The Franchise Memorandum

The Supreme Court of Idaho has upheld a decision in favor of an authorized distributor of business forms who complained of losses related to protected accounts. Thurston Enters. v. Safeguard Bus. Sys., 2019 WL 667966 (Idaho Feb. 19, 2019). Safeguard Business Systems, a supplier of business forms and products, had entered into a distributor agreement granting Thurston Enterprises the exclusive right to commissions on sales within a protected area. If another distributor sold Safeguard Systems products to a customer that had previously purchased products from Thurston, Safeguard would issue a “rotation notice” that would provide Thurston with the commission for the sale made by the other distributor. After Safeguard acquired a competitor and the competitor’s distributor agreements, Thurston agreed to sell certain protected accounts for Safeguard to transfer to a newly acquired distributor.

Thurston brought suit when it found out that the newly acquired distributor had been selling Safeguard Systems products to Thurston’s customers, and it argued that Safeguard fraudulently induced it to relinquish protected accounts without providing information about the commissions to which Thurston would have been entitled had it retained those accounts. The Idaho Supreme court affirmed the lower court’s judgment for Thurston, rejecting Safeguard’s argument that the protection clause only applied to sales of the same product to a particular customer. The court noted that the clause gave Thurston the right to commissions on any Safeguard Systems product sold to one of Thurston’s customers, regardless of whether Thurston had previously sold that same product to the customer. The court also upheld the fraud claim, rejecting Safeguard’s argument that Thurston was aware before selling account rights that the newly acquired distributor had made sales to those customers. The court noted that Safeguard never issued a “rotation notice” to Thurston, who therefore did not know that the new distributor had specifically made sales of Safeguard Systems products that would be subject to the protection clause.