It makes sense then that franchisors, with an established and hopefully profitable concept, want to dictate franchisees’ prices.  However, whether this is legal is more complicated than it might seem.

The first issue is simple: Does the franchise agreement grant or reserve the franchisor the right to control or set prices for goods and services?  If not, the analysis stops here.  Franchise Agreements must include the option and ability to set prices.

If the franchise agreement allows Franchisors to set prices, the analysis becomes more difficult because whether franchisors can set prices implicates state and federal antitrust laws.  Without delving too deeply into the weeds of antitrust rules and case law, the brief answer is that, under federal law, at least, franchisors setting or fixing prices may not violate the antitrust laws[1].  However, some states have expressed disagreement with the federal law that would allow “vertical” price control systems, further muddying the waters on whether it is permitted. 

Antitrust litigation has not directly addressed price fixing in the franchising context.  Therefore, there are still ways in which courts can deem price fixing illegal.  The penalties and fines for antitrust violations can be quite severe.  Therefore, consulting with legal counsel on the legality of setting prices is not just advisable, but critical.  This step can ensure the franchise operates within the bounds of the law and avoids potential issues with state attorneys general or the Federal Trade Commission. 

Despite these complexities, franchisors have other options to influence franchisee pricing that will not implicate or violate state or federal antitrust laws.  One such option is “Suggested Retail Pricing,” a widely used strategy that allows franchisors to suggest prices for franchisees to use without any strings attached.  This approach can provide a sense of control while avoiding potential legal pitfalls.

Franchisors might wonder how this works, given that franchisees can disregard suggested prices.  It might surprise you that McDonald’s, one of the most, if not the most popular franchise, takes this approach.  In the FAQ section of their website, McDonald’s has the following language:

Why don’t you list prices on the McDonald’s website?

 McDonald’s prices vary by location.  Ninety percent of McDonald’s restaurants are independently owned and operated by franchisees, who have the ability to set their own pricing.     

Suggested Retail Pricing works because the franchisor ideally has a working system.  If Franchisors can show that the best-performing franchisee locations (company-owned and franchised locations) use the suggested prices, the rest of the franchisees will be incentivized to follow.

A less common and sometimes deemed illegal option is to use a Minimum Advertised Price that conditions the franchisee’s receipt of certain benefits on using the franchisor’s published pricing.[2]  Aside from potentially being illegal, franchisees may not appreciate the coercive nature of this approach.

In summary, can Franchisors set the prices their franchisees must use?  Maybe, but other options are less risky.  If Franchisors use an option other than the Suggested Retail Price, seeking legal counsel can help minimize the chances of violating state or federal antitrust laws.

[1] Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 899 (2007).

[2] See Blind Doctor, 2004 WL 1976562, at *7 (advertising policy restricting certain price advertising subject to rule of reason and upheld); but see New York v. Herman Miller, Inc., NO. 08-CV-02977 (S.D.N.Y. Mar. 21, 2008) (coercive price setting deemed illegal under rule of reason analysis); Ill.  Corp. Travel v. Am.  Airlines, 889 F.2d 751, 752 (7th Cir. 1989) (dicta) (coercive price setting deemed a form of price fixing and deemed illegal per se).