## Facts

- Holiday Inns, Inc. (HI) operated a national motor-hotel chain and both franchised and owned/operated Holiday Inn-branded properties.
- American Motor Inns, Inc. (AMI), HI’s largest franchisee, operated dozens of Holiday Inns and sought a new franchise for a prime site near the Newark Airport terminal.
- HI used a “radius letter” practice: upon receiving a new franchise application, HI solicited views from existing nearby franchisees about approving the proposed inn.
- HI’s standard franchise agreement included a “non-Holiday Inn clause” restricting a franchisee from operating a non–Holiday Inn hotel or motel in the vicinity of a Holiday Inn in which the franchisee had an interest.
- HI sent radius letters to nearby franchisees regarding AMI’s Newark application; at least one objected.
- HI denied AMI’s application and, invoking the non-Holiday Inn clause, refused to allow AMI to build a non–Holiday Inn hotel on the Newark property.
- AMI sued under Sherman Act § 1 and Clayton Act § 4, alleging that HI’s practices—alone and in combination—enabled franchisees and HI to allocate territories and restrain competition.

## Issues

1. Whether HI could form a Sherman Act § 1 “contract, combination, or conspiracy” with independently owned franchisees through the radius-letter process and related conduct.
2. Whether the district court improperly expanded the case from the Newark dispute to a broader attack on HI’s franchising system, affecting notice and fairness.
3. Whether the non-Holiday Inn clause constituted an unreasonable restraint of trade (treated as exclusive dealing) under § 1.
4. Whether the combination of the radius-letter practice, the non-Holiday Inn clause, and HI’s company-owned location policies unreasonably restrained trade by functioning as a horizontal market allocation.

## Decision

- The Third Circuit affirmed in part and reversed in part.
- The court upheld that HI and its franchisees could qualify as separate economic actors capable of § 1 concerted action.
- The court sustained, on the record presented, the conclusion that the challenged practices could operate to restrain competition and warranted rule-of-reason scrutiny, including concerns resembling market allocation effects.
- The court treated the non-Holiday Inn clause as an exclusive-dealing restraint analyzed under the rule of reason, requiring attention to competitive effects and market conditions.
- The court concluded HI had adequate notice that AMI challenged broader franchising practices, not solely the Newark denial.
- The court modified and remanded aspects of the injunction, directing more limited, record-based equitable relief rather than sweeping prohibitions on standard franchising mechanisms.

## Legal Principles

- A franchisor and its franchisees are not automatically a single entity for Sherman Act § 1 purposes; independently owned franchisees may conspire with the franchisor when their coordinated conduct restrains competition.
- Territorial-related restraints in franchise systems are not categorically unlawful; they generally require rule-of-reason analysis weighing competitive harms against legitimate business justifications.
- Exclusive-dealing provisions are evaluated under the rule of reason, focusing on market power, degree of foreclosure, and the availability of alternative competitive channels.
- Antitrust injunctions must be tailored to the proven conduct and record; courts should avoid remedies that unnecessarily prohibit potentially lawful franchising tools that can serve legitimate functions.

## Conclusion

The Third Circuit treated HI’s radius-letter practice and non-compete-style franchise provision as restraints requiring careful rule-of-reason evaluation, affirmed § 1 liability in substantial part, and remanded for narrower injunctive relief directed at anticompetitive uses rather than blanket bans on franchising practices.


American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230 (3d Cir. 1975)