Chapter Four
The Legal and Regulatory Environment
Authors’ Comments
During the initial reviews of our prior text in Business to Business Marketing, we often
were asked why include a separate chapter on the legal environment and Business
Ethics (Chapter 16). For this text, reviewers fully accepted the needs for these chapters
and in fact requested specific topics be covered (Sarbanes-Oxley, and so on). Since we
have always believed that the regulatory environment and business ethics are
contextual issues, the new feedback was heartening. Perhaps the last few years of
business news has made an impression!
An understanding of marketing-related law can provide the business-to-business
marketer with opportunities to tailor offerings to customer needs in competitive
markets. Our experience with teaching these topics has shown that the initial reaction
of students is one of amazement because they believe they know of violations that
occur on an almost routine basis, or frustration, because they believe that price is a
major element of the marketing mix and the law has taken that away from marketers.
As understanding grows, students recognize that good marketing efforts will usually
Chapter 4: The Legal and Regulatory Environment 2
Opening Vignette
Your Plight as Owner of Pacific Drives
This opening introduces Pacific Drives, a fabricated company that will be used in sample
legal scenarios throughout the chapter.
Pacific Drives is a small, innovative manufacturer of computer hard drives. Its primary
customers are the makers of laptop computers. Several situations are described where
something that many students have not likely considered.
Learning Objective
Understand the primary goals and objectives of business legislation
and its implications in a market economy.
Business Legislation in a Free Market
Students are often surprised (and skeptical) when they are exposed to the
substantial number of rules and regulations governing business in a “free
Business related legislation is focused in three areas: (PowerPoint 4.3)
• Protect Companies from each other
Predatory pricing, tying agreements, and so on, maintaining market
access.
Chapter 4: The Legal and Regulatory Environment 3
Enforcement Responsibilities (PowerPoint 4.4)
Enforcement is the responsibility of the executive branch of the federal
Learning Objective
Understand the basic U.S. antitrust and business regulatory legislative
acts.
Legislative Acts that Affect Marketing
Exhibit 4-1 summarizes the various Legislative Acts (PowerPoint 4.5)
Exhibit 4-1: Summary of Antitrust Acts and Their Focus
(PowerPoint 4.5)
Statute
Focus
(PowerPoint 4.6)
Sherman Antitrust Act (1890)
Monopolies, attempts to monopolize. Provided for
both civil and criminal penalties. Broad coverage was
base for later legislation.
Tying agreements, interlocking directorates,
intercorporate stockholding. Provides for civil
penalties only.
(PowerPoint 4.9)
Robinson-Patman Act (1936)
Often known as “the price discrimination act,”
provided penalties for both buyers as well as sellers.
Requires proportionally equal terms to buyers in
common markets.
acquisitions where they may substantially impact
competition.
Chapter 4: The Legal and Regulatory Environment 4
Uniform Commercial Code (PowerPoint 4.13)
Adopted by all states except Louisiana, the UCC is the topic of most Business
Law courses and not extensively dealt with here.
Time permitting a discussion of “common law” and precedence may be
interesting.
Sarbanes-Oxley Act and its Offspring (PowerPoint 4.14)
Public Company Accounting Reform and Investor Protection Act of 2002
Learning Objective
Gain a sense of the interaction of legislation and the activities it
restricts or prohibits.
Business Legislation Issues (Summarized on PowerPoint 4.15)
• Intercorporate Stockholding (PwrPt 4.16)
• Interlocking Directorates (PwrPt 4.17)
Learning Objective
Recognize the business-to-business marketing implications and
nuances of those restrictions.
To further discuss competitive pricing and price discrimination, Pacific
Drives is again used as an example.
Chapter 4: The Legal and Regulatory Environment 5
Exhibit 4-5 (PowerPoint 4.23) shows a United Memories (UM) entering the
market, offering NBM Computers a hard drive (UM Model 300) comparable
to the Pacific Model 1000 for $32.
Issues: The most serious marketing issues are not related to price.
• Given a successful relationship between NBM and Pacific, is the
price attractive enough to get NBM to switch?
• Should NBM inform Pacific? (yes)
Learning Objective
Recognize the defining role that legislation can have with regards to
intricate and multiple supply chain roles.
Exhibit 4-6 (PowerPoint 4.24) shows a third but smaller customer, Spartan
Computers, entering the market in competition with NBM and PaloAlto.
• Is it acceptable to charge Spartan a higher price? Yes, the higher
quantity discounts to NBM and PaloAlto are legal if
cost-justified
.
Chapter 4: The Legal and Regulatory Environment 6
• What happens if, based on the lower volume purchases, all of
Spartan’s suppliers charge a higher price than they charge NBM
and PaloAlto? Doesn’t this make it very difficult for Spartan to
compete? Could this be interpreted as an action that restrains
trade?
Though not thoroughly covered until Chapter 14, this may be
Learning Objective
Understand specific market issues related to price discrimination.
How can effective marketing avoid some of these pitfalls?
• Don’t sell the generic version of the drive to large customers–sell it
only to distributors and retail channels.
Learning Objectives
Understand the methods and variability in enforcement of the acts.
Understand the substantiality test in enforcement decisions.
Several factors contribute to the variability of enforcement of these acts. Not the
least of the reasons that enforcement is variable is that agencies have limited
budgets and must pick their battles with discretion. Usually, the DOJ or agencies
will “go after” the “big fish,” the largest violators, expecting (hoping) that smaller
Chapter 4: The Legal and Regulatory Environment 7
©2011 Pearson Education, Inc. publishing as Prentice Hall Business-to-Business Marketing
organizations will fall into place.
Some International Implications
Many of the same goals and principles
Example: European Union
approved by U.S. regulators.
Foreign Corrupt Practices Act (FCPA)
• Result of a Securities and Exchange Commission (SEC) investigation of
payments made to foreign officials by U.S. companies.
Learning Objective
Be introduced to intellectual property protection, licensing and the
relationship to antitrust laws.
Intellectual Property (PowerPoint 4.27 shows all, individual slides follow)
Patents (PwrPt 4.28)
Copyrights (PwrPt 4.29)
Joint Venture (PwrPt 4.33)
Confidentiality Agreements
Often necessary in development partnerships
Supplier and customer formally show respect for each other’s intellectual
property.
Chapter 4: The Legal and Regulatory Environment 8
Key Terms
common law
confidentiality agreement
consent decree
copyrights
cross license
non-disclosure agreement
patents
predatory pricing
price discrimination
price maintenance
Answers to Questions for Review and Discussion
1. How can intercorporate stockholding exist without raising FTC or Justice Department
concerns?
Intercorporate stockholding can exist with FTC and Justice Department guidelines only when
2. What market factors must be present under Robinson-Patman that require a
supplier to offer the same product to two (or more) different customers?
The market factors that must be present under Robinson-Patman that require a supplier to offer
Chapter 4: The Legal and Regulatory Environment 9
3. What market factors must be present for a manufacturer to legally refuse to
continue to offer its products through a particular channel (what are the
circumstances when a “free rider” condition can exist)?
Market factors present for a manufacturer to legally refuse to offer its products through a
4. Describe the practical importance of good market intelligence in addressing potential
competitive pricing situations under the Robinson-Patman Act.
5. When a marketing manager questions whether an action may or may not be
interpreted as a violation of a competitive legislative act, what consumer-level
factors can ultimately be used as guidelines?
Consumer-level factors that can be used as guidelines to determine whether or not an action can
6. Overall, it can be said that the unified goal of business legislation is to maximize
choice in the marketplace. Of the philosophies of marketing (Production, Product,
Sales, Marketing and Societal Marketing), which has as its goal to maximize choice
in the marketplace?
Production Era – Maximize Consumption
Chapter 4: The Legal and Regulatory Environment 10
7. What extenuating circumstances must usually be present for a business practice to
be scrutinized by the Justice Department? What limits the Justice Department from
investigating all potential violations?
The extenuating circumstances present for a business practice to be scrutinized by the Justice
Department center on issues that create the appearance of reducing competition. Limitations
8. When there is significant disparity in size of competitors seeking the same
customers, how do Clayton and Robinson-Patman fail to maintain the fabled “level
playing field”?
While complying with the “letter of the law,” the larger company may have a significant
advantage over the smaller company if its size yields greater economies of scale in purchasing. If
justice department at the time.
9. How can continuous innovation and close partnerships with customers reduce the
likelihood that market managers will be concerned with price discrimination issues?
Continuous innovation and close partnerships with customers reduce price discrimination issues
through the continued modification and adaptation of techniques that can provide savings over
10. Rather than the “letter” of the law as related to specific acts and legislation,
understanding business regulation has often been described as understanding the
intent of the law and the temperament of the enforcers. Explain.
The intent of the law implies the “essence” of the law, i.e. to avoid reducing competition, to
Chapter 4: The Legal and Regulatory Environment 11
11. How are the myriad of State and Federal legislative acts and commissions
consistent with a free market philosophy?
The myriad laws and acts are consistent with a free market philosophy in that they assist in the
12. What protections does a joint venture offer to the two companies that have
partnered together? What limitations must be agreed upon at the start of the
venture? Why is a willingness to participate in a confidential agreement with a
customer an important factor in the “resell the job” or end game portion of the
buyer decision process (Chapter 3)?
Joint ventures provide a method for companies with disparate resources to create a combination
of effort without one party losing control over its resources. It allows a company with technology
13. Discuss the ways use of industrial distributors can assist small companies to
overcome uncompetitive price situations that develop in their small volume
purchases. (This may be more easily understood if you return to this question after
completion of Chapter 14.)
Generally, industrial distributors act as a “one stop shop” for small businesses that would