Distribution, Competition, and Antitrust / IP Law

Don’t Get Tied in a Knot

Franchisors always need to be a bit careful when imposing upon franchisees a requirement to buy products from them. On March 11, in Shamrock Marketing, Inc. v. Bridgestone Bandag, LLC (W.D. Ky. No. 3:10-cv-00074-H), a federal district court refused to dismiss tying claims brought by a competing product supplier against a franchisor. (A “tie” typically exists when a supplier requires someone to purchase product B if she wants product A. Product A is the tying product, and Product B is the tied product.) Bandag, a franchisor with about 300 tire dealerships, did not impose an express tie, but instead allegedly provides strong incentives to purchase certain products from Bandag. Under this program, franchisees receive a credit good towards the purchase of certain products (“curing envelopes”) (the tied product) for every pound of rubber purchased from Bandag (the tying product). All franchisees are required to participate in the incentive program. This program allegedly totally or nearly totally offsets the price for Bandag curing envelopes. Allegedly as a result, the plaintiff saw a 90% decrease in sales of curing envelopes to Bandag franchisees.

The case illustrates a few principles. First, franchisors can be sued by third-party suppliers (as if worrying about franchisees is not enough). Second, a tying claim can be based on something other than a categorical requirement to buy two products together; a tying arrangement can be found where a deal induces all rational buyers of the tying product to accept the tied product (though the court noted the difficulties of actually proving and prevailing on such a claim). And third, franchisors may have to impose less burdensome restrictions to ensure quality. Although Bandag did not expressly assert a quality defense, the court found that it could have defended quality through a less burdensome alternative to tying, i.e., quality specifications.

On the plus side for franchisors, the court refused to allow the plaintiff to proceed on allegations that the relevant market consisted of Bandag rubber (which would, of course, have raised Bandag’s market share considerably – tying is usually not actionable unless the defendant has sufficient economic power in the tying product market). There was no change in policy following the “lock in” of franchisees, because Bandag always had a contractual right to impose its requirements. A policy change is a prerequisite, in the court’s view, to a restricted market definition. However, because Bandag allegedly has a 50% share of the overall market, and the remaining 50% is fragmented, the court found there were sufficient allegations that Bandag has enough market power to commit actionable tying.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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