Franchise Lawyer Blog

Franchising and Price Maintenance – Part One

Antitrust law concerns itself in part with resale price maintenance (“RPM”), sometimes more harshly referred to as price fixing. Historically, “horizontal” price maintenance, that is, price agreements between two parties at the same level of the retail chain (such as Costco and Sam’s Club) has been “per se” illegal. This means the mere fact that it occurs is a violation of the Sherman Act, which contains the antitrust laws. No explanation is needed or accepted as an excuse. Vertical price maintenance used to be per se illegal as well, such as a franchisor telling a franchisee it has to sell above or below a certain price. This concept is extremely important in the franchising model, because there are times a franchisor will want its franchisees to remain within a specific pricing model.

In 1997 the Supreme Court determined that the ”Rule of Reason” could apply to determining if maximum RPM was a Sherman Act violation. The Rule of Reason takes a broader, more holistic view of the actions of the parties. The goal of the Rule of Reason test is to distinguish on a case by case basis between restraints that are anti-competitive and harmful to consumers from those restraints which are pro-competitive and in the consumer’s best interest.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Supreme Court revisited the appropriate legal standard for determining the legality of minimum price restraints. There, Leegin, a leather goods manufacturer, required its retailers to sell Leegin products at no less than Leegin’s minimum prices.

In Leegin, the Supreme Court noted that vertical price restrictions differ in nature from horizontal price restrictions and indicated that to determine whether a vertical price restriction is illegal, a court must review all of the facts, under the Rule of Reason, including specific information about the relevant business and the history, nature and effect of the restraint.

Applied to the franchising industry, Leegin suggests that franchisors may require franchisees to sell products and/or services at prices no lower than minimums established by the franchisor. However, the effect must still be pro competitive. Although a number of pricing restraints have survived attacks since Leegin, in Toledo Mack Truck Sales & Service v. Mack Trucks, Inc., 530 F.3d 204 (3rd Cir. 2008), the court, after applying the rule of reason test, found that the minimum prices charged by Mack Truck dealers were established by an unlawful restraint on trade. Mack Trucks can be distinguished from Leegin because dealers initially colluded horizontally not to compete with one another and then Mack Trucks agreed vertically to deny or delay sales assistance to any dealer selling outside of its area. The court reasoned that because the restraint resulted from a horizontal dealer cartel instead of the franchisor’s independent decision, the restraint was illegal.

Every case of maximum or minimum price maintenance must be carefully examined with the Rule of Reason.

Because the Sherman Act does not preempt state anti-competition statutes, state laws addressing minimum price restraints are also applicable. Thus, in some cases, state laws have resulted in decisions that differ greatly from what one would expect if the case was heard under federal law applying Leegin’s rule of reason test. We will explore state anti-trust cases in a subsequent blog post.

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