Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ind. App.: Purchase order relationship between Levi’s and retailer did not create franchise, (Oct 28, 2014)

By Edward L. Puzzo, J.D.

A distribution relationship in which a retailer purchased jeans from Levi Strauss on a purchase order and acceptance basis did not create a franchise within the Indiana Deceptive Franchise Practices Act, the Indiana Court of Appeals in Indianapolis has ruled (Richard I. Spiece Sales Co., Inc. v. Levi Strauss North America, October 27, 2014, Kirsch, J.).

Spiece Sales sold various brands of sportswear through its retail stores in Indiana and on its website. Among the brands of jeans sold by Spiece Sales were those manufactured by Levi Strauss North America. In March 2011, Levi’s revoked Spiece Sales’ authorization to sell its products online due to alleged violations of its Internet policy, including Spiece Sales’ bids on Levi’s trademarks as paid search terms for search engines such as Google. Levi’s also brought a collection claim against Spiece Sales for over $315,000 in unpaid inventory.

In response, Spiece Sales filed various counterclaims against Levi’s, alleging violations of the Indiana Deceptive Franchise Practices Act, as well as breach of contract and constructive fraud. The trial court ruled in favor of Levi’s claims and against Spiece Sales counterclaims. Spiece Sales appealed.

On appeal of claims by the trial court without a jury, the findings and judgment will not be set aside unless they were clearly erroneous. The appellate court ruled that the findings here were not erroneous, and therefore affirmed the lower court.

Existence of franchise. The appellate court addressed whether Spiece Sales and Levi’s had a franchise relationship. Spiece Sales alleged that they did, stating that their relationship began in 1978 when Spiece Sales was welcomed as a new account, subject to Levi’s policies regarding account selection and distribution. Later, in 2000, Levi’s authorized Spiece Sales to sell its jeans online, subject to its continued compliance with Levi’s Internet policies that were subject to change from time to time. Levi’s Internet policies required retailers to offer brands other than Levi’s on their websites and to refrain from using Levi’s logos and trademarks in such a way as to imply that the website was owned or managed by Levi’s.

Levi’s argued that the relationship with Spiece Sales involved selling its products on a purchase order and acceptance basis only, and was not a franchise. Levi’s accepted each purchase order conditioned upon compliance with its applicable policies and payment for the products received.

The appellate court agreed that Spiece Sales was neither a franchisee nor protected by the Deceptive Franchise Practices Act. Under the Act (Indiana Code Sec. 23-2-2.5-1), the finding of a franchise required the existence of a contract, and a grant to the franchisee of the right to dispense goods under a marketing plan prescribed in substantial part by the franchisor.

As set forth by the trial court, Spiece Sales met none of the requirements for being a franchisee. Levi’s had no control over what Spiece Sales sold to customers; Levi’s offered Spiece Sales the opportunity to purchase new products to sell to customers, but did not require it to do so; Spiece Sales was not required to adhere to any marketing plan, and indeed created its own promotional events; and Levi’s published suggested minimum advertised prices, but had no mandatory pricing rules and Spiece Sales was free to deviate from those suggestions. Thus, Spiece Sales was not a franchisee, and its counterclaim under the Franchise Act failed.

Breach of contract. Spiece Sales also argued that the 1978 letters from Levi’s—authorizing its sale of Levi’s products in brick and mortar stores—and its 2000 letter authorizing Internet sales were letter agreements confirming the existence of a contract. But the trial court concluded that Levi’s sold to Spiece Sales on a voluntary at-will purchase order and acceptance basis only. Upon acceptance of a purchase order, Levi’s sole obligation was to deliver the order, and Spiece Sales’ sole obligation was to pay for the order. Neither had an ongoing obligation to continue their relationship. Each purchase order was a separate agreement. Levi’s policies, including its Internet policies, were not contracts and merely provided that non-compliance would allow Levi’s to revoke a retailer’s ordering privileges. The appellate court agreed that no ongoing contract existed, so Spiece Sales’ breach of contract counterclaim failed.

Constructive fraud. Similarly, the parties’ relationship consisted of a series of arm’s length commercial purchase transactions, and there was no fiduciary relationship between the parties. Without a fiduciary duty, the constructive fraud counterclaim also failed.

The case is Civil Action No. 85A02-1312-CC-1037.

Attorneys: Emily C. Guenin-Hodson and Mark C. Guenin (Guenin Law Office, PC) for Richard I. Spiece Sales Co., Inc. Steven L. Jackson, Anne K. Ricchiuto and Katrina M. Gossett (Faegre Baker Daniels LLP) for Levi Strauss North America.

Companies: Richard I. Spiece Sales Co., Inc.; Levi Strauss North America.

Cases: FranchisingDistribution IndianaNews