This posting was written by John W. Arden.
An exclusive Hawaii distributorship of electronic games that was not substantially associated with its supplier’s trademarks and did not pay a franchise fee to its supplier was not a “franchise” within the Hawaii Franchise Investment Law, the federal district court in Honolulu has ruled (Prim Limited Liability Co. v. Pace-O-Matic, Inc., December 13, 2012, Mollway, S.). Thus, the supplier’s termination of the exclusive distributorship, allegedly without cause, could not be held to violate the statute.
In November 2008, electronic game supplier Pace-O-Matic entered into an agreement making Prim Limited Liability Co. an exclusive distributor of “amusement devices” in an area that included Hawaii. In October 2010, Pace-O-Matic sent Prim a letter, alleging it was in default and terminating the exclusivity portion of the agreement. Shortly thereafter, Prim filed a lawsuit, asserting breach of contract, tortious interference with prospective business advantage, unfair methods of competition in violation of the Hawaii “little FTC Act,” violation of the Hawaii Franchise Investment Act, breach of express warranty, breach of implied warranty, and a right to indemnification.
Pace-O-Matic filed a motion for partial summary judgment on the unfair competition, franchise law, and implied warranty claims. The court granted summary judgment on the franchise law and implied warranty claims, but denied summary judgment on the unfair competition claims.
“Franchise” Definition
In its motion, Pace-O-Matic argued that it was entitled to summary judgment on the franchise law claim because the parties never had a franchise relationship as defined by the Hawaii Franchise Investment Law. Under the statute, a “franchise” is an agreement “in which a person grants to another person, a license to use a trade name, service mark, trademark, logotype or related characteristic … and in which the franchisee is required to pay, directly or indirectly, a franchise fee.” Haw. Rev. Stat. §482E-2. However, Prim failed to show that there was a triable issue regarding the existence of a franchise between Prim and Pace-O-Matic.
Association with trademark. Prim’s claim that the distributorship agreement allowed it to use Pace-O-Matic’s name, trademarks, and proprietary software was at odds with the language of the agreement. The agreement did not suggest that Prim was authorized to use Pace-O-Matic’s trademarks or software. Rather, the agreement made clear that Pace-O-Matic was only authorizing Prim to “purchase games and fills from Pace and exercise its best efforts to develop markets for the games and distribute the games.”
A distributorship is different from a franchise, the court observed. The distribution agreement allowed Prim to distribute Pace-O-Matic’s products; it did not “substantially associate” Prim with Pace-O-Matic’s trademarks.
“The very essence of a franchise relationship is that the franchisee represents the franchise to the public; a franchise is not created whenever one company purchases and distributes another company’s products.”
Franchise fee. Similarly, Prim failed to provide evidence that it paid Pace-O-Matic a franchise fee. It contended that its payment for “fills” constituted a franchise fee because the price of the fills far exceeded the cost of a few keystrokes to generate a fill. However, Pace-O-Matic’s profit margin is not proof that Prim’s payment for fills constituted a franchise fee, the court held.
“Hawaii law does not provide that a distributor’s profit on a distributorship agreement transforms a relationship into a franchise,” the court noted. “Moreover, there is no evidence that the cost of the fills constituted an ‘unrecoverable investment’ in Pace.”
“Little FTC Act”
Prim’s claim that Pace-O-Matic committed unfair competition in violation of the Hawaii “little FTC Act” raised genuine issues of fact. Prim’s pleadings alleged that Pace-O-Matic’s conduct caused injury to Prim’s business or property and was likely to result in damages exceeding $75,000. Prim also alleged that it was injured by the termination of its exclusive distributorship and the direct sale of fills to one of its customers. Pace-O-Matic did not dispute the termination or the direct sales.
“When the supplier itself takes on the role of competitor and seeks to do business with the exclusive distributor’s customer, it may indeed be . . . an aggravating circumstance sufficient to support a claim” under the Hawaii “little FTC Act,” the court found. Thus, the claim survived the motion for summary judgment.
The case is Civil No. 10-617 SOM/KSC.
Dean L. Franklin (Thompson Coburn) for Prim Limited Liability Co. Effie Ann Steiger for Pace-O-Matic.
Showing posts with label association with trademark. Show all posts
Showing posts with label association with trademark. Show all posts
Saturday, December 22, 2012
Monday, December 17, 2012
Bakery Distributorships Were Not “Franchises” Within the Washington Franchise Investment Protection Act
This posting was written by John W. Arden.
Pepperidge Farm bakery distributorships were not “franchises” within the Washington Franchise Investment Protection Act because Pepperidge Farm did not exercise the level of control over the distributors to satisfy the “marketing plan” requirement, the distributors were not substantially associated with the Pepperidge Farm trademarks, and the distributors did not pay a franchise fee, according to the federal district court in Richland, Washington (Atchley v. Pepperidge Farm, Incorporated, December 6, 2012, Shea, E.).
Since Pepperidge Farm was not a franchisor doing business within Washington, it was not required to register a franchise disclosure document or provide a disclosure document prior to entering a distributorship agreement.
Pepperidge Farm entered into consignment agreements with third-party independent contractors, granting them geographically exclusive distributorships. In 2003, Michael Gilroy purchased an existing distributorship from David Spangler for $299,550. In 2004, John Atchley purchased a distributorship from Jason Godwin for $225,000. For both purchases, payment was nominally made to Pepperidge Farm, which facilitated the transactions. Pepperidge Farm credited the payments to outstanding loans or other financial obligations owed by the selling distributors and then furnished all remaining monies directly to the selling distributors.
Each distributor voluntarily entered into a separate consignment agreement with Pepperidge Farm and received an exclusive right to distribute Pepperidge Farm products in retail stores within their territories. The distributors received commission payments for the sale of Pepperidge Farm goods or a percentage of the net proceeds, depending on the products. Despite the territorial exclusivity provision of the agreements, Pepperidge Farm retained the right to sell and deliver its products to customers in the distributors’ territories.
After business reversals, the distributors brought separate claims against Pepperidge Farm, alleging violation of the Washington Franchise Investment Protection Act and negligent misrepresentation. Both cases were eventually assigned to Senior Judge Fred Van Stickle, who granted partial summary judgment for Pepperidge Farm and then consolidated the cases. Judge Van Stickle granted summary judgment on the remaining negligent misrepresentation claims and held a trial on Pepperidge Farm’s counterclaim for Gilroy’s failure to repay the loan that enabled him to purchase the distributorship. The court found that factual issues regarding whether the forced sale of Gilroy’s distributorship was commercially reasonable precluded summary judgment.
After a three-day trial in February 2009, the court entered a finding that the sale of the distributorship was commercially reasonable. The distributors appealed to the Ninth Circuit, which largely affirmed the district court rulings, but reversed the decision with respect to the Franchise Investment Protection Act, concluding that there was a genuine issue of material fact about whether the distributors paid franchise fees. The appeals court remanded the case for further proceedings.
On remand, the district court dismissed the Franchise Investment Protection Act claims on the ground that the distributorships were not “franchises” within the meaning of the Act. Under the statute, a “franchise” is an agreement by which (i) a person is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed in substantial part by the grantor; (ii) the operation of the business is substantially associated with a trademark, trade name, or other commercial symbol owned by or licensed by the grantor; and (iii) the person pays or is required to pay a franchise fee.
Marketing Plan
Although Pepperidge Farm controlled pricing of products directly sold and provided pricing schedules for the purpose of calculating commissions, it did not exercise control over many other factors used to determine the existence of a marketing plan, the court found. These factors included: (1) hours and days of operations; (2) advertising; (3) retail environment; (4) employee uniforms; (5) trading stamps; (6) hiring; (7) sales quotas; and (8) management training. While Pepperidge Farm provided the distributors with financial support by guaranteeing the initial loan to finance purchases of the distributorships, it was not show to provide any other financial support.
Thus, the distributors failed to satisfy the marketing plan element of the “franchise” definition of the Washington Franchise Investment Protection Act.
Association with Trademark
To satisfy the “substantial association” element of the “franchise” definition, the distributors were required to show a substantial association with Pepperidge Farm trademarks or trade names beyond the act of distributing the Pepperidge Farm products. Although Atchley used the Pepperidge Farm logo on his business card and on one business form and his delivery trucks, such association was limited and incidental, the court ruled. The use of the Pepperidge Farm trademarks did not rise to the level of “substantial association.”
Payment of Franchise Fee
A “franchise fee” is a payment for the right to enter into a business under a franchise agreement and does not include “any payment for the mandatory purchase of goods or services or any payment for goods or services available only from the franchisee.” Also excluded from the definition are payments for purchases at a bona fide wholesale price. Ordinary business expenses are not “franchise fees” because they are paid during the regular course of business and not for the right to do business.
Thus, the distributors did not pay, agree to pay, or were required to pay a “franchise fee” within the meaning of the Washington Franchise Investment Protection Act, in the court’s view.
The case is No. CV-04-452-EFS.
Howard R. Morrill (Simburg Ketter Sheppard Purdy) for John R. Atchley. Forrest A. Hainline, III (Goodwin Procter LLP) for Pepperidge Farm Inc.
Pepperidge Farm bakery distributorships were not “franchises” within the Washington Franchise Investment Protection Act because Pepperidge Farm did not exercise the level of control over the distributors to satisfy the “marketing plan” requirement, the distributors were not substantially associated with the Pepperidge Farm trademarks, and the distributors did not pay a franchise fee, according to the federal district court in Richland, Washington (Atchley v. Pepperidge Farm, Incorporated, December 6, 2012, Shea, E.).
Since Pepperidge Farm was not a franchisor doing business within Washington, it was not required to register a franchise disclosure document or provide a disclosure document prior to entering a distributorship agreement.
Pepperidge Farm entered into consignment agreements with third-party independent contractors, granting them geographically exclusive distributorships. In 2003, Michael Gilroy purchased an existing distributorship from David Spangler for $299,550. In 2004, John Atchley purchased a distributorship from Jason Godwin for $225,000. For both purchases, payment was nominally made to Pepperidge Farm, which facilitated the transactions. Pepperidge Farm credited the payments to outstanding loans or other financial obligations owed by the selling distributors and then furnished all remaining monies directly to the selling distributors.
Each distributor voluntarily entered into a separate consignment agreement with Pepperidge Farm and received an exclusive right to distribute Pepperidge Farm products in retail stores within their territories. The distributors received commission payments for the sale of Pepperidge Farm goods or a percentage of the net proceeds, depending on the products. Despite the territorial exclusivity provision of the agreements, Pepperidge Farm retained the right to sell and deliver its products to customers in the distributors’ territories.
After business reversals, the distributors brought separate claims against Pepperidge Farm, alleging violation of the Washington Franchise Investment Protection Act and negligent misrepresentation. Both cases were eventually assigned to Senior Judge Fred Van Stickle, who granted partial summary judgment for Pepperidge Farm and then consolidated the cases. Judge Van Stickle granted summary judgment on the remaining negligent misrepresentation claims and held a trial on Pepperidge Farm’s counterclaim for Gilroy’s failure to repay the loan that enabled him to purchase the distributorship. The court found that factual issues regarding whether the forced sale of Gilroy’s distributorship was commercially reasonable precluded summary judgment.
After a three-day trial in February 2009, the court entered a finding that the sale of the distributorship was commercially reasonable. The distributors appealed to the Ninth Circuit, which largely affirmed the district court rulings, but reversed the decision with respect to the Franchise Investment Protection Act, concluding that there was a genuine issue of material fact about whether the distributors paid franchise fees. The appeals court remanded the case for further proceedings.
On remand, the district court dismissed the Franchise Investment Protection Act claims on the ground that the distributorships were not “franchises” within the meaning of the Act. Under the statute, a “franchise” is an agreement by which (i) a person is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed in substantial part by the grantor; (ii) the operation of the business is substantially associated with a trademark, trade name, or other commercial symbol owned by or licensed by the grantor; and (iii) the person pays or is required to pay a franchise fee.
Marketing Plan
Although Pepperidge Farm controlled pricing of products directly sold and provided pricing schedules for the purpose of calculating commissions, it did not exercise control over many other factors used to determine the existence of a marketing plan, the court found. These factors included: (1) hours and days of operations; (2) advertising; (3) retail environment; (4) employee uniforms; (5) trading stamps; (6) hiring; (7) sales quotas; and (8) management training. While Pepperidge Farm provided the distributors with financial support by guaranteeing the initial loan to finance purchases of the distributorships, it was not show to provide any other financial support.
Thus, the distributors failed to satisfy the marketing plan element of the “franchise” definition of the Washington Franchise Investment Protection Act.
Association with Trademark
To satisfy the “substantial association” element of the “franchise” definition, the distributors were required to show a substantial association with Pepperidge Farm trademarks or trade names beyond the act of distributing the Pepperidge Farm products. Although Atchley used the Pepperidge Farm logo on his business card and on one business form and his delivery trucks, such association was limited and incidental, the court ruled. The use of the Pepperidge Farm trademarks did not rise to the level of “substantial association.”
Payment of Franchise Fee
A “franchise fee” is a payment for the right to enter into a business under a franchise agreement and does not include “any payment for the mandatory purchase of goods or services or any payment for goods or services available only from the franchisee.” Also excluded from the definition are payments for purchases at a bona fide wholesale price. Ordinary business expenses are not “franchise fees” because they are paid during the regular course of business and not for the right to do business.
Thus, the distributors did not pay, agree to pay, or were required to pay a “franchise fee” within the meaning of the Washington Franchise Investment Protection Act, in the court’s view.
The case is No. CV-04-452-EFS.
Howard R. Morrill (Simburg Ketter Sheppard Purdy) for John R. Atchley. Forrest A. Hainline, III (Goodwin Procter LLP) for Pepperidge Farm Inc.
Thursday, November 17, 2011
Equipment Dealer Was Not Connecticut “Franchise”
This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.
The relationship between a terminated dealer of outdoor power equipment and a manufacturer was not a "franchise" under the meaning of the Connecticut Franchise Act (CFA) because the dealer failed to show that more than 50% of its business resulted from the relationship, the U.S. Court of Appeals in Chicago has ruled.
A federal district court’s grant of summary judgment in favor of the manufacturer on the dealer’s CFA claim (Business Franchise Guide ¶14,551) was affirmed.
Association with Franchisor’s Trademark
To qualify as a “franchise” under the CFA, the dealer must be substantially associated with the franchisor’s trademark. To be substantially associated with the franchisor’s trademark, the dealer must show that most, if not all, of its business was derived from association with the franchisor, the court noted.
Based on the "most or all" formulation, federal courts have found that a franchise existed only where at least half of the plaintiff’s business resulted from its relationship with the defendants.
In the district court, resolution of the dealer’s CFA claim hinged on testimony submitted by the dealer’s president. Much of that testimony, in which the president detailed the gross profits and gross sales of the business, was stricken by the court as inadmissible expert testimony on the grounds that the dealer had not disclosed the president as an expert witness.
Gross Profits
Regardless of whether the president’s statements were considered to be expert or lay testimony, they were inadmissible as based on the president’s opinion rather than any objective analysis. Both lay and expert testimony was inadmissible where it consisted of unsupported inferences from raw data, according to the court.
In this instance, the president’s opinion that sales and gross profits from its Sprinkler Hose division should have been disregarded was inadmissible. If the sales and gross profits from the division were included in the overall calculations, the total gross profits of the dealer’s business derived from the parties’ relationship ranged from 34.41% to 41.37%.
Gross Sales
Although the federal district court excluded the president’s opinion on whether the sales of the manufacturer’s products by Home Depot should be included in the total sales figures for the dealer, given the president’s role as the dealer’s president and secretary, he could likely assess the appropriateness of including those sales, according to the appellate court. However, in light of the purpose of the CFA, it made sense only to include only the amount of commissions on Home Depot sales that the dealer would lose as a result of its termination, not the full sales price of those products, in determining the dealer’s gross sales.
If only the commissions the dealer would lose from the Home Depot sales were used in determining the dealer’s gross sales of the manufacturer’s products, the manufacturer’s products still accounted for less than 50% of the dealer’s total sales. In the relevant years, the total gross sales of the dealer’s business that derived from the parties’ relationship ranged from 26% to 35%.
Failure of Business
Finally, the fact that the dealer went out of business shortly after its termination failed to establish, on its own, that the dealer was substantially associated with the manufacturer’s trademark under the CFA, the court determined. No court had relied solely on the fact that a company went out of business to conclude that a franchise relationship existed between two parties, the court observed.
More importantly, the dealer’s claim that the termination caused it to go out of business was inconsistent with the position it took before the federal district court that the loss of the relationship with the manufacturer "was not the death knell” because the dealer could have survived “absent a dire economy."
The decision is Echo, Inc. v. Timberland Machines & Irrigation, Inc., CCH Business Franchise Guide ¶14,714.
The relationship between a terminated dealer of outdoor power equipment and a manufacturer was not a "franchise" under the meaning of the Connecticut Franchise Act (CFA) because the dealer failed to show that more than 50% of its business resulted from the relationship, the U.S. Court of Appeals in Chicago has ruled.
A federal district court’s grant of summary judgment in favor of the manufacturer on the dealer’s CFA claim (Business Franchise Guide ¶14,551) was affirmed.
Association with Franchisor’s Trademark
To qualify as a “franchise” under the CFA, the dealer must be substantially associated with the franchisor’s trademark. To be substantially associated with the franchisor’s trademark, the dealer must show that most, if not all, of its business was derived from association with the franchisor, the court noted.
Based on the "most or all" formulation, federal courts have found that a franchise existed only where at least half of the plaintiff’s business resulted from its relationship with the defendants.
In the district court, resolution of the dealer’s CFA claim hinged on testimony submitted by the dealer’s president. Much of that testimony, in which the president detailed the gross profits and gross sales of the business, was stricken by the court as inadmissible expert testimony on the grounds that the dealer had not disclosed the president as an expert witness.
Gross Profits
Regardless of whether the president’s statements were considered to be expert or lay testimony, they were inadmissible as based on the president’s opinion rather than any objective analysis. Both lay and expert testimony was inadmissible where it consisted of unsupported inferences from raw data, according to the court.
In this instance, the president’s opinion that sales and gross profits from its Sprinkler Hose division should have been disregarded was inadmissible. If the sales and gross profits from the division were included in the overall calculations, the total gross profits of the dealer’s business derived from the parties’ relationship ranged from 34.41% to 41.37%.
Gross Sales
Although the federal district court excluded the president’s opinion on whether the sales of the manufacturer’s products by Home Depot should be included in the total sales figures for the dealer, given the president’s role as the dealer’s president and secretary, he could likely assess the appropriateness of including those sales, according to the appellate court. However, in light of the purpose of the CFA, it made sense only to include only the amount of commissions on Home Depot sales that the dealer would lose as a result of its termination, not the full sales price of those products, in determining the dealer’s gross sales.
If only the commissions the dealer would lose from the Home Depot sales were used in determining the dealer’s gross sales of the manufacturer’s products, the manufacturer’s products still accounted for less than 50% of the dealer’s total sales. In the relevant years, the total gross sales of the dealer’s business that derived from the parties’ relationship ranged from 26% to 35%.
Failure of Business
Finally, the fact that the dealer went out of business shortly after its termination failed to establish, on its own, that the dealer was substantially associated with the manufacturer’s trademark under the CFA, the court determined. No court had relied solely on the fact that a company went out of business to conclude that a franchise relationship existed between two parties, the court observed.
More importantly, the dealer’s claim that the termination caused it to go out of business was inconsistent with the position it took before the federal district court that the loss of the relationship with the manufacturer "was not the death knell” because the dealer could have survived “absent a dire economy."
The decision is Echo, Inc. v. Timberland Machines & Irrigation, Inc., CCH Business Franchise Guide ¶14,714.
Monday, March 08, 2010
Sub-Distributor Failed to Adequately Allege Illinois “Franchise”
This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.
A sub-distributor of electrical components failed to adequately allege that its relationship with a distributor was a "franchise" under the meaning of the Illinois Franchise Disclosure Act, according to the federal district court in Chicago.
Accordingly, the sub-distributor’s counterclaim against the distributor for violations of the Act’s registration, anti-fraud, and "good cause" for termination provisions was dismissed.
After the distributor terminated the parties’ agreements and brought suit for failure to pay for delivered goods, the sub-distributor responded with several counterclaims, including the alleged violations of the Illinois Franchise Disclosure Act.
Association with Distributor’s Trademark
The sub-distributor argued that it pled sufficient facts to permit the court to infer the existence of a franchise relationship under federal notice pleading standards. However, the sub-distributor’s counterclaim was devoid of any allegation that it used the distributor’s name or mark in marketing the distributor’s electrical components, as required by the statutory definition of "franchise," the court ruled.
Although it could be inferred that the sub-distributor used the distributor’s tradename or mark because the components at issue were alleged to be unique, it was certainly not a necessary inference, the court commented. Moreover, there was no allegation that the operation of the sub-distributor’s business was substantially associated with the distributor’s mark.
Franchise Fee Requirement
The sub-distributor cited caselaw and argued that it was not required to make allegations specific to the Franchsie Disclosure Act's requirements for a "franchise." However, the sub-distributor failed to allege that it operated a business under the distributor’s mark or paid the distributor a "franchise fee," two of the elements necessary to establish a franchise.
Notice pleading required a plaintiff to plead sufficient facts to make a claim plausible on its faith and the sub-distributor’s alleged facts did not reach even that low threshold.
The decision is BJB Electric v. North Continental Enterprises, CCH Business Franchise Guide ¶14,317.
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