| In what many believe is the first decision addressing the issue of whether franchisors may compete with their franchisees in e-commerce, a panel of arbitrators has enjoined franchisor Drug Emporium and its subsidiary, DrugEmporium.com from selling over the Internet to customers located in the territories in which franchisees have been given the exclusive right to operate Drug Emporium stores.
In deciding that a preliminary injunction should be issued, the arbitrators considered the following question, “...whether a virtual drug store is a drug store for purposes of a franchise agreement?”
In finding that the franchisees demonstrated the requisite likelihood of ultimately proving that Drug Emporium’s internet sales breached its commitment to provide its franchisees the exclusive right to conduct the business of drug stores in designated territories, the arbitrators concluded: “It is not for this panel to divine whether a virtual reality is real or whether it is a phantom. We will take Respondents at their word. Respondents have marketed DE.com to be a ‘drugstore’ in its filings to the SEC. We also infer from the Respondents conduct that [they] honored the Claimants territories until now, including the offer of compensation during the test period for DE.com, that the parties reasonable expectation was that the Claimants would not be forced to compete with drug store sales by Respondents. This inference is bolstered by the failure of the franchise agreements to permit the Respondents to operate drug stores within the territory absent a breach by the franchisees.”
The arbitrators also found that the franchisees proof as to how Drug Emporium has been operating its website, including advertising this new website as, “Your neighborhood pharmacy for twenty years,” establishes a likelihood that the franchisees will ultimately prevail in proving dilution of the licenses the franchisees hold to use the Drug Emporium trademark in their territories.
Michael Dady of Dady & Garner, PA, an American Franchisee Assoc. Affiliate Member, represented the franchisees in this matter. Dady commented, “When franchisees are given exclusive territories to conduct their store operations, and pay substantial royalties to obtain support from their franchisors, they do not expect to have to compete with their franchisors. This decision enforces the reasonable expectation of our franchisee clients of no competition from their franchisor.”. |
