A federal district court in California ruled last month on the important issues surrounding the right of a franchisor to sell products via the Internet into a franchisee’s territory. In Stillwell v. RadioShack Corp., 2009 WL 3697995 (S.D. Cal. Nov. 2, 2009), a group of RadioShack franchisees sued RadioShack in connection with its direct internet sales to consumers. The franchise agreements (which had been globally modified by a past class action suit) granted the franchisees an “Area of Primary Responsibility” (AOPR), in which RadioShack would “not open a company store . . . and within which [RadioShack] will not authorize the establishment of an Authorized Sales Center.” The franchisee group claimed that sales via RadioShack’s Web site to consumers located in the AOPRs constituted the establishment of either a company store or an Authorized Sales Center in violation of the agreements. The court disagreed, finding that the plain language of the agreements did not support such an interpretation. The court analogized Internet sales to catalogue/mail order sales, which RadioShack had conducted under the agreements for many years, and found that the franchise agreements prohibited RadioShack only from establishing “bricks and mortar” outlets in the AOPRs. RadioShack was granted summary judgment on the franchisees’ breach of contract claim. On the same facts, the court also rejected claims of unfair competition and tortious interference.
The court found, however, that allegations regarding RadioShack’s Internet sales could support a claim for breach of the covenant of good faith and fair dealing. Although there is no covenant implied into franchise agreements under Texas law (which governed the agreements), the modified agreements explicitly incorporated the covenant, stating that neither party “shall do or fail to do anything which would deprive the other party of the benefits of” the agreement and that the parties “shall be governed by the standards of good faith and fair dealing.” Here, the franchisees alleged that RadioShack sold products on its Web site at prices that were “lower than the wholesale prices offered to franchisees” and that RadioShack informed online customers that they could make returns at franchised store locations. The court found that these practices, if proven, could violate RadioShack’s duty of good faith in the franchise agreements by depriving franchisees of the benefit of the franchise agreements.