Legal director Sandeep Vaheesan and chief economist Brian Callaci co-author a report that examines how the Chicago School revolution in antitrust contributed to the growth of franchising, gig work, and other fissured arrangements across the U.S. economy.

Abstract:

Can parties control independent trading partners through contract? Antitrust law in the United States has confronted this question since its inception. From the 1940s through the 1970s, the Supreme Court generally held that corporations could not control the business decisions of distributors and suppliers using contracts, or vertical restraints in the parlance of antitrust. For example, a manufacturer could not restrict the pricing freedom of distributors by including a minimum or maximum resale price term in sales contracts. Although the courts were somewhat more tolerant of vertical restraints governing non-price terms of trading, they also restricted powerful firms from preventing trading partners from carrying the products of rivals or limiting which territories or customers they could serve. The courts reasoned that vertical restraints offended antitrust norms on two distinct grounds: they unfairly limited the freedom of small and medium-sized firms and unduly restricted business rivalry at one or more levels of a supply chain.

Since the 1970s, the Supreme Court has relaxed antitrust rules on vertical restraints. Firms now have broad freedom to control trading partners, whether distributors, franchisees, or suppliers, through contract and dictate what they sell, where, and on what terms. The result has been a tightening of corporate control and a reduced role for independent business. Vertical restraints common in franchising minutely dictate the management practices of the businesses subject to them. For example, a typical franchise contract not only incorporates a lengthy and detailed operations manual into the contract, but also gives the franchisor the right to unilaterally change it. Franchisors and other lead firms obtain employment-like control over those outside their boundaries, while disowning the duties and responsibilities of employers. David Weil, an economist and former head of the Wage and Hour Division of the Department of Labor, has labeled these arrangements “fissured work.” The freedom of contract and efficiency justifications for these contracts rest on questionable assumptions and fail to recognize the availability of less restrictive alternatives.

Employing its broad unfair methods of competition power, the Federal Trade Commission should prohibit or limit the use of a range of vertical restraints. In certain instances, work law and franchise relationship law are more appropriate tools for addressing workplace fissuring. Antitrust, working in tandem with these other bodies of law, can work to build a fair economy and promote genuine entrepreneurial independence for countless small and medium-sized firms.

Read the full paper on Cornell Law Review here.