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Insight

McDonald's in hot water in the EU over alleged price fixing

01/06/2017

At the start of last year we wrote here about the anti-trust complaint brought to the European Commission by three Italian consumer bodies against McDonald's. The complaint alleged that the way McDonald's operates its franchise network infringes EU anti-trust rules for the following reasons:

•that it abuses its position as a landlord by charging excessive rents to franchisees, with prices alleged to be up to 10 times market rates;

•that its contract terms unlawfully restrict the ability of franchisees to switch to other fast food brands; and

•the contracts are excessively long (20 years on average), include non-compete provisions that are too long, and mandate the location of the franchised outlets.

The complaint has now taken on a new dimension, with the recent news that French and German groups have urged their own national competition authorities to look into further alleged anti-competitive practices by McDonald's.

The main complaint is that franchisees in these territories are being forced by their franchisor to charge higher prices to consumers than McDonald's charges to consumers in its own corporately owned stores. In response, McDonald's has rejected the allegations, asserting that franchisees are free to set their own menu prices.

Where does the law stand on price fixing in the EU?

It is a long established principle in EU antitrust law (and one which is mirrored in UK domestic competition law) that an agreement between a retailer and a supplier under which the retailer agrees to resell goods (or services) either at a price:

- fixed (directly or indirectly enforced) by the supplier or above a minimum price level set by the supplier; or

- which has been agreed between the supplier and the retailer,

is prohibited. Agreements or concerted practices which are in breach of this prohibition run the risk of mega fines, the unenforceability of contracts and potential criminal sanctions.

In the context of franchising, franchisors can dictate a maximum price for franchisees to sell their products, but it is anti-competitive for a franchisor to fix a minimum price for its franchisees to sell its products or exert pressure which by design results in franchisees having to sell at certain prices – in this case, at prices which exceed the prices charged by the franchisor for the same products in its corporately owned stores.

What happens next?

It will be interesting to see what the national authorities conclude in these cases and whether other franchisees in other jurisdictions come forward with similar allegations. This case also highlights an interesting development in national and potentially international franchisee associations which are prepared to coordinate efforts in an attempt to curb the alleged bad behavior of their franchisor.

We will be monitoring the situation closely and will report back once we have more developments.