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
Under trademark law a franchisee
only may use a franchisor's trademark
in a manner which is authorized by the
franchisor.
2
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.
3
A franchisee's rights relating to where
or how it may use a franchisor's
trademarks is principally a matter of
contract law.
4
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.
5
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.
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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.
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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.
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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.
9
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.
10
US agreements typically prohibit
franchisees from owning or using
domain names which contain the
franchise trademarks, unless the
franchisor expressly approves of such
uses.
11
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.
12
Vertical customer and territorial
restraints are evaluated under the
"rule of reason." They are not “per se”
unlawful.
13
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.
14
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.
15
Restrictions on franchisees' rights to
sell or promote their businesses or
products/services over internet must
be disclosed in US Franchise
Disclosure Documents (FDDs).
16
FDD Item 12: Territory
(6) For all territories (exclusive and nonexclusive) disclose:
(i) Any restrictions on the franchisor from
soliciting or accepting orders from
consumers inside the franchisee’s
territory, including:
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(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.
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(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.
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(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.
20
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.
21
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)
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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
[email protected]
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