Franchisees And Antitrust Laws: What's The Verdict?

Franchisees and franchisors often face conflicting interests, with the former being subject to the latter's marketing and pricing demands. While antitrust laws are designed to preserve and promote competition in certain markets, they do not always align with the interests of individual franchisees and dealers. This has led to confusion and meritless cases, as many incorrectly believe that a franchisor establishing mandatory pricing policies or guidelines for their franchisees automatically violates antitrust laws.

However, with the help of an experienced antitrust attorney, certain distribution policies mandated by franchisors can be viewed as detrimental not only to individual franchisees but also to overall competition. Common antitrust violations in the franchise context include unlawful customer restrictions, minimum price fixing, profit passover arrangements, product and service tying arrangements, and unilateral refusals to deal.

While state and federal antitrust laws protect franchisees and dealers, it is important to consult an attorney to determine if a franchisor's practices constitute an antitrust violation. The legal landscape is complex and constantly evolving, and what may have been considered permissible in the past might no longer be the case.

Unlawful Customer Restrictions

To determine whether a customer restriction violates antitrust laws, both the franchisor's intent and the practical effect of the restriction must be considered. If the restriction limits customers' options, it is more likely to be considered an antitrust violation. However, if the restriction only limits active marketing outside of a franchisee's territory without restricting the customers they can serve, it is generally considered an industry-standard practice and does not raise antitrust implications.

Franchisors may also implement non-solicitation and non-competition covenants as forms of customer restrictions. While these do not typically raise antitrust issues, they can be unenforceable if they are not reasonably limited or do not serve a legitimate interest of the franchisor. Courts may revise or void these covenants if they are deemed overly broad or unduly restrictive.

It is important for franchisees to consult with an experienced antitrust attorney to understand their legal rights and options if they believe their franchisor is imposing unlawful customer restrictions. These attorneys can help franchisees assess the specific practices of their franchisor and determine if there is a potential antitrust violation.

Minimum Price Fixing

In the United States, price fixing can be prosecuted as a criminal federal offense under Section 1 of the Sherman Antitrust Act. Federal antitrust laws provide for both civil and criminal enforcement, with civil antitrust enforcement occurring through lawsuits filed by the Federal Trade Commission (FTC), the Antitrust Division of the U.S. Department of Justice, and private parties who have been harmed by an antitrust violation. Criminal antitrust enforcement is handled solely by the Justice Department's Antitrust Division.

The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied. It requires a conspiracy between sellers or buyers, with the purpose of coordinating pricing for mutual benefit. For example, manufacturers and retailers may conspire to sell at a common "retail" price, set a common minimum sales price, or buy a product from a supplier at a specified maximum price.

Price fixing is a major concern of government antitrust enforcement. Individuals and companies that knowingly enter price-fixing agreements are routinely investigated by the FBI and other federal law enforcement agencies and can face criminal prosecution, with potential penalties including lengthy terms of imprisonment (up to ten years) and large fines (up to $1 million for individuals, $100 million for companies, or twice the gain or loss from the offense).

A naked agreement among competitors to fix prices is almost always illegal, whether prices are specified at a minimum, maximum, or within a range. Illegal price fixing occurs whenever two or more competitors agree to take actions to raise, lower, maintain, or stabilize the price of any product or service.

In 2007, the U.S. Supreme Court relaxed the federal restrictions on resale price maintenance, but legislators and regulators in multiple states have continued to enforce the pre-2007 standards. To get around these state-level restrictions, franchisors often utilize practices such as establishing "suggested" retail prices, refusing to sell products to franchisees who resell them below a particular price point, and imposing minimum advertised prices.

If you believe that your franchisor is attempting to control the minimum prices you charge for your goods or services, you may have a claim for an antitrust violation and should consult with an antitrust lawyer.

Profit Passover Arrangements

In the franchise context, a typical profit passover arrangement involves one franchisee making a payment to another when the first franchisee sells a product or service to a customer in the second franchisee’s territory. This payment is typically mandated by the franchisor, which also predetermines the amount of “profit passover” that is owed.

The idea behind profit passovers is that they are intended to compensate franchisees for the costs associated with other franchisees’ extra-territorial sales. Most products and services come with warranties, and performing warranty work comes at a cost. If one franchisee must perform warranty work as a result of another franchisee’s sale, then that sale can be a liability for the franchisee who is on the hook for any repairs. To compensate for this liability, franchisors require the selling franchisee to pay over a portion of the profit from the sale, which is termed a “profit passover”.

While this makes sense in theory, the problem is that it disincentivizes franchisees from making sales outside of their territories (because the profit margin is lower), and this can stifle competition. As a result, some profit passover arrangements constitute antitrust violations.

Product and Service Tying Arrangements

Franchisees and franchisors often have a contentious relationship, with franchisors imposing strict and sometimes unlawful demands on their franchisees. One such example is the use of unlawful tying arrangements, which can violate the Sherman Act and other federal antitrust laws.

A tying arrangement is a commercial transaction where the purchase of one item (the "tying" item) is dependent on the purchase of another (the "tied" item) or an agreement not to purchase the tied item from a competitor. These can be products or services, or other things like trademark licenses, real estate leases, or franchises.

Tying arrangements can be unlawful if they violate Section 1 of the Sherman Act, which prohibits "contracts in restraint of trade", or Section 2, which prohibits monopolization.

In the context of franchising, a common example of a tying arrangement is when a franchisor requires a franchisee to purchase specific products or services from them or their affiliates as a condition of the franchise agreement. While requiring franchisees to purchase certain products or services is often essential for brand standardization, it becomes unlawful when franchisees are forced to purchase additional, unwanted items in order to obtain the desired items. These types of arrangements are often designed to directly increase the franchisor's profits or to increase revenue for suppliers who then pay rebates to the franchisor.

In the case of Burda v. Wendy's International, Inc., a federal court ruled that a franchisee could assert a claim for an illegal tying arrangement when they were required to purchase ingredients from the franchisor and its affiliates after signing the franchise agreement.

To determine if a tying arrangement is unlawful, it must be shown that the arrangement identifies two distinct products, that the tying product restrains competition, and that a "not insubstantial" amount of commerce is affected.

If you believe your franchise is suffering due to an illegal tying arrangement, it is important to consult with an experienced antitrust attorney who can help you understand your rights and options for arbitration or litigation.

Unilateral Refusals to Deal

While unilateral refusals to deal are not per se unlawful, they may constitute antitrust violations depending on the specific circumstances. If a franchisor is refusing to deal with a franchisee in a manner that is inconsistent with how they treat other franchisees, the franchisee should consult an experienced antitrust attorney to discuss their situation and determine their options.

It is important to note that antitrust laws at both the state and federal levels protect franchisees and dealers, and they have the right to initiate civil litigation to protect their rights if they believe their business is being harmed by anti-competitive practices.

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