Ethics and Laws Affecting Business to Business Creditors

Note: In this section, the discussion of legal matters will be limited to the subject of antitrust due to its significance to the credit profession.

Choices must be made daily; customer and our company’s interests collide, and conflicts must be resolved. Resolution must be quick but considerate, to determine the appropriate action to be taken. Furthermore, complicating all credit decisions is the onus of the resolution being categorized as legal, ethical or both.

In our personal lives as well, we are constantly making decisions. Too often, however, many decisions are made subconsciously rather than giving them the attention they warrant. The response to every decision we make bears with it accountability. Was it right or wrong? Fortunately, every decision is not of the magnitude to matter in the big “scheme of life”. For example, driving when we are late causes most of us to “push the speed limit” without really being mindful of breaking the law. In this illustration, it is unlikely the police would cite us for speeding if we were only exceeding the official speed limit by 5 miles per hour. However, the fact that the “law” chose to ignore us does not mitigate the act because we still have a moral obligation to other drivers, our families and ourselves to drive according to the rules which are there to keep us safe. But, if we exceed the limit by 11 miles per hour in the same situation (usually a conscious decision), we would likely be stopped and ticketed for speeding (violating the law). As you can see, the gray line between right and wrong versus legal or illegal is not only a distorted line, but is also in the eyes of the beholder.

Do Ethics and Business Mix?

Strict business morality might dictate that if ethics and the interests of the business conflict, managers and employees invariably should be told that they must always do the right thingñfor no other reason than that it is right. On the other hand, it is unlikely that if in some instance what is ethically correct would lead to the demise of our company, we would, as a matter of fact, claim “so be it”. In the real world, it is not likely that a businessperson is going to sacrifice their company to claim such altruistic extremism. Although we surly cannot avoid ethical dilemmas, it is clear that none of us should be placed in the situation that we must perpetrate an illegal act for the sake of our company.

What most of us need to determine is how we should juggle the confusing mix of ethical/unethical-legal/illegal circumstances. Unfortunately, credit and financial managers, often faced with the predicament of choosing “right from wrong,” have had very little to guide them in their decisions.

More than most business professionals, credit professionals are at great risk of compromising ethical values and being confronted with situations that violate the law while dealing with a wide variety of issues involved in their day-to-day business. To be truly effective in credit, a credit professional must deal with customers, sales personnel, numerous other corporate departments, competitors and outside professionals. Each can place demands on you that may create ethical or legal dilemmas.

Concerns with Right and Wrong

The ethics we should be concerned with are fundamental and vital. They are based on the conviction that it is important to do one’s best to distinguish between right and wrong and always try to do what is right. Webster’s dictionary provides a more formal definition: “ethics are the system of moral principles dealing with what is good and bad and with moral duty and obligation.”

Ethical and legal behavior is not simply a matter of character, it is a matter of decision making. A person’s character is developed one decision at a time. Making proper ethical decisions is what makes the difference between a truly successful businessperson and one who is not.

The Ethics / Law Fallacy

A common fallacy in discussions about ethics is “If it’s legal, it’s ethical.” Thus, a common response to charges of impropriety is to invoke the law. This legalistic approach to ethics assumes that anything not prohibited by law is, by that fact itself, proper and ethical. The main error in this approach flows from the implicit assumption that legal standards articulate or establish ethical principles. Although to abide by the law carries with it an ethical obligation or responsibility (it is generally unethical to break the law), laws and rules do not depict what an ethical credit professional ought to do.

The Difference Between Lawfulness and Ethics

Laws and rules establish minimal standards of impropriety; they do not define the criteria of ethical behavior. A person is not ethical simply because they act lawfully. Ethical people measure their conduct by basic ethical principles rather than rules. One can be dishonest, unprincipled, untrustworthy, unfair and uncaring without breaking the law. Thus, in making personal or business decisions, the law is only a minimal threshold describing what is legally possible, it does not address the problem of how we should behave.

The Canons of Business Credit Ethics

The National Association of Credit Management developed the “Canons of Business Credit Ethics” (Appendix A) which established principles for the credit profession to observe. Although to practice in the field of credit, one does not have to be certified, these principles present fundamental guidelines that prudent credit professionals should follow. In the fields of law, medicine and accounting, to name a few, certification carries with it not only an ethical responsibility to follow the Code of the profession, but a legal one. Failure to comply with the guiding principles (Codes) in these fields not only results in revocation of ones license (certification) but exposes the practitioner to criminal liability.

Requiring certification to perform in a profession (lawyer, doctor, CPA etc.) is a result of the profession’s influence on the public as its customer. A profession, such as credit management on-the-other-hand, where the credit employee’s primary responsibility is to their company, does not demand the vocation to be certified because the customer is doing business with the company not the credit manager. In other words, the customer is putting their trust and confidence in the company rather than the credit employee. Performing a job while employed by a company (such as a credit employee) however, is what makes the issue of ethics such a difficult philosophy to fulfill. As an example: Most credit professionals recognize some duty to keep customer information confidential, although such a duty has limits when the confidential information concerns a danger to their company or other creditors. The credit manager does of course have an obligation (morally) to keep its company safe by taking action which, for example, may require revealing to senior sales/marketing personnel the confidential information prompting a negative credit decision. But, should this creditor notify other creditors’ of the customer to keep them out of danger? To the degree that only factual information is distributed, that is acceptable. However, if the confidential information learned is in anyway hypothetical, or the resulting outcome is based on some situation that may or may not happen, the answer is no.

Antitrust Laws and Federal Trade Commission (FTC) Guidelines

The power of Congress to regulate trade or business practices through the antitrust and trade regulation laws is derived from its constitutional power to regulate interstate and foreign trade and commerce. The regulation and enforcement of antitrust laws is handled by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice. There are also individual antitrust laws enforced by state Attorney Generals.

The Federal Trade Commission

“The Federal Trade Commission enforces a variety of federal antitrust and consumer protection laws. The Commission seeks to ensure that the nation’s markets function competitively, and are vigorous, efficient, and free of undue restrictions. The Commission also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive. In general, the Commission’s efforts are directed toward stopping actions that threaten consumers’ opportunities to exercise informed choice. Finally, the Commission undertakes economic analysis to support its law enforcement efforts and to contribute to the policy deliberations of the Congress, the Executive Branch, other independent agencies, and state and local governments when requested.

In addition to carrying out its statutory enforcement responsibilities, the Commission advances the policies underlying Congressional mandates through cost-effective non-enforcement activities, such as consumer education.”

Antitrust Laws

The basic federal legislation of the United States applying to monopoly and restraint of trade are the antitrust laws. These laws consist principally of the Sherman Antitrust Act of 1890, as amended; the Clayton Act of 1914, amended by the Robinson-Patman Act of 1936; and the Federal Trade Commission Act of 1914, as amended.

The antitrust laws share the same basic objectives and manner of execution. Their general objective is to ensure a competitive economy. This is not applicable in exactly the same manner to all industries and under all circumstances. In certain instances, the Congress of the United State has in fact dispensed with competition. However, the fostering of competition has been and is the governing legislative rule.

As to manner of execution, Congress has placed in the hands of the Department of Justice, the Federal Trade Commission (FTC) and the courts a wide discretion in the interpretation and application of these laws. The Antitrust Division of the Department of Justice and the FTC initiate most proceedings invoking the antitrust laws. It therefore follows that, in determining whether and how to frame complaints, and subsequently in proceedings in court to obtain rulings and relief, the Antitrust Division and the FTC substantially influence the development of these laws. The courts, however, are ultimately responsible for interpreting and applying the antitrust laws. They have been vested with a wide range of discretion in construing these statutory provisions and molding their remedies.

While the antitrust laws and regulations affect a wide range of business activities, this paper will focus on the appropriate regulations that relate to the functions of credit management.

Exchange of Credit Information through the Activities of Credit Groups

Antitrust principles that apply to activities of individual companies apply similarly to activities of trade credit group meetings. Consequently, there are great risks inherent in involvement with trade credit groups that must be addressed and assessed. Individual members of trade groups may not engage in anti-competitive conduct such as price-fixing, market allocation or setting production quotas. During meetings, members should be advised to be cautious about group activities. Suggestions to avoiding problems might include:

  1. Have the format of the credit interchange report reviewed by counsel for legal compliance.
  2. Submit an agenda or programs to counsel prior to meetings.
  3. Counsel should view papers before distribution.

The following conclusions can be made from the Sherman Act and the Federal Trade Commission Act concerning the activities of trade credit group meetings:

  1. Any agreement, expressed or implied, between members of a credit group or other competitors to establish and maintain uniform prices, discounts, terms or conditions of sale, is illegal.
  2. Any agreement, expressed or implied, between members of a credit group or other competitors to concertedly refuse to sell merchandise to a person listed as a delinquent in the payment of its accounts to other members of the group, is illegal.
  3. Any agreement, expressed or implied, between members of a credit group or other competitors to concertedly refuse to extend credit to accounts listed as delinquent and to place all such accounts on a C.O.D. or cash basis, is illegal.
  4. Membership in an industry credit group must be open to all qualified applicants upon non-discriminatory terms and conditions. Companies meeting the general qualifications for membership cannot be arbitrarily excluded and denied the benefits of membership, and particularly the privilege of receiving the credit information gathered and disseminated by the group. However if the credit group establishes standard qualifications for membership and the same are reasonable, it can legally limit its membership and the use of its facilities to companies which meet such qualifications. Such qualifications might be:
    1. That the applicant shall be a member of a designated credit association or affiliated association (i.e. NACM or one of its affiliates);
    2. That the applicant be engaged in the business of selling its products to customers within a certain territory or classification of product;
    3. That the applicant shall have been engaged in business over a stated number of years, and shall have gross sales of not less than a stated amount per year.
  5. List of delinquent accounts identifying the name of the debtor and stating the amount owed and accounts turned over to attorneys and collection agencies, are unobjectionable if proper care is taken to exclude the names of persons who have an honest and legitimate reason for not paying their account, and the names are promptly removed when the accounts are paid. It is preferable that the names of the creditors to whom the delinquent accounts are owing, should not be revealed. Coded references to creditors are however, permissible provided such codes are known only to the agency issuing such report.
  6. Discussions of delinquent accounts at meetings are unobjectionable provided the discussion is limited to past transactions and there is no agreement, expressed or implied, for uniform action with respect to such customers. Minutes should be taken of all group meetings.
  7. A by-law provision for expulsion for membership in a trade credit group, or other penalty for violation of its rules, is not illegal and is strongly urged.

Advertising and Promotional Programs

Federal Trade Commission guidelines (Fred Meyer case) and/or the Robinson-Patman Act make it clear that the seller may be liable under section 5 of the Federal Trade Commission Act for knowingly granting a buyer services or allowances that were not made available on proportionately equal terms to the buyer’s competitors. A buyer may also be liable for knowingly inducing the seller to give it favorable treatment.

It is a common practice for a buyer to deduct from the seller’s invoice the amount of the advertising allowance that the buyer believes it is entitled to receive. Such a practice is normally contrary to the program that the seller has introduced to its customers. The buyer, of course, wishes to make a deduction from the invoice so that in effect, it receives its allowance payment earlier.

A strict interpretation of the antitrust laws indicates that if the buyer deducted too much from the invoice or was not entitled to make the deduction, and the seller ignores this action by allowing the deduction, the result is that the seller unlawfully discriminated in favor of the buyer who made the deduction. Such a practice may lead to seller liability for providing an allowance not made available to competing buyers on proportionately equal terms.

The Need for a Plan

  1. Competing customers are all businesses that compete with each other in the resale of the seller’s products of like grade and quality regardless of whether they purchase directly from the seller or through some intermediary.
  2. The term services is used to describe that which the seller provides to the buyer to promote the resale of the seller’s product by the customer. (I.e. cooperative advertising, demonstrators, catalogs and displays.)
  3. Proportionally equal terms can be formulated by basing the payments made or the services furnished on the dollar volume or on the quantity of the product purchased during a specific period.

On Pricing and Discounts

Advice and guidance for the following section was provided by John F. Mclean of Pillsbury, Madison & Sutro LLP. Mr. Mclean is a leading expert in the field of United States antitrust regulation, and can be reached in San Francisco at the firm’s office at 415-983-1297.
Illegal price discrimination occurs when a company sells the same product to different buyers at different net prices and, as a result, adversely affects competition between

The seller and its competitors –

  • known as primary line competition –
    competition between Supplier A and Supplier B

The favored and disfavored customers –

  • known as secondary line competition –
    competition between Wholesaler A and Wholesaler B

Your customers’ customers –

  • known as tertiary line competition –
    competition between Retailer A and Retailer B

One key provision for credit professionals to be aware of in the Robinson-Patman Act is covered in section 2 (f), which prohibits a buyer from knowingly inducing or receiving a discriminatory price.

Price Discrimination Equals Price Difference

A difference in price is measured by the product’s net price, taking into account any rebates, discounts – cash, volume, surcharges, freight allowance, credit terms or other factors that impact the price paid. It must be understood, that price discrimination is an act of treating a buyer unfairly.

If you are asked by a customer to extend the credit terms, and you have a legitimate reason based on a non-discriminatory profile (or set of circumstances), you may legally grant that customer extended credit terms without offering those terms to the customers’ competitors.

  • Example 1 – Customer A has a “cash flow problem” due to some unexpected event (theft, fire that interrupted business, weather conditions that disrupted selling, etc.). If you allow extra time for customer A to pay, you do not have to offer the same payment arrangements to the competitors of customer A unless they ask for it under the same or similar circumstances.
  • Example 2 – Customer A’s business is disrupted by an earthquake and has requested additional time to pay. It would be advisable for you to locate all competitors of customer A, similarly affected by the earthquake, and offer the same extended credit terms arrangement to them. When the financial or other “crisis” has passed, the customers should be returned to normal terms of sale.

Competitive Injury

Under section 2 (a) of the Robinson-Patman Act the plaintiff, in a price discrimination suit needs only to prove a probability or reasonable possibility of a substantial injury to competition. It is fundamental that the favored and disfavored customers must compete to be competitively injured. Wholesalers do not compete with retailers (unless the wholesaler also has a retail sales channel). A retailer in San Francisco might not compete with a retailer in New York City.

The evidence needed to support an inference of competitive injury depends on whether competition in the primary, secondary or tertiary line is involved.

Defenses to a Price Discrimination Claim

A price discrimination claim under section 2 (a) of the Robinson-Patman Act is subject to three statutory defenses:

  1. Meeting competition
  2. Cost justification and
  3. Changing conditions

Along with these defenses, a seller may avoid liability if the price differential constitutes a “functional” discount.

1. Meeting Competition

The meeting competition defense allows a seller to lower its price to a selected customer on the good faith belief that it is meeting the price of a competitor. The defense is established by showing that:

  • the seller based its price on a review or investigation of a competitor’s prices, i.e., as a result of due diligence;
  • the competitor’s prices where then available in the market;
  • the products involved were of comparable salability;
  • the competitor’s prices were not known by the seller to be illegal.

Good faith is tested against the standard of a reasonable and prudent business manager responding fairly to a situation perceived to be one of competitive necessity. The seller must make a reasonable attempt to verify its competitor’s price offers via customers or public sources.

Such diligence, however, should never be practiced by contacting a competitor directly to ascertain its current price.

2. Cost Justification

The cost justification defense allows differences in price that “make only due allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities” in the sale or delivery of the products. The defense is cumbersome and not often successful. To prevail, the price discount must not exceed the cost savings created by one or more of these factors. The evidence supporting the savings justification must be developed before the discount is offered.

3. Changing Conditions

The changing conditions defense allows price reductions in “response to changing conditions affecting the market for or marketability of the goods concerned, such as but not limited to actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith if discontinuance of business in the goods concerned.” The defense would seem to be applicable to a company’s sales of equipment that has become technologically outdated.

4. Functional Discounts

While not stated in the statute, the functional discount defense permits a seller to charge different prices based on the buyer’s place in the chain of distribution, e.g., wholesaler or retailer. This is permitted because wholesalers do not compete with retailers and there are no adverse competitive consequences from price differences. Still, there are caveats. The discount given to wholesalers should be reasonably related to the costs they incur in reselling the products involved. If the discount is too large, the wholesaler may pass on some of it to its retail customers to the detriment of the retailers who buy directly from the initial seller.


It is important for you to establish and maintain high ethical standards as well as following the ethical guidelines set forth by your company. Furthermore, you need to have an understanding of the laws that have a direct influence on your work. While ethical principles are nurtured through experience, it is hoped that this TRM section will help clarify some of the more vague and confusing antitrust issues that face our profession.

Appendix A

Canons of Business Credit Ethics

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