractors," said the EC report.

Until 1990, Caterpillar seemed to agree.  Dixon and Esteves say they were courted by the company in the late-'80s because the company wanted them to buy parts directly from it, as opposed to its dealers.  The men say they had unsecured credit lines with Caterpillar as large as $200,000 and $250,000, respectively.

Today, Dixon and Esteves believe Caterpillar courted them because it wanted to control their ability to buy parts.  But until 1990, when a new Caterpillar subsidiary called Caterpillar Export Services (CES) began asking exporters to identify their customers, they never suspected the company was unhappy with them.

The Dade exporters claim CES told them it needed their customer lists to analyze the flow of spare parts outside the United States.  Caterpillar has said it needed to know where spare parts were being resold so it could compensate its overseas dealers for their lost business.

When exporters balked at disclosing their customers, Caterpillar allegedly offered them heavy incentives to cooperate, including higher credit limits and promises of parts availability.  It also threatened not to sell them parts if they didn't cooperate.

All three dealers say Caterpillar promised that their customer lists would be confidential.  But after they turned over customer names, Dixon and Esteves say their credit limits were reduced, parts weren't available to them, and their customers in Latin America were solicited by Caterpillar.

"What coincidence," said Dixon.  "After you start giving these people names, your customers start getting calls from sales people from Caterpillar."

Enrique Diaz Benza, owner of EDB Constructions in Paraguay and a former customer of Dixon's, filed an affidavit in the litigation confirming that Caterpillar officials asked him to stop doing business with Dixon in April 1992, shortly after Dixon says he gave EDB's name to Caterpillar.

Diaz Benza, whose company owns about 300 pieces of such Caterpillar heavy equipment as tractors, diggers and bulldozers, said higher prices and slower service are already affecting the construction business in Paraguay.

"From an independent businessman's point of view, the reseller listing is destructive and burdensome to owners and users of Caterpillar equipment," Diaz Benza said.

The Date exporters say dozens of their former competitors are now watching their suits with Caterpillar hoping they win back the right to sell spare parts.

"A lot of people are intimidated.  They say, well this is useless. That is what Caterpillar is relying on," Dixon says.  "These three schmucks, if we are going to go down, we are going to go down fighting."