Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Franchisor Required to Pay Developer for In-House Sales Only 20 Percent of What It Charged Franchisees, (May 15, 2013)

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

In a contractual dispute between a franchisor of business training centers, Sandler Systems, Inc. (SSI), and Topline Solutions, Inc., the developer of a negotiation program called "Negotiating with the Savvy Buyer," SSI was required to pay Topline 20 percent of the amount it would have received if it had sold to a franchisee the materials used for in-house provision of the negotiation program, the federal district court in Baltimore has decided (Topline Solutions, Inc. v. Sandler Systems, Inc., May 13, 2013, Quarles, W.). Topline’s contention that it was entitled to 20 percent of "all revenues collected by SSI for training done with negotiation for…in-house clients" was rejected.

Background. Topline, together with others, developed "Negotiating with the Savvy Buyer" and executed a Co-Development Agreement ("CDA") to market and sell an adaption of Negotiating with the Savvy Buyer called the SSI Negotiating Program through SSI’s network of franchises and customers. Under the CDA, SSI agreed to pay Topline 20 percent "of SSI’s net receipts, if any, from the sale of the SSI Negotiation Program to the Sandler Franchise Network, including initial and subsequently modified materials."

Topline sued Sandler for breach of contract and other claims. By prior order, it was determined that SSI breached the CDA and an independent auditor was appointed to conduct discovery for the calculation of damages. The parties disputed one section of the CDA and resolution was necessary for the auditor to complete his work.

The central dispute was the proper method for calculation of in-house use of the SSI Negotiation Program under Section 7(d) of the CDA, the court noted. Specifically, Topline contended it should receive 20 percent of the "trainer cost" paid for trainers teaching the materials and the "workbook creation" cost for preparation of the program. SSI asserted that Topline was not entitled to receive these revenues.

Analysis. Central to the construction of 7(d) was the nature of the SSI Negotiation Program, the court reasoned. The program was more than just its written materials. The CDA referred to the SSI Negotiation Program separately from the SSI Negotiation Program itself.

The CDA stated that the "SSI Negotiation Program may be delivered as a one-day program, a two-day program, an advanced program, or as an introduction." Further, SSI could update and/or modify the SSI Negotiation Program materials. The CDA also gave the procedure for setting the price for sales of the SSI Negotiation Program without reference to materials. In sum, the CDA indicated that the SSI Negotiation Program was more than its written materials, the court determined.

This conception of materials clarified Section 7(d), the court explained. Under that section, if SSI delivered the SSI Negotiation Program to in-house clients, it must pay Topline "the same amount as [Topline] would have received as a royalty if the materials had been purchased" by a franchisee. Because the materials were distinct from the SSI Negotiation Program, the royalty calculation under Section 7(d) must rely on an amount for which SSI would have sold the materials to a franchisee, the court held. This use of the materials price for calculation of the royalty necessarily excluded other revenue that SSI could have received from in-house clients, such as payment for trainers.

Accordingly, Topline was incorrect in arguing that it was entitled to 20 percent of SSI’s "trainer costs" under Section 7(d), the court ruled. Additionally, the "workbook creation" cost was an amount that SSI charged for its production of the program. These too were not covered by Section 7(d).

Tripline was entitled only to 20 percent of what SSI would have charged franchisees for the materials that it used in presenting the SSI Negotiation Program to its in-house clients, the court reasoned. This royalty amount did not depend on the actual amounts received by SSI.

The case is Civil No. WDQ-09-3102.

Attorneys: Jeremy W. Schulman (Shulman Rogers Gandal Pordy and Ecker PA) for Topline Solutions, Inc. Russell David Karpook (Cohan West and Karpook PC) for Sandler Systems, Inc.

Companies: Topline Solutions, Inc.; Sandler Systems, Inc.

Cases: FranchisingDistribution MarylandNews