Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: Safeguard distributor plausibly alleges breach of agreement, (Nov 18, 2015)

By Linda O’Brien, J.D., LL.M.

A business management system distributor plausibly alleged breach of contract claims against the system provider for violation of the customer protection provisions of the distributor agreement, the federal district court in Los Angeles has decided. Thus, the system provider’s motion to dismiss was denied (United Safeguard Distributors Assn., Inc. v. Safeguard Business Systems, Inc., November 17, 2015, Lew, R.).

Safeguard Business Systems, Inc. (SBS) provides business management solutions to small businesses, including printing, promotional products, business apparel, and web services. Schob and Schob, Inc. is a distributor for SBS. United Safeguard Distributor Association, Inc. (USDA) is a membership organization for SBS distributors.

In May 2015, USDA and Schob brought suit against SBS, in part, for breach of contract. Specifically, the plaintiffs alleged that SBS failed to investigate the improper solicitation of Schob customers by other SBS distributors, failed to pay applicable commissions, failed to notify Schob of materially adverse effects on its sales, required distributors to purchase supplies from preferred vendors, imposed rebates on supply purchases, and charged excessive commission fees and shipping costs. SBS moved to dismiss the complaint.

Breach of contract. The court found that the plaintiffs plausibly alleged a breach of contract claim regarding Schob’s customer protection rights. The plaintiffs alleged that SBS violated the distributor agreement by failing to (1) prohibit other distributors from selling to Schob’s protected customers; (2) pay Schob all commissions generated on sales to its customers; and (3) promptly notify Schob of any event expected to have a material adverse effect upon the sale of SBS systems to its customers pursuant to the customer protection rights identified in the agreement.

According to the court, the plaintiffs clearly set forth sufficient evidence that SBS was aware of customer protection violations yet failed to prohibit the violations, failed to pay Schob all the applicable commissions on the sales to its protected customers, and was aware of company owned distributors’ solicitation of Schob customers. Consequently, these actions were a breach of the distributor agreement.

However, the plaintiffs did not plausibly allege breach of contract claims with respect to the distributor requirement to purchase products from preferred providers, the imposition of rebates on supply purchases, and increased commission charges and shipping costs. The plaintiffs’ argument that the distributor agreement was breached by SBS requiring them to purchase higher priced products from preferred suppliers rather than otherwise qualified approved vendors was rejected. The court noted that the language of the agreement did not authorize or prohibit SBS from requiring SBS distributors to purchase from preferred vendors and there was no breach of contract unless SBS violated an express duty stated in the agreement. The plaintiffs failed to show that SBS owed Schob a duty to permit the distributor to select its own suppliers.

Furthermore, the distributor agreement “unequivocally” provided that distributors must solicit orders for SBS systems in accordance with published price schedules and that commission rates may change at the discretion of SBS. Finally, the plaintiffs failed to show that the agreement prohibited SBS from raising commission fees above its actual administration costs or that increased shipping and handling costs constituted a breach of the distributor agreement, the court concluded.

The case is No. 2:15-cv-03998-RSWL-AJW.

Attorneys: James M. Mulcahy (Mulcahy LLP) for Schob and Schob, Inc. Christopher S. Reeder (Robins, Kaplan LLP) for Safeguard Business Systems Inc.

Companies: Schob and Schob, Inc.; Safeguard Business Systems Inc.; United Safeguard Distributor Assn., Inc.

Cases: FranchisingDistribution CaliforniaNews