Antitrust Law Daily Wrap Up, ANTITRUST—DMd: Franchisor Challenging Franchisee’s Exclusive Territory as Restraint of Trade Had Burden of Proving Adverse Impact on Competition, (May 29, 2013)

By John W. Arden, J.D., LLM.

In a car rental franchisor’s declaratory judgment counterclaim against a franchisee, asserting that an exclusive territory provision in the franchise agreement was an unlawful restraint of trade under California law, the franchisor bore the burden of proving that the exclusive arrangement substantially affected competition, according to the federal district court in Greenbelt, Maryland (Schwartz v. Rent-A-Wreck of America, Inc., May 24, 2013, Messitte, P.). The court viewed the counterclaim as an antitrust inquiry, which usually requires the complaining party to demonstrate the requisite anticompetitive effect.

California appellate courts have held that parties challenging an exclusive arrangement as an unlawful restraint of trade under state law (California Bus. & Prof. Code §16600) must show that the arrangement substantially affects competition, the district court found. In this case, franchisor Rent-A-Wreck must show that the exclusive territory provision of its franchise agreement has a substantially adverse impact on competition in the relevant market.

Rent-A-Wreck’s attempts to place the burden on the franchisee were unconvincing, the court observed. The franchisor cited Scott v. Snelling, Inc., 737 F.Supp. 1034 (N.D. Cal. 1990), in which a franchisee asserted a claim under California Bus. & Prof. Code §16600 against the enforcement of a covenant not to compete by its franchisor in order to block the use of a trade secret. The court held that the franchisor bore the burden of showing the existence of the trade secret. However, the fact that Snelling had the burden of showing that unfair competition would result if the covenant were not enforced did not mean that the burden should be placed on a person seeking to uphold a covenant in a non-trade secret case, the district court ruled. There was no reason to read the decision so expansively.

The franchisor’s claims that “many, many courts, in various jurisdictions” have held that the proponent of a covenant bears the burden of proof was rejected, since Rent-A-Wreck cited only a single case from the State of West Virginia.

Following the guidance of the weight of California authority, the federal district court held that the burden of proof was on Rent-A-Wreck.

The case is Civil No. PJM 07-1679.

Attorneys: Roger Charles Simmons (Gordon and Simmons LLC) for David Schwartz. John Christopher Hanrahan (Law Offices of John C. Hanrahan LLC) for Rent-A-Wreck of America, Inc.

Companies: Rent-A-Wreck of America, Inc.

Cases: Antitrust FranchisingDistribution MarylandNews