For many franchising companies, the “Company Store” has been a profitable addition to their bottom line. Franchisees must either buy all or a select number of items from the “Company Store” or alternatively, Franchisees must buy from designated suppliers who in turn pay the Franchisor a rebate. For many Franchisees, it doesn’t matter that the Franchisor makes a handsome profit. The convenience of one stop shopping is all that matters. However for other Franchisees, the thought that they are being gouged (rightly or wrongly) by the Franchisor ultimately leads to litigation.
The litigating Franchisees contend that the required purchases constitute a violation of the Sherman Antitrust Act by coercing them to purchase goods or services from specified suppliers, thus restraining competition when they should be able to make purchases from sellers of their own choosing.
In today’s litigious environment, it is crucial for any Franchising Company selling products or services or requiring Franchisees to purchase from designated sources, to understand Federal, and just as importantly, State legal regulations before launching a required supplier program. Not only is a Franchisor subject to Federal antitrust laws, but some States have their own antitrust laws. Recently a State Attorney General sought to hold one of our Franchise Clients in violation of that State’s antitrust laws, a very serious charge. Fortunately, our Client had consulted with us prior to implementing their pricing program and was ready. The charge never materialized!
It is also not uncommon for States to have relationship laws which directly affect your Franchise Agreements. As a result, you must understand how to successfully structure Franchisee programs from a legal perspective. For example, several States restrict a Franchisor’s ability to require its Franchisees to buy goods and services from the Franchisor or its designee as well as restricting rebates. A few States even prohibit sourcing restraints if goods of comparable quality are available elsewhere, or they place the burden on the Franchisor to show that restrictive purchasing arrangements are reasonably necessary.
Franchisors must also pay close attention to the disclosure requirements of the Amended FTC Franchise Rule. Now Franchisors are required to disclose supplier payments received by the Franchisor and the basis of payments made to the Franchisor from suppliers. In most cases, a Franchisor must disclose gross revenue from required Franchisee purchases.
With all these obstacles standing at the door, can it be said that the “Company Store” is still a good place to increase a Franchisor’s bottom-line? Absolutely! But, the “Company Store” takes planning before it can be opened. It is essential that the legal requirements be understood in order to develop and properly structure the “Company Store” and the required purchase program before it is launched. Duell Law is ready to help you. Plan ahead. Don’t be the next TV ad for the local Plaintiff’s lawyer which announces the multi-million dollar judgment against your Franchise Company.