Franchise Lawyer Blog

Vertical Minimum Price Agreements

Franchisors and franchisees each have a vested interest in determining the prices of the goods or services being sold at franchised locations. These concerns and the manner in which they are addressed frequently bring the franchise world into contact with the labyrinthian world of legal antitrust restrictions.

One basic form of price control is minimum retail prices; that is, the franchisor and/or its suppliers establishing a pricing floor beneath which their products cannot be sold. The motivations behind this device are many: to maximize profits; to prevent dilution of the value of the good and/or services; to encourage competition, etc. For 96 years, vertical minimum price agreements; i.e., agreements running up and down from franchisees/retailers to manufacturers/distributors/franchisors, were considered per se illegal under Section 1 of the Sherman Act as anti-competitive price fixing. Per se illegality means they are automatically illegal regardless of the circumstances.

Then in 2007 came the case now referred to as Leegin. In Leegin, the United States Supreme Court ruled that vertical price restraints should hereafter be judged by “the rule of reason,” overruling the 1911 case of Dr. Miles Medical Co. v. John D. Park & Sons Co. Justice Anthony Kennedy’s majority opinion held that “Dr. Miles had erred by treating vertical minimum price agreements between manufacturers and retailers as analogous to horizontal price-fixing agreements between sellers.”

Since then, commentators have been divided on the impact of Leegin. While the decision has been recognized as affording companies, including franchisors, greater flexibility in imposing minimum retail price maintenance programs, it has been noted that it is not clear how state laws will be affected by the federal decision or even if the states will follow it at all. Many states have laws as restrictive as the Sherman Act but not identical to it.Only time will tell how the individual states continue to enforce their laws intended to prevent anti-competitive behaviour.

On the other hand, some business commentators have noted a willingness on the part of manufacturers, and presumably franchisors and their suppliers, to “embrace their newfound pricing power.” Some of have expressed concern that this will feed inflation.

The effect of the case will bear close scrutiny for some time. Congress continues to look at the effect of the Leegin decision on consumer prices. Many legal commentators warn that determining that vertical minimum price maintenance is not per se illegal is not the same thing as saying that it is per se legal; in other words, the rule of reason analysis can still find that the conduct violates the Sherman Act. For that reason, franchisors and their manufacturers and suppliers are urged to implement any such pricing structures with a carefully thought out plan that takes into account the specifics of the Supreme Court’s decision.

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