Sales Under New Block Exemption Regulation: US Perspective

1. Internet Sales Under the New Block Exemption Regulation:The United States Perspective Carl Zwisler Gray Plant Mooty Washington, DC 2010 IDI Annual Conference Torino, Italy June 11-12, 2010

2. Under trademark law a franchisee only may use a franchisor's trademark in a manner which is authorized by the franchisor.

3. Well drafted franchise agreements grant franchisees the right to use the franchisor's trademarks only in the manner the franchisor prescribes or approves.  All other rights relating to the trademarks are usually reserved to the franchisor.

4. A franchisee's rights relating to where or how it may use a franchisor's trademarks is principally a matter of contract law.

5. Example 1 Limitations on Grant 1.2.1 Channels of Distribution. Except as otherwise expressly set forth herein, Licensee shall have the right to sell SBC products only by retail sale though the SBC Cafes operated in accordance with this Agreement. Licensee shall have no right to sell any Grocery Channel Coffee from the SBC Cafes. Licensee shall have no right to sell SBC products thought any trade or distribution channel other than SBC Cafes, and without limiting the foregoing, Licensee shall not sell SBC products by wholesale, mail order, on-line computer sales or other computer sales methods, by specialty sales, or by any other means outside of any SBC Cafe.

6. Without limiting the foregoing, without SBC express prior written consent, which may be granted or withheld in SBC sole and absolute discretion, Licensee shall not use any Trademark in any computer or other media network and shall not establish a website or “home page” or other advertising or reference source relating to any Trademark in any computer or other media network.

7. Example 2 We grant you the right to operate a Franchised Store at a specific location as set forth in Section 1.12 to your franchise agreement. You may operate the Franchised Store only at the approved location and may not solicit or accept orders outside of your Franchised Store. This means, among other things, that you cannot use other channels of distribution, such as the Internet, catalog sales, and telemarketing or other direct marketing to make sales at locations outside your Franchised Store. You will not receive an exclusive territory.

8. Example 3 You have no right to (i) sublicense the marks or the System to any other person or entity, (ii) use the Marks of the System at any location other than the Site, or (iii) to use the marks or the System in any wholesale, e-commerce, or other channel of distribution besides the retail operation of the Store at the Site.

9. Example 4 Websites. You are not authorized to have a website for your Store. We will provide basic information about your Store on our website.

10. Except for the "covenant of good faith and fair dealing," no law or legal theory grants a franchisee rights which exceeds the express grant in a franchise agreement.  Under the covenant of good faith, a franchisor may not engage in conduct which effectively deprives a franchisee of receiving the benefits of his bargain.

11. US agreements typically prohibit franchisees from owning or using domain names which contain the franchise trademarks, unless the franchisor expressly approves of such uses.

12. US antitrust laws (competition laws) only impact vertical internet sales restrictions if they are "customer restraints" or "territorial restraints" which unreasonably restrain competition in any line of commerce in any geographic market.

13. Vertical customer and territorial restraints are evaluated under the "rule of reason." They are not “per se” unlawful.

14. Johnathan Jacobson, Antitrust Law Developments (sixth), (2003) quoting from U.S. Supreme Court in Continental TV, Inc. v. Sylvania, Inc. 433 US 36 (1997): “The market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition. That is because “[v]ertical restrictions promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products.

15. Nonprice vertical restrictions are evaluated under the rule of reason, by which the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing in unreasonable restraint on competition. In conducting a reasonableness inquiry, the Court observed that existing “interbrand competition confronting the manufacturer” can provide a “significant check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product.

16. Restrictions on franchisees' rights to sell or promote their businesses or products/services over internet must be disclosed in US Franchise Disclosure Documents (FDDs).

17. FDD Item 12: Territory (6) For all territories (exclusive and non-exclusive) disclose: (i) Any restrictions on the franchisor from soliciting or accepting orders from consumers inside the franchisee’s territory, including:

18. (A) Whether the franchisor or an affiliate has used or reserves the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing sales, to make sales within the franchisee’s territory using the franchisor’s principal trademarks.

19. (B) Whether the franchisor or an affiliate has used or reserves the tight to use other channels of distribution such as the Internet, catalog sales, telemarketing or other direct marketing, to make sales within the franchisee’s territory of products or services under trademarks different from the ones the franchisee will use under the franchise agreement.

20. (ii) Any restriction on the franchisee from soliciting or accepting orders from consumers outside of his or her territory, including whether the franchisee has the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing, to make sales outside of his or her territory.

21. Internet advertising and sales restrictions which restrict price competition among franchisees may generate scrutiny.  Compare Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 US 877 (2007) with MD law criminalizing minimum vertical price fixing.

22. What are “Passive Internet Sales?” • Amazon.com 2009 sales $24.5 billion, 42% growth over 2008 • Internet Sales projected to be 8% of US Retail Sales by 2014 ($248.7 billion)

23. Thank you, Carl E. Zwisler Gray Plant Mooty 2600 Virginia Avenue, NW Suite 1111 – The Watergate Washington, DC 20037 Phone: 202-295-2225 Facsimile: 202-295-2275 carl.zwisler@gpmlaw.com