OUR FRANCHISE AND DISTRIBUTION CLIENTS AND FRIENDS FROM: GRAY PLANT MOOTY'S FRANCHISE AND DISTRIBUTION PRACTICE GROUP

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1 The GPMemorandum TO: OUR FRANCHISE AND DISTRIBUTION CLIENTS AND FRIENDS FROM: GRAY 'S FRANCHISE AND DISTRIBUTION PRACTICE GROUP Quentin R. Wittrock, Editor of The GPMemorandum Maisa Jean Frank, Editor of The GPMemorandum Julia C. Colarusso, Editor of The GPMemorandum DATE: April 5, 2017 No. 216 (Distribution Issue) This issue of The GPMemorandum focuses on topics primarily of interest to companies that use distributors and dealers rather than manage a business format franchise system. The distribution-related topics this quarter include antitrust, the application of state statutes, and the arbitrability of disputes. ANTITRUST TENTH CIRCUIT AFFIRMS DISMISSAL OF ILLEGAL TYING CLAIM IN MEDICAL AND SURGICAL SUPPLY MARKET In Suture Express, Inc. v. Owens Sr Minor Distribution, 2017 WL (10th Cir. Mar. 14, 2017), a distributor of sutures and endomechanical (together known as "suture-endo") supplies sued two competitors in the medical and surgical supply market, alleging that their bundling packages constituted illegal tying arrangements in violation of state and federal antitrust laws. Unlike the defendants, who distributed a large selection of medical supplies from a network of regional distribution centers, Suture Express's narrow focus on two types of easy-to-ship medical supplies distributed from a single centralized warehouse provided it with significant savings in its distribution of those products. After Suture Express steadily grew its market share, the defendants responded by selling their own suture-endo supplies in discounted bundled packages with other essential medical supplies, which in effect meant that even though customers could purchase cheaper sutureendo supplies from Suture Express, they would have to pay a

2 penalty on other medical supplies if they did not buy the bundled packages from the defendants. The United States Court of Appeals for the Tenth Circuit affirmed summary judgment in favor of the defendants, concluding that Suture Express had not shown that the defendants had sufficient market power or that there was an actionable antitrust injury. Suture Express argued that the defendants had sufficient market power because the tying arrangement allowed them to control prices, but the Tenth Circuit concluded that this argument did not account for other pro-competitive explanations for a customer's willingness to buy a bundled package, such as the consolidation of purchases and having fewer distributors to deal with. Moreover, any price difference between the suture-endo supplies sold by the defendants was not necessarily evidence of market power, but was instead explained by their markedly different distribution models. As to antitrust injury, the court noted that the evidence demonstrated a decrease in markups, a consolidation of buying power, and the growth of other regional and national competitors not named as defendants all of which suggested that the medical supply market was becoming more, not less, competitive. Because injury to Suture Express as a competitor, rather than injury to competition as a whole, did not establish antitrust injury, the Tenth Circuit affirmed summary judgment.!phone USERS HAVE STANDING TO SUE APPLE FOR ANTITRUST VIOLATIONS The Ninth Circuit Court of Appeals has reversed a district court's standing-based dismissal of a class-action complaint against Apple Inc. In re Apple iphone Antitrust Litig., 846 F.3d 313 (9th Cir. Jan. 12, 2017). The plaintiffs alleged that Apple violated federal antitrust law by requiring iphone "apps" to be sold only through Apple's "App Store," prohibiting third-party app developers from selling the software outside of Apple, and charging app developers 30 percent of their App Store sales. The district court had held that the plaintiffs lacked standing because of the longstanding "direct-purchaser rule" in antitrust law, which provides that only immediate buyers from the alleged antitrust violator have standing to sue. The district court found that the app developers, not Apple, distributed the apps directly to purchasers, so the purchaser-plaintiffs did not have standing to sue Apple. The appellate court disagreed with the district court and held that Apple functioned as a distributor of iphone apps rather than as a manufacturer or producer. Apple argued that it did not sell apps, but rather sold app distribution services to developers, similar to how a shopping mall leases physical space to various stores. The appellate court rejected that analogy, finding that the app developers did not sell through their own "stores" because, as alleged by the plaintiffs, Apple specifically prohibited the developers from doing so. Although Apple did not set the price of the apps or take ownership of the apps, the appellate court declined to follow case law from another 2

3 circuit and found that Apple functioned as a distributor from whom the plaintiffs made direct purchases. Therefore, according to the appellate court, the plaintiffs had standing to sue, and the case was remanded to the district court for further proceedings. C I NI I IN/'.. WISCONSIN DISTRICT COURT DENIES MOTION TO DISMISS CLAIM THAT DISTRIBUTOR FAILED TO COMPLY WITH AGREEMENT'S NOTICE REQUIREMENT A Wisconsin federal court recently denied a distributor's motion to dismiss a breach of contract action brought by one of its dealers. Traffic and Parking Control Co. v. Global Traffic Techs., LLC, 2017 WL (E.D. Wis. Mar. 21, 2017). TAPCO claimed, among other things, that GTT breached the dealership agreement between the parties by sending its termination notice in the form of an . While the notice clause of the agreement did not explicitly identify as a permissible form of written notice, both parties' addresses were listed in the contact information section of the clause. In moving to dismiss TAPCO's claims, GTT first argued that its to TAPCO complied with the notice clause because it was in writing and TAPCO's address was included in the agreement's notice provision. GTT alternatively argued that its amounted to "substantial compliance" with the notice provision, which was all that was required under Wisconsin law. GTT further argued that TAPCO failed to allege damages resulting from GTT's alleged breach. TAPCO maintained that the plain language of the agreement did not list among the permitted notice methods and that its request for declaratory and injunctive relief obviated the need to plead damages. The district court denied GTT's motion to dismiss, holding that TAPCO's allegations stated a claim for breach of contract. Construing the agreement in TAPCO's favor, the court found that the notice clause appeared to support TAPCO's position that notice by was insufficient. Any argument by GTT that the clause was ambiguous would require extrinsic evidence of the parties' intent, to be developed in discovery, and thus was not appropriate support for a motion to dismiss. Finally, the court rejected GTT's contention that TAPCO had to seek monetary damages in order to maintain its breach of contract action, reasoning that parties need not claim monetary damages when they pursue declaratory and injunctive relief., I L LAW ft./ BATHTUB MANUFACTURER'S LICENSING ARRANGEMENT CREATED AN ACCIDENTAL FRANCHISE, BUT COURT FINDS LIMITED REMEDIES Meanwhile, the United States District Court for the Southern District of New York held that a license agreement between Safe Step Walk In Tub and CKH Industries created an 3

4 accidental franchise, and therefore partially denied Safe Step's motion to dismiss CKH's claims. Safe Step Walk In Tub Co. v. CKH Indus., Inc., 2017 WL (S.D.N.Y. Mar. 17, 2017). Under both the FTC's "Franchise Rule" and applicable state laws, the court found that the following three indicia of a franchise were readily met: (1) the franchisee obtained the right to operate a business or sell or offer goods or services that are associated with a trademark or other commercial symbol provided by the franchisor; (2) the franchisor promised to, or had the right to, exercise significant control or provide significant assistance in the operation of the business; and (3) the franchisee was required to pay the franchisor a fee. In considering those elements, the court noted that Safe Step had licensed CKH the use of its trademark; that Safe Step exerted control over CKH's business through minimum sales requirements, a marketing plan, training requirements, and reporting requirements; and that Safe Step charged CKH an initial fee of $5,000. Nevertheless, the court further determined that franchise laws provided only a limited basis for recovery. It looked to the structure of the parties' contractual arrangement which included numerous regional agreements to determine which franchise laws should apply. The court acknowledged that because the federal Franchise Rule does not provide a private right of action, CKH could not bring a claim against Safe Step for violation of its disclosure obligations under federal law. CKH argued that the regional agreements also implicated state franchise laws, including those of New Jersey and Rhode Island, which contain "Little FTC Acts" that do grant a private right of action. The court concluded, however, that most of CKH's claims lacked merit. It observed that a threat of harm to consumers was necessary to trigger CKH's rights under the Little FTC Acts. Characterizing Safe Step's violation of its disclosure obligations under state and federal law as a private contractual matter between the parties, the court found no threat to consumers and therefore dismissed those claims. But the court allowed CKH's claims under state franchise relationship laws relating to wrongful termination or nonrenewal to proceed. DISTRIBUTOR'S CALIFORNIA UNFAIR COMPETITION LAW CLAIM ALLOWED DESPITE NO DISTRIBUTION IN CALIFORNIA A federal court in California has allowed various claims by a distributor against its supplier to go to trial, including a California Unfair Competition Law ("UCL") claim alleging the supplier should have provided a Franchise Disclosure Document. G.P.P., Inc. v. Guardian Protection Prods., Inc., 2017 WL (E.D. Cal. Jan. 18, 2017). The Pennsylvania-based plaintiff was the exclusive distributor of defendant Guardian's products in several different territories, which did not include California. But the distributor had originally entered into distribution agreements that included a California choice-of-law provision. A dispute arose out of the distributor's alleged failure to meet certain quotas. Despite notices of potential termination sent by the supplier, the parties 4

5 continued their distribution relationship while seeking a declaration of whether termination would be proper. Both parties moved for summary judgment. The supplier argued that the distributor could not base its UCL claim on alleged violations of the federal Franchise Rule because the Federal Trade Commission Act does not provide a private cause of action. The court ultimately denied summary judgment on the UCL claim, finding that the Franchise Rule would not preclude a UCL claim based on a failure to provide a FDD. The court refused to follow an unpublished Ninth Circuit case cited by the supplier, and further found that state franchise laws provided an independent basis for the UCL claim. ARBITRATION MICHIGAN COURT HOLDS THAT FEDERAL MOTOR VEHICLE FRANCHISE CONTRACT ARBITRATION FAIRNESS ACT DOES NOT APPLY TO FOREIGN DEALERS A Michigan federal court recently found that it lacked the authority to determine the arbitrability of a dispute between an American manufacturer and a foreign dealer in Arabian Motors Group, W.L.L. v. Ford Motor Co., 2017 WL (E.D. Mich. Jan 19, 2017). A Kuwaiti dealer alleged that it could not be compelled to arbitrate its dispute with an American manufacturer as required by the parties' resale agreement. The dealer claimed that the agreement's delegation clause was unenforceable under the federal Motor Vehicle Franchise Contract Arbitration Fairness Act. The court found that the Fairness Act does not apply to contracts between domestic manufacturers and foreign dealers; therefore, the clause delegating the authority to determine arbitrability remained enforceable. Generally, questions of arbitrability are to be decided by courts, rather than arbitrators. The parties in this case, however, had agreed to arbitrate under the then-current UNCITRAL Rules, which provide that "the arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause." Courts have consistently held that the use of the UNCITRAL Rules is clear evidence that the parties intended to have an arbitrator decide the threshold issues of the enforceability of an arbitration clause. The dealer contended that the delegation provision was unenforceable under the Fairness Act because it requires the post-dispute consent of the parties to submit any matter (including arbitrability) to arbitration. The Fairness Act applies, however, only to motor vehicle franchise contracts. The court found that a contract between a manufacturer and a foreign dealer is not a motor vehicle franchise contract as contemplated by the statute. The court based its finding on the presumption that Congress generally intends for its statutes to have strictly domestic application and there was no convincing indication that Congress had intended differently with regards to the Fairness Act. 5

6 John W. Fitzgerald, co-chair ( ) Megan L. Anderson ( ) Sandy Y. Bodeau ( ) Phillip W. Bohl ( ) Jennifer C. Debrow ( ) Danell Olson Caron ( ) Elizabeth S. Dillon ( ) Lavon Emerson-Henry ( ) Ashley Bennett Ewald ( ) Michael R. Gray ( ) * Kathryn E. Hauff ( ) Karli B. Hussey ( ) Franklin C. Jesse, Jr. ( ) Gaylen L. Knack ( ) Minneapolis, MN Office Kirk W. Reilly, co-chair ( ) * Raymond J. Konz ( ) * Richard C. Landon ( ) * Craig P. Miller ( ) Bruce W. Mooty ( ) * Kevin J. Moran ( ) Kate G. Nilan ( ) Ryan R. Palmer ( ) Daniel J. Ringquist ( ) Max J. Schott II ( ) Michael P. Sullivan, Jr. ( ) James A. Wahl ( ) Lori L. Wiese-Parks ( ) * Quentin R. Wittrock ( ) Washington, DC Office Robert L. Zisk, co-chair ( ) John J. McNutt ( ) * Julia C. Colarusso ( ) * Iris F. Rosario ( ) * Whitney A. Fore ( ) Justin L. Sallis ( ) * Maisa Jean Frank ( ) Frank J. Sciremammano ( ) Jan S. Gilbert ( ) * Erica L. Tokar ( ) * Virginia D. Horton ( ) Stephen J. Vaughan ( ) Mark A. Kirsch ( ) Diana V. Vilmenay ( ) Peter J. Klarfeld ( ) Eric L. Yaffe ( ) Sheldon H. Klein ( ) Carl E. Zwisler ( ) * Wrote or edited articles for this issue. For more information on our Franchise and Distribution practice and for recent back issues of this publication, visit the Franchise and Distribution Practice Group at *.er Follow us on Twitter: OGPM_Franchise GRAY 80 South Eighth Street 600 New Hampshire Avenue, N.W. 500 IDS Center The Watergate Suite 700 Minneapolis, MN Washington, DC Phone: Phone: franchise@gpmlaw.com The GPMemorandum is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A., and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own franchise lawyer concerning your own situation and any specific legal questions you may have. GP: vl 6