- Email: [email protected]
Legal Blotter
LEGAL BLOTTER by Robert F. Steeves, director of APhA's legal division
permissible franchise restrictions One of our oldest economic traditions is the public demand for a mercantile system characterized by free and open competition. That demand is expressed in the strong mandate of the federal antitrust law which requires any limitation or restraint of trade to be measured by our standard of free competition. The antitrust law generally prohibits a variety of restrictive trade practices. Some restrictive trade practices are not prohibited, however, and these are justified as promoting desirable economic or competitive objectives. For example, a contract prohibiting the seller of a business from competing in the locality of his old business for a reasonable period of time after the sale is considered justifiable because it encourages the purchase and sale of businesses. Franchising, a restrictive marketing method familiar to most pharmacists, enables a supplier to limit his product to certain retailers, to limit the customers to whom the retailers can sell and to limit the geographical area which a wholesaler can serve. Such limitations may be desired for many reasons. A supplier may find it necessary to grant a dealer exclusive rights to a given area to persuade him to risk investment in a new product. On the other hand, the supplier of a well-
known product may want a convenient means for restricting distribution of his product to dealers who provide service adequate to assure continued consumer satisfaction. For some time, the legality of restrictions imposed by franchise agreements and their enforcement have been subject to question. Recently, the United States Supreme Court provided some answers in the case of United States v. Arnold, Schwinn & Co. Although this case involved bicycles, the legal principles established apply as well to other franchised products such as those marketed through community pharmacies. The Schwinn case presented the Court with three variations of franchising1. distribution by outright sale to franchised wholesalers for resale only to franchised dealers 2. distribution to franchised dealers through agency or consignment arrangements with wholesalers
3. "Schwinn Plan" distribution in which Schwinn shipped directly to franchised dealers, invoiced and extended credit to the dealer and paid a commission to the wholesaler taking the order.
The Court declared that "where the manufacturer parts with title, dominion, or risk," as in the first method, it
Forrest T. Patterson, a registered' pharmacist with practice in North Ca,r olina, Texas and Virginia, has joined APhA's legal division and will be responsible for assisting with general legal matters for the association. Patterson has a BS in pha1rmacy from the University of North Carolina and attended law school there, receiving his law degree in June, 1967. Prior to attending law school, Patterson served four years in the U.S. Army MSC, attaining the rank of first lieutenant. He has co-authored the a'rticle on franchise restrictions with Robert Steeves.
is per se unlawful for the manufacturer to limit the freedom of the dealer "as to where and to whom it will resell the products." But the second and third methods which do not involve an outright sale and in which the manufacturer "completely retains ownership and risk of loss," the Court declared justifiable by competitive circumstances. And here, even though Schwinn had been "firm and resolute" in its insistence "upon confining sales by franchised dealers to consumers," the Court considered the second and third methods justified by the circumstances existing in the bicycle market and, therefore, lawful under the federal antitrust law. In the Schwinn decision, the Court noted its concern for the problem of small business striving to "meet the competition of giants" and included among the factors critical to the result the availability of other brands of bicycles to nop-franchised dealers and franchised dealers' handling of other brands of bicycles as well as Schwinn's. The Court did not approve the mere presence of strong competition as sufficient justification for restrictive distribution arrangements and this factor will vary from case to case. But the Court did declare that a supplier may franchise retail dealers and confine retail sales to them-so long as the circumstances justify the restrictions and there is no outright sale of the product to the dealer. Consequently, suppliers who wish to confine sales of their product to particular dealers may attempt to cast their franchising agreements in the form of Schwinn's second or third method of distribution. In any event, as a result of Schwinn, a supplier may no longer make an outright sale of his product to a franchised dealer and at the same time impose restrictions as to where and to whom the dealer may resell the product. Vol. NS7, No. 12, December 1967
639
permissible franchise restrictions One of our oldest economic traditions is the public demand for a mercantile system characterized by free and open competition. That demand is expressed in the strong mandate of the federal antitrust law which requires any limitation or restraint of trade to be measured by our standard of free competition. The antitrust law generally prohibits a variety of restrictive trade practices. Some restrictive trade practices are not prohibited, however, and these are justified as promoting desirable economic or competitive objectives. For example, a contract prohibiting the seller of a business from competing in the locality of his old business for a reasonable period of time after the sale is considered justifiable because it encourages the purchase and sale of businesses. Franchising, a restrictive marketing method familiar to most pharmacists, enables a supplier to limit his product to certain retailers, to limit the customers to whom the retailers can sell and to limit the geographical area which a wholesaler can serve. Such limitations may be desired for many reasons. A supplier may find it necessary to grant a dealer exclusive rights to a given area to persuade him to risk investment in a new product. On the other hand, the supplier of a well-
known product may want a convenient means for restricting distribution of his product to dealers who provide service adequate to assure continued consumer satisfaction. For some time, the legality of restrictions imposed by franchise agreements and their enforcement have been subject to question. Recently, the United States Supreme Court provided some answers in the case of United States v. Arnold, Schwinn & Co. Although this case involved bicycles, the legal principles established apply as well to other franchised products such as those marketed through community pharmacies. The Schwinn case presented the Court with three variations of franchising1. distribution by outright sale to franchised wholesalers for resale only to franchised dealers 2. distribution to franchised dealers through agency or consignment arrangements with wholesalers
3. "Schwinn Plan" distribution in which Schwinn shipped directly to franchised dealers, invoiced and extended credit to the dealer and paid a commission to the wholesaler taking the order.
The Court declared that "where the manufacturer parts with title, dominion, or risk," as in the first method, it
Forrest T. Patterson, a registered' pharmacist with practice in North Ca,r olina, Texas and Virginia, has joined APhA's legal division and will be responsible for assisting with general legal matters for the association. Patterson has a BS in pha1rmacy from the University of North Carolina and attended law school there, receiving his law degree in June, 1967. Prior to attending law school, Patterson served four years in the U.S. Army MSC, attaining the rank of first lieutenant. He has co-authored the a'rticle on franchise restrictions with Robert Steeves.
is per se unlawful for the manufacturer to limit the freedom of the dealer "as to where and to whom it will resell the products." But the second and third methods which do not involve an outright sale and in which the manufacturer "completely retains ownership and risk of loss," the Court declared justifiable by competitive circumstances. And here, even though Schwinn had been "firm and resolute" in its insistence "upon confining sales by franchised dealers to consumers," the Court considered the second and third methods justified by the circumstances existing in the bicycle market and, therefore, lawful under the federal antitrust law. In the Schwinn decision, the Court noted its concern for the problem of small business striving to "meet the competition of giants" and included among the factors critical to the result the availability of other brands of bicycles to nop-franchised dealers and franchised dealers' handling of other brands of bicycles as well as Schwinn's. The Court did not approve the mere presence of strong competition as sufficient justification for restrictive distribution arrangements and this factor will vary from case to case. But the Court did declare that a supplier may franchise retail dealers and confine retail sales to them-so long as the circumstances justify the restrictions and there is no outright sale of the product to the dealer. Consequently, suppliers who wish to confine sales of their product to particular dealers may attempt to cast their franchising agreements in the form of Schwinn's second or third method of distribution. In any event, as a result of Schwinn, a supplier may no longer make an outright sale of his product to a franchised dealer and at the same time impose restrictions as to where and to whom the dealer may resell the product. Vol. NS7, No. 12, December 1967
639