The Eleventh Circuit Court of Appeals should follow both the holding and the wisdom of State Oil v. Khan, 522 U.S. 3 (1997). This precedent allows Burger King Holdings Inc. to start an $1 double cheeseburger national campaign so that it might serve consumer welfare, better compete with other chains, and paradoxically give local franchisees opportunities to make more of the Burger King brand name.
The Court's holding in State Oil v. Khan, 522 U.S. 3 (1997) is a true vindication of the Sherman Antitrust Act. While Congress intended to enforce the Sherman Antitrust Act against corporate giants and trusts, Congress aimed at their behaviors rather than their structures. Congress did not intend to destroy big and competitive companies. Congress sought to curtail these companies' practices that restrained trade. "The Sherman Act's main purpose, then and now, is to conquer a 'combination of corporate giants or trusts, conspiring to hinder competition in order to raise prices and reap supra-competitive profits to the detriment of consumers (and competition)." Vermiculite, Ltd. v. W.R. Grace & Co. - Conn. 965F. Supp. 802, 812-813 (W.D.Va. 1977)."
In Albrecht v. Herald Co., 390 U.S. 145, the plaintiff Albrecht was an independent distributor for a newspaper who charged prices to customers that were higher than those that the newspaper recommended. According to their distribution agreement, Herald Company hired a new solicitation company to ask Albrecht's customers to make a new deal that would offer the newspapers at a price below the newspaper's suggested price. 300 of Albrecht's 1200 original customers switched distributors on the condition that Albrecht could distribute to them again if Albrecht lowered his prices.
The Supreme Court mistakenly found that agreements to fix maximum prices 'cripple the freedom of traders and thereby restrain their ability to sell in accordance with their own judgment,' id., at 152, quoting Keifer-Stewart Co. v. Seagram & Sons, 340 U.S. 211, at 213 (1951). The result in this case seemed so inappropriate because the newspaper tried to infuse more competition from other distributors whenever an independent distributor abused its market position and charged exorbitant local prices.
Without any basis in evidence, the Albrecht Court developed reasons for why vertical maximum prices unreasonably restrained trade. First, maximum prices allegedly deprived franchisees of their ability to compete and survive in their local markets. Secondly, maximum prices deprived franchisees of the ability to set prices that would enable franchisees to "furnish services and conveniences which consumers desire and for which they are willing to pay." Thirdly, maximum prices would unfairly advantage "a few large or specifically advantaged dealers" who would lose advantages outside of price competition. And finally, maximum price arrangements would distort the market to the point that they became guises for setting new minimum franchisee prices. Albrecht v. Herald Co., 390 U.S. at 152-153.
Without support, these reasons gained a life of their own until State Oil v. Khan 522 U.S. 3 (1997) found that franchisors did not necessarily restrain trade when they set maximum prices. Justice O'Connor noted that a franchisor could reasonably minimize a local franchisee’s monopoly position over a certain local area and maximize profits in its own self-interest. Franchisors would not drive away customers by providing them with fewer services because doing so would be against their best business judgment. State Oil v. Khan, 522 U.S. at 16-18. Why would Burger King Inc. deprive itself or its local franchisees of a better business opportunity that could compete with McDonald's or Wendy's?
In the rare cases where franchisors blatantly restrain trade with maximum pricing, the rule of reason is the most appropriate tool for plaintiffs to prove these violations.
Burger King, Inc.'s $1 double cheeseburger national campaign reaches a particular type of consumer and gives Diddy's Burger King more freedom in promoting a stronger national brand.
$1 double cheeseburgers help a unique brand of consumers known as "marginal" buyers. Marginal buyers intensely consume promotional specials and do not want to hear localized or specialized information about the benefits of a product. Marginal buyers simply want to consume a $1 double cheeseburger because Burger King Holdings, Inc. will offer it for $1. In general, these marginal buyers will eat anything for $1. Burger King Holdings wants to reach this type of buyer during economic times when many unemployed, underemployed, and underpaid Americans are temporarily marginal buyers. From this perspective, Burger King Inc.'s maximum pricing expands the fast food market rather than restraining it. See Benjamin Klein, Distribution Restrictions Operate by Creating Dealer Profits: Explaining the Use of Maximum Resale Price Maintenance in State Oil v. Khan, 7 S.CT. ECON. REV. 1, 12-13 (1999).
Franchises work best when franchisors can spend its resources developing a strong national brand and franchisees can maximize their local resources to share that brand with their communities. Wendy's, McDonald's, and Burger King have used value menus to send a message to consumers that quality meals are affordable during times that require tight budgeting. Because franchisors have not been able to send these messages through uniform pricing of certain items, many franchisors have resorted to seeking more control of their franchisees through more restrictive franchise agreements, earlier termination of franchise agreements, and direct competition with independent franchisees. Justice O'Connor recognized this as the perverse effect of the per se rule against vertical pricing. State Oil v. Khan, 522 U.S. at 282. The lingering ghosts of a dead legal doctrine have encouraged unnecessary franchisor and franchisee wars.
Businesses can resolve these disputes outside of the courts and expand opportunities for consumers. Burger King, Inc.'s national campaign for the $1 double cheeseburger specifically states that "prices may vary and are different in Hawaii." Burger King Inc. makes exceptions for independent franchisees who petition for an exception in their own interest and in the interest of consumers. The Eleventh Circuit Court should apply the rule of reason to uphold the $1 double cheeseburger national campaign.