Vertical restraints are restrictions placed by a franchisor on how a franchisee may operate within the supply and distribution chain, such as pricing, territory, and sourcing requirements. These restraints occur between parties at different levels of the business structure. In franchising, they help protect brand standards and uniformity.
Vertical restraints in franchising refer to contractual limits that a franchisor imposes on its franchisees to control how products and services are sold, sourced, or priced. Unlike horizontal restraints—agreements between competitors—vertical restraints occur between businesses operating at different levels in the supply chain (e.g., a franchisor and a franchisee). Common examples in franchising include minimum resale pricing policies, exclusive territories, mandated suppliers, and non-compete clauses. These provisions are generally designed to ensure brand consistency, protect market structure, and improve customer experience. While vertical restraints can raise antitrust concerns if they restrict competition excessively, they are often allowed under U.S. law if they are deemed “reasonable” and pro-competitive. Franchise agreements typically outline these restraints in detail, and they are legally enforceable as long as they don’t violate federal or state antitrust laws.
Additional Definition: Restrictions imposed by a franchisor on its “downstream” customer or franchisee. An example of such restraint may be a limitation on where a franchisee may offer and sell products or services. Also see “Price Fixing.” and Horizontal Restraints
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The concept of vertical restraints has long been examined under antitrust law, particularly under the Sherman Act and later under the rule of reason framework adopted by U.S. courts. In the context of franchising, vertical restraints became more common in the 1970s and 1980s as franchisors sought tighter control over brand experience and operational standards. Landmark court cases—such as *Continental T.V., Inc. v. GTE Sylvania Inc.*—shifted how vertical restraints were treated, moving from a per se illegal standard to a more flexible rule-of-reason approach. Today, franchisors rely heavily on vertical restraints to regulate pricing consistency, sourcing quality, and market exclusivity, though they must be careful not to cross into anti-competitive territory.
Vertical restraints are legal tools used by franchisors to control critical aspects of franchisee operations, including pricing, sourcing, and territories. While these restrictions promote brand uniformity and operational efficiency, they must be carefully structured to avoid violating antitrust laws. Understanding vertical restraints is essential for both franchisors and franchisees to ensure compliance and protect the integrity of the franchise system.
