The Franchise Owner's most trusted news source


Log In / Register | Nov 27, 2014

Can Franchisors Restrict A Franchisee's Supply Sources?

When it comes to restricting franchisee supply sources in Indiana and Iowa, franchise agreements need to meet two criteria:

  1. The restriction must be reasonably necessary for a lawful purpose.
  2. It must be justified on business grounds.

There are a few exceptions. First, these laws don't apply to suppliers who meet a franchisor's standards. Also, the laws don't cover trademarked goods.

Indiana and Iowa passed these laws so franchisees aren't required to purchase goods or services from a franchisor or an affiliated supplier. Specifically, franchisors can't require franchisees to purchase anything that is (1) unnecessary to business operations and (2) not justified for the business.

Indiana franchise law and trademarked goods

Under the Indiana Franchise Act, franchise agreements can't require franchisees to purchase inventory or supplies exclusively from a franchisor or its sources. Again, trademarked goods and services are excluded.

In one case concerning a weight-loss program franchise, an Indiana court handed down a split decision. On one hand, the court found that the franchisee shouldn't be forced to purchase decor for its shop from the franchisor. However, the franchisee needed to keep purchasing the franchisor's trademarked nutritional supplements.

Indiana franchise law and advertising campaigns

Indiana also prohibits some franchise agreements that require franchisees to participate in advertising or promotional campaigns. This applies only to expenses that are (1) indeterminate, (2) set by a third party, or (3) calculated by a formula. The main exception is when an agreement specifies a maximum amount that a franchisee must pay.

In one case, an Indiana court found that the provision did not apply to an advertising pool that required franchisees to pay according to a formula. The ad pool itself was not a franchisor, so the act didn't apply.

Supply sources under Iowa franchise law

In Iowa, franchisors must let franchisees buy equipment, fixtures, supplies, and services from any source. Of course, sources must meet the franchisor's quality standards.

There is one exception. Franchisors can require franchisees to purchase reasonable quantities of inventory, goods, or services from the franchisor or its affiliate. However, purchases need to be central to the business. Also, they have to meet one of two requirements:

  1. The franchisor or its affiliate must manufacture or produce the goods or services.
  2. The goods or services must incorporate a franchisor- or affiliate-owned trade secret.

Supply source law in other states

It's important to point out that two other states—Hawaii and Washington—and the District of Columbia have similar laws that restrict franchisee supply sources.

In other states, it is important to consider your franchise agreement, which may contain provisions allowing the franchisee to obtain goods or services from approved third parties. There may be procedures under which you can apply to obtain approval of alternative suppliers. Many franchisee associations have successfully been able to do this.

Contact a franchise attorney

If you have any questions about franchise agreements that restrict your franchise's supply sources, be sure to contact a franchise attorney.

Your rating: None Average: 5 (1 vote)