Joint Action by Franchisees

Franchisees may cooperate, coordinate activities, and act jointly in a
variety of circumstances and for any number of reasons. This Chapter
explores antitrust risks of such joint conduct. It will look at antitrust
issues associated with joint efforts by franchisees to exert pressure on a
franchisor or on other franchisees, joint purchasing arrangements,
franchisee associations and the information sharing that is often a benefit
of a franchise system, as well as enforcement of covenants in a franchise
agreement prohibiting a franchisee from hiring another franchisee’s
A. Can Franchisees Act Jointly against a Franchisor?
Franchisees may act jointly to influence their franchisor in many
different situations. They may seek to exert pressure on the franchisor
on issues ranging from marketing, to operating costs, to territorial
protection. For example, the franchisor may have announced a new
marketing or brand strategy with which some franchisees disagree, or the
franchisor may be entertaining applications for new franchises that
existing franchisees believe will harm their businesses. Alternatively,
franchisees may pressure the franchisor to take action against another
franchisee (for example, one which is discounting prices or engaged in
other conduct perceived by the franchisees as problematic). These types
of collaboration raise varying antitrust issues, and they are considered
1. Refusal to Perform Franchise Agreement
Franchisees may jointly agree not to perform obligations under their
franchise agreements in an effort to influence the franchisor in some
respect. Franchisors alleging that such franchisee action constitutes an
antitrust violation face an uphill battle, because courts typically find that
the franchisor has sustained no antitrust injury from the action.
a. Payment of Royalties
Perhaps the most basic example of joint franchisee action concerning
franchise obligations is withholding of royalties, or a royalty boycott. In
154 Antitrust Handbook for Franchise and Distribution Practitioners
Oil Express Nat’l, Inc. v. D’Alessandro,1 the plaintiff, a franchisor of
quick-change oil stations, alleged that the defendant franchisees
instigated a royalty boycott and convinced 27 other franchisees to join.2
The court held that the franchisor could not prove extortion or a boycott
because, at the time of the alleged threat, the franchisees had been
terminated and therefore did not owe any fees; as such, they had nothing
with which to threaten the franchisor.3 The court observed that even if
the franchisor’s allegations about a royalty boycott were true, it had not
suffered any antitrust injury. The court pointed out that antitrust injury
“‘should reflect the anticompetitive effect either of the violation or of the
anticompetitive acts made possible by the violation.’”4 Since the
franchisor’s complaint focused merely on its own pecuniary damages
and not on any effects on competition, the court ruled that the franchisor
could not prove antitrust injury.5
The outcome in Oil Express, while pointing to the hurdles to
recovery, does not immunize joint royalty negotiations by franchisees.
Whether such joint negotiations should be condemned as per se unlawful
or whether the practice should be assessed under the rule of reason is an
open issue.
b. Exit from System
Similarly relying on the lack of antitrust injury, another court found
no antitrust violation where franchisees acted jointly to leave the
franchisor’s system. In McAlpine v. AAMCO Automatic Transmissions,6
AAMCO, the franchisor, alleged that eleven of its franchisees in the
Detroit area had engaged in an unlawful restraint of trade by
simultaneously terminating their franchise agreements to form their own
competing transmission repair business. The court held that, although
AAMCO was harmed by the conduct, it could not prove an antitrust
violation because the cause of AAMCO’s injuries was the franchisees’
breach of their franchise agreements, not a violation of the antitrust
1. No. 96C 1528, 1998 WL 214727 (N.D. Ill. April 27, 1998).
2. The alleged purpose of the royalty boycott was to force the franchisor to
lower its royalty rate from 5% to 1%. Id. at *1.
3. Id. at *3.
4. Id. (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
489 (1977)).
5. Id. at *4.
6. 461 F. Supp. 1232 (E.D. Mich. 1978).
Joint Action by Franchisees 155
laws.7 The court explained that the breach of contract was not an
antitrust violation “merely because the termination had the effect of
hurting AAMCO’s competitive position in the Detroit market,”8 and it
observed that the antitrust laws are not intended “to protect an existing
business such as AAMCO against loss in a competitive market.”9
2. Other System Issues
a. Pressure to Limit Appointment of Franchisees
Antitrust issues may also arise when franchisees jointly exert
pressure on a franchisor to block appointment of a franchisee that may
compete with existing franchisees. For example, In ES Development,
Inc. v. RWM Enterprises,10 the Eighth Circuit affirmed liability under
Section 1 of the Sherman Act where car dealership franchisees acted
together to prevent the opening of a nearby auto mall. The plaintiff,
ES Development (ESD), sought to build an auto mall offering multiple
brands of automobile dealerships at a single location. When eight local
dealers, representing various brands, learned of ESD’s plan, they became
concerned that they would lose clientele because customers would prefer
the one-stop shopping available at the auto mall.11
Each of the dealers operated under a separate franchise agreement
setting forth procedures for objecting to the grant of same-brand
dealerships in its market area. Each manufacturer reserved the right to
make the ultimate decision as to which franchises to grant. The eight
dealers jointly retained an attorney, adopted a statement of purpose and
the name “Dealers Alliance,” and agreed to fund a market study to be
used against the manufacturers in the event of litigation. In addition,
each dealer sent to its respective franchisor a form letter, prepared by the
group’s attorney, stating the dealer’s concerns with the development of
the auto mall. The letters had their desired effect—after receiving them,
7. Id. at 1263-65. In so holding, the court relied on § 4 of the Clayton Act.
See id. at 1263 (“Section 4 of the Clayton Act expressly restricts the right
to sue for treble damages to suits based on injuries which occur ‘by reason’
of antitrust violations” (quoting § 4(a) of the Clayton Act, 15 U.S.C.
§ 15(a)).
8. Id. at 1266.
9. Id.
10. 939 F.2d 547 (8th Cir. 1991).
11. Id. at 551.

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