Territorial and Customer Restrictions

• Pages: 101-114

101

CHAPTER III

TERRITORIAL AND CUSTOMER RESTRICTIONS

This Chapter will consider the use of restrictions in franchise

agreements to limit the territory within which a franchisee can sell, the

locations from which it sells, and the categories of customers to whom it

can sell, and to regulate other nonprice aspects of its sales activities. The

use of these restrictions varies by industry and products involved.1

A. Introduction

The Supreme Court recognized in Continental T.V. v. GTE Sylvania

Inc.2 that vertically-imposed location, territorial, and other nonprice

restrictions may serve procompetitive purposes and should not, therefore,

be per se illegal under Section 1 of the Sherman Act. The Court held that

they are to be evaluated under the rule of reason.3 In the wake of

Sylvania, very few challenges to nonprice vertical restraints have

succeeded.4

The Court considered in Sylvania the restructuring of a television

manufacturer’s distribution network around a series of territorial and

location restrictions. Sylvania had seen its market share slip as it

followed its traditional distribution through wholesalers who could sell to

retailers as they saw fit. Sylvania decided to sell directly to retailers. In

hope of attracting the more aggressive and competent retailers thought

necessary to the improvement of its market position, Sylvania “limited

the number of franchises granted for any given area and required each

franchisee to sell his Sylvania products only from the location or

1. For examples of contractual provisions across a range of industries, see

HAROLD BROWN ET AL., FRANCHISING–REALITIES AND REMEDIES–FORMS

VOLUME (2004) (a printing center business (§ 4.01, ¶ 2.1 at 8-9); a

residential real estate brokerage business (§ 5.01, ¶ 2.5 at 11); a discount

muffler installation franchise (§ 7.02, ¶ 2.1 at 7); a telecommunications

consulting franchise (§ 9.01, ¶ 3.2 at 14); a weight control center franchise

(§ 10.1, ¶ 1 at 3-5); a hotel franchise (§ 11.01, ¶ 1 at 2); and a hair care

salon franchise (§ 12.01, ¶ 1.a at 4)).

2. 433 U.S. 36 (1977).

3. Id. at 59.

4. See ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS

156-57 (6th ed. 2007) [hereinafter ANTITRUST LAW DEVELOPMENTS

(SIXTH)].