Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Franchisor failed to stop franchisees from poaching franchisee’s business, suit says, (Feb 16, 2016)

By Linda O’Brien, J.D., LL.M.

A franchisor of direct mail advertising business opportunities has breached a franchise agreement by failing to provide the franchisee with the territorial benefits set forth in the agreement and failing to enforce its policies against violating franchisees that improperly poached business within the plaintiff’s designated territory, according to a complaint filed in the federal district court in Tampa, Florida (New York Direct Marketing Corp. v. Valpak Direct Marketing Systems, Inc., February 11, 2016).

Valpak Direct Marketing Corp. offers franchise opportunities for the operation of a business that promotes and sells cooperative direct mail advertising in VALPAK® envelopes to be distributed within designated geographic areas.

According to the complaint, Valpak entered into a franchise agreement with New York Direct Marketing Group and provided the franchisee with a Valpak Franchise Disclosure Document (FDD). Pursuant to the franchise agreement, the plaintiff was provided with the County of New York and certain zip codes within Bronx County, New York. The plaintiff’s territory was exclusive except for allowing Valpak to conduct business in the plaintiff’s territory through its national sales department. The agreement also granted the plaintiff the right to decide whether to allow other Valpak franchisees to do business within its territory, except where the client’s purchasing representative resided outside that territory.

The Valpak Intermarket Sales Policy (ISP) governs how parties to an intermarket sales transaction must interact with each other in order to comply with the Valpak franchise agreement. Specifically, other Valpak franchisees must get the plaintiff’s prior consent to sell Valpak business within the plaintiffs’ geographical territory and to sell Valpak business in any other territory through a purchasing representative who is located within the plaintiff’s territory, the complaint alleges.

The lawsuit states that Valpak franchisees and national sales derive approximately 65 percent of their business from the advertisement of home and garden products and automotive services. However, the plaintiff, whose territory includes Manhattan, derives less than one percent of its sales from those advertisements. Consumers in Manhattan generally rent or own space in high rise residential buildings where they do not often need such products or services. The plaintiff’s territory was operated at a deficit by Valpak in the years prior to the parties entering into the franchise agreement, causing Valpak to acknowledge the difficulties inherent in Valpak’s business model.

The franchise agreement provides for the implementation of an internal mediation process regarding violations of the Valpak ISP. In June 2015, the plaintiff utilized the process when it brought five independent against Valpak franchisees for improperly poaching business from the plaintiff’s territory. In August 2015, the Valpak dispute resolution team (DRT) found in the plaintiff’s favor; however, it arbitrarily limited the plaintiff’s damages awards to a collective total of $50,000. On appeal, the president of Valpak overturned the DRT’s findings and thereby effectively denied the plaintiff any lost profits due to the violations. A significant factor in the president’s decision, according to the complaint, was that certain officers and executives of Valpak had special relationships with the owners of the violating franchises.

The complaint also alleges that the plaintiff bargained for and paid consideration for the benefits of its exclusive territories and has been effectively precluded from fully benefiting from that territory in the future. Thus, the plaintiff has been harmed through lost profits where Valpak failed to enforce the rules and regulations in the franchise documents for the protection of the plaintiff’s territory.

The plaintiff asserts claims for breach of contract, breach of good faith and fair dealing, and negligence. The action seeks declaratory relief, damages, pre-judgment interest, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 8:16-cv-00324-CEH-TBM.

Attorneys: Jason M. Murray, Rashad Collins, and Isabel Yague (Murray Law, P.A.) for New York Direct Marketing Corp.

Companies: New York Direct Marketing Corp.; Valpak Direct Marketing, Inc.

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