U.S. Supreme Court Frees Franchisors and Product Sellers to Set Retail Price

On June 28, 2007, the United States Supreme Court made it easier for franchisors and product suppliers to set the prices for which their products must be resold. In the past, setting minimum resale prices has been forbidden, however, in the case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court held that so-called “vertical minimum resale price restraints” are no longer unlawful per se (or in all cases).  Rather, such restraints are now to be judged under the “rule of reason.” 

As a result, franchisors and product suppliers may now institute resale price maintenance programs, including maximum and minimum pricing levels, so long as they are not “anticompetitive.”  In judging whether a price restraint is anticompetitive, courts will consider factors specific to the industry, as well as the “history, nature, and effect” of the restraint to determine whether it is “an unreasonable restraint on competition.”

While this decision clearly opens the window of opportunity for franchisors to begin imposing minimum price restrictions on the products sold by their franchisees – including those that franchisees purchase from third parties – there are several important considerations that franchisors must keep in mind. 

• The provisions of existing franchise agreements may very well prevent the franchisor from imposing minimum price restrictions on its existing franchisees.
• Various state antitrust laws continue to remain in effect and may or may not be interpreted in line with Leegin.
• Retail price management is still per se illegal in some foreign jurisdictions.

If a franchisee challenges a franchisor’s minimum price requirements, the franchisor may have to affirmatively demonstrate how the procompetitive benefits of the restrictions outweigh the burden of the price increase.  As an example of a procompetitive benefit of retail price management, the Court cites preventing bargain retailers from taking customers from competing retailers that charge higher prices because they have spent capital developing the goodwill of the franchisor’s or manufacturer’s brand. 

The Court also suggests that the use of minimum price restrictions by new brands seeking to enter a competitive market can serve procompetitive interests.

Finally, mandating prices may lead to increased finger pointing from their franchisees. If a franchisor imposes minimum price requirements, and then a franchisee fails because it is unable to achieve a sustainable level of sales, the natural progression is for the franchisee to blame its failure on the franchisor.  Thus, franchisors should be prepared to provide a procompetitive explanation for their price restrictions, as well as any data demonstrating measurable benefits resulting from their retail price management policies.