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There are several cases that have been instrumental in the growth and development of franchise law as we now know it.

State Oil Co. v. Khan (1997)

This case overruled the decision reached in Albrecht v. Herald Co. (1968), which held that vertical maximum price restraints—an arrangement where competitors along the same supply chain agree to fix the price of goods/services—were classified as illegal. Until 1997, this was the standard upon which courts agreed.

However, with State Oil Co. v. Khan, the Supreme Court ruled that vertical maximum price restraints would no longer classify as illegal. According to Justice Sandra Day O’Connor, there was no evidence to suggest that these restrictions actually hurt consumers. Instead, maximum vertical price fixing would be scrutinized under the more lenient Rule of Reason, wherein judges consider various factors and justifications for the price fixing.

The main purpose behind the Sherman Antitrust Act is to guard competition between competing brands, ultimately benefiting consumers. Max resale prices, the court reasoned, were not likely to harm consumers or competition. The lenient Rule of Reason used in the State Oil case is how courts address price fixing today in our current world of franchise law.

Atlanta Bread Co. International, Inc. v. Lupton-Smith (2009)

In the state of Georgia, contracts that restrain trade are considered void, as they are contrary to the state’s public policy. The contracts at issue in this case were a non-compete franchise agreement between Atlanta Bread Co. International, Inc and Lupton Smith. After Lupton-Smith began operating a coffee shop in Atlanta, the franchisor and appellant, Atlanta Bread Co. International, sent a notice to appellees, believing them to be in violation of their contracts. Soon after, Lupton-Smith sued for wrongful termination of the franchise agreements.

After this case was brought to court, the Georgia Supreme Court rejected that a franchise relationship should be regarded any differently than a standard employment agreement. The court also held that in-term covenants would be treated with the same strict scrutiny as applied to post-term covenants. These concepts are relevant for franchisors and franchisees to consider in the building of any agreements or contracts, as this standard is still upheld today.

Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. (2010)

This case begins with AnimalFeeds seeking arbitration on behalf of a class of purchasers of parcel tanker transportation services. The parties selected an arbitration panel to decide whether the arbitration clause permits class arbitration. Although the panel agreed that the clause supported class arbitration, the District Court voided the decision, concluding that the arbitrators had disregarded the law.

Once the case reached the Supreme Court level, the judges held that the imposed class arbitration violated the Federal Arbitration Act. The court believed that the panel had exceeded its powers in its failure to apply a rule of either the FAA or New York law. Furthermore, the court concluded that a party cannot submit to class arbitration unless the group agreed to do so within some form of formal contract. In other words, an agreement to arbitrate does not imply an authorization of class action arbitration.

This case is important for current franchisors to consider while crafting arbitration contracts. As is established in Stolt-Nielsen, class arbitration must be explicitly agreed upon within a formal contract.



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