Amacom Franchising And Licensing_1 doc

48 FRANCHISING AS A GROWTH STRATEGY chisor’s] consent.’’ The court stated that there was ‘‘no doubt’’ that requiring a franchisee in the freight forwarding business to use other franchisees in the system for deliveries is a material provision of the franchise agreement. In Great Clips, Inc. v. Levine Civ. No. 3-90-211 [Trade Cases 1992-93] Bus. Fran. Guide ن 70,930 (D. Minn. June 16, 1993), a franchisee was permanently en- joined from continuing to violate its franchise agreement by departing from the franchisor’s single-price, eleven-dollar haircut policy. In another case, Novus de Quebec v. Novus Franchising, Inc., Civ. No. 4-95-702, [Trade Cases 1995-96] Bus. Fran. Guide ن 10,823 (D. Minn. Dec. 5, 1995), an auto glass repair franchisor terminated its area developer for ‘‘failure to comply with the uniformity and quality standards’’ in the franchise agreement and for failure to cooperate with an audit inspection as required under the agree- ment. The area developer also had awarded franchises to franchisees of com- peting franchise systems after the franchisor had already rejected them as suitable candidates. The district court rejected the area developer’s request for an injunction to prevent termination of the license, citing the area devel- oper’s ‘‘total disregard for the spirit and philosophy behind the Novus Sys- tem and for the goodwill associated with the Novus marks and System.’’ Another case where a franchisee’s noncompliance with the franchisor’s system was determined to cause irreparable harm to the franchise system and its marks was Burger King Corp. v. Stephens, 1989 WL 147557 (E.D. Pa.), where the court granted Burger King’s request for an injunction to force a franchisee to cease operating where the franchisee had violated Burger King’s operating standards and Burger King was thus ‘‘[unable] to insure the maintenance of high quality service that the trademarks represented, [thereby] causing irreparable injury to the franchisor’s business reputation and goodwill.’’ Other examples where courts have protected franchisors and licensors from possible damage to their marks by licensees or franchisees include Cottman Transmission Systems, Inc. v. Melody, 851 F.Supp. 660 (E.D. Pa. 1994) (continued use of marks by a terminated franchisee could cause irreparable harm by loss of consumer faith and confidence); Jiffy Lube International, Inc. v. Weiss Brothers, Inc. 834 F.Supp. 683 (D.N.J. 1993) (un- authorized use of franchisor’s trade dress and marks enjoined because a con- tinuing infringement would cause irreparable harm); Star Houston, Inc. v. Texas Dept. of Transportation and Saab Cars U.S.A., Inc., 957 S.W. 2d 102, 109 (App. Tex. 1997) (dealer’s refusal to participate in new signage program was a material breach constituting good cause for termination). As these cases illustrate, a franchisor’s efforts to apply quality control that ensures consistency in the licensed products and services offered under the given marks protects the value (i.e., goodwill) of a franchisor’s intellectual prop- erty. Other Methods of Enforcing Quality Control Standards in a Franchise System Operations Manuals and Training Programs The franchisor usually provides the franchisee with a comprehensive opera- tions manual, which is generally reviewed for the first time at the initial 10376$ $CH4 10-24-03 09:37:25 PS 49 DEVELOPING SYSTEM STANDARDS AND ENFORCING QUALITY CONTROL training session for owners and managers of the franchise business. These manuals and training programs instruct the franchisee on all aspects of op- erating and managing the business within the quality control standards es- tablished by the franchisor. The operations manual should set forth in a clear and concise fashion the minimum levels of quality to be maintained in all aspects of the business, from cleanliness to customer service to recipes to employee relations. These standards should be taught and reinforced through- out the training program. Architectural/Engineering Plans and Drawings In most types of franchised businesses, uniformity of physical appearance is imperative. The franchisor often provides detailed architectural drawings and engineering plans both as a service to franchisees and as a method of protecting quality control. These plans reinforce the importance of a consis- tent image in the minds of consumers, who may be looking for the ‘‘golden arches’’ or ‘‘orange roof’’ in their search for a familiar place to eat along the highway. Plans may include specifications for signage, counter design, dis- play racks, paint colors, HVAC systems, lighting, interior decoration, or spe- cial building features. Trade Dress Trade dress is also a method of enforcing quality control and design stan- dards. The leading case on the protection of a franchisor’s trade dress is Taco Cabana International, Inc. v. Two Pesos, Inc., 932 F.2d 1113 (5th Cr. 1991), affirming a jury’s finding that Taco Cabana had a protectable trade dress that was inherently distinctive, and that consumers might likely confuse or asso- ciate Taco Cabana with a competitor restaurant that had infringed on Taco Cabana’s trade dress. The court explained that ‘‘an owner may license its trade dress and retain proprietary rights if the owner maintains adequate control over the quality of goods and services that the licensee sells with the mark or dress.’’ Site Selection Assistance The top three priorities for the success of a franchisee’s business have often been cited as ‘‘location, location, and location.’’ Many franchisors assist fran- chisees in selecting a proper site for their franchise business and even assist in lease negotiations and supervision of construction. Such efforts not only help to ensure the franchisee’s success but also provide an additional basis for maintaining quality control in terms of minimum parking requirements, traffic patterns, minimum/maximum square footage, demographics of the local market, and prevention of market saturation. Intranets and Technology Modern franchisors are also turning to Intranets, video-conferencing, and related communications and computer technologies as a way to enforce sys- 10376$ $CH4 10-24-03 09:37:25 PS 50 FRANCHISING AS A GROWTH STRATEGY tems standards, provide support, and monitor quality control. The diverse technologies available for use in Intranets include email, Web browsers, groupware, Java, streaming audio and video, ‘‘push’’ technology, and count- less other Web-based software applications. The enforcement of quality control and system standards can be accom- plished by publishing product, service, and marketing information that can then be accessed easily and inexpensively by each franchisee in the system, and by designated, password-controlled individuals within a franchisee or- ganization, using public telecommunications networks. Outside contractors and suppliers also can be given limited access to the Intranet to facilitate their interaction with the system. An Intranet can also provide a secure central point for collecting finan- cial information in order to track financial performance and maintain finan- cial controls. Intranets also can permit authorized external users, such as suppliers, shareholders, and analysts, to have limited access to certain fi- nancial data, in order to build better relationships through timely, accurate communications. Other finance and accounting applications on an Intranet can be used specifically for company-owned operations, such as budgeting, payroll, expense reports, and cash management and online banking. Intra- nets also can be used to replaced the ‘‘centralized cash registers’’ and other forms of legacy systems for greater control over franchisee operations. The addition of a secure transaction processing feature to an Intranet could also be used to facilitate inventory management, as well as further enhance cash management, reporting, and other controls. National or Uniform Advertising Programs Advertising and promotion of the franchise business on a local and national level is an essential part of virtually all franchise systems. If the franchisees are left on their own to develop advertising and promotional materials for local television, radio, and newspapers, the system will not send out a uni- form message about the products and/or services offered by the franchise network. Additionally, franchisors will not have control over the quality and content of the advertising materials used by franchisees. Franchisees may not be knowledgeable of the laws prohibiting unfair or deceptive advertising and trade practices. Thus, without the franchisor’s guidelines, they are more likely to stumble into trouble, diminishing the goodwill the franchisor has worked hard to build. For this reason, a centralized advertising program, engineered by the franchisor’s in-house staff or an outside advertising agency, develops newspaper, television, and radio advertisements for use by fran- chisees in their local markets, helping the franchisor maintain a certain mini- mum level of quality in advertising. Moreover, this centralized advertising program should include a franchisor review and approval process for adver- tisements developed by franchisees. Approved Supplier Program The franchisee will need a wide variety of raw materials, office and business supplies, equipment, foodstuff, and services in order to operate the franchise 10376$ $CH4 10-24-03 09:37:25 PS 51 DEVELOPING SYSTEM STANDARDS AND ENFORCING QUALITY CONTROL business. The level of control that the franchisor is entitled to exercise over the acquisition of these supplies and materials will vary, depending on the nature of the franchise business and the extent to which such goods are pro- prietary. Franchisors may be prohibited, under certain circumstances, from forcing a franchisee to buy all equipment and supplies from them or their designated sources. The franchisor does, however, have a right to establish objective per- formance standards and specifications to which alternate suppliers and their products or services must adhere. Such standards are justifiable for the pur- pose of ensuring a certain minimum standard of quality. In establishing an approved supplier or vendor certification program, the franchisor should carefully develop procedures for the suggestion and evaluation of alternative suppliers proposed by the franchisee. The standards by which a prospective supplier is evaluated should be clearly defined and reasonable. This evaluation should be based upon: 1. Ability to produce the products or services in accordance with the fran- chisor’s standards and specifications for quality and uniformity 2. Production and delivery capabilities and ability to meet supply commit- ments 3. Integrity of ownership (to assure that association with the franchisor would not be inconsistent with the franchisor’s image or damage its good- will) 4. Financial stability 5. Familiarity of the proposed supplier with the franchise business 6. Negotiation of a satisfactory license agreement to protect the franchisor’s trademarks The franchisor should always reserve the right to disapprove any proposed supplier who does not meet these standards. In addition, an approved sup- plier should be removed from the list of suppliers if, at any time, it fails to maintain these standards. Other reasonable standards, applicable in the franchisor’s industry, may also be adopted. Special Legal Issues Affecting Exclusive Supplier and Vendor Certification Programs For certain highly proprietary aspects of the franchise business such as the ‘‘secret sauce,’’ the franchisor typically has the authority to require the fran- chisee to purchase those products exclusively from the franchisor or from a supplier designated and approved by the franchisor. This is known as a tying arrangement. Not all tying arrangements are permitted under applicable anti- trust laws. Proposed tying programs continue to be one of the greatest sources of conflict and litigation between franchisors and franchisees. This section discusses how and when a franchisor can legally require its fran- chisees to purchase products solely from the franchisor (or a specific sup- 10376$ $CH4 10-24-03 09:37:26 PS 52 FRANCHISING AS A GROWTH STRATEGY plier, which may or may not be affiliated with the franchisor). It also examines the limitations on the franchisor’s right to impose a tying arrange- ment and discusses other limitations on the franchisor’s controls over fran- chisees. Federal antitrust law identifies a tying arrangement as an arrangement whereby a seller refuses to sell one product (the tying product, franchise) unless the buyer also purchases another product (tied product, food products or ingredients, for example). Such arrangements are perceived as posing an unacceptable risk of ‘‘stifling competition’’ and as a general matter are not favored the courts. One of the critical factors examined by the courts in determining whether a particular transaction or set of purchase terms constitutes an un- lawful tying arrangement is a tie-in between two separate and distinct prod- ucts or services that are readily distinguishable in the eyes of the consumer whereby the availability of the tying product is conditioned on the purchase of the tied product. For example, in a case involving Kentucky Fried Chicken Corp. (KFC), the court discussed the distinction between two separate products unlaw- fully tied together by a seller and two interrelated products that are justifi- ably tied together. In that case Marion-Kay, a manufacturer and distributor of chicken seasoning, counterclaimed against KFC, alleging unlawful tying of its KFC franchises to the purchase of its own special KFC seasoning exclu- sively from two designated distributors. The court found that the alleged tying product (the KFC franchise) and the alleged tied product (the chicken seasoning) were not two separate products tied together unlawfully. Rather, the court stated that the use of the KFC trademarks and service marks by franchisees is so interrelated with the KFC chicken seasoning that no person could reasonably find that the franchise and the seasoning are two separate products. In the Kentucky Fried Chicken case, the court recognized the need and the right of a franchisor to require its franchisees to purchase certain prod- ucts from the franchisor directly or from its designated sources if those prod- ucts are so intimately related to the intellectual property licensed to the franchisee as to be necessary for the purpose of maintaining the quality of the product identified by the trademark. The crucial inquiry is into the rela- tionship between the trademark and the product allegedly tied to it. In a similar case involving Baskin-Robbins franchisees, the court found that the trademark licensed to the Baskin-Robbins franchisees was inseparable from the ice cream itself and concluded that the trademark was therefore utterly dependent upon the perceived quality of the product it represented. If the trademark serves only to identify the tied product, there can be no illegal tie- in, because the trademark and the quality of the product it represents are so inextricably interrelated in the mind of the consumer as to preclude any finding that the trademark is a separate product. The crucial distinction is between a product-driven franchise system (distribution system), where the trademark represents the end product mar- keted by the system, and a business format system in which there is generally only a remote connection between the trademark and the products the fran- 10376$ $CH4 10-24-03 09:37:26 PS 53 DEVELOPING SYSTEM STANDARDS AND ENFORCING QUALITY CONTROL chisees are compelled to purchase. In a product-driven system, a tying ar- rangement is more likely to be upheld because the products being tied to the purchase of the franchise are an integral part of the franchisor’s system and are intimately related to the trademarks being licensed to the franchisee. A business format franchise is usually created merely to implement a particular business system under a common trade name. The franchise outlet itself is generally responsible for the production and preparation of the sys- tem’s end product or service. The franchisor merely provides the trademark and, in some cases, also provides the supplies used in operating the fran- chised outlet and producing the system’s products. Under a distribution sys- tem, the franchised outlet serves merely as a conduit through which the trademarked goods of the franchisor flow to the ultimate consumer. Gener- ally, these goods are manufactured by the franchisor or by its licensees ac- cording to detailed specifications. In a related case involving the Chicken Delight franchise system, the tied products imposed on the franchisees were commonplace paper products and packaging goods neither manufactured by the franchisor nor uniquely suited to the franchised business. Under the business format franchise sys- tem, the connection between the trademark and the products the franchisees are compelled to purchase were remote enough that the trademark, which simply reflects the goodwill and quality standards of the enterprise it identi- fies, may be considered as separate from the commonplace items that are tied more closely to the trademark’s actual use. Therefore, in order for tying arrangements to be looked upon favorably, the court must find that the tied products are uniquely related to the fran- chise system and intimately related to the trademarks being licensed to franchisees. Thus, the purchase of certain products, which are sold by fran- chisees under the franchisor’s trademarks and are highly proprietary and an integral part of the system, may be restricted by designating certain suppliers (even if that supplier is the franchisor) and maintaining strict product speci- fications. On the other hand, it is unlikely that restrictions on the purchase of supplies such as forms, service contracts, business cards, and signage would be upheld as a valid tie-in because these items, although an integral part of the system, are not uniquely suited to the system or intimately related to the trademarks licensed to the franchisees. Furthermore, as more fully discussed below, a restriction on the purchase of these supplies could not be justified if less restrictive alternatives are available that would yield the same level of quality control. In the case of these ‘‘commonplace’’ supplies, a court could find that providing strict specifications for the quality and uniformity of sup- plies and allowing franchisees to obtain the approval of other suppliers for these items would be less restrictive and thus the favored method of ensuring quality and uniformity Justification for Certain Types of Tying Arrangements An otherwise illegal tying arrangement may, under appropriate circum- stances, be justified by a franchisor and upheld by a court. One such justifi- 10376$ $CH4 10-24-03 09:37:27 PS 54 FRANCHISING AS A GROWTH STRATEGY cation recognized by the courts is a tying arrangement necessary to preserve the distinctiveness, uniformity, and quality of a franchisor’s products in con- nection with the license of the franchisor’s trademarks. In the case of a franchisor who grants a license to its franchisees to use its trademarks, the franchisor (licensor) owes an affirmative duty to the pub- lic to ensure that in the hands of the licensee the trademark continues to represent what it purports to represent. If a licensor relaxes quality control standards by permitting inferior products under a licensed mark, this may well constitute a misuse or even statutory abandonment of the mark. Courts have qualified what would appear to be a level of absolute discretion being vested in the franchisor by stating that not all means of achieving and main- taining quality control are justified. Rather, they have held that a restraint of trade can be justified only in the absence of less restrictive alternatives. If specifications of the type and quality of the products to be used by the franchisee are sufficient to ensure the high standards of quality and unifor- mity the franchisor desires to maintain, then this less restrictive alternative must be utilized in lieu of requiring the franchisee to purchase those prod- ucts only from the franchisor. If specifications for a substitute would require such detail that they could not be supplied (i.e., they would divulge trade secrets or be unreasonably burdensome), then protection of the trademarks may warrant the use of what would otherwise be an illegal tying arrange- ment. Whether or not such a tying arrangement is unlawful will depend on whether or not the franchisor can successfully demonstrate restricting to sources to approved suppliers to the exclusion of other potential sources, is necessary and justified in order to ensure product distinctness, uniformity, and quality. For example, in Ungar v. Dunkin’ Donuts of America, Inc. (D. Pa. 1975), the court denied franchisor’s motion for summary judgment of an unlawful tying claim, holding that a requirement that franchisees purchase supplies from approved sources might have constituted an unlawful tying arrangement in view of allegations that the approved supplier system was merely a vehicle for payment of kickbacks and that the franchisor was un- willing to approve new suppliers, despite their ability to meet specifications. Similarly, in Midwestern Waffles, Inc. v. Waffle House, Inc., 734 F.2d 705 (11th Cir. 1984), the court held that a franchisor’s requirement that fran- chisees purchase equipment and vending services from approved sources could constitute a per se illegal tying arrangement because, although an ap- proved source requirement was not by itself illegal, if franchisees were co- erced into purchasing equipment from companies in which the franchisor had an interest, then the illegal tie could exist. In another example where the tying arrangement was rejected, Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1991), the court held that a fran- chisor’s trademark and licenses were separate and distinct items from its packaging, mixes, and equipment that purportedly were essential compo- nents of the franchise system. The court explained that in determining whether an aggregation of separable items should be regarded as one or more items for tie-in purposes in normal cases of sales, the function of the aggrega- tion must be analyzed and questions such as cost savings and whether items 10376$ $CH4 10-24-03 09:37:27 PS 55 DEVELOPING SYSTEM STANDARDS AND ENFORCING QUALITY CONTROL involved are normally sold or used must be addressed. ‘‘In franchising, it is not what articles are used but how they are used that gives the system and its end product entitlement to trademark protection.’’ In William Cohen & Son, Inc. dba Quality Foods v. All American Hero, Inc. (693 F.Supp. 201 (D.N.J. 1988), the issue of whether the franchisor’s requirement that its franchisees purchase all of their supplies of marinated steak sandwiches from an affiliate company amounted to a per se illegal tying of the sandwich meat portions to the grant of restaurant franchises and could not be decided on summary judgment. Similarly, in Carpa, Inc. v. Ward Foods, Inc. 536 F.2d 39 (5th Cir. 1976), a seafood restaurant franchisor un- lawfully tied the purchase of design fixtures, equipment, and food products to the use of its trademark where franchisees were required to pay large sur- charges to the franchisor for approved items. More recently, several courts have again recognized the business justi- fication standard as an appropriate defense to an allegation that a franchisor is involved in an illegal tying arrangement. In 1987, the U.S. Court of Ap- peals held that a United States importer of German automobiles was justified in requiring its dealers to purchase all of their replacement parts from the importer as a condition of their securing a franchise to sell the automobiles in order to secure quality control, to protect goodwill, and to combat ‘‘free- riding’’ dealers. The court was satisfied with the substantial evidence to sup- port the importer’s assertion that the tie-in was used to assure quality control in view of the fact that the importer purchased 80 percent of its parts from German manufacturers and subjected parts purchased from other manufac- turers to an elaborate and rigorous inspection procedure. On August 27, 1997, the United States Court of Appeals for the Third Circuit affirmed a lower court ruling dismissing antitrust claims against Domino’s Pizza brought by an association of Domino’s Pizza franchisees. The case known as Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 1997 WL 526213 (3d Cir. August 27, 1997) involved an allegation by the plaintiffs that Domino’s Pizza had monopolized the sale of ingredients and supplies to its franchisees and had engaged in illegal tying and exclusive dealing arrange- ments in violations of Sections 1 and 2 of the Sherman Act. The lower court had ruled that all of the plaintiff’s antitrust claims failed because Domino’s Pizza could not as a matter of law possess market power in ingredients and supplies sold to its franchisees. In dismissing the Sherman Act claims, the lower court concluded that whatever market power Domino’s Pizza might have had over its franchisees arose out of its franchise agreement. The Court of Appeals held that Domino’s-approved ingredients and supplies sold to Domino’s Pizza franchisees could not be a relevant product market for anti- trust purposes. The Court stated that a relevant product market includes all reasonably interchangeable products available to consumers (i.e., pizza stores) for the same purpose. Since ingredients and supplies sold by Domi- no’s Pizza to its franchisees were comparable to (and reasonably interchange- able with) ingredients and supplies available from other suppliers and used by other pizza companies, these items could not be a separate market for antitrust purposes. Whether a legally recognizable justification exists to warrant a tying ar- 10376$ $CH4 10-24-03 09:37:28 PS 56 FRANCHISING AS A GROWTH STRATEGY rangement will ultimately depend on (1) the licensor’s legitimate need to ensure quality control, (2) the availability of ‘‘less restrictive means’’ to achieve protection of the quality control, and (3) whether the alleged ‘‘tied product’’ is truly proprietary in nature. The relationship between the trade- mark and the product must be sufficiently intimate to justify the tie-in on grounds of quality control, uniformity, and protection of goodwill. More im- portantly, a tie-in otherwise justified in the name of quality control will not be upheld if less restrictive means are available for ensuring quality and uni- formity. There is a continuous struggle between the antitrust laws that generally disfavor tying arrangements and the trademark laws that impose a duty upon the owner of a trademark to monitor the use of the mark by licensees to ensure that the licensor’s standards of quality are maintained and that the licensee’s use of the mark is consistent with the licensor’s intentions. Quality Control and the Field Staff The franchisor’s quality control program that is, for the most part, adminis- tered by the field support staff, is the front line of defense for the franchisor’s trademarks. Field support personnel are responsible for enforcing the fran- chisor’s quality control standards and for reporting field conditions to the franchisor. Quality control strategies developed by top management may be misguided if the information gathered and reported by field support person- nel is not accurate. The franchisor should, therefore, closely monitor its field support personnel and replace those who are lenient, arbitrary, or inconsis- tent. In a large system, the field support staff is typically the only contact the franchisee will have with the franchisor. It is, therefore, essential that all members of the field support staff possess those qualities necessary to create and maintain a good relationship with franchisees while at the same time reinforcing the franchisor’s necessary standards. A properly administered quality control program provides the franchisor with a method for policing franchisees that achieves positive results and uniformity throughout the franchise system. By establishing, maintaining, and enforcing high standards of quality, all parties, including the franchisee, will benefit. Thus, the impor- tance of quality control should be properly explained to franchisees (initially at training) and reinforced on an ongoing and consistent basis by field sup- port personnel. The role of field support staff does not end with the enforcement of quality control standards. Often, field personnel act as troubleshooters in helping franchisees improve their business. In emergency situations, they may even step in as operating manager. For this reason, the franchisor’s field personnel should be well educated in the intricacies of operating the fran- chise business. They should be able to handle any situation that may arise. They will be looked to as leaders and should be comfortable in that role. Above all, field support personnel should be good listeners and communica- tors. 10376$ $CH4 10-24-03 09:37:29 PS 57 DEVELOPING SYSTEM STANDARDS AND ENFORCING QUALITY CONTROL Pricing as a Quality Control Enforcement Tool Until recently, virtually all types of vertical price restraints were viewed by the courts as per se illegal, thereby giving franchisors the power to suggest prices but not the ability to set prices. In November 1997, the U.S. Supreme Court reversed 30 years of case law by holding that vertical maximum price fixing arrangements were no longer per se illegal under Section 1 of the Sher- man Act but, rather, such maximum price fixing arrangements were now to be evaluated under a ‘‘rule of reason’’ standard. Under this standard, a maxi- mum price fixing agreement is illegal only if it ‘‘imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature and effect’’ State Oil v. Kahn, 118 S.Ct. 275 (1997). The facts in Kahn involved a gasoline station operator who leased the station from State Oil Company and whose agreement required Kahn to buy gasoline from State Oil at a suggested retail price less a specified margin. The agreement also required that any profit Kahn earned as a result of charging customers more than the suggested retail price be rebated to State Oil. When Kahn was being evicted after falling behind on his lease payments he sued State Oil for preventing him from raising his prices, asserting vertical maxi- mum price fixing in violation of Section 1 of the Sherman Act. The Kahn court did not change the law on minimum price fixing arrangements, how- ever, and such arrangements are still per se illegal. The result of Kahn is that a supplier or franchisor must now determine whether the imposition of maximum prices somehow restrains trade unreasonably. While minimum price fixing is per se illegal, at least one court has held that setting price points without either a floor or ceiling may be permitted. In Great Clips, Inc. v. Levine, 1993 WL*76623 (D. Minn. 1993), the court found that Great Clips’ even-dollar, single-price restrictions did not violate the Sherman Act. The Great Clips pricing policy required franchisees to charge an even-dollar price (e.g., $7.00, $8.00, $9.00, etc.) but did not set that price. Great Clips also required franchisees to post a single price for hair cuts on its price board. Great Clips did allow franchisees to offer discounts from the even-dollar price, however, but only on 21 days out of every 3 months. This restriction was imposed to ensure compliance with certain consumer fraud regulations, according to Great Clips. Franchisees were also permitted to offer coupons through direct mail and print media. The Great Clips court explained that the even-dollar, single price re- striction was not anticompetitive because Great Clips franchisees were free to set the price within the restricted pricing structure. Even the imposition of the ‘‘3 weeks per 3 months’’ discount policy did not violate the Sherman Act, the court explained, because franchisees had many ways to set their prices without violating the franchisee agreement. The court noted Great Clips’‘‘legitimate and important interests in how the franchise is run,’’ and that Great Clips’ marketing strategy was pro-competitive because it would stimulate interbrand competition, and that must be the focus of the inquiry (1991 WL 322975*7 [D. Minn. 1991]). Suggested resale prices have long been recognized as a form of manufac- 10376$ $CH4 10-24-03 09:37:29 PS [...]... governing franchising After seven years of public comment and debate, the FTC adopted its trade regulation rule that is formally titled ‘‘Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Venture’’ on December 21, 1978, to be effective October 21, 1979 Many states followed the lead of California, and there are now fifteen states that regulate franchise offers and sales... franchisee and if the franchisee’s advertising or promotional activities require the franchisor’s approval ❒ Grant of an exclusive territory, and the sale of products or services at bona fide wholesale prices ❒ Percentage discounts (although insubstantial) ,and mutual advertising and soliciting by the franchisor and the franchisee ❒ Volume discounts attained by a system of distributors and subdistributors, and. .. and desist orders, injunctions, consent orders, mandated rescission or restitution for injured franchisees, and civil fines of up to $10,000 per violation The FTC Rule regulates two types of offerings: (1) package and product franchises and (2) business opportunity ventures The first type involves three characteristics: (I) the franchisee sells goods or services that meet the franchisor’s quality standards... federal standard of disclosure applicable to all franchisor offerings and to permit states to provide additional protection as they see fit Thus, while the FTC Rule has the force and effect of federal law and, like other federal substantive regulations, preempts state and local laws to the extent that these laws conflict, the FTC has determined that the rule will not preempt state or local laws and regulations... of the intellectual properly being offered, making items an optional menu of support and services rather than making them mandatory and integrated? ❒ If you choose to operate in the gray area and without a UFOC, how comfortable are you and your management team with living the possibility of a regulatory investigation and or a system-wide rescission offer if the relationship is subsequently deemed to... semi-exclusive basis, possibly with multiple levels of jurisdiction (such as regional and location distributorships and arrangements) designed to establish uniformity of prices and marketing terms ❒ Reservation of control by the franchisor over matters such as customer terms and payments, credit practices, and warranties and representations made to customers ❒ The franchisor’s rendering of collateral services... the franchisor will file documents and pay the required fees in all states in which it seeks registration Each state examiner has an opportunity to review the filing and then forwards its comments to a ‘‘lead examiner.’’ The lead examiner is responsible for coordinating the comments by and among each state and within 30 days of the initial filing must deliver to the franchisor and its counsel a single... includes state-mandated language regarding offering circular delivery requirements and related disclaimers, addresses of administrators and the list of registered agents, subfranchisors, and franchise brokers The Guidelines mandate disclosure of certain risk factors A franchisor must use prescribed language to disclose as a risk that its franchise agreement includes an outof-state form and/ or choice... estate, equipment, fixtures, security deposits, inventory, construction costs, working capital, accounting and legal fees, license and permit fees, and any other costs and expenditures should be disclosed The disclosure should include to whom such payments are made, under what general terms and conditions, and what portion, if any, is refundable A payment must be disclosed if it is required to be paid during... Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, and Washington F E D E R A L A N D S TA T E R E G U L A T I O N O F F R A N C H I S I N G 61 Other states that regulate franchise offers include Hawaii, which requires filing of an offering circular with the state authorities and delivery of an offering circular to prospective franchisees; Michigan, Illinois, and Wisconsin, . the focus of the inquiry (19 91 WL 322975*7 [D. Minn. 19 91] ). Suggested resale prices have long been recognized as a form of manufac- 10 376$ $CH4 10 -24-03 09:37:29 PS 58 FRANCHISING AS A GROWTH. Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, and Washington. 10 376$ $CH5 10 -24-03 09:37:22 PS 61 FEDERAL AND STATE REGULATION OF FRANCHISING Other states that regulate. upon: 1. Ability to produce the products or services in accordance with the fran- chisor’s standards and specifications for quality and uniformity 2. Production and delivery capabilities and ability