Franchisors often require franchisees to purchase supplies, materials, or inventory only from suppliers the franchisor approved. But where franchisors see benefits of consolidating by requiring franchisees to participate in volume purchases and ensuring product quality and consistency, franchisees see potential conflicts of interest.

In Window World of Baton Rouge v. Window World, a vinyl window sales and installation franchise, the franchisees agreed to: "sell and install only and exclusively those products, goods, equipment, and parts from vendors approved by [Window World]." The agreements added that Window World would try to get the lowest possible wholesale pricing for franchisees. Window World did not collect royalties from franchisees. Instead it collected from vendors a percentage of the sales price of items sold to franchisees.

In 2007, Window World announced that Associated Materials (AM) would be the only approved supplier of windows. Franchisees sued under antitrust law, claiming Window World and AM had an illegal conspiracy to "lock them in", forcing them to buy inventory at higher prices than they could get from other suppliers or even than they could get from AM if they weren't franchisees. The alleged price inflation increased AM's profits and Window World's royalty collections.

The North Carolina court concluded the franchisees could pursue their antitrust claim if Window World conspired to manipulate the "market" so that franchisees were forced to pay artificially high prices. But in this case Window World was able to require franchisees to buy windows solely from AM not because of power over the market, but because the license agreements gave the franchisor the right to approve even only one supplier if it wished.

The agreements were clear, so when franchisees signed they had fair warning of the risks of buying a Window World franchise. Franchisees effectively purchased windows in a free market; before signing, they had freedom in the "market" to buy a different franchise in which the franchisor didn't have the right to designate a sole supplier. The court dismissed the claim.

Before buying a franchise, a potential franchisee should be sure to understand the scope of the franchisor's right to designate approved vendors. Ask other franchisees in the system if they get competitive prices from vendors. Check the franchise agreement for terms that may limit this freedom in the future. Make sure to understand how the franchisor gets its revenue. It may be illogical to expect to pay rock bottom prices for supplies if what the vendor charges must be enough to also provide revenue to the franchisor.

But don't automatically reject a franchise just because there is a single source of supply. A franchise brand's concentration and volume purchasing from a chosen supplier may have offsetting benefits that contribute to the success of the system and its franchisees.

See Window World of Baton Rouge v. Window World, N.C. Super. Ct., ¶15,880