One of the interesting and frustrating things about practicing franchise law is the dizzying manner in which the law is evolving. Because the franchise model extends into virtually every industry, the legal developments come in every conceivable area of practice. It is very difficult for the practitioner to remain current. Here are a couple of recent developments in insurance and antitrust, for example:
Alvord Investments LLC v. The Hartford Financial Services Group, Inc., et.al. 660 F.Supp 2d 850 (W.D. Tenn.2009) stands for the proposition that a franchisor will not be covered under its Directors and Officers policy for a franchisee claim where the policy contains broad language that excludes coverage for claims arising in any way from any franchisee in any capacity. In this case the coverage was denied even though the claimant was no longer a franchisee, the court reading the language to apply the exclusion even to former franchisees. Franchisors should examine their policies and the endorsements contained therein to confirm they are covered for claims by former or current franchisees, or claims arising from their relationships with their franchisees.
Antitrust law is a complex and changing area of the law with respect to franchising. We have previously discussed the impact on franchisors of the re-evaluation of vertical minimum price agreements in the context of the 2007 Leegin case. We read a recent case that sheds some light on the confusing subject of illegal tying arrangements.
An illegal tying arrangement is created when a party agrees to sell one product on the condition that the buyer will also purchase another different product. This is illegal under the Sherman Act where the the seller maintains “market power” in the tied products market.
In the case of Burda v. Wendy’s Int’l Inc., Bus Franchise Guide (CCH) #14,240 (S.D. Ohio Sept. 21, 2009), a Wendy’s franchisee claimed that the required purchase of food supplies from a Wendy’s subsidiary was an illegal tied product, the “tying product” being the sale of the franchise. The court focused on an evaluation of market power based upon a “lock-in” theory; that is, once the purchaser acquired the franchise, did it become locked in to purchase the tied products and was this policy known at the time of the sale. The court found that the claim was valid if Wendy’s had not revealed the requirement at the time of the sale of the franchise. If the franchisor puts the franchisee on notice of exclusive purchase requirements prior to the time the franchise is sold, the claimant would be unable to establish a “lock-in” claim.
The decision gives specific language that would serve as appropriate notice. If the franchisor states in its FDD and franchise agreement that it may decide in its sole discretion to require franchisees to purchase exclusively from the franchisor and approved suppliers, then the illegal tying antitrust claim can be avoided. The disclosure of exclusive supply arrangements should be made in the FDD in any event; the avoidance of antitrust claims makes their inclusion even more compelling.