Fisher & Zucker
FRANCHISE ALERT - November 1999 Newsletter Article

Required Purchases Provision Enforced in Ice Cream Franchise

Franchisors often require that franchisees purchase certain items only from the franchisor or its approved suppliers. Franchisees often attempt to avoid such "required purchases" provisions in order to purchase cheaper or lower-quality items. As a result of this tension, courts are often required to determine whether such provisions violate antitrust laws or are otherwise unenforceable.

We recently assisted Mister Softee, Inc. ("MSI"), the franchisor of over 560 Mister Softee mobile ice cream trucks, in enforcing a required purchases provision. For quality control reasons, MSI's franchise agreement requires its franchisees to purchase their ice cream mix and supplies from MSI or its approved supplier.

In May 1999, several MSI franchisees commenced a federal antitrust lawsuit in New York against MSI claiming that the disputed provisions constituted an illegal tie under Section 1 of the Sherman Act. A tie exists when a seller agrees to sell one product to a buyer only if the buyer also agrees to purchase a second, different product. Federal antitrust laws are violated when a seller uses its market power in one product to "force" a consumer to purchase the second product. The MSI franchisees alleged that in order to obtain a license to use the MSI trademarks (the tying product), they were required to purchase the ice cream mix and supplies (the tied products) from MSI or its approved supplier. The franchisees sought a preliminary injunction to permit them to purchase ice cream mix and supplies from unapproved vendors.

In order to obtain a preliminary injunction in the Second Circuit, the franchisees were required to demonstrate that they would be irreparably harmed if the injunction did not issue and that they either had a likelihood of success on the merits or that there were sufficiently serious questions going to the merits to make them a fair ground for litigation. MSI argued that the franchisees failed to meet their burden because (i) the trademark and the ultimate ice cream product are so interrelated that they do not constitute separate products for antitrust purposes; and (ii) even if the franchisees passed the two product test, MSI did not have sufficient economic power in the tying product market to force the franchisees to purchase the tied products.

In its economic power argument, MSI focused on the pre-and post contract market analysis used in Queen City Pizza, Inc. v. Domino's Pizza, Inc., Wilson v. Mobil Oil Corp. and Eastman Kodak Co. v. Image Technical Services, Inc. First, MSI argued that before execution of the franchise agreements, it did not have sufficient market power in the tying product market to force the franchisees to purchase the tied products because the prospective MSI franchisees, like any prospective franchisees, were free to choose from any number of franchises or other business opportunities. No single franchisor (including MSI), therefore, has the requisite market power to force a prospective franchisee to accept an illegal tie. Secondly, MSI argued that after execution of the franchise agreement, there can be no illegal tie under the antitrust laws.

MSI argued (as Domino's did in Queen City) that once the franchisee has executed its franchise agreement, it may have a contractual claim against the franchisor for unreasonably requiring it to purchase products it would not otherwise purchase, but it does not have an antitrust claim. While the MSI court did not specifically address the market power arguments, it did hold that MSI's trademarks and its ultimate ice cream product did not constitute separate products and, therefore, there was no antitrust violation. The court further held that the franchisees had no likelihood of success on the merits of their antitrust claims and found no serious questions going to the merits to make them a fair ground for litigation.

Back to News Article Listing

F I S H E R Z U C K E R
Franchise Law / Business Lawyers

121 Avenue of the Arts, Suite 1200, Philadelphia, PA 19107
215.545.5200

402 Park Boulevard, Cherry Hill, NJ 08002
856.665.5253

777 Gloucester Street, Suite 411, Brunswick, GA 31520
912.264.4211

Copyright 2004 - Fisher and Zucker