Franchising After Leegin: A License to Fix Prices?

F or decades, many franchisors and manufacturers have struggled with how to prevent discounting by franchisees, dealers, and distributors. This has been especially true in industries where low margins and free riding by discounters make it difficult for other franchisees, dealers, and distributors to meet their suppliers’ standards for product promotion and support. Efforts by franchisors and manufacturers to police discounting, however, risk running afoul of antitrust law prohibitions against resale price maintenance, i.e., vertical1 minimum price fixing. For nearly a century, resale price maintenance agreements have been held to be per se unlawful in violation of § 1 of the Sherman Act.2 In other words, agreements fixing the minimum resale prices of franchisees, dealers, and distributors have been presumed to be unreasonable restraints of trade “without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”3 On June 28, 2007, however, the Supreme Court issued its long-awaited decision in Leegin Creative Products, Inc. v. PSKS, Inc.4 By a five-to-four margin,5 the Supreme Court overturned the per se condemnation of minimum resale price maintenance, opining that minimum vertical price fixing should instead be scrutinized under the rule of reason. The rule of reason is the “traditional framework of analysis” under § 1 of the Sherman Act.6 It requires the court to determine on a case-by-case basis whether the restraint in question “is one that promotes competition or one that suppresses competition.”7 For antitrust law groupies, this change could not be more significant. But just how significant is this change, as a practical matter, for franchisors? Will it (or should it) really make a difference in the way in which they do business? Similarly, what effect will this change have on manufacturers that, like defendant in Leegin, sell their products through dealers, distributors, and other retail outlets that are not company-owned? The dissent in Leegin predicted that this change “will likely raise the price of goods at retail and . . . create considerable legal turbulence as lower courts seek to develop workable principles.” Although lucrative for trial lawyers, legal turbulence is not the desired objective of most franchisors and manufacturers. It may be possible after Leegin, however, for franchisors and manufacturers to be more aggressive and effective in policing discounters without generating the legal equivalent of a hurricane, tropical storm, or other turbulence. To help franchisors and manufacturers evaluate the risk of changing their practices in the wake of Leegin and understand why some changes may be riskier than others, this article first addresses (1) the context in which Leegin was decided, including just how much of a change from prior law it actually does and does not represent; and (2) exactly what the Supreme Court did and did not say in deciding Leegin. This article concludes with some recommended best practices for franchisors and manufacturers that have determined that discounting will undermine rather than strengthen their franchising and distribution systems.