Can Franchisors Control Franchise Prices?

Franchising is yet another way of business where a brand promotes and sells its products or services through a group of franchisees. The factors which differentiate this business model from others are the control and assistance of all the members of the organization. The uniformity and consistency across all franchises are the outcomes of various agreements, protocols, and standards which the franchisor imposes on the franchisees. This is done to ensure the customers have the same experience with the brand from outlet to outlet.  But can the franchisor control prices at which franchisees sell the products? The answer is yes. The franchisor can decide the prices of its products. However, there are certain limitations to this power. Let us see the different duties and powers of a franchisor to understand this better.

Can all the franchisors control prices in the franchise?

In this franchising business, a franchisor can control the activities which are necessary to safeguard the brand image, goodwill, trademarks, and quality of the products or services. In recent times the courts have been trying to impose liability on the franchisor for the actions as well as the omissions of the franchisees. The likelihood of imposing liability on the franchisor will depend on the degree of control asserted on the franchisees. Higher the control, the higher the likelihood of liability.

The franchisors have certain limits when it comes to controlling the price at which their franchisees sell the products. There are many circumstances associated with this and the franchisees are also required to proceed in a definite manner.

Antitrust considerations

Trust issues

The US antitrust laws, also known as the Competition laws were a major concern for the franchisors who wanted to take complete control over the franchisee pricing. The franchisors who want to set a minimum price limit at which a franchisee sells the products may still face problems under this law. However, if the franchisor is planning to let an upper limit to the price the franchisee charges for the products, that can be a harmless move and the antitrust law doesn’t apply to such franchisors.

Back in 1997, the franchisor and franchisee agreeing on a minimum or maximum limit on the price at which the franchisee is selling were considered illegal per se. The term illegal per se implies illegal without showing any harm to competition. The Supreme Court later ruled that setting a maximum limit to the price will not be considered illegal considering all the circumstances under which the decision has been made. In case of unreasonable constraints on competition, the restrictive practice of the franchisor can be prohibited by the law.

In 2007, the court ruled that setting a minimum limit on the price will also not be considered illegal per se. But the judgment under the rule of reason will prevail. However, as a franchisor trying to set a minimum sale price for the franchisees can be a risky move. Many state laws still consider this as illegal and one might land up in trouble if the state enforces action against this action.

In the last few years, the applicability of antitrust laws on the franchise business has been significantly limited by the courts. Complaints from franchisees against price-fixing, exclusive requirements of dealing, and tying have fallen as the courts prevent such claims from being successful when it comes to the franchise business.

Can the franchisor impose a minimum resale price?

Under the federal antitrust law, franchisors are allowed to decide the minimum resale prices or MRP. It can be prohibited only if it affects the inter-brand competition. A rule of reason test will be done to check if the restriction is a justified one or not.

Even though the federal laws allow MRP setting on basis of “rule of reason”, there are state laws that consider this as illegal per se and one can be charged with the offense in case he/she tries to impose control on the MRP at which the franchisee is selling the products or services.

Hence, there is no guarantee that MRP fixing will be allowed. The franchisors should, therefore, seek some competent counsel if they want to impose MRP on the franchisees. This is required when the franchisees are located in states where MRP fixing is prohibited. It is always better to set an MRP that is franchise-driven and doesn’t harm the competition.

Liabilities that can be imposed on a franchisor

Considering the franchise agreement and the actions of the franchisor, the court can impose three possible liabilities on the franchisor:

  • Vicarious liability

This is a legal claim in which the franchisor is imposed with liability for the actions of the franchisee.

  • Co-employer relationship liability

This is a legal claim asserted by employees working under the franchisee but controlled by the franchisor. This is seen in cases when the franchisee and the franchisor have joint liability.

  • Franchisor acts as an actual business

In this case, the franchisor takes complete control of the franchise which is under a franchisee. In this case, a court looks if the franchisee believes that the franchisor has total control of his franchise.

There are many other liabilities that can be imposed on the franchisor for exceeding the limits of his control. To avoid any of these liabilities, the franchisors are required to make careful considerations. For maintaining consistency and uniformity across all franchises a certain level of control is mandatory. However, this power can also turn into a litigated issue. Seeking help from a franchise attorney while exerting control can be a safe decision on the franchisor’s part.

Pricing policies used by franchisors

There are certain policies that a franchisor can opt for in an attempt to control the prices. Some of these policies are:

  • Suggested retail pricing

Under this policy, the franchisors are allowed to suggest retail prices at which the franchisees should sell their products or services. However, these prices cannot be enforced on the franchisees and the franchisees need not comply with the pricing that has been suggested.

  • Unilateral pricing

When a franchisor refuses to sell products to a franchisee who is not willing to resell the products at a rate above the minimum MRP set by the franchisor, it can be considered as a unilateral refusal to deal. This is illegal.

  • Minimum advertised price

This is an attempt made by the franchisor to provide marketing materials to franchisees upon compliance with the suggested pricing scheme. As a franchisee, you should know that this system has limitations and you can take legal action if the franchisor exceeds them.

How franchisors can get into trouble for price-fixing?

Trouble for price fixing

The fundamental to a successful franchise operation of all franchises in a uniform manner. The reputation of the brand depends on customer satisfaction from all franchises. So, there is no reason why there should be no consistency in the prices across all franchises. The brand wants all customers to get their products at the same value no matter which state they belong to. The price point is often considered as an identifier of the brand. It’s easy to understand why the franchisor wants to control the pricing at each franchise.

Suggesting an upper limit at which the franchisees can sell is a way to safeguard the brand name without breaking any law. But trying to enforce the suggestion on the franchisee is not a good idea.

Many franchisors try to do price-fixing in indirect ways to escape litigations under the Competition Laws. Many smaller brands try price-fixing as they feel they are too small to impact the market. They try and avoid the reach of Competition law. But there is no escaping the law and even small brands can land up in trouble for such acts.

The franchisor is allowed to make recommendations only and the ultimate decision will always lie in the hands of the franchisee.

Pricing differences in same brand stores

Many people ask the reason behind different prices across different outlets of the same brand, for example, Subway. Subway is a popular franchise organization that gives freedom to the franchisees to decide the prices at which they sell the products. The customer base, costs of renting, wages, utilities differ from one location to another. If the brand fixes a price for all the franchisees it will be unfair to them. The aim of each of these franchisees is to maximize their profits and ensure customer satisfaction. Hence, the franchisees should be free to decide the prices at which profit can be maximized.

This is seen in most popular franchise organizations like Pizza Hut, Baskin Robbins, Great Clips, Papa John’s Pizza, and many more.

Conclusion

The franchisor usually has control over most aspects of a franchise, but when it comes to pricing the franchisor’s control is limited. The franchisor needs to make careful decisions to avoid breaking any law. But the final say on the price always lies with the franchisee and the franchisor can only make recommendations.