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 franchisor’s trade mark is such that the franchisee’s 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

In the sports shoes case. a supplier refusing to sell is liable for damages caused. and when. The Competition Council has not yet handed down any decisions with respect to franchises. the Tribunal feels this practice to be necessary to maintain the quality standard of the product in question. 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. 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 1986 Ordinance on abuse of a situation of economic dependence provided . Refusal of a franchisor to satisfy demands from nonfranchisees appears to be inherent in franchising. This decision was based on the impact of the refusal to supply on Brunet’s business and the nature of his previous relationship with Chrysler. with the result that a customer is denied an advantage that would otherwise be available to him. The Council has in its possession a considerable body of case law pertaining to refusals to deal in the context of market relations.supplying parts to Brunet. when the supplier refuses to supply a product to a customer that the latter sells in association with the supplier’s trade mark or in respect of which he is a registered user. 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. However. In its decision. reference may be made to the analyses it has made of other vertical contracts. inter alia the decisions relating to the distribution of hi-fi and video equipment309. 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. so that these would be based on only objective and qualitative considerations310. 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. 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. This decision is presently under appeal. or someone seeking to become one. and second. the Tribunal may not issue an order. furthermore. the Council enjoined a number of manufacturers to change their criteria for selecting dealers for their network. these exceptions are of particular relevance to franchise operations: first. The Competition Council has issued no jurisprudence on the right to renew a franchise. and so may be “justifiable” and qualify for an exemption under Article 10. when the Tribunal finds that the supplier could not accommodate any additional customers at a locality without making significant capital investment there. Rather. In two cases. it refers to the practice of refusing a customer. however. Termination or non-renewal of a franchise agreement also could raise issues of a refusal to deal. Section 81 of the Competition Act on delivered pricing may be applied to franchise dealership. 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. France Under Article 36 of the 1986 Ordinance. Refusals to deal may also be involved in the initial selection of distributors.

They are more unlikely to be declared unlawful.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. It will depend on their reasonableness. The Council did. Sections 1 and 2 of the Sherman Act may be applicable to refusals to deal. refusals to deal may be dealt with in two different ways. could find himself in this situation311.2 could be used to establish certain rights with respect to the renewal of franchise contracts. A franchisee. 15. 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. The Competition Council considered that some distributors previously admitted to the network could be excluded from it without competition being thereby restricted. (ii) causing another entrepreneur to take action which comes under (i). .a means for controlling abusive conduct by franchisors vis-à-vis their franchisees when the latter are in a situation of economic dependence. They may also be prohibited when they are operated by entrepreneurs having a dominant position on the market. in order to improve the distribution of his product. 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. ascertain that the new network set up preserved intrabrand competition313. concerted refusals to deal are likely to be declared unlawful. It is too early to judge whether Article 8. refuses to enter into a relationship with a distributor or franchisee in the first instance. The approach taken could be along the lines adopted in a case concerning selective distribution. Labour law applies in his relations with the franchisor and business law in his conflicts with third parties 314. or where the franchisor either terminates an existing distributor/ franchisee or intervenes in the sale or assignment of a franchise 318. “who does not have an equivalent solution” (Article 8. United States Issues of a refusal to deal generally arise when a manufacturer. Japan Under Notification No. The courts generally take the franchisee’s high degree of dependence on his franchisor into account and the fact that he is not well placed to renegotiate a new contract315. Other refusals to deal are also covered by Article 2. decide to alter the structure of his network by introducing selection criteria. They will be generally declared unlawful if they coexist with another violation of the Antimonopoly Act such as resale price maintenance. The Council recognised that a supplier may. Kenner Parker Tonka (1989)312. however. In addition. without his previous dealers benefiting from any acquired rights with respect to their status quo. the franchisee has a hybrid status. 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. Without proper justification. Termination of contract has the effect of depriving the franchisee of his customers who abandon his point of sale for the new franchisee’s store. here a franchisor. For civil courts.

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

Ct. In American Motor Inns Inc. often with the active encouragement of the franchisor 322. Holiday Inns had refused an application by one of its main franchisees. The Court ruled that Arnold Pontiac had produced the type of . The Circuit concluded that “that is a good business reason. This is particularly true in franchise relationships.e. 1515 (1988). v. Franchisor and the franchisee are ipso facto in constant contact. The requirement since the Colgate case to show conspiracy remains a delicate issue. the Court found that it was not unreasonable for the franchisor to exercise power of approval.. v. Arnold Pontiac. i. American Motor Inns. 111 S.. the Court followed Monsanto in determining the evidence necessary to find a Section 1 violation. BRG of Georgia. when the existence of a combination or conspiracy in violation of the Sherman Act can be demonstrated320. batteries and automotive accessories but simply to protect its own interests. 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. 521 F2d 1230 (3rd Cir 1975).e. objected.” 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. 282 F. In contrast. The Monsanto and Sharp cases are discussed above in the section on resale price maintenance. 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 related Supreme Court rulings. alleged that four Buick dealers had conspired together and with GMC to prevent it from receiving a Buick franchise. illustrate the complex and controversial nature of the issues. Holiday Inn had allowed them to carve up the market among themselves “thus precluding further intrabrand competition. v. and the unlawful restrictions imposed on the buyers. The franchisor had sent a letter beforehand to franchisees already operating in the vicinity to apprise them of the application. in particular terminations and non-renewals. in Hamro v. 1987). The Supreme Court recently applied a similar analysis in Palmer v. Shell Oil Co. Holiday Inns. 108 S. Inc. who themselves were interested in expansion. do constitute offences when they impede competition and when the link between the allegedly unlawful non-renewal and the complaints is proven. Such conduct constitutes a horizontal market allocation that is a violation of the Sherman Act”. 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. Sharp Electronics Corp.Ct.. Kestenbaum having failed to satisfy the Court on these counts. 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. the airport zone). In Arnold Pontiac-GMC. 465 US 752 (1984) and then in Business Electronics Corp.. the courts have found that various forms of refusal to deal. 401 (1990). Spray Rite Serv.2d 1335 (3rd Cir. some of them. v. Holiday Inns Franchises Committee was unable in these circumstances to grant the franchise to American Motor 321. an automobile dealer with Buick and GMC trunk franchises. first in Monsanto Co. to open a new hotel near Newark airport. 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 Ninth Circuit confirmed the district court’s 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. and evidences a procompetitive intent which is probative of a lack of anticompetitive effect. Inc..accepted the justification given by the franchisor for refusing assignment to the candidate proposed by Kestenbaum. Corp. Bud Baer. 674 F2d 784 (9th Circuit 1982). Inc.

and of the Court. Article 3-2(j) authorises provisions that require the franchisor’s consent to an assignment of the rights and obligations under the franchise agreement. the selection of franchisees were used to enforce a concerted practice by franchisees involving pricing. In addition. The choice of dealers. 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. 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. 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 hence refusals to deal. The Commission.”323 Other decisions of the Commission. the Commission has made clear that otherwise qualified dealers must not be excluded to maintain high prices. are treated quite differently in selective distribution systems. will not itself market the goods or services. As noted in Chapter III.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. also have allowed franchisors to choose franchisees and to limit the number of franchisees324. The 3rd Circuit reversed the district court’s grant of summary judgement to defendants on Arnold Pontiac’s Section 1 Sherman Act claim against them. in granting an individual exemption for the Pronuptia agreement. applied without discrimination. the guidelines for selective distribution require that distributors be chosen on the basis of objective qualitative criteria. European Community As a general matter. the franchisor is free to choose his franchisees and to deal only with them. and will not supply its goods to third parties. If. the benefits of the block exemption regulation could be withdrawn by the Commission under the terms of Article 8. 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. however. Quantitative limitations of dealers who meet the qualitative criteria are not acceptable.325 . No specific rules govern the choice of franchisees. and that the franchisor is free to choose his franchisees. observed: “In effect.

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