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The Franchise Memorandum

Arbitrators Rule for Franchisor in Supply Chain Challenge
Posted in Antitrust

Franchisor American Dairy Queen Corporation and its corporate parent, International Dairy Queen, Inc., prevailed this month against the most recent challenges by a franchisee association and cooperative that represents some of its franchisees. An arbitration panel held that the franchisor and its parent’s supply entity have not violated antitrust law or a prior settlement agreement with respect to the approval and distribution of products for use in franchisees’ locations. Dairy Queen Operators Association and Dairy Queen Operators Cooperative v. International Dairy Queen, Inc. and American Dairy Queen Corporation (Arbitration Award, October 1, 2008).  Gray Plant Mooty represented ADQ and IDQ in this matter, which was the third arbitration following the federal-court class action settlement in Collins, et al. v. ADQ, et al. (M.D. Ga. 2000), as reported in Issue 25 of The GPMemorandum.

In this most recent arbitration, the franchisee cooperative brought broad allegations under antitrust law. The panel rejected each claim brought by the cooperative, which competes for the sale of products to Dairy Queen® stores. First, the panel found that the franchisor’s authorized warehouses have not engaged in below-cost pricing through product “bundling” and discount practices. The panel also found that ADQ and IDQ had legitimately enacted non-price restrictions such as the rationing of special limited-time-offer promotional products and the refusal to add “dual” warehouses that would carry the cooperative’s products alongside the IDQ-sponsored line of products. 

There has been no anticompetitive conduct by the franchisor or its approved supply chain, the panel found. For that reason, the arbitrators did not need to determine whether the claimants had set forth a cognizable “relevant market,” as also would have been necessary to prove an antitrust violation.

In addition to finding that the franchisor had not violated federal or state antitrust law, the panel rejected the breach of contract claims asserted by the association and cooperative. Nor did any of the claimants’ allegations on price or non-price issues establish breach of the covenant of good faith and fair dealing, the arbitrators held.

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In a non-antitrust case, the same franchisor also prevailed this June on associational standing grounds in Michigan Dairy Queen Operators’ Association v. International Dairy Queen, Inc., 2008 WL 2566547 (W.D. Mich. June 9, 2008). In that case, the court granted the defendants’ motion and dismissed the plaintiffs’ claims, without prejudice, for lack of standing. The plaintiffs consisted of a group of four associations whose members are Dairy Queen® franchisees in various states. The associations claimed that the franchisor was breaching its franchise agreements by allegedly mandating conversion of outlets to DQ Grill & Chill® or Dairy Queen® Treat Center® units. 

In reaching its conclusion that the state franchisee associations did not have standing to assert claims on behalf of their members, the court focused on whether the case would require the participation of individual members of the associations. Noting that this case involves “strictly contracts claims” based on the franchise agreements, the court could not fathom how those claims and the relief sought could be addressed without the franchisees. The court determined that the filing of individual contract actions by the franchisor or franchisees is better and more effective than the associations’ claims.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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