USA – ILLINOIS Law and Practice Contributed by: Carmen D. Caruso, Bill Whitner and Gage Meyers, Carmen D. Caruso Law Firm
the restriction applied only during the term, the court distinguished it from a post-term restraint and did not require the territorial limitations applicable to restric - tions extending beyond the franchise relationship. 6.3 Requiring Franchisees to Purchase Specific Goods and Services A franchisor may generally require a franchisee to pur - chase products, ingredients, equipment or services from the franchisor or its designated or approved sup - pliers. Such requirements are common in US franchis - ing and are generally lawful when reasonably related to legitimate business objectives, such as product quality, protecting trade marks and goodwill, and system-standard compliance. Mandatory purchasing requirements must be prop - erly disclosed. Item 8 of the FDD requires disclosure of the extent to which franchisees must purchase or lease goods, services, supplies, fixtures, equipment, inventory, computer hardware or software, real estate or other items from the franchisor, its affiliates or des - ignated suppliers, and any rebates, commissions or other financial benefits the franchisor or its affiliates receive. Mandatory purchasing requirements, however, may raise antitrust concerns when they function as tying or exclusive-dealing arrangements – ie, when a sell - er conditions the sale of one product on the buyer’s agreement to purchase another from the seller, or to refrain from purchasing the tied product elsewhere. See Northern Pac Ry Co v United States , 356 US 1 (1958). Not every mandatory purchasing requirement is an unlawful tying arrangement, however; legality generally depends on the restriction’s competitive effects, the franchisor’s market position, the extent to which competing suppliers are foreclosed, and the restriction’s legitimate business justifications. See Tampa Elec Co v Nashville Coal Co , 365 US 320 (1961); People ex rel Scott v Convenient Food Mart , Inc , 21 Ill App 3d 97, 104, 315 NE2d 124, 131 (1974). An approved-supplier requirement thus presents less antitrust risk when it serves legitimate business pur - poses, such as product quality, protecting trade marks and goodwill, ensuring system-wide consistency, or
satisfying operational standards. See Continental TV , Inc v GTE Sylvania Inc , 433 US 36, 54–59 (1977). Illinois law also imposes a separate contractual con - straint through the implied covenant of good faith and fair dealing. See Dayan v McDonald ’ s Corp , 466 NE2d 958, 971 (Ill App Ct 1984). The covenant limits a party’s exercise of contractual discretion exercised arbitrarily, capriciously or inconsistently with the par - ties’ reasonable expectations. Thus, even where a franchise agreement expressly permits the franchisor to designate suppliers, exercising that authority may raise a good-faith issue if used primarily to generate revenue for the franchisor or its affiliates without a legitimate connection to the franchise system or fran - chisees’ interests. 6.4 Channel Reservation A franchisor can generally reserve certain sales chan - nels, including internet and e-commerce sales, to itself or affiliates, subject to the same disclosure and anti - trust principles applicable to other purchase and ter - ritorial restrictions. Illinois has no statute specifically addressing internet channel reservation; the question is instead resolved through the franchise agreement’s territorial and channel-of-trade provisions, informed by general antitrust rule-of-reason analysis and accu - rate disclosure of the scope of territorial protection actually granted. 6.5 Vertical Agreement Block Exemptions Because Illinois is outside the EU, the Vertical Agree - ment Block Exemption Regulation (VBER) does not apply; Illinois franchise agreements are instead gen - erally evaluated under US antitrust law and the rule of reason described in 6.1 Treatment of Competition Restrictions in Franchise Agreements . Unlike the VBER, US law provides no comparable block exemp - tion, and courts instead generally consider whether a particular restraint promotes or harms competition. This approach is generally favourable to single-brand franchise systems: courts recognise that vertical, non- price restraints can promote competition by protecting brand investment, maintaining consistent quality and preventing free-riding, and such restraints are gener - ally lawful unless they have actual or likely anti-com - petitive effects. See, for example, Continental TV , Inc
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