D.

Refusals to deal Australia The Trade Practices Act does not specifically proscribe refusals to deal, recognising that franchisors are generally free to choose the franchisees with whom they wish to do business. Refusals to deal may, depending on the facts, constitute a contravention of several provisions of the Act. A refusal to deal by a corporation with a substantial degree of market power may constitute a contravention of section 46 (misuse of market power). Similarly, a refusal to deal may be evidence of an exclusive practice. Collective refusals to deal between competitors (be they franchisees or franchisors) constitute, for the purposes of section 45 (contracts, arrangements and understandings), exclusionary provisions (or primary boycotts) as defined by section 4D. Such boycotts are not subject to a competition test, but may be authorised by the TPC on public benefit grounds.

Canada Refusal to deal is governed by Section 75 of the Competition Act, which is applicable in the following circumstances: i) a person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market on usual trade terms; ii) the person referred to in paragraph (i) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market; iii) the person referred to in paragraph (i) is willing and able to meet the usual trade terms of the supplier or suppliers of the product; iv) the product is in ample supply. The Tribunal may therefore order that one or more suppliers of the product in the market accept the person as a customer within a specified time on usual trade terms unless, within the specified time, any customs duties on the article are removed, reduced or remitted and the effect (of so doing) is to place the person on an equal footing with other persons who are able to obtain adequate supplies of the article in Canada. Sub-section 75(2) establishes a distinction important in the application of the Section to franchise operations: it states that an article is not a separate product in a market only because it is differentiated from other articles in its class by a trade mark, proprietary name or the like. To be differentiated, an article must have such a dominant position in that market as to substantially affect the ability of the franchisee to carry on business in that class of articles, if he does not have access to that article. In the case of a franchise relationship, it is therefore important to establish whether the market dominance of the product bearing the franchisors trade mark is such that the franchisees ability to carry on business in that class of article might be significantly affected unless he has access to it. In case of doubt the Tribunal could not find competition to be insufficient solely on the grounds that the franchisor supplies the article bearing his trade mark. The application of section 75 of the Competition Act to the practice of refusal to deal was considered by the Competition Tribunal in the 1989 Chrysler Auto Parts case. The actions that formed the basis for this case included refusals by Chrysler to supply a Canadian exporter, Brunet, with brand-name Chrysler parts for export to overseas markets. Brunet previously had been able to obtain parts for export from Chrysler Canada on terms similar to those for authorised Canadian distributors of these products. In this case, the Tribunal issued a remedial order requiring Chrysler to recommence

supplying parts to Brunet. This decision was based on the impact of the refusal to supply on Brunets business and the nature of his previous relationship with Chrysler. In its decision, the Tribunal indicated that it is not compelled under section 75 to order the supply of products in every case where the elements of the section are met. Rather, the Tribunal stated that it might refuse to issue an order to supply in such cases if there are legitimate economic and business interests to protect. This decision is presently under appeal. Section 81 of the Competition Act on delivered pricing may be applied to franchise dealership; it refers to the practice of refusing a customer, or someone seeking to become one, delivery of an article at any place where the supplier engages in a practice of making delivery to other customers on the same trade terms that would be available to that customer if his place of business were located there. The Act stipulates that when the Competition Tribunal finds that delivered pricing is engaged in by a major supplier of an article in a market or is widespread in a market, with the result that a customer is denied an advantage that would otherwise be available to him, it may make an order prohibiting such practice and requiring the supplier to supply a customer in a locality where he is already delivering to other customers. In two cases, however, the Tribunal may not issue an order; these exceptions are of particular relevance to franchise operations: first, when the Tribunal finds that the supplier could not accommodate any additional customers at a locality without making significant capital investment there; and second, when the supplier refuses to supply a product to a customer that the latter sells in association with the suppliers trade mark or in respect of which he is a registered user, and when, furthermore, the Tribunal feels this practice to be necessary to maintain the quality standard of the product in question.

France Under Article 36 of the 1986 Ordinance, a supplier refusing to sell is liable for damages caused, provided that the requests are in no way abnormal and are made in good faith and are not justified by the provisions of Article 10 (which provides for exemptions on conditions similar to those in Article 85(3) of the Treaty of Rome) 308. Refusal may be considered unlawful if it results from a cartel or is a sign of a position of dominance or abuse of economic dependence. Refusal of a franchisor to satisfy demands from nonfranchisees appears to be inherent in franchising, and so may be justifiable and qualify for an exemption under Article 10. The Competition Council has not yet handed down any decisions with respect to franchises. However, reference may be made to the analyses it has made of other vertical contracts. The Council has in its possession a considerable body of case law pertaining to refusals to deal in the context of market relations, inter alia the decisions relating to the distribution of hi-fi and video equipment309. Refusals to deal may also be involved in the initial selection of distributors. In the sports shoes case, the Council enjoined a number of manufacturers to change their criteria for selecting dealers for their network, so that these would be based on only objective and qualitative considerations310. Termination or non-renewal of a franchise agreement also could raise issues of a refusal to deal. The Competition Council has issued no jurisprudence on the right to renew a franchise. The 1986 Ordinance on abuse of a situation of economic dependence provided

a means for controlling abusive conduct by franchisors vis--vis their franchisees when the latter are in a situation of economic dependence. A franchisee, who does not have an equivalent solution (Article 8.2) and who might therefore be impelled on expiry of his contract to apply to have it renewed on the grounds that he had no equivalent substitute solution, could find himself in this situation311. It is too early to judge whether Article 8.2 could be used to establish certain rights with respect to the renewal of franchise contracts. The approach taken could be along the lines adopted in a case concerning selective distribution, Kenner Parker Tonka (1989)312. The Competition Council considered that some distributors previously admitted to the network could be excluded from it without competition being thereby restricted. The Council recognised that a supplier may, in order to improve the distribution of his product, decide to alter the structure of his network by introducing selection criteria, without his previous dealers benefiting from any acquired rights with respect to their status quo. The Council did, however, ascertain that the new network set up preserved intrabrand competition313. For civil courts, the franchisee has a hybrid status. Labour law applies in his relations with the franchisor and business law in his conflicts with third parties 314. Termination of contract has the effect of depriving the franchisee of his customers who abandon his point of sale for the new franchisees store. The courts generally take the franchisees high degree of dependence on his franchisor into account and the fact that he is not well placed to renegotiate a new contract315.

Japan Under Notification No. 15, refusals to deal may be dealt with in two different ways. A concerted refusal to deal is defined under Article 1 of the Notification as a concerted action between two entrepreneurs: (i) aiming to refuse to deal with a third party or to restrict the quantity or substance of a product to be delivered to him; (ii) causing another entrepreneur to take action which comes under (i). Without proper justification, concerted refusals to deal are likely to be declared unlawful. In addition, a concerted refusal to deal shall be deemed an unreasonable restraint of trade that is prohibited under Article 3 of the Antimonopoly Act if the conduct results in a substantial restraint of competition in a market. Other refusals to deal are also covered by Article 2. They are more unlikely to be declared unlawful. It will depend on their reasonableness. They will be generally declared unlawful if they coexist with another violation of the Antimonopoly Act such as resale price maintenance. They may also be prohibited when they are operated by entrepreneurs having a dominant position on the market. United States Issues of a refusal to deal generally arise when a manufacturer, here a franchisor, refuses to enter into a relationship with a distributor or franchisee in the first instance, or where the franchisor either terminates an existing distributor/ franchisee or intervenes in the sale or assignment of a franchise 318. Sections 1 and 2 of the Sherman Act may be applicable to refusals to deal. Terminations of vertical relationships also are subject to the provisions in federal statutes (specifically the Petroleum Marketing Practices Act and the Automobile Dealers Day in Court Act) and in state laws discussed in the previous chapter.

Section 1 of the Sherman Act may be violated where : 1) the refusal to deal is pursuant to a horizontal agreement either between suppliers, or between dealers who induce the supplier to terminate another dealer; or 2) the refusal to deal is used by the supplier to enforce another illegal, vertical restraint. In the latter case, refusals to deal are subject to the same standard as the underlying restriction to be enforced; i.e. vertical refusals to deal to enforce resale price maintenance have been found per se illegal (as in Monsanto) while those used to enforce, for example, territorial restrictions are judged under the rule of reason (as established in GTE Sylvania). Section 2 of the Sherman Act may be violated where the suppliers refusal to deal is in furtherance of an attempt to obtain or maintain monopoly power; e.g. Lorain Journal Co. v. United States, 342 U.S. 143 (1951)319. Franchise agreements have benefited from the traditional concept of freedom of choice that has prevailed since the United States v. Colgate Co., 250 U.S. 300 (1919). This decision established the doctrine that a seller (here a franchisor) may, in the absence of any intent to create or maintain a monopoly, unilaterally select the person (or persons) with whom he chooses to deal. In various decisions over the years, the courts have acknowledged that the franchisor has a legitimate interest in ensuring that his franchise is in the hands of competent persons able to maintain the quality of the goods and services that are the subject of the franchise. They have generally admitted a franchisors refusal to consent to a primary sale or assignment of the franchise and his desire to terminate or not renew a franchise agreement when such action is the result of a unilateral decision and constitutes a reasonable step to preserve his legitimate interests in the franchise system. In Seligson v. Plum Tree, Inc., 362 F Supp 748, 753 (ED PA 1973), a gift store franchisor, Plum Tree, was sued by the Seligson family, who claimed to represent Plum Trees franchisees. It was alleged, inter alia, that under the franchise agreement, franchise rights were not assignable without Plum Trees written prior consent. The Court settled this matter, stating: There is certainly nothing unreasonable in requiring the consent of the franchisor to the assignment of the franchise. A franchisor has a perfect right to consider the character, stability, reputation, business ability, etc. of those to whom it will entrust its own good name, its mark and its products. We see nothing invidious in a franchisor taking precautions against the indiscriminate use of its own reputation and the intrusion of perhaps unsavoury strangers. The Courts also have accepted that franchisors may block a proposed assignment of the franchise to competent managers when the refusal is for legitimate, procompetitive reasons. In Kestenbaum v. Falstaff Brewing Corp., 575 F2d 574 (5th Cir 1978), cert. denied, 440 U.S. 909 (1979), a beer distributor, Kestenbaum, sued his supplier, the Falstaff brewery, to which he had been bound since 1967 (although they had dealt with each other before that date) by a franchise agreement renewable yearly. Among the issues was the legality of a clause requiring the franchisee to obtain the franchisors approval of the assignees sales management and financial ability to perform as a Falstaff distributor. Kestenbaum, after running into business problems, had found a buyer for two franchises he held. While not calling into question the buyers management ability or his financial soundness, the franchisor refused to agree to the proposed assignment. Falstaff preferred that the franchises be assigned to existing distributors and suggested that Kestenbaum should receive only $25 000 for the sale. The franchisee pointed out that his franchisors requirements (in particular, the prior consent requirement) affected the goodwill value of his business. The Fifth Circuit overruled the decision of the district court, which had found that this restraint was unlawful per se, and found that the rule of reason should apply. It

accepted the justification given by the franchisor for refusing assignment to the candidate proposed by Kestenbaum, namely that the territory was too small and that it was preferable to add it to that of one of his franchisees already operating in the vicinity. The Circuit concluded that that is a good business reason, and evidences a procompetitive intent which is probative of a lack of anticompetitive effect. Kestenbaum was required to produce further proof of his allegations regarding the coercion he had been subjected to, the impact this had had on the value of his business, and the unlawful restrictions imposed on the buyers. Kestenbaum having failed to satisfy the Court on these counts, the Court found that it was not unreasonable for the franchisor to exercise power of approval. Similarly the courts recognised the validity of the position of a franchisor which refused to assign a franchise to one of its franchisees whose performance was considered to be wanting; in Hamro v. Shell Oil Co., 674 F2d 784 (9th Circuit 1982), the Ninth Circuit confirmed the district courts judgment that Shell had not employed wrongful means and that it had acted not to punish Hamro or force it to purchase larger quantities of tyres, batteries and automotive accessories but simply to protect its own interests. In contrast, the courts have found that various forms of refusal to deal, in particular terminations and non-renewals, do constitute offences when they impede competition and when the link between the allegedly unlawful non-renewal and the complaints is proven, i.e. when the existence of a combination or conspiracy in violation of the Sherman Act can be demonstrated320. In American Motor Inns Inc. v. Holiday Inns, 521 F2d 1230 (3rd Cir 1975), Holiday Inns had refused an application by one of its main franchisees, American Motor Inns, to open a new hotel near Newark airport. The franchisor had sent a letter beforehand to franchisees already operating in the vicinity to apprise them of the application; some of them, who themselves were interested in expansion, objected. Holiday Inns Franchises Committee was unable in these circumstances to grant the franchise to American Motor 321. The Third Circuit held that in allowing its existing franchisees to decide whether a potential competitor could be authorised to enter the market in question (i.e. the airport zone), Holiday Inn had allowed them to carve up the market among themselves thus precluding further intrabrand competition. Such conduct constitutes a horizontal market allocation that is a violation of the Sherman Act. The Supreme Court recently applied a similar analysis in Palmer v. BRG of Georgia, Inc., 111 S. Ct. 401 (1990). The requirement since the Colgate case to show conspiracy remains a delicate issue. This is particularly true in franchise relationships. Franchisor and the franchisee are ipso facto in constant contact, and the franchisees are tied to each other by their common trading identity and by all the formal and informal contacts they establish among themselves, often with the active encouragement of the franchisor 322. The related Supreme Court rulings, first in Monsanto Co. v. Spray Rite Serv. Corp., 465 US 752 (1984) and then in Business Electronics Corp. v. Sharp Electronics Corp., 108 S.Ct. 1515 (1988), illustrate the complex and controversial nature of the issues. These cases involved allegations that the desire to maintain minimum prices lay behind refusals to renew a dealership (in Monsanto) or termination of a dealership (Sharp). The Monsanto and Sharp cases are discussed above in the section on resale price maintenance. In Arnold Pontiac-GMC, Inc. v. Bud Baer, Inc., 282 F.2d 1335 (3rd Cir. 1987), the Court followed Monsanto in determining the evidence necessary to find a Section 1 violation. Arnold Pontiac, an automobile dealer with Buick and GMC trunk franchises, alleged that four Buick dealers had conspired together and with GMC to prevent it from receiving a Buick franchise. The Court ruled that Arnold Pontiac had produced the type of

evidence required by Monsanto a written memorandum by a GMC representative to a Buick zone manager to show the existence of a combination among Buick dealer defendants. Furthermore, the Court stressed there was a plausible motive for such a combination the elimination of one competitor in a limited market and combined action of the dealers in the area was rational since it would be more effective than complaints by an individual dealer. The 3rd Circuit reversed the district courts grant of summary judgement to defendants on Arnold Pontiacs Section 1 Sherman Act claim against them.

European Community As a general matter, the franchisor is free to choose his franchisees and to deal only with them. No specific rules govern the choice of franchisees. The Commission, in granting an individual exemption for the Pronuptia agreement, observed: In effect, the characteristics of such a (franchise) system are such that the franchisor grants to the franchisee the exclusive right to use his brand marks and his commercial know-how in a defined territory, and that the franchisor is free to choose his franchisees. The exclusion of any other dealer from the territory allotted to the franchisee is therefore a consequence which is inherent in the very system of franchising.323 Other decisions of the Commission, and of the Court, also have allowed franchisors to choose franchisees and to limit the number of franchisees324. Article 2(a) of Regulation 4087/88 permits the franchisor to agree with a franchisee that within a contract service area it will not grant rights to exploit the franchise to third parties, will not itself market the goods or services, and will not supply its goods to third parties. Article 3-2(j) authorises provisions that require the franchisors consent to an assignment of the rights and obligations under the franchise agreement. If, however, the selection of franchisees were used to enforce a concerted practice by franchisees involving pricing, the benefits of the block exemption regulation could be withdrawn by the Commission under the terms of Article 8. The choice of dealers, and hence refusals to deal, are treated quite differently in selective distribution systems. As noted in Chapter III, the guidelines for selective distribution require that distributors be chosen on the basis of objective qualitative criteria, applied without discrimination. Quantitative limitations of dealers who meet the qualitative criteria are not acceptable. In addition, the Commission has made clear that otherwise qualified dealers must not be excluded to maintain high prices.325