As franchisee lawyers, franchisees often ask us about a franchisor’s right to set franchisees’ prices. Most franchisees assume they can set their own pricing, and many claim it is an antitrust violation for a franchisor to set their prices. Unfortunately, that is not generally the case, and the answer is a bit more complicated. With the recent spike in inflation, the pricing issue has again come to the forefront of the franchise relationship. Indeed, increasing supply costs are chipping away at franchisees’ already tight margins and forcing franchisees to choose between eating these cost increases or passing them on to their customers through higher menu prices. (See page 10 for expert context on the impact higher menu prices has on customers). It is important for franchisees to understand that when a franchisor attempts to set prices, there are a number of different factors a franchisee needs to consider.
Generally, it is not a federal antitrust violation for a franchisor to impose maximum or minimum price restraints on franchisees. More specifically, the United States Supreme Court has held that neither minimum nor maximum price restraints are automatically unlawful in a situation akin to the franchisee/franchisor relationship. Instead, when a franchisee challenges a franchisor’s decision to set prices, courts would likely view this as a “vertical” restraint and apply a “rule of reason” standard to a franchisor’s decision to set maximum and/or minimum pricing. Because the “rule of reason” standard is very favorable for franchisors, we believe it is unlikely that, absent extremely unusual and compelling facts, courts would find a franchisor’s minimum and/or maximum price restraints to be in violation of federal antitrust laws.
What’s more, while some states have their own antitrust laws, those laws often mirror federal laws and decisions. In short, antitrust law is far from a silver bullet in terms of challenging a franchisor’s pricing mandates.
Franchisees can find more fertile ground for challenging a franchisor’s pricing requirements within the text of their franchise agreement and, potentially, contained within the Franchise Disclosure Document. Many (although not all) franchise agreements include language relating to pricing. To the extent the franchise agreement only allows the franchisor to make recommendations (but not impose mandates) on pricing, or is silent on whether the franchisor has the right to set pricing, franchisees may have good arguments to push back on any attempts by the franchisor to set pricing.
Other franchise agreements expressly allow a franchisor to set a franchisee’s pricing on every product or service the franchisee might offer. Be sure to carefully read the language in the franchise agreement, however, as some franchise agreements only allow a franchisor to set pricing in certain situations (for example, in connection with national promotions) or in connection with certain products or services. So, even if the franchise agreement does provide for some right to set franchisee pricing, franchisees should be sure to look for express limitations on that right.
Even in those cases when a franchise agreement expressly allows the franchisor to set prices, a franchisee still has options. A legal concept known as “the implied covenant of good faith and fair dealing” may limit a franchisor’s ability to set prices. Often, the implied covenant of good faith and fair dealing does not prohibit price restraints outright, but it may give franchisees a cause of action if the franchisor sets a price unreasonably high or unreasonably low. Such claims are, however, often difficult to win. For example, in 2010, a federal court in Florida ruled in favor of Burger King’s decision to cap the price of a double cheeseburger at $1, holding it did not violate the implied covenant of good faith and fair dealing, even though franchisees were forced to sell the product at a loss. That said, it is possible that, with different facts and a different applicable law, the outcome could be different.
The bottom line is that nothing is absolute when it comes to a franchisor’s ability to set prices at the store level. Simply put, it depends. Accordingly, if the franchisor is setting pricing in a manner that is harming a franchisee, the franchisee should explore all options. That may include consulting with a lawyer to understand their legal rights. Alternatively, even if there is no legal cause of action for a franchisor’s actions, franchisees should consider whether their independent franchisee association might be able pressure the franchisor to either stop setting prices or modify the prices to be more franchisee-friendly. •
J. Mark Dady is an attorney and the
Managing Partner of Dady & Gardner,
P.A. His practice is focused on the
representation of franchisees, dealers,
and distributors located throughout
the United States. He can be contacted
at 612-359-5488, or by email at
mdady@dadygardner.com.
