Franchise agreement

No. 72. Franchise agreement.

A distributor of electronic equipment requested the Commission to render an advisory opinion with respect to the legality of a proposed franchise agreement with its deaJers. A ScheduJe of Fair Trade Prices was to be attached to and made a part of the agreement and the dealer must agree that he wi1 not advertise offer for sale or se11 any products at less than the fair trade prices, nor make any refunds, discounts, allowances or concessions which wi11 have the effeet of decreasing those prices, nor offer any of the fair traded items in combination with other merchandise at a single, combination or joint price. The agreement further provided that this provision shouJd be applicabJe only in those states where agreements of this eharacter are lawful.

The Commission advised that in view of the McGuire Act amendment to Section 5 of the Federal Trade Commission Act it could see no obj ection to inclusion of the provision in the agreement. However, the Commission added, the responsibiJity rests squarely upon the se11er exacting such agreements from his dealers to see that they are not given effect outside those areas where permitted by state law, for them no exemption would exist to protect the agreements from established antitrust ruJes applying to resale price maintenance.

Even though the contract provides that this provision sha11 be applicable only in those states where such agreements are lawful , it would appeal' that to some extent the burden is pJaced upon the dealer to asccrtain whether 01' not the agreement is lawful in his own state before he can know whether or not he is obligated to honor it. If this has the effect of creating a situation whereby the Schedule is genera11y adhered to in states where fair trade is not legal , the presence of the provision in ,

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the franchise agreement could raise a serious inference of an unlawful resale price maintenance program in those states. The Commission further advised that such pitfalls can be avoided in the franchise agreements with dealers in Doniair trade states by specifically eliminating therefrom provisions relating to the maintenance of fair trade prices. If the distributor rlesires to circulate price schedules to dealers in nonfair trade states, it would be more appropriate to circulate them under the heading '4 Suggested Prices " rather than "Fair Trade Prices. In the alternative, the danger of involving dealers in i1ega! resale price maintenance could be avoided by expressly noting on the franchise agreement those states wherein the provisions relating to maintenance of fair trade prices cannot be given effect.

Additionally, the Commission noted the provision that the distributor wi1 establish, with the aid of the latest marketing information, a reasonable yearly sales volume obj ective of $and this vol ume wiIJ be a consideration in yearly franehise renewal. The Commission advised that it could see no objection to the establishment of such quotas so long as they are reasonable. However, the distributor was advised that much of the legality of any franchise system depends upon the manner in which the agreements are implemented and enforced , for if apparently reasonable reservations of rights by the distributor are in practice administered in an unreasonable manner, so as to unfairly encroach upon the freedom of the licensees, an agreement which is legal on its face can become illegal in effect. (File No. 663 7053, released July 20 1966.

Note. The CommissioIl rcyoked the Adyisory Opinion reported in this digest as of August 2, 1967. This action was based upon the belief that the Opinion was being abused by the party to whom it was issued , not becaLisP of any concern over accuracy of the advice contained therein.

:\o. 73. Rejection of description "golden" for nongold thimble. The Federal Trade Commission has rendered an advisory opinion objecting to both the description "golden " for a nongold thimble, and the accompanying explanatory phrase "electroplated with real gold" Since the thimble in question is not composed throughout of 24 karat gold, unqualified use of the word 'golden' would be improper " the FTC' s advisory opinion stated. Further advising that " the phrase electroplated with real gold ' would constitute neither adequate qualification of the word golden ' nor a proper representation standing alone " the Commission pointed out that the gold flashing on the thimbles is between three and seven mi1ionths of an inch thick and that a coating of gold of less than 7/1 000 000 of an ineh in thickness is too thin and insubstantial to warrant the description gold electroplate. '" (File No. 653 7004, released July 22 , 1966.