Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: 7-Eleven’s infringement claim against franchisee tossed, (Apr 21, 2015)

By Peter Reap, J.D., LL.M.

7-Eleven, Inc.’s claim of trademark infringement against one of its franchisees and other defendants in connection with the franchisee’s alleged resale of 7-Eleven branded products at a competing and unauthorized convenience store was without merit because the franchisor failed to allege sufficient facts regarding the likelihood of confusion, the federal district court in Newark has decided (7-Eleven, Inc. v. Maia Investment Company, Inc., April 17, 2015, Simandle, J.). Additionally, the franchisor’s claim for fraud was barred by New Jersey’s economic loss doctrine, and its claim for civil conspiracy failed for lack of an underlying unlawful act. All three claims were dismissed.

Background. 7-Eleven alleges that its franchisee, Sam Younes, conspired with other defendants to sell 7-Eleven branded products at a competing convenience store. Specifically, 7-Eleven contended that Younes provided 7-Eleven proprietary products, including Cheeseburger Bites, BIG BITE hot dogs, Buffalo Chicken Rollers, and Buffalo Chicken Taquitos, for sale at the “24-7 Foodmart” in Cherry Hill, New Jersey, owned and operated by defendant Maia Investment Company, Inc. Other defendants included Younes’ wife, Nashwa Younes, who is Maia’s president; his son, Mohammad Younes, who is Maia’s vice-president; and Kathy Morgan, who is the manager of the 24-7 Foodmart where the alleged infringement occurred.

Trademark infringement. Under the first sale doctrine, “a trademark owner’s authorized initial sale of its product into the stream of commerce extinguishes the trademark owner’s rights to maintain control over who buys, sells, and uses the product in its authorized form,” the court noted. Iberia Foods Corp. v. Romeo, 150 F.3d 298, 301 n.4 (3d Cir. 1998). The mere resale of genuine goods, without more, does not state a claim for trademark infringement because there is no confusion about the product if the goods sold are genuine.

As this Court noted in Nagler, however, “[t]his does not mean that sellers of genuine goods are therefore immune from trademark liability.” Food Sciences Corp. v. Nagler, Civ. 09-1798 (JBS), 2010 WL 1186203 (D.N.J. Mar. 22, 2010). The plausibility of 7-Eleven’s trademark infringement claim turned on whether 7-Eleven adequately alleged a likelihood of confusion, the court explained.

7-Eleven argued that the defendants’ resale of 7-Eleven branded products without more was sufficient to allege a likelihood of confusion because the sale of such products, exclusively sold at 7-Eleven stores, “inherently suggest[s] an affiliation with or sponsorship by 7-Eleven that is likely to confuse consumers.” The court rejected a similar argument in Nagler, and 7-Eleven provided no support for such an argument in the present action. Absent authority endorsing the contention that resale of certain products is inherently likely to confuse consumers, the court was bound by well-settled law that mere display and resale of a genuine product does not violate the Lanham Act.

Here, 7-Eleven’s Amended Complaint alleged almost nothing beyond the mere resale of 7-Eleven’s products, the court observed. Importantly, neither the Amended Complaint, nor 7-Eleven’s briefing, described with any specificity the “proprietary roller grill product identifiers” upon which many of the products were allegedly prepared and displayed. It was conceivable that these “identifiers” could be construed as advertising and labeling exclusively used by 7-Eleven, which could constitute conduct by the defendants beyond merely reselling 7-Eleven’s products. However, without additional facts clarifying the nature, location, quantity, and prominence of these identifiers, including whether and in what manner they bear 7-Eleven’s logo, the court declined to speculate.

Accordingly, the facts as alleged in the Amended Complaint fell short of those necessary to support a claim for trademark infringement based on sponsorship confusion.

Fraud. “The economic loss doctrine prohibits plaintiffs from recovering in tort economic losses to which their entitlement only flows from contract.” Chen v. HD Dimension Corp., Civ. 10–863, 2010 WL 4721514, *8 (D.N.J. Nov. 15, 2010). However, state and federal courts have repeatedly recognized that New Jersey law remains unsettled as to whether the economic loss doctrine bars a claim for fraud where the alleged fraud is circumscribed by a contract between the parties, the court noted.

Although the New Jersey Supreme Court has yet to resolve the question, courts in the District of New Jersey consistently distinguish between fraud in the inducement and fraud in the performance of a contract. Where the fraud alleged is contained within the four corners of the contract, that is, where it concerns the nonfulfillment of a warranty or a guarantee contained in the contract, the plaintiff is prohibited from pursuing a separate tort claim; but, where the fraud is extrinsic to the contract, that is, where it more closely resembles a fraud in the inducement claim, then the plaintiff is not prohibited from pursuing simultaneous tort and contract claims. In the absence of direction from the New Jersey Supreme Court or state appellate courts, the court followed the reasoning of courts in the District that distinguish between conduct extrinsic or intrinsic to the contract.

7-Eleven’s fraud claim against Sam Younes involved conduct explicitly addressed in the Franchise Agreements between the parties. The fraud claim was thus entirely derivative of Sam Younes’ contractual duties as defined in the Franchise Agreements. Under New Jersey law as interpreted by courts in the District, such a fraud claim was barred by the economic loss doctrine.

Conspiracy. Under New Jersey law, to state a claim for civil conspiracy, a plaintiff must allege that the defendant (1) entered into an agreement with at least one other person, (2) for the purpose of committing an unlawful act, and (3) one of the conspirators then took at least one overt act in furtherance of the agreement, and (4) plaintiff suffered some damage as a result.

7-Eleven’s conspiracy claim against all defendants was premised on their alleged role in aiding and abetting the alleged fraud committed by Sam Younes. However, as discussed above, 7-Eleven’s fraud claim against Sam Younes was barred by the economic loss doctrine. Without an underlying wrong, 7-Eleven could not state a claim for conspiracy.

The case is No. 14-8006 (JBS/JS).

Attorneys: Stephen Sussman (Lebensfeld Sharon & Schwartz P.C.) for 7-Eleven, Inc. Steven E. Angstreich (Weir & Partners LLP) for Maia Investment Company, Inc.

Companies: 7-Eleven, Inc.; Maia Investment Company, Inc.

Cases: FranchisingDistribution NewJerseyNews