The Franchise Memorandum

A recent decision by a federal trial court in San Francisco construed California law in a manner that may have implications for franchisors and suppliers who find themselves in litigation in that state. In Nicolosi Distributing, Inc. v. BMW of North America, 2011 U.S. Dist. LEXIS 44544 (N.D. Cal. Apr. 19, 2011), a distributor of automotive paint entered into an exclusive multi-year supply agreement with German Motors, a San Francisco BMW dealership and repair shop. German Motors is certified by BMW as a “Certified Collision Repair Center” (“CCRC”), which is, in effect, an essential designation for any shop wishing to repair BMW vehicles. In 2010, BMW began requiring repair shops wishing to keep the CCRC certification to use only BMW-brand paints. Plaintiff NDI claimed that its paints, which were made by the same company as BMW-branded paints (DuPont), are identical to the BMW paint and that, among other things, this new requirement interfered with its contract with German Motors and constituted an illegal tying arrangement under California’s Cartwright Act. BMW moved to dismiss the tying claims, arguing that “the CCRC certification and the BMW-brand paint are one singular product…,” and that the BMW trademark is “‘inextricably interrelated’ with high quality BMW-brand products, specifically BMW-brand paint,” thus there was no illegal tying of more than one product or service, since there was only one “product.” The court noted that “the alleged tying product—CCRS certification—is analogous to the branding aspect of a franchise agreement” and, further, “[w]here the tying product is a trademark—often the branding aspect of the franchise agreement—whether a trademark may appropriately be regarded as a separate product requires an inquiry into the relationship between the trademark and the products allegedly tied to its sale.”

The court refused to dismiss the tying claims, positing that if the new requirement to purchase only BMW-brand paint was not an essential ingredient of BMW’s formula for success and if the paints were identical, an improper tying arrangement could exist. The court also held that prior case law “appear(s) to accept the possibility that the granting of permission to use a trademark can constitute a tying product.” Finally, the court noted that NDI had sufficiently alleged that BMW has sufficient economic power in the tying market to coerce the purchase of the tied product, or to affect a substantial amount of sales of the tied product. The court found the tying market could be the market for repairing BMW brand cars or for repairing cars generally and that, within that market, BMW could have a monopoly over a “product” that is uniquely attractive, the CCRC branding.