News Briefs

GNC Franchisees Sue for Predatory Pricing

Franchisees of General Nutrition Companies, Inc. (GNC, Inc.) filed a lawsuit in Federal District Court in Newark, NJ, alleging “predatory pricing,” an illegal change in the franchisor's policy toward the use of third-party suppliers, and unfair application of store appearance standards. GNC, Inc., based in Pittsburgh, sells vitamins and herbal supplements through both franchised and company-owned stores.

“The primary issue is predatory pricing … violations of the Robinson-Patman Act … under which products are sold by company-owned stores at prices that are below wholesale prices available to franchisees,” said Gerald Marks, an attorney based in Red Bank, NJ, who is representing the GNC franchisees. “We will probably soon seek an injunction to prevent GNC from predatory pricing.”

The plaintiffs are the GNC Franchisee Association, Inc., a national organization that represents nearly 400 U.S. franchisees, as well as four individual New Jersey franchisees and one New York franchisee. The defendants are: GNC, Inc.; General Nutrition Distribution Co., a subsidiary of GNC, Inc.; and Apollo Management, LLP, the parent company of GNC, Inc.

The franchisees say that GNC's promotional campaigns and pricing policy put them at an unfair competitive position in comparison to company-owned stores. GNC mails coupons that entitle consumers to purchase popular products, such as TrimSpa', at significant discounts. But if the franchisees honor those discounts, they wind up selling the products for less than the wholesale cost they pay to GNC. “When you add in all of the fees, you find that franchisees are losing up to $4 per bottle of supplements on a $21 bottle,” said Marks. “GNC's UFOC has an express promise of fair wholesale pricing, plus the implied covenant of good faith … and these are being violated.”

GNC representatives did not respond to calls from FBLA.

Franchisees are raising two other issues. First, they are protesting a recent change in the company's policy that makes it harder for them to purchase nutritional products from third-party suppliers. “For many years franchisees have been allowed to purchase from outside sources, as long as certain criteria were met,” said Marks. “Now, by fiat, the company changed the rules. All purchases must come through General Nutrition Distribution (GND), or outside suppliers must sell to GND first.” Second, the franchisees are opposed to how inspectors are reviewing whether their stores meet GNC's appearance standards.

GNC has clashed with its franchisees repeatedly, and Marks is currently representing franchisees in another lawsuit that alleges that GNC misappropriated advertising funds. That prior lawsuit was filed against GNC's former owners, Royal Numico, a Dutch company that sold to Apollo Management in November 2003. That lawsuit has been moved back to federal district court in New Jersey, where it was initiated, after GNC obtained a change in venue to federal district court in Pittsburgh. (See FBLA, October 2003.)

Obesity Lawsuit Protection Passes in Michigan; Remains Stalled in Congress

On Oct. 7, Michigan Gov. Jennifer Granholm signed Public Act 367, which bans civil lawsuits against restaurants and other sectors of the food industry (including advertisers) “for personal injury or death due to weight gain or an obesity-related condition.”

Gov. Granholm's action makes Michigan the 12th state that has passed a law this year to protect the food industry from lawsuits. The issue became a concern after a New York City attorney sued McDonald's last year for allegedly causing the obesity of several teenage girls. Although the lawsuit was thrown out of court, restaurants and food producers became alarmed that lawsuits would target them for supplying processed foods to people who became obese.

Obesity lawsuit protection at the federal level remains stalled in the Senate. The House passed The Personal Responsibility in Food Consumption Act (H.R. 339) in March 2004, but the Senate has not voted on the House's bill, nor a similar bill, The Commonsense Consumption Act (S. 1428).

Meanwhile, attorneys and health advocates at the second annual Legal Approaches to the Obesity Epidemic Conference, held in Boston in September, promised more obesity lawsuits as a way to propel new regulations. Some of these regulations would affect franchised restaurants: additional information on food labels; a statement that some foods might be “addictive”; and the ability to sue restaurants for “discrepancies” between the nutritional information they provide about food and the actual nutritional content of the food that is served.

Mack Trucks' Disputes with Dealers Expand

Heavy-duty truck manufacturer Mack Trucks, Inc., is now engaged in lawsuits with two dealers, one in Ohio and one in Michigan, over what the dealers allege to be violations of prohibitions on direct sales of vehicles and discriminatory pricing. The lawsuits illustrate how franchisees and dealerships are challenging the rights of manufacturers to compete directly against them for business.

The Ohio dispute, which began in July 2002, involves Toledo Mack Sales & Service Inc., of Toledo, a Mack Trucks' franchised dealer since 1982. The dealership filed a lawsuit in the Eastern District Court of Pennsylvania (Mack Trucks is based in Allentown, PA), charging that Mack Trucks undersold it and competed through direct sales, which are prohibited by Ohio's laws governing auto dealers.

Mack Trucks countersued and terminated Toledo Mack's franchise agreement earlier this year. But the Ohio Motor Vehicle Dealers Licensing Board overturned that termination in August 2004. Mack Trucks has appealed the decision.

Discovery has been completed, and the case is likely to go to trial, said Wayne Mack (no relation to Mack Trucks or Toledo Mack). Mack, a partner with Duane Morris LLP in Philadelphia, is representing Toledo Mack and also Wiegand Mack Sales & Service, Inc, Sterling Heights, MI, which filed a suit that covers some of the same ground. “We're eager to go to trial,” Mack said about the Toledo Mack litigation.

Although auto dealers (as well as service station/fuel dealers) have more protection than typical franchisees, Mack sees several parallels to the franchise environment. “The underlying threat that Toledo Mack faces is the same as what all franchisees face ' a franchisor competing unfairly against its franchisee,” he said. “The Robinson-Patman Act violations that we are alleging in the second case, Wiegand Mack, address discriminatory pricing and 'sweetheart deals' that no franchisor should be able to offer to some of its franchisees.”

Robinson-Patman, 15 U.S.C. '13, decrees that a franchisor may not directly or indirectly discriminate in prices between franchisees in the sale of goods.

Mack added that his firm represented franchisees of Carvel Ice Cream Stores in another case, Carvel Corporation v. Noonan, which also dealt with direct sales. In that case, the Carvel franchisees sued Carvel in New York State for breach of contract and tortious interference for selling ice cream cakes in supermarkets. See Court Watch, page 5.

“With the advent of the Internet and the ability to sell so many things without a bricks-and-mortar site, I see more of these cases coming,” said Mack.

A&P Canada Buys Out Food Basics Franchisees to Settle Lawsuit

Great Atlantic & Pacific Tea Co., the parent company of grocer A&P Canada, will buy out 29 Food Basics franchisees that were suing it for breach of contract. The total settlement, including the buyout, will be CAN $40 million, said A&P Canada in a press release.

The franchisees filed a lawsuit in 2002, alleging that A&P was reneging on contractual promises in ways that reduced the franchisees' profitability and put them at a competitive disadvantage with company-owned stores in the same market. A&P countersued.

Although 29 franchisees filed lawsuits, another 40 franchisees did not. They will remain Food Basics outlets in the region.

GNC Franchisees Sue for Predatory Pricing

Franchisees of General Nutrition Companies, Inc. (GNC, Inc.) filed a lawsuit in Federal District Court in Newark, NJ, alleging “predatory pricing,” an illegal change in the franchisor's policy toward the use of third-party suppliers, and unfair application of store appearance standards. GNC, Inc., based in Pittsburgh, sells vitamins and herbal supplements through both franchised and company-owned stores.

“The primary issue is predatory pricing … violations of the Robinson-Patman Act … under which products are sold by company-owned stores at prices that are below wholesale prices available to franchisees,” said Gerald Marks, an attorney based in Red Bank, NJ, who is representing the GNC franchisees. “We will probably soon seek an injunction to prevent GNC from predatory pricing.”

The plaintiffs are the GNC Franchisee Association, Inc., a national organization that represents nearly 400 U.S. franchisees, as well as four individual New Jersey franchisees and one New York franchisee. The defendants are: GNC, Inc.; General Nutrition Distribution Co., a subsidiary of GNC, Inc.; and Apollo Management, LLP, the parent company of GNC, Inc.

The franchisees say that GNC's promotional campaigns and pricing policy put them at an unfair competitive position in comparison to company-owned stores. GNC mails coupons that entitle consumers to purchase popular products, such as TrimSpa', at significant discounts. But if the franchisees honor those discounts, they wind up selling the products for less than the wholesale cost they pay to GNC. “When you add in all of the fees, you find that franchisees are losing up to $4 per bottle of supplements on a $21 bottle,” said Marks. “GNC's UFOC has an express promise of fair wholesale pricing, plus the implied covenant of good faith … and these are being violated.”

GNC representatives did not respond to calls from FBLA.

Franchisees are raising two other issues. First, they are protesting a recent change in the company's policy that makes it harder for them to purchase nutritional products from third-party suppliers. “For many years franchisees have been allowed to purchase from outside sources, as long as certain criteria were met,” said Marks. “Now, by fiat, the company changed the rules. All purchases must come through General Nutrition Distribution (GND), or outside suppliers must sell to GND first.” Second, the franchisees are opposed to how inspectors are reviewing whether their stores meet GNC's appearance standards.

GNC has clashed with its franchisees repeatedly, and Marks is currently representing franchisees in another lawsuit that alleges that GNC misappropriated advertising funds. That prior lawsuit was filed against GNC's former owners, Royal Numico, a Dutch company that sold to Apollo Management in November 2003. That lawsuit has been moved back to federal district court in New Jersey, where it was initiated, after GNC obtained a change in venue to federal district court in Pittsburgh. (See FBLA, October 2003.)

Obesity Lawsuit Protection Passes in Michigan; Remains Stalled in Congress

On Oct. 7, Michigan Gov. Jennifer Granholm signed Public Act 367, which bans civil lawsuits against restaurants and other sectors of the food industry (including advertisers) “for personal injury or death due to weight gain or an obesity-related condition.”

Gov. Granholm's action makes Michigan the 12th state that has passed a law this year to protect the food industry from lawsuits. The issue became a concern after a New York City attorney sued McDonald's last year for allegedly causing the obesity of several teenage girls. Although the lawsuit was thrown out of court, restaurants and food producers became alarmed that lawsuits would target them for supplying processed foods to people who became obese.

Obesity lawsuit protection at the federal level remains stalled in the Senate. The House passed The Personal Responsibility in Food Consumption Act (H.R. 339) in March 2004, but the Senate has not voted on the House's bill, nor a similar bill, The Commonsense Consumption Act (S. 1428).

Meanwhile, attorneys and health advocates at the second annual Legal Approaches to the Obesity Epidemic Conference, held in Boston in September, promised more obesity lawsuits as a way to propel new regulations. Some of these regulations would affect franchised restaurants: additional information on food labels; a statement that some foods might be “addictive”; and the ability to sue restaurants for “discrepancies” between the nutritional information they provide about food and the actual nutritional content of the food that is served.

Mack Trucks' Disputes with Dealers Expand

Heavy-duty truck manufacturer Mack Trucks, Inc., is now engaged in lawsuits with two dealers, one in Ohio and one in Michigan, over what the dealers allege to be violations of prohibitions on direct sales of vehicles and discriminatory pricing. The lawsuits illustrate how franchisees and dealerships are challenging the rights of manufacturers to compete directly against them for business.

The Ohio dispute, which began in July 2002, involves Toledo Mack Sales & Service Inc., of Toledo, a Mack Trucks' franchised dealer since 1982. The dealership filed a lawsuit in the Eastern District Court of Pennsylvania (Mack Trucks is based in Allentown, PA), charging that Mack Trucks undersold it and competed through direct sales, which are prohibited by Ohio's laws governing auto dealers.

Mack Trucks countersued and terminated Toledo Mack's franchise agreement earlier this year. But the Ohio Motor Vehicle Dealers Licensing Board overturned that termination in August 2004. Mack Trucks has appealed the decision.

Discovery has been completed, and the case is likely to go to trial, said Wayne Mack (no relation to Mack Trucks or Toledo Mack). Mack, a partner with Duane Morris LLP in Philadelphia, is representing Toledo Mack and also Wiegand Mack Sales & Service, Inc, Sterling Heights, MI, which filed a suit that covers some of the same ground. “We're eager to go to trial,” Mack said about the Toledo Mack litigation.

Although auto dealers (as well as service station/fuel dealers) have more protection than typical franchisees, Mack sees several parallels to the franchise environment. “The underlying threat that Toledo Mack faces is the same as what all franchisees face ' a franchisor competing unfairly against its franchisee,” he said. “The Robinson-Patman Act violations that we are alleging in the second case, Wiegand Mack, address discriminatory pricing and 'sweetheart deals' that no franchisor should be able to offer to some of its franchisees.”

Robinson-Patman, 15 U.S.C. '13, decrees that a franchisor may not directly or indirectly discriminate in prices between franchisees in the sale of goods.

Mack added that his firm represented franchisees of Carvel Ice Cream Stores in another case, Carvel Corporation v. Noonan, which also dealt with direct sales. In that case, the Carvel franchisees sued Carvel in New York State for breach of contract and tortious interference for selling ice cream cakes in supermarkets. See Court Watch, page 5.

“With the advent of the Internet and the ability to sell so many things without a bricks-and-mortar site, I see more of these cases coming,” said Mack.

A&P Canada Buys Out Food Basics Franchisees to Settle Lawsuit

Great Atlantic & Pacific Tea Co., the parent company of grocer A&P Canada, will buy out 29 Food Basics franchisees that were suing it for breach of contract. The total settlement, including the buyout, will be CAN $40 million, said A&P Canada in a press release.

The franchisees filed a lawsuit in 2002, alleging that A&P was reneging on contractual promises in ways that reduced the franchisees' profitability and put them at a competitive disadvantage with company-owned stores in the same market. A&P countersued.

Although 29 franchisees filed lawsuits, another 40 franchisees did not. They will remain Food Basics outlets in the region.