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Franchising and the Robinson-Patman Act
Franchising and the Robinson-Patman Act are virtual strangers. R-P rarely applies to any franchise scenario.
R-P was enacted in 1936 as a regulator of price discrimination, an attempt to lessen the impact of large chain store buying power that enabled predatory pricing that was driving mom and pop stores out of business.
Its thrust is to require that competing resellers be able to purchase at non discriminatory prices. Where chain store purchasing was being allowed to cumulate purchases for many stores to obtain large quantity discounts, something mom and pop operations were incapable of, the impact was obvious. R-P deals with price per quantity in one delivery, not cumulative quantity discounting.
In addition to straight price discrimination, it was recognized that other aspects of “price” included allowances and services in aid of store promotions and that adverts could be used instead of just the purchase price to achieve pernicious ends. Hence R-P has provisions that impose standards on advert and promo allowances and services to attempt to level the playing field somewhat. How these work and the games that can be played with how they work/don’t work would fill a book, and this article isn’t going there.
In franchising, these problems usually don’t exist. Where franchisees are required to buy from their franchisor or from designated vendors who may be paying the franchisor for monopoly rights to sell to its franchisees, it is unlikely that anyone is getting competition critical discounts. In fact, it is unlikely that franchisees are even getting access to the normal competition set pricing that non franchisee competitors enjoy. Hence, discrimination by a designated vendor amongst franchisees within a market area is not a noticeable issue.
On the other hand, the question of discriminatory pricing by vendors that give non franchised resellers a decided advantage over franchisee buyers never comes up either – with rare exception. For one thing, if the vendor has to pay the franchisor commissions on sales made to the franchisor’s franchisees that don’t have to be paid when selling the same products or services to independents, those payments are cost elements that can be taken into account to exonerate the differential pricing. To the extent that even then the price differences are not fully accounted for, the remaining differences are usually de minimis or the vendor has another defense to exonerate disparate pricing – that he has to sell to the others at lower prices in order to meet competition from his competitors. As a monopoly vendor to the franchisees, he has no competition to meet. The meeting competition defense is the most regularly available defense to pricing differential liability.
Most states do not have a state law equivalent of R-P. It is usually a federal issue to be brought before a federal court. R-P is differently interpreted amongst the federal circuits. In some federal courts R-P applies to transactions that have even minimal contacts with “interstate commerce”. The federal antitrust laws generally – and R-P is one of the antitrust laws - have jurisdiction regarding claims asserted that reaches as far as the commerce clause of the constitution will permit. An example of the reach into local business relations that is permitted under the commerce clause of the constitution may best be seen in the civil rights cases. The most famous of these is U.S vs Mc Clung. Mc Clung owned Ollie’s BBQ Restaurant in Birmingham, Alabama, and refused service to blacks. A civil rights action was brought and the defense was that Ollie’s bought only from intrastate vendors and did no business with any vendor from out of state – therefore no interstate commerce was involved and the act didn’t apply. But the court found that the ketchup on the tables in the restaurant was from a manufacturer in Pennsylvania, and that this was enough to permit the reach of a federal statute under the commerce clause of the constitution. The antitrust laws have the same reach – except R-P in some of the federal circuits. In some circuits, an actual physical interstate shipment must have been part of the discrimination transactions that are the subject of the particular lawsuit or there is no R-P claim.
Couple that little exercise with the fact that R-P law is so complicated and inconsistently applied from case to case that federal judges hate R-P cases and will do anything they can to dismiss them out of hand. All this falderal makes R-P litigation far more expensive than it’s worth in almost every instance.
Writer's Note: There are, exceptions to this, but those exceptions are so rare that they are not worth writing about. In the last five years, I have had only one R-P case (which won the day for my client). I had not prior to that had one in over 15 years, and I do not expect to have another R-P case for the next 15 years. But I would be thrilled to be pleasantly surprised.