LAWSUITS SHOW FACTORING’S STIGMA
Byline: David Lipke
NEW YORK — Ask John Daly, president of Tyco Capital Commercial Services, formerly known as CIT Commercial Services, what the biggest business issue facing factors today is, and his answer is not the flagging economy or increased credit risks. Rather, it’s the unappealing image that many manufacturers still harbor regarding factoring finance.
“It’s always a challenge, the whole factoring image is taboo,” said Daly. “This is a $50 billion to $60 billion industry, and for some reason, it has a tint that it’s less desirable than banking or commercial finance. My biggest issue is getting out to people the tremendous value that factoring delivers.”
Factoring’s image has not been helped by a pair of lawsuits filed in U.S. district court in New York, claiming that factors make group decisions on the credit-worthiness of domestic apparel makers, in violation of the Sherman Anti-Trust Act. The lawsuits allege that factors wield monopolistic power in the financing of the apparel industry and enjoy an illegal stranglehold on the viability of the 80 percent of U.S. apparel manufacturers who rely on factors for survival.
In addition, the lawsuits claim that Tyco now factors 90 percent of all piece-goods suppliers who provide the necessary raw materials for apparel makers to conduct business. If Tyco refuses to credit check a particular apparel manufacturer, it becomes highly difficult for that company to obtain fabric, buttons and other vital piece goods from Tyco clients. Consequently, “[Tyco] has unlawfully obtained an anticompetitive choke-hold on the entire domestic garment industry,” complains one lawsuit.
The first complaint was filed in May by Donald Weiner, owner of a Plainview, N.Y.-based retail chain called Dresses for Less. The filing claims that Tyco (then known as CIT) and a group of seven other factors, dubbed the Uptown Credit Group, bankrupted several manufacturing firms Weiner co-owned by denying the firms credit.
Since filing the lawsuit, Weiner has placed advertisements in trade papers and parked billboards outside of Tyco’s Manhattan headquarters publicizing his crusade against the factoring industry’s allegedly unfair business practices.
According to Alexander Schmidt, Weiner’s attorney, participants in the Uptown Credit Group have met twice a week for the past two decades to reach express or implied agreements concerning which garment manufacturers would be granted or denied credit. In the meetings, confidential business information on each factor’s clients was shared with other members of the group, in effect creating a cartel controlling 80 to 85 percent of the factoring market, said Schmidt.
The reason that supposed competitors would share such information, noted Schmidt, is to minimize credit risks, stabilize pricing for factoring services, preserve each factor’s market share and achieve monopoly powers that allow factors to dictate financing terms to clients. Weiner’s allegations were flatly denied by Harlan Lazarus, the attorney for the Uptown Credit Group. “It is absolutely untrue that members of the group make collective group decisions regarding credit,” he stated. The aim of the group, which was founded in 1956, is to “foster trade through the interchange of information,” said Lazarus, who declined to detail the type of information exchanged.
Lazarus also pointed out that “the exchange of information between business firms concerning the credit worthiness of customers has long been held not to violate antitrust laws.” The attorney cited a 1925 Supreme Court decision (Cement Manufacturers Protective Association v. United States) and a 1976 Second Circuit Court of Appeals decision (Michaelman v. Clark-Shwebel Fiber Glass Corp.), which upheld the legality of sharing this type of data.
Schmidt argued that these decisions only permit the sharing of data so long as creditors use the information independently and do not make joint credit decisions. A 1980 Supreme Court decision (Catalano Inc. v. Target Sales Inc.) states that joint decisions to deny credit are antitrust violations and constitute per se illegal price fixing, he added.
The Weiner case was bolstered by a similar lawsuit filed Oct. 3 by owners of a group of apparel companies who claimed the businesses were severely damaged by the illegal denial of credit and price fixing by a group of factors.
Laura Dilimetin, attorney for the plaintiffs, Theodore Sadaka, Karen Sadaka and Gladys Sadaka, alleges in the complaint: “The factoring defendants have the power to drive manufacturers out of business by their agreements together to control the market and, in turn, control the garment manufacturers by choosing which manufacturers they would withhold payments to and to deny credit to.”
Tyco’s Daly can be grateful for at least one development: Since the World Trade Center tragedy, Weiner has halted his protests outside of Tyco’s offices.