Tying Clause in a Franchise Contract from the View of Competition Law: A Comparative Study in Iran and US Law

دانشنامه حقوق اقتصادی

Article 2, Volume 23, Issue 10, February 2017, Pages 21-38   

Document Type: Scientific research

DOI: 10.22067/le.v23i9.53954

Authors

mostafa elsan^{* 1}; Kholood Deriss²; Leila Najafizadeh³

¹Shahid Beheshti University

²Qum University

³Azad University

Abstract

The main principle governing any contract is freedom of contracts. A contract may contain restraint or a limitation clause for one or both parties. Franchise is a complex and detailed contract having different limitations along with its subject matter. In the case of franchising, the tying product is till' franchise itself and the tied products are the supplies the franchisee must purchase to operate his business.
Product tying is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. In legal terms, a tying sale makes the sale of tying good to the de facto customer conditional on the purchase of a second distinctive good (the tied good). Tying is often illegal when the products are not naturally related. It is related to but distinct from freebie marketing, a common and legal method of giving away (or selling at a substantial discount) one item to ensure a continual flow of sales of another related item.
The tying doctrine has generally been applied to franchising in cases in which the franchisor's licensing of his trademark or name was conditioned on agreement by the prospective franchisee to purchase additional products from him (A New Approach, 1981, p. 1271).
Some kinds of tying, especially tying created by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) in order to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components. The main question that arises is as following; is it legal for franchisors to have purchase requirements or tying agreements?
In 1970, Congress enacted section 106 of the Bank Holding Company Act Amendments of 1970 (BHCA) known as the anti-tying provision, which is codified at 12 U.S.C. § 1972. The statute was designed to prevent banks, whether large or small, state or federal, from imposing anticompetitive conditions on their customers. Tying is an antitrust violation, but the Sherman and Clayton Acts did not adequately protect borrowers from being required to accept conditions to loans issued by banks, and section 106 was specifically designed to apply to and remedy such bank misconduct (Tying (commerce), https://en./wiki/Tying_(commerce) ).
In the US, both the Sherman Antitrust Act and Section 3 of the Clayton Act have considered tying sale from the view of competition. We can use this legal context for developing Iranian competition and consumer protection law.
In this paper, we are discussing one of the prevalent restraint clauses in franchise contracts. This survey is done thorugh doing a comparative study on the law of the United States and Iranian competition law. A tying sale makes the sale of one good (the tying good) to the customer conditional on the purchase of a second distinctive good (the tied good).
While the courts have usually considered such pricing arrangements as an extension of monopoly from the market for the tying good to the tied-good market, economists have generally rejected this view, preferring instead to view the tie-in from the perspective of alternative hypotheses.

Keywords

Franchise Contract; Comptition Law; competition law; Tying (Tie-in) Sale; the Law of United States

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