Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ill. App.: Substantial association with franchisor must be determined by fact-finder, (Jun 30, 2014)

By Edward L. Puzzo, J.D.

Whether a bakery owner's business was "substantially associated" with Pepperidge Farm, resulting in their relationship being considered a “franchise” within the Illinois Franchise Disclosure Act, was an issue that should be decided by the fact-finder, not by the trial court as a matter of law on summary judgment, the Illinois Appellate Court has ruled (McKeever v. Pepperidge Farm, Inc., June 27, 2014, Hutchinson, S).

Agreement history. In 1992, Pepperidge Farm entered into a consignment agreement with Steve McKeever, owner of Piemonte Bakery, granting him an exclusive right to distribute certain Pepperidge Farm products to retail stores within a specified territory. Subsequently, McKeever distributed Pepperidge Farm products to retailers within the assigned territory, and also distributed Piemonte Bakery products. McKeever's trucks and driver uniforms did not use the Pepperidge Farm logo, but trays and dollies with Pepperidge Farm products contained the Pepperidge Farm trademark.

In 2010, Pepperidge Farm terminated its relationship, offering McKeever 125 percent of the fair market value of the distributorship. McKeever responded by filing a lawsuit alleging that Pepperidge Farm had violated the Illinois Franchise Disclosure Act by terminating the agreement without cause. McKeever also sought a declaration that the termination was invalid and unenforceable, and a permanent injunction reinstating the agreement. Pepperidge Farm moved for summary judgment, alleging that plaintiff's business was not a “franchise” because it was not "substantially associated" with Pepperidge's trademark. The lower court agreed, and McKeever appealed.

Substantial association. In order for a relationship to qualify as a “franchise,” the business must be "substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor..." (815 ILCS 705/3(1)(b)). Under Illinois regulations, "substantially associated" includes the use of the franchisor's mark "in a manner likely to convey to the public that it is an outlet of the franchisor," regardless of whether or not permission to use the franchise's mark exists in the franchise agreement (14 Ill. Code 200.103).

Issue of material fact. The lower court and the appellate court both agreed that the issue of whether a franchise relationship exists under the Franchise Act is a factual determination. But the appellate court further found that there was a genuine issue of material fact as to whether such a relationship existed here. The appellate court noted that the franchise agreement expressly permitted McKeever's business to use the Pepperidge trademark on its trucks and equipment. McKeever's employees also filled Pepperidge products on retail shelves and organized Pepperidge promotional displays. Whether the activities of his employees in retail stores, and McKeever's use of the Pepperidge trademark on equipment but not his trucks, conveyed to the public that McKeever's business was an outlet of Pepperidge was an issue that should be decided by the fact-finder, not by the trial court as a matter of law on summary judgment. The court therefore reversed and remanded the lower court's summary judgment, and reversed the lower court's dissolution of the preliminary injunction.

The case is 2014 IL App (2d) 131093-U and 2014 IL App (2d) 131204-U.

Attorneys: Jody Booher (Barrick, Switzer, Long, Balsley & Van Evera, LLP) for Steve McKeever and Piemonte Bakery Inc. Louis D. Bernstein (Bernstein Law Firm, LLC) for Pepperidge Farm Inc.

Companies: Piemonte Bakery Inc.; Pepperidge Farm, Inc.

Cases: FranchisingDistribution IllinoisNews