Open Price Agreements: Good Faith Pricing in the Franchise Relationship D OUGLAS C. B ERRY , D AVID M. B YERS , AND D ANIEL J. O ATES Open price term contracts also can be important to business O ver the last century, as format franchises, even though those franchises do not directly commercial relationships involve sales of the franchisor’s goods to consumers. 6 In busi- became more complex ness format franchises, the franchise agreement often requires and intertwined, the law had to the franchisee to purchase franchisor-approved goods related to evolve to keep pace. Contracts the operation of the franchised business. For example, hotel that previously would have been franchisors might require their franchisees to purchase toi- voided for indefiniteness became letries, sheets, or furnishings from franchisor-approved ven- permissible, even when they left dors; or real estate services franchisees might be required to out key terms, including price. 1 obtain printed advertising materials from particular printing That evolution resulted from the companies selected by the franchisor. In this respect, business need for contracts that could con- format franchises are similar to product franchises because to firm long-term or ongoing obliga- Douglas C. Berry continue operating, the franchisee has no choice but to purchase tions between parties but also goods from exclusive or limited sources into the future. As a would allow adjustments for result, franchisees and approved vendors often desire open unforeseeable circumstances— price terms related to these supply provisions to provide flexi- such as market fluctuations, bility to adapt to changing conditions. changes in industries, and general Despite the widespread use of (and need for) contracts uncertainty occurring over with open price terms, particularly in the franchise setting, extended periods of time—with- these contracts continue to breed litigation concerning their out which it would be commer- most fundamental aspects. 7 This article addresses the con- cially untenable for the parties to proceed. 2 That flexibility is criti- flicts that arise under Uniform Commercial Code (UCC) Section 2-305, which permits the use of open price terms cal for price provisions in long- subject to the fulfillment of certain conditions. 8 In particular, term sale of goods contracts, the provision applies when a franchise agreement does not including those in franchising. David M. Byers initially specify a price but instead places discretion with the In a franchise system based franchisor to set the price at a later date. 9 The specific situa- on sales of the franchisor’s prod- ucts, 3 the franchisor and fran- tion that raises the most concern arises when the party charged with setting the price of goods is alleged to have chisee aim to establish a long- acted in bad faith in doing so. term relationship in which the This article discusses the background and purpose of UCC franchisee continually will pur- Section 2-305. It then examines the cases interpreting open chase and resell the franchisor’s price provisions under Section 2-305(2) in the franchise con- goods to the public, whether those text, revealing the inconsistent methodology for ensuring that products are coffee, gasoline, soft prices are set in compliance with the provision’s good faith drink concentrate, or hamburger patties. 4 Those goods are the requirements. The courts’ lack of a coherent systematic approach to resolving open price term disputes has led to sig- lifeblood of the franchise because Daniel J. Oates nificant confusion. Consequently, the article proposes a they (along with the franchisor’s framework for analyzing future disputes that provides a more trade and service marks) define consistent method for determining whether a party’s conduct the franchise and ensure a consistent customer experience, is consistent with the obligation of good faith. which is critical to the success of a network of independent- ly operating dealers or franchisees. 5 To survive long-term, Overview and History the parties’ relationship, based on the perpetual sale of The advent of the open price term in modern contracts was goods from one party to the other, must include a means for a dramatic departure from the common law. 10 Under common adjusting the price of goods over time. An open price term law, price is an essential term in any valid contract. 11 Without contract fills that need. a fixed price, there is no way to measure with any certainty whether a valid contract was ever created. 12 Consequently, Douglas C. Berry and David M. Byers are shareholders with Graham under traditional common law, open price term contracts & Dunn in Seattle, Washington, and Daniel J. Oates is an associate would have been invalidated as “agreements to agree” and with the firm. Summer 2007 ■ Franchise Law Journal 45
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