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Heading: internauts
According to the American Arbitration Association the franchiser Drug Emporium Inc. (“DEI”) and its subsidiary Drug Emporium.com, (“DE.com”) are in breach of their franchise agreement with their Drug Emporium franchisees, and are thus no longer allowed to sell products over the Internet within the franchisees’ exclusive territories. The arbitration panel was asked by the franchisees, the Claimants in the case, to reside over whether the definition of the term “drug store”, as outlined in the franchise agreement, applies to the DEI’s online enterprise, DE.com (the respondents). The Claimants argued that their franchiser’s online sales unlawfully infringed on their exclusive territory which was guaranteed in their respective franchise agreements. As a Web site, DE.com can naturally be accessed and exploited by online customers in any delineated market nationwide. The Claimants’ legal counsel affirmed that “When franchisees are given exclusive territories to conduct their store operations, and pay substantial royalties to obtain support from their franchisers, they do not expect to compete with their franchisers”. The
Respondents maintained the position that the franchisees’ arguments are not
legally applicable in this case. The
respondents advocated that DE.com is a virtual store that resides in a
computer and is thus not a “drug store”, a physical enterprise as
was defined in the contract agreement.
As a consequence, the territorial exclusivity granted to a “drug
store” franchisee neither applies to DE.com nor can such a virtual
store be at fault for any territorial encroachment. In
their decision, the arbitration panel concluded that evidence demonstrate that
the respondents violated their franchise agreements.
First, by marketing their Web site as a “full service online
drugstore” and “your neighborhood pharmacy for twenty years”, a logical
inference could be made regarding the nature of DE.com.
Moreover, the respondents themselves registered DE.com as a
“drugstore” in its filings with the Securities and Exchange Commission.
Second, the panel concluded that DEI demonstrated bad faith towards their
franchisees. The arbitration panel said that in “attempting to build
market share by offering special sales at prices that vastly undercut prices
available at the [franchisees’] . In addition, during negotiations to sell DE.com to a
third party, DEI’s refusal to “include a contractual provision to
require the purchase to be subject to this panel’s ruling lead to the
inference that the intention is to exploit the [chain’s
trademark]
with even greater zeal.” The
implications of this case has drawn considerable attention from the legal
community. Michael Dady, the lawyer who represented the
franchisees, believes that the arbitrator’s decision will ensure that
franchisees continue to benefit from the rights guaranteed by their respective
franchise agreements. “Drug Emporium franchisees have had for over twenty
years exclusive rights to their franchiser’s trademark” Dady explains.
“Suddenly however, their exclusive rights were
taken away”. Dady believes that the arbitrators intention was to affirm
that the franchisers cannot seize these exclusive rights without consenting its
franchisees first. Dady
is quick to illustrate that his franchisee clients are not typically against
having their franchisers find new and innovative ways of relaying information,
products and services to customers. In
fact , Dady explains, franchisees would participate in new forms of Internet marketing, so long as franchisees could righfully profit from sales in their
territories, as contractually guaranteed. Rather than implementing such
marketing policies at the expense of franchisee sales, Dady said that his aim is
“to negotiate agreements with franchisers that would allow consumers to
benefit, all the while not harming the franchisees in the process”. Andrew
C. Seldon, a member of the Minneapolis firm Briggs and Morgan and former chair
of the American Bar Association Forum on Franchising, sees Internet encroachment
as one of the most important issues facing the franchising industry. Seldon
claims that as existing franchise agreements long predate e-commerce, such
agreements will increasingly be examined in an effort to resolve problems online
that the contracts were never intended to address. Therefore, in regards to all
pre-Web franchise agreements, Seldon notes that this “decision underlines the
importance of addressing and resolving the legal issues of Internet marketing
prior to any marketing program
being implemented.” In
regard to whether future legislation is needed to combat franchise Internet
encroachment, Dady answered that such regulation may indeed be required. Dady
suspects that “an Internet legislation, or a generic legislation that would
apply to Internet encroachment is more likely develop…
if franchisees continue to get hurt, all the while not being able to find
a remedy through the courts or arbitration”.
The
Drug Emporium arbitration ruling is
one of many cases where the existing legislation is found ill-equipped to
resolve Internet franchise encroachment. Although
this case was resolved, it underscores a more critical problem for lawmakers as
the evolution of technology continues to outpace our current legal system. R.S. Links : >American Arbitral Association
decision, >Stuart
Gittleman, « Franchisees Win Landmark Internet Arbitration Ruling »,
September 12, 2000, Law.com, See also on Juriscom.net : >Le
commerce électronique en toute franchise ? (Chroniques francophones), |
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Thoumyre |
