Pricing Issues
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47
CHAPTER II
PRICING ISSUES
A franchisor has a legitimate interest in the prices at which its
products or services are resold and in the margins earned by its
franchisees.1 For example, demand for particular products and services
depends in large part on the retail price—the lower the price (all else
equal), the greater the demand—and hence the franchisor’s interest in
that price. A franchisor has an interest, at the same time, in ensuring that
franchisees earn sufficient margins to enable them to hire and train
qualified sales personnel, to promote the franchisor’s products or
services aggressively, and to invest in facilities. In some cases, it is
important to the franchisor that its franchisees educate the consumer
concerning the technical or other performance attributes of its products.
Discounting by a franchisee that free rides on showrooms or other pre- or
postsale services provided by competing franchisees at their individual
expense may cause those franchisees to cut back on such services—a
move that, ultimately, may undermine the brand image and
competitiveness of the franchisor. A franchisor that offers premium
branded products will also have a strong interest in price positioning that
reflects the value of its brand as well as the quality and innovative
features of its products, and in combating their use as loss leaders.
Finally, a franchisee can diminish the franchisor’s hard-earned goodwill
by charging more than suggested resale prices for products in high
demand.2
(1984); Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698,
707 (7th Cir. 1984) (manufacturer has “vital interest” in retail prices);
Great Clips, Inc. v. Levine, No. 3-90-211, 1993 WL 476623, at *3
(D. Minn. June 16, 1993) (“[L]egitimate [price-related] restrictions are the
price franchisees pay for the benefits of the franchise. It is important to
remember that the franchisor has legitimate and important interests in how
the franchise is run, marketability of further franchises not the least among
them.”).
2. For further discussion of the economics of vertical price-related
agreements, see ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW AND
ECONOMICS OF PRODUCT DISTRIBUTION 37-111 (2006) [hereinafter
PRODUCT DISTRIBUTION]; ABA SECTION OF ANTITRUST LAW, ANTITRUST
LAW DEVELOPMENTS (6th ed. 2007) [hereinafter ANTITRUST LAW
DEVELOPMENTS (SIXTH)].
48 Antitrust Handbook for Franchise and Distribution Practitioners
This Chapter addresses the circumstances under which a franchisor
may generally control or influence resale prices with relatively low
antitrust risk. The principles discussed below apply to vertical
arrangements between a franchisor (or supplier) and its individual
franchisees (or resellers).3 A key distinction in assessing the antitrust
implications of price-related strategies is whether the arrangement is
vertical, as noted here, or horizontal, i.e., among competing franchisors
or competing franchisees. The latter is treated more harshly under U.S.
law, and, except for Part C of this Chapter, is dealt with elsewhere.4
Furthermore, this Chapter seeks to provide an overview of basic
principles and, as such, does not necessarily address specific
circumstances that could increase antitrust risk in individual situations.
The details of specific pricing programs should be reviewed by antitrust
counsel.
This Chapter also outlines the general principles under the Robinson-
Patman Act that govern a franchisor’s wholesale pricing to franchisees
and promotional allowances and services offered to franchisees by the
franchisor to promote the franchisor’s products. The Robinson-Patman
Act only applies to the sale of products, not services or intangibles like
licenses.5
Importantly, the various pricing strategies discussed below are
evaluated with respect to their relative antitrust risk under the federal
antitrust laws.6 This Chapter does not deal with risks that may arise from
contractual limitations or state franchise or dealer laws, which may limit
the use of practices otherwise permissible under the federal antitrust
laws.
3. For convenience, the terms supplier and reseller may be used in this
chapter in the place of franchisor and franchisee, respectively.
4. See Chapter I, notes 46-61 and accompanying text, and Chapter VI. For an
overview of the case law on price-fixing by competitors, see generally
ANTITRUST LAW DEVELOPMENTS (SIXTH), supra note 2, at 81-100.
5. Several states have enacted laws similar to the Robinson-Patman Act that
apply to sales of both products and services. For a more detailed review of
state discrimination laws, see ABA SECTION OF ANTITRUST LAW, STATE
ANTITRUST PRACTICE AND STATUTES (3d ed. 2004) [hereinafter STATE
ANTITRUST PRACTICE].
6. State antitrust laws are generally consistent with federal antitrust standards,
but the chapter notes several instances in which particular state antitrust
laws may depart from federal norms. For a more complete review of state
antitrust laws, see STATE ANTITRUST PRACTICE, supra note 5.
Pricing Issues 49
A. Can a Franchisor Control the Prices Charged by Its
Franchisees?
The Supreme Court held more than 90 years ago in Dr. Miles
Medical Co. v. John D. Park & Sons Co.7 that an agreement between a
supplier and its customer on the minimum price at which the customer
resells the supplier’s product is illegal under Section 1 of the Sherman
Act.8 Such an agreement is usually referred to as vertical price fixing or
resale price maintenance (RPM) and, until recently, applied to vertical
agreements on minimum and maximum resale prices. Unlike the ban
against horizontal price fixing where price includes virtually any aspect
of price, price in the context of vertical price fixing means, more
narrowly, “price or price level.”9
In its 1997 decision in State Oil Co. v. Khan,10 the Supreme Court
overruled its earlier application of the per se rule to vertical agreements
on maximum resale prices, holding that the rule of reason, rather than the
per se rule, applied.11 In the Court’s view, such arrangements did not
invariably harm consumers, and may be beneficial to the extent they
lower prices and increase interbrand competition.12 The prohibition
against minimum RPM, however, remained intact.13
7. 220 U.S. 373 (1911).
8. Id. at 408-09.
e.g., Great Clips, Inc. v. Levine, No. 3-90-211, 1993 WL 476623, at *1-2
(D. Minn. June 16, 1993) (franchisor price restrictions requiring
franchisees to post even-dollar prices, charge a single even-dollar price for
haircuts and limit discounting to 21 days of every 3 months not minimum
RPM where franchisees could adopt any even-dollar price and offer any
discount during the 21-day period and promotional coupons at any time).
10. 522 U.S. 3 (1997).
11. Id. at 22.
12. Id. at 14-15.
2004) (minimum RPM illegal but not proved in that case); Pace Elecs. v.
Canon Computer Sys., 213 F.3d 118, 121-24 (3d Cir. 2000) (minimum
RPM illegal; terminated dealer adequately alleged antitrust injury); First
Med Representatives v. Futura Med. Corp., 195 F. Supp. 2d 917, 930-32
(E.D. Mich. 2002) (allegations that minimum resale price agreement
between first and second tier distributors was per se illegal survived
Rule 12(b)(6) motion).
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