1975, January, Pg. 25. Franchising: Common Antitrust Pitfalls.

• Author: by Michael D. McIntosh

4 Colo.Law. 25

Colorado Lawyer

1975.

1975, January, Pg. 25.

Franchising: Common Antitrust Pitfalls

25Vol. 4, No. 1, Pg. 25Franchising: Common Antitrust Pitfallsby Michael D. McIntoshFranchising is a rapidly expanding facet of our economy, presently accounting for approximately $134 billion in annual sales, a figure representing 25 percent of all retail sales.(fn1) The backbone of this widespread marketing technique is the relatively small businessman. Numerous familiar advertisements offer an individual the opportunity to own his own business, without any prior experience, for a total initial investment generally in the range of $5,000 to $25,000.

Because it is difficult to define the franchise relationship without. being too broad or narrow,(fn2) practically every legislature, tribunal and author dealing with the subject has developed its own definitions. Precise limits do not exist because new and different franchise arrangements are constantly being created. However, some definition of franchising is necessary to understand the problems relating to the antitrust laws, and it is perhaps sufficient to here define a franchise as an agreement generally between two parties wherein the franchisor grants to the franchisee, in return for some valuable consideration, the right to sell or distribute certain goods or services under a generally prescribed plan in conjunction with the franchisor's trademark or service mark. As is apparent, this definition encompasses the more traditional forms of franchising, such as auto dealerships and service stations, as well as the more modern forms, such as the popular fast food establishments.

Whether representing the franchisor or the franchisee, the lawyer must from the outset explore numerous issues. Included among these is a comparison of the franchising concept with the more traditional modes of doing business, e.g. maintaining a distribution and sales system within the business or selling on consignment. The type of business must be evaluated to determine its suitability for franchising, as well as the suitability of the people involved. Additionally tax considerations and the multi-pronged labor issues must be explored. Then if the franchising concept is deemed preferable, many other more specific issues must be evaluated, including for example the price of the franchise, the territory, supervisory control, the standards for quality and service, advertising budgets, franchisor assistance, termination rights and procedures, means of settling disputes, and many others. Of course all of these factors must be considered in light of the present and probable future state of the law.

The laws dealing specifically with franchising are developing rapidly. Traditional common law precepts, including fraud, misrepresentation and good faith bargaining,

26particularly when there is a disparity in bargaining strength between the franchisor and the franchisee, are quite important. All aspects of business law are relevant, as are federal and common law trademark principles. The statutory law in most states (including Colorado, which has no specific act) and on the federal level is still quite limited, but legislatures are currently considering a number of proposals. Because of the effect certain franchising practices have on free competition, federal and state antitrust law is thoroughly intermingled with many facets of franchising. These antitrust laws are often ignored in franchise agreements, a practice which can clearly be detrimental to the client. The following overview of antitrust concepts important to franchising, while necessarily fairly general, will hopefully be of benefit in recognizing and circumventing some of these common pitfalls.Trademark ControlAll franchise operations have one thing in common: a trademarked product or service. This common trademark links all of the franchisees with the franchisor and with each other and permits many small, independent owners to do business under the umbrella of a large operation. This is perhaps the primary advantage of franchise ownership.

Title 15 of the United States Code, the Federal Trademark Statute (popularly known as "the Lanham Act"), governs most aspects of trademark law, including all of the administrative requirements. The Lanham Act does not expressly sanction the licensing of trademark rights, but it has long been established that, by following the proper guidelines, the proprietor of a trademark may permit the mark to be used by others. One of these guidelines is the assurance of quality control over the trade marked product or service by the licensee. All trademark rights can be decreed abandoned if the licensor does not comply with these quality control requirements.(fn3) Therefore certain specific restrictions must be placed on the franchisee in order to assure this quality control.

Quality control assurance is designed to protect the public from inconsistent and inferior goods and/or services. The antitrust laws are also designed to protect the public by enhancing free competition. A natural conflict can exist between these two dictates of public policy, and the franchisor must therefore maintain the required quality control under a very carefully conceived program in order to ensure that he does not violate any of the antitrust laws.

Restriction...