Magazine article Business Credit

Part II: The Inner Workings of Industry Credit Groups

Magazine article Business Credit

Part II: The Inner Workings of Industry Credit Groups

Article excerpt

A hefty slice of the profits of most American businesses, particularly manufacturing and wholesaling, comes from sales to marginal accounts. One of the core responsibilities of the credit executive is the management of these accounts to produce profit while avoiding bad debts. This includes the selection of the marginal accounts to do business with--and the constant monitoring of these accounts to be sure of their continued viability. To protect his or her company, the credit executive must have a constant flow of up-to-date information about marginal accounts. A written credit report is rarely sufficient; the credit executive must have background information about the firm, its owners, and other factual data not usually available from a written report.

DEALING WITH CORPORATE LAWYERS

Most credit executives have found that the best source for such information is the industry credit group. Such a group has a single industry focus, includes the major suppliers, and provides background data on an up-to-date basis. But there can be a problem: your own company's legal counsel.

Credit groups, like all trade groups, are "gatherings of competitors" under the Federal Antitrust Laws. Your company's legal counsel is charged with the duty of ensuring that neither the company nor its executives violate these or any other laws. Attendance at meetings with competitors--especially where common customers are discussed--may scare your legal counsel. You may find it necessary to explain the legality of the organization, the services, and the activities of any credit group you wish to join. While credit executives are not expected to be antitrust law experts, some legal insights may help.

COURTS UPHOLD LEGALITY OF CREDIT GROUPS

The exchange of factual credit experience information, through a group or by individual competitors, is legal. In a l925 case involving a credit group (Cement Manufacturers Protective Association vs. United States, 268 U.S. 603), the U.S. Supreme Court held that "the gathering and dissemination of information which will enable sellers to prevent the perpetration of fraud upon them, which information they are free to act upon or not as they choose, cannot be held to be an unlawful restraint upon commerce, even though, in the ordinary course of business, most sellers would act upon the information."

In 1976, in a case in which it was charged that three companies' credit managers had caused a bankruptcy through the exchange of credit experience information, a U.S. Appeals Court found that each of the three credit executives had made his or her own independent decision to cut off credit. The court upheld the right of "any individual business to make its own business decisions, providing that it acts independently and not pursuant to an unlawful understanding, tacit or expressed" (Michelman vs. Clark-Schwebel Fiber Glass Corporation, et. al, 534 F.2nd 1036).

As in these basic cases, the courts have consistently upheld the legality of the exchange of credit information provided that any decisions made on the basis of this information are independent decisions by individual businesses. The courts have just as consistently condemned agreements (Eastern Retail Lumber Dealers Association vs. United States, 234 U.S. 600) stating that "an act harmless when done by one may become a public wrong when done by many acting in concert, for it then takes on the form of a conspiracy..." Your legal counsel wants assurance that any credit group in which you participate will not engage in any acts or practices that could be construed as conspiracies in restraint of trade.

LEGAL ORGANIZATION IS A MUST

A credit group must be legally organized, and its services and activities must be properly operated and monitored. But, precisely because it is a "gathering of competitors," it must also present the image of a legal organization with proper operations.

The group by-laws are the first benchmark. …

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