Sourcing Restrictions and Vendor Rebates

This Chapter considers antitrust issues raised by a requirement that a
franchisee purchase goods or services for its franchise operations from
the franchisor or a supplier approved by the franchisor. This kind of
requirement has been challenged on the ground that it unlawfully ties the
sale of the goods or services to the grant of the franchise. Also
considered is the application of the antitrust laws to a requirement that a
supplier make payments to a franchisor, commonly called rebates, based
on purchases of goods or services from the supplier by the franchisor’s
A. Can a Franchisor Require that Franchisees Purchase Supplies or
Services Only from It or Other Approved Sources?
It is now settled that a franchisor may require, under most
circumstances, that franchisees purchase goods or services necessary for
the franchised business from the franchisor or other sources approved by
the franchisor. The limits of any such requirement have been developed
over decades of litigation challenging sourcing restrictions under the
tying doctrine.
1. Definition of Tying
A tie is an arrangement whereby a firm conditions the sale of a
product on a requirement that the purchaser also buy a second product
which, but for the requirement, it would not buy.1 A tie-in of services
can be challenged only under Section 1 of the Sherman Act, but a tie-in
of goods can be challenged either under Section 1 of the Sherman Act or
under Section 3 of the Clayton Act, the latter of which reaches
conditional sales of commodities.2 The buyer must be forced or coerced
into accepting the tied product: “[T]he essential characteristic of an
invalid tying arrangement lies in the seller’s exploitation of its control
over the tying product to force the buyer into the purchase of a tied
1. See, e.g., Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 461-62
(1992); N. Pac. Ry. v. United States, 356 U.S. 1, 5-6 (1958).
2. For the text of § 3 of the Clayton Act, see Chapter IV, note 2.
128 Antitrust Handbook for Franchise and Distribution Practitioners
product that the buyer either did not want at all, or might have preferred
to purchase elsewhere on different terms.”3
2. The Policy against Tying
Tying is suspect under the antitrust laws because the seller’s power
in one market—that for the tying product—is used to restrain
competition on the merits in a second market—that for the tied product.
“[T]he essence of illegality in tying agreements is . . . [the fact that] a
seller exploits his dominant position in one market to expand his empire
into the next.”4 As the Supreme Court stated in Jefferson Parish,5
impairment of competition in the tied product market can have multiple
adverse effects:
This impairment could either harm existing competitors or create
barriers to entry of new competitors in the market for the tied
product . . . and can increase the social costs of market power by
facilitating price discrimination, thereby increasing monopoly profits
over what they would be absent the tie. . . . And from the standpoint of
the consumer . . . the freedom to select the best bargain in the second
market is impaired by his need to purchase the tying product, and
perhaps by an inability to evaluate the true cost of either product when
they are available only as a package. 6
3. Elements of an Unlawful Tie-In
The Supreme Court noted in Illinois Tool Works v. Independent Ink7
that many tying arrangements are “fully consistent with a free,
competitive market”8 and that they may be procompetitive.9 Although it
has been urged that tying arrangements should be tested under the rule of
reason,10 courts continue to follow a framework for analysis that
3. Eastman Kodak Co., 504 U.S. at 464 n.9 (quoting Jefferson Parish Hosp.
Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984)).
4. Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611 (1953).
5. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
6. Id. at 14-15 (footnote omitted).
7. 547 U.S. 28 (2006).
8. Id. at 45.
9. Id. at 36.
10. See, e.g., Jefferson Parish, 466 U.S. at 34-35 (O’Connor, J., concurring).

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT