Mailand v. Burckle
572 P.2d 1142, 20 Cal.3d 367, 143 Cal. Rptr. 1 (1978)
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Rule of Law:
Vertical price-fixing arrangements, where a franchisor sets the franchisee's retail price, are per se illegal under California's Cartwright Act. Such illegality is not justified by a profit-guarantee provision, especially when the guarantee is funded by secret rebates paid from the supplier to the franchisor based on the franchisee's purchases.
Facts:
- Wilfred and Margaret Mailand entered into a franchise agreement with defendants to operate a Green Pastures Drive-In Dairy, which sold dairy products and gasoline.
- The agreement guaranteed the Mailands a 7% gross profit on gasoline sales in exchange for giving the defendants the right to set the retail price of gasoline.
- The agreement also required the Mailands to purchase gasoline exclusively from Powerine Oil Company, unless defendants consented in writing to another supplier.
- Prior to the agreement, defendants arranged for Powerine to charge the Mailands a price for gasoline that was several cents above the normal wholesale price.
- Powerine secretly rebated this price difference back to the defendants, creating a fund from which the guaranteed profit payments to the Mailands were made.
- The Mailands were not informed of the secret rebate arrangement before signing the contract and operating the business.
- During a gas price war, defendants paid the Mailands over $20,000 in guaranteed profits, while receiving over $61,000 in secret rebates from Powerine over a two-year period.
- After nearly two years, the Mailands, upon learning the arrangement might be illegal, refused to allow defendants to set gasoline prices and began purchasing gasoline from another supplier.
Procedural Posture:
- Wilfred and Margaret Mailand sued their franchisors (defendants) and Powerine Oil Company in state trial court, alleging violations of the Cartwright Act.
- Powerine settled with the Mailands for $19,000 before trial.
- The defendants filed a cross-complaint for declaratory relief and breach of contract.
- The trial court found that the franchise agreement did not violate the Cartwright Act.
- The trial court ruled that even if a violation had occurred, the Mailands were barred from recovery by the doctrine of in pari delicto.
- The trial court also found that defendants were not damaged by the Mailands' subsequent refusal to adhere to the pricing and supplier provisions.
- Both the Mailands (as plaintiffs/appellants) and the defendants (as cross-complainants/appellants) appealed the trial court's judgment.
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Issue:
Does a franchise agreement that allows the franchisor to set the franchisee's retail price for gasoline, in exchange for a guaranteed profit margin funded by secret rebates from the supplier to the franchisor, constitute a per se illegal price-fixing arrangement in violation of California's Cartwright Act?
Opinions:
Majority - Mosk, J.
Yes, the franchise agreement and rebate arrangement constitute a per se illegal price-fixing scheme. The Cartwright Act, like the federal Sherman Act, treats both horizontal and vertical price-fixing as per se illegal, meaning no justification of reasonableness or pro-competitive effects can save them. The agreement explicitly allowed defendants to fix the retail price of gasoline, a clear violation. The defendants' argument that this was justified by the 7% profit guarantee fails because the guarantee was not a genuine risk-sharing mechanism but was funded by the Mailands themselves through the secret rebate scheme, which the court described as 'an ingenious model of economic bootstrapping.' The rebate arrangement between the defendants and Powerine was a separate per se violation, as it was a combination to increase the price of merchandise sold to the Mailands. The doctrine of in pari delicto does not bar the Mailands' recovery because they did not bear equal responsibility for creating the illegal scheme; it was the defendants' invention, and the Mailands were unaware of the secret rebates when they entered the agreement.
Dissenting - Clark, J.
No, the agreement does not violate the Cartwright Act because the rule of reason, not the per se rule, should apply. The relationship between the parties was a joint enterprise where both shared the risks and potential for profit and loss, not a typical vertical restraint. The price-setting provision was designed to be pro-competitive, allowing the business to maintain low prices and compete effectively, especially during price wars. The majority anomalously uses a law designed to prevent high prices to invalidate an agreement that fostered low, competitive prices. The secret commission arrangement may constitute a tort or breach of contract, but it is not a restraint of trade under the Cartwright Act and does not warrant treble damages.
Analysis:
This decision solidifies the strict application of the per se rule against vertical price-fixing under California's Cartwright Act, signaling that courts will not entertain defenses based on alleged pro-competitive justifications or reasonableness. It demonstrates that courts will look past the form of a contract to its economic substance, invalidating arrangements where risk-sharing is illusory. The case also narrows the availability of the in pari delicto defense in antitrust actions, aligning with federal precedent by requiring that the plaintiff bear equal fault in creating the illegal scheme, not merely participating in it under economic pressure. This precedent serves as a significant warning to franchisors that any attempt to control franchisee pricing, directly or indirectly, faces a high risk of being declared per se illegal.
