Antitrust Claims Arising Out Of Franchise Or Dealership Termination

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CHAPTER VIII

ANTITRUST CLAIMS ARISING OUT OF

FRANCHISE OR DEALERSHIP TERMINATION

Mandatory treble damages, costs, and attorneys’ fees provide

powerful incentives for a terminated franchisee or dealer to assert federal

antitrust claims against the franchisor or supplier who terminated it.1 The

specter of such damages not only raises the financial stakes of

termination litigation, but also opens the door to many complicated

factual and economic issues, which can in turn further increase litigation

expenses (e.g., by necessitating the retention of expert witnesses).

Franchisees and dealers face a difficult battle establishing antitrust

liability, however, particularly in the wake of recent developments in

federal antitrust law, and an understanding of the federal antitrust laws

that may be applicable to franchisee or dealer termination cases is critical

for those counseling parties subject to such litigation.2/

Terminated franchisees or dealers seeking recovery under the federal

antitrust laws are most likely to base their claims on Section 1 of the

Sherman Act3 (which prohibits contracts, combinations, or conspiracies

that unreasonably restrain trade), Section 2 of the Sherman Act,4 (which

prohibits monopolization, attempts to monopolize, and conspiracies to

monopolize), and the Robinson-Patman Act,5 (which prohibits price

discrimination).6 Before each of these statutes and their potential

1. 15 U.S.C. § 15.

2. This chapter provides an overview of the antitrust issues that typically

arise in termination disputes. See also ABA SECTION OF ANTITRUST

LAW, ANTITRUST HANDBOOK FOR FRANCHISE AND DISTRIBUTION

PRACTITIONERS (2008) and ABA SECTION OF ANTITRUST LAW,

ANTITRUST LAW DEVELOPMENTS (6th ed. 2007) for a more in-depth

discussion of antitrust claims and defenses.

3. 15 U.S.C. § 1.

4. 15 U.S.C. § 2.

5. 15 U.S.C. § 13.

6. A terminated franchisee or dealer also may bring suit under the applicable

state antitrust statute. Although many state antitrust statutes closely

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146

applicability to termination suits are discussed in detail, it is worthwhile

to note two important concepts that are at play in the analysis and

evaluation of virtually every federal antitrust claim.

First, the principal goal of the federal antitrust laws is to prohibit

conduct that unreasonably restricts competition; it is generally not

enough to demonstrate injury to an individual competitor.7 Moreover, to

recover on an antitrust claim, a private plaintiff must establish that it has

suffered antitrust injury; that is, “injury of the type the antitrust laws

were intended to prevent and that flows from that which makes

defendants’ acts unlawful.” “

8 It is not enough that an injury is “causally

related to an antitrust violation”; an injury “will not qualify as ‘antitrust

injury’ unless it is attributable to an anti-competitive aspect of the

practice under scrutiny.”9 This means that a terminated dealer or

franchisee must show that its claimed injury stems from a reduction in

competition, not simply from any harm to itself resulting from its

termination. Frequently, termination suits are dismissed for failure to

state a claim where all that is alleged is the substitution of one distributor

for another, because competition is unaffected by the replacement of the

terminated distributor.

Second, the primary concern of antitrust law is interbrand

competition, not intrabrand competition.10 Interbrand competition is the

competition between different manufacturers of the same type of

product.11 By contrast, intrabrand competition is the competition

between distributors, wholesalers, or retailers of the product of a given

manufacturer.12 The primacy of interbrand competition in antitrust law

means that manufacturers have wide discretion in placing restrictions on

resemble federal antitrust laws, and often look to federal cases for

guidance in interpreting state antitrust statutes, state antitrust enforcement

is beyond the scope of this chapter and is not discussed in detail. See

ABA SECTION OF ANTITRUST LAW, STATE ANTITRUST PRACTICE AND

STATUTES (4th ed. 2009) for in-depth treatment of state antitrust laws.

7. Brown Shoe v. United States, 370 U.S. 294, 320 (1962).

8. Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334 (1990)

(quotation omitted).

9. Id. at 334.

10. Leegin Creative Leather Prods. v. PSKS, 551 U.S. 877, 890 (2007) (“The

promotion of interbrand competition is important because the primary

purpose of the antitrust laws is to protect [this type of] competition.”)

(internal quotations omitted).

11. Id.

12. Id.

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the distribution of their products that reduce intrabrand competition,

provided they do not unreasonably restrict interbrand competition.13

These vertical restrictions can promote interbrand competition by

“encourag[ing] retailers to invest in tangible or intangible services or

promotional efforts that aid the manufacturer’s position as against rival

manufacturers,” “by facilitating market entry for new firms and brands,”

“inducing the retailer’s performance and allowing it to use its own

initiative and experience in providing valuable services” through

guaranteed margins and threatened termination if it fails to live up to

expectations, and by preventing discounting retailers from “free riding”

on the efforts of other retailers who furnish services to customers.14 In

certain circumstances, however, these vertical restrictions may be found

anticompetitive.15

A. The Sherman Act

Section 1 of the Sherman Act proscribes contracts, combinations and

conspiracies (i.e., concerted conduct) in unreasonable restraint of trade,16

while Section 2 of the Sherman Act prohibits monopolization, attempts

to monopolize (i.e., unilateral conduct by a single firm designed to

acquire or maintain dominance in the marketplace), and conspiracies to

monopolize.17 Section 4 of the Clayton Act grants those injured by the

conduct proscribed in the federal antitrust laws the right to sue the

offending party.18 The prima facie elements of claims alleging violations

of Sections 1 and 2, as well as their potential applicability to termination

cases, are discussed in turn.

1. Section One of the Sherman Act

Some franchisees and dealers have alleged that their termination was

the unlawful product of an illegal price-fixing conspiracy or group

13. Id. (“Absent vertical price restraints, the retail services that enhance

interbrand competition might be underprovided. This is because

discounting retailers can free ride on retailers who furnish services and

then capture some of the increased demand those services generate.”)

(citing Continental T.V. v. GTE Sylvania, 433 U.S. 36, 55 (1977)).

14. Id. at 891-92.

15. Id. at 893-94.

16. 15 U.S.C. § 1.

17. 15 U.S.C. § 2.

18. 15 U.S.C. § 15.