The selection of a law firm to assist in the organization and operation of the buying group or GPO is a critical decision. While there are hundreds and even thousands of highly qualified business lawyers available in most states, very few of them have experience in all the areas of law that a buying group or GPO is likely to encounter.Such areas include distribution law, antitrust law, franchise law, product liability law, intellectual property law, information technology law, employment law, securities law, tax law, commercial and bankruptcy law and general contract law. This is not an all-inclusive list. Each of these areas of law impacts buying groups in specific ways that even lawyers with deep expertise in any one of them might not have dealt with in their practice. Examples taken from each of these areas of law will be helpful to illustrate the complexities buying groups present.
Examples taken from each of these areas of law will be helpful to illustrate the complexities buying groups present.
Many buying groups are involved in the distribution of products. In most cases, however, the group is not directly in the chain of title of the product. The contracts with the approved vendors of the group need to be carefully crafted to avoid having the group become unintentionally liable for the purchases of its members, yet to have the vendor be responsible for indemnifying the group against third party claims and other damages involving the sale of its products. Several other fine points that require different treatment of the group from the typical distributor customer of the vendor must also be considered.
Section 1 of the Sherman Act pertains to conspiracies to restrain trade. A conspiracy requires the involvement of two or more actors. In many instances, a buying group will not be considered as a single actor, but rather a group of actors consisting of two or more of its members. This is especially true if the group is owned by and governed by its members. Ironically, however, the more integrated a group is and the more engaged it is in taking risks and making profit, the more likely it will be viewed as a single actor. Areas of concern in the antitrust field for buying groups include price fixing, territory, customer or product allocations, boycotts and price discrimination. The complexion, structure of ownership and method of operations of each buying group or GPO, brings its own unique set of issues to the realm of antitrust law.
To come within the definition of a franchise, these three elements must exist: (1) a fee is charged to the participants; a trademark is licensed to the participants; and (3) significant marketing assistance or control is provided to and/or exercised over the participants. Many buying groups who provide marketing programs can unwittingly fall into the trap of being classified as a franchise. In some states, that can open the group up to significant penalties and make it much more difficult to terminate members. There are several exclusions and exemptions that apply to the definition of a franchise that can be beneficial to a group seeking to avoid this tangled web of regulations. To be effective, the group’s counsel needs to be aware of these franchise issues.
Product Liability Law.
If a defective product of a group approved vendor could inflict death, personal injury or property damage, it is possible that the group could be named as a defendant in a product liability law suit. There are several steps the group can take in advance to limit its exposure to product liability. Appropriate indemnity provisions should be included in the contracts of the vendors and the members, along with provisions requiring sufficient insurance coverage and the furnishing of insurance certificates. Due to the uniqueness of the group dynamics, the indemnity provisions typically found in supply contracts will need to be modified to fit the circumstances of the group.
Information Technology Law.
An increasingly growing number of buying groups are discovering the economies of presenting IT solutions for their membership to share. Examples of such IT programs include a database of product images and descriptions that members can draw from in compiling product catalogs, a common online product ordering system, and a data warehouse that tracks all the purchases and sales of each member. The contracts with the third parties who provide such IT solutions are usually written on two levels. One is with the group itself and then there is a separate contract for the individual members to sign in order to avail themselves of the program (sometimes referred to as an End User Agreement). On occasion, an IT vendor might attempt to bundle these contract considerations into one agreement with the group, thinking that the group has the power to bind its individual members contractually. Such is seldom the case. Having a working knowledge of information technology law is important for buying group counsel as it negotiates through the various provisions in a contract that do not pertain to a group or are adverse to its best interests.
Intellectual Property Law.
One of the advantages that come with the purchasing power of a buying group is having the opportunity to develop a private label or exclusive brand product program for the members. Not only does the exclusive brand program enable group members to better manage and control warranty claims on the products sold by them, but often manufacturers will give a greater discount on goods that do not reflect the manufacturer’s brand. Also, a private label program facilitates changing approved vendors for a given line of goods that are sold under the group’s brand. Such change is a seamless transition as far as the end users are concerned. They have no idea it even happened. Many buying groups have marketing programs for their members. By identifying their businesses with a common trademark, the members can appear to be part of a national or superregional chain of stores. In both of these examples, registering the trademarks or service marks involved is essential. Keeping control of the trademarks through licensing agreements is equally important. A group needs legal counsel experienced in intellectual property law to guide and help manage it through these various legal nuances. A typical trademark lawyer who does not understand how buying groups function might overlook and miss some important pieces of the overall puzzle.
As groups mature and grow, so does the number of their staff. Personnel changes, particularly involuntary termination of employees, requires guidance of counsel. Buying groups should have a well thought out and well documented program to follow in each step of the employment process. Counsel can assist the group in preparing or reviewing their forms for employment applications, employment agreements (which typically contain confidentiality and non-disclosure provisions), employee handbook, employment policies, and separation agreements. While it is true that for the most part there is little difference in the types of issues that arise in buying groups as opposed to other companies, nevertheless, it is helpful for the group to have legal counsel with a good working knowledge of employment law, rather than having to turn to other counsel.
For those groups which are owned by their members, federal and state securities laws should be considered as members acquire ownership in the group. The higher the cost of the buy-in, the more important compliance with those laws is. In most cases, the new member will qualify as an “accredited investor” under SEC Rule 501 of Regulation D.3. Such status greatly reduces the amount of paperwork required to comply with the securities laws. It is important for legal counsel to make sure that accredited investor status of each new owner is well documented and that such shareholder provides an investment letter to further protect the group.
When the group is first established, careful consideration should be given as to whether it wishes to be a tax-paying entity, such as a C corporation, or whether it wishes to be a tax pass-through entity, such as a limited liability company. Yet another choice is to be a T corporation, which is especially designed for co-operatives. Groups are seldom able to qualify as S Corporations because many of their shareholders are corporations. There are highly complex and sophisticated (many have said, non-sensical) tax laws to be taken into account in making such decisions. Unless, the group’s counsel is a high-level tax expert, he or she would do well to consult with one in order to provide the group the advice most advantageous for it.
Commercial and Bankruptcy Law.
Let’s face it. Even the most careful screening of prospective members and vendors cannot prevent one or more from going insolvent or bankrupt. Regarding members, the best type of security is for the group to always owe the member more than the member owes the group. If the group has a central billing program, i.e., an arrangement in which the supplier bills the group, the group bills and collects from its members and then pays the supplier, the possibility of the member owing the group more than the group owes it, becomes very real. A good working knowledge of commercial law is needed to secure and perfect the group’s rights in any additional collateral furnished by the member to protect the group, should the member be unable to pay its debt to the group. If the member goes into bankruptcy, it is often difficult and expensive for the group to have the trustee to release the member’s ownership rights in the group. Having the right security and the right leverage is critical at that point in time. Another bankruptcy trap to navigate is when a supplier goes bankrupt. The trustee will likely seek to recover dividends paid to the group during the 90-day “preference period” leading up to the filing date of the bankruptcy as preference payments. Having knowledgeable counsel will enable the group to assert defenses available to such claims with result that they can be drastically reduced in settlement or even eliminated altogether.
General Contract Law.
With millions and possibly billions of dollars flowing through a buying group, it is important that the group’s contracts with its suppliers and members be tightly drawn and enforceable. The ability to spot and address the nuances peculiar to buying group contractual relationships comes with deep experience of buying group counsel. Such experience is gained over the years as new and unique situations are encountered and handled. It is very common for a legal solution (or contractual provision) found to work well for one group to also be helpful for an unrelated group represented by the same counsel.
While many business lawyers are very well versed in one or more of the areas discussed above, very few have experience in all these areas of concentration. It is true that many law firms have great expertise in all these areas, but most lack attorneys who are well acquainted in all of these areas insofar as they pertain to buying groups. Accordingly, making the right choice in the selection of legal counsel can benefit the group for years to come.
Ray Law Firm has served buying groups, marketing groups and GPOs in various locations throughout the country and internationally since 1985. They understand how each of these areas of the law impacts buying groups. They are well equipped to guide founders in making the right choices in setting up their group and in dealing with the myriad of legal issues they are likely to encounter over the future years of operation. Please feel free to contact us with any specific issues or questions you may have.