Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Md.: Maryland’s Fair Distributor Act excludes franchisors even if registration has lapsed, (Aug 29, 2024)

By Rebecca Mayo, J.D.

A franchisor with a lapsed registration is still regulated by the Maryland Franchise Registration and Disclosure Law and therefore business relationships between such a franchisor and distributor fall outside the scope of the Maryland Fair Distributorship Act.

A distributor failed to show that a franchisor’s lapsed registration made the franchisor subject to the Maryland Fair Distributor Act (MFDA), according to a district court in Maryland. Because the MFDA does not apply to franchisors regulated under the Maryland Franchise Registration and Disclosure Law, such a franchisor, even with a lapsed registration, could not be held liable for a violation of the MFDA. Therefore, the court granted summary judgment in favor of the franchisor (DiStefano, Inc. v. Tasty Baking Co., No. 1:22-cv-01493-SAG (D. Md. Aug. 26, 2024)).

Tasty Baking Company is a large manufacturer of prepackaged baked goods that utilizes a system of distributor franchises to distribute its products to stores. The distributors enter into Distribution Agreements with Tasty directly, or may acquire a Distribution Agreement from an existing distributor. The Agreement requires distributors to use “best efforts to develop the market for and maximize the sale of” Tasty’s products, including maintaining a fresh supply of products at all retail outlets, removing damaged or overcoded products, and maintaining proper service and delivery to all outlets in the territory.

DiStefano, Incorporated (DI) first purchased distribution rights from Tasty in 2004 and later acquired an additional route from a third party in 2017, assuming a 2009 Distribution Agreement. In July 2021, Tasty sent a letter to DI referring to several failures to provide proper service as defined in the Distribution Agreement, including leaving overcode products on the shelves at four retailers. Later that month, a second letter described similar violations at the same four stores and clarified that future failure of performance could result in termination of the agreement. In September 2021, Tasty sent a third letter informing DI that it was again in breach of the agreement because one of the retailers had banned DI from servicing its stores due to repeated service issues, and again clarified that repeated failure of performance would likely result in termination of the Agreement. Shortly thereafter, Tasty’s Area Sales Director discovered more out-of-code baked goods at a retailer in DI’s territory and Tasty notified DI that the Distributor Agreement assumed in 2017 would be terminated for chronic failure of performance. DI filed claims for Breach of Contract and Violation of the Maryland Fair Distributorship Act, Md. Code § 11-1302 (MFDA). Tasty moved for summary judgment on both claims.

MFDA. The MFDA does not apply to a “franchisor regulated under the Maryland Franchise Registration and Disclosure Law.” Md. Code Ann. Com. Law § 11-1302(b)(2) (MFRDL). However, DI argued that Tasty’s registration as a franchisor lapsed from 2016-2018 and therefore Tasty was not a franchisor at the time DI acquired the second Tasty franchise in 2017, thus the MFDA should apply. The court disagreed, finding that DI bought its first franchise from Tasty in 2004, and though the second franchise was acquired from a third party in 2017, they were provided with a Franchise Disclosure Document. Further, DI provided a consent order as evidence of Tasty’s registration lapse, but the consent order notes that “Tasty offers and sells franchises in the form of distributorships to independent operators who sell and distribute bakery products.” The consent order also made it clear that though Tasty’s registration lapsed, it was still regulated by the MFRDL, and Tasty was in fact found in violation by the Securities Commissioner of Maryland. Therefore, the court held that the MFDA did not apply to Tasty as a regulated franchisor and summary judgment was appropriate on this claim.

Breach of contract. DI argued that Tasty violated the Agreement by breaching its implied duty of good faith both in terminating the agreement and operating DI’s former route after termination. While Pennsylvania courts recognize a duty of good faith and fair dealing, it applies only in the context of an attempt on the part of the franchisor to terminate its relationship with the franchisee and it does not override the express terms of the contract.

The court first looked to determine if DI adduced facts creating a genuine issue as to whether Tasty breached the terms of the Agreement or failed to act in good faith. The court found neither. The court noted that it was undisputed that DI received three breach notices within a period of only three months and DI admitted to having no evidence that those breach notices were incorrect or that the breaches described did not occur. The Agreement expressly provided that failure to remove overcode products from stores constituted a material breach and that three curable breach notices would be grounds for termination. DI did argue that Tasty’s inspectors targeted DI and that’s why so many violations were discovered, but it was undisputed that the violations happened. Therefore, the court found that it was not commercially unreasonable for Tasty to terminate DI’s Distribution Agreement. There was no genuine issue of material fact about whether Tasty acted in good faith in terminating the agreement, or whether the termination was commercially reasonable.

The court then looked to determine if DI cited facts creating such an issue as to whether Tasty breached the agreement through its post-termination conduct. The court noted that the sole obligation of Tasty after termination under the Agreement was to use reasonable efforts to operate the route in accordance with its own policies and DI was required to reimburse Tasty’s expenses. The court found that DI did not adduce any fact that created a genuine dispute as to whether Tasty used reasonable efforts in operating DI’s former route after termination, therefore there was no genuine issue of material fact as to whether Tasty breached the Agreement either during or after termination, making summary judgment appropriate on this claim.

The Case is No. 1:22-cv-01493-SAG.

Judge: Gallagher, S.

Attorneys: David G. Ross (Garris Horn LLP) for DiStefano, Inc. Robert Ross Niccolini (Ogletree Deakins Nash Smoak and Stewart PC) for Tasty Baking Co.

Companies: DiStefano, Inc.; Tasty Baking Co.

Cases: FranchisingDistribution MarylandNews GCNNews