In deciding that a preliminary injunction should be issued, the
arbitrators said the question was "whether a virtual drug store is
a drug store for purposes of a franchise agreement."
In finding that the franchisees demonstrated the requisite
likelihood of ultimately proving that Drug Emporium's internet
sales breached its commitment to provide its franchisees the
exclusive right to conduct the business of drug stores in
designated territories, the arbitrators said:
"[the web site was marketed] as 'the full
service on-line drugstore'... The parties' reasonable expectation
was that the [franchisees] would not be forced to compete with
direct drug store sales by [the franchisors]. This inference is
bolstered by the failure of the franchise agreements to permit the
[franchisors] to operate drug stores within the territory [reserved
for the franchisees, except in the case of] a breach by the
franchisees.”
The arbitrators also found that the franchisees' proof as to how
Drug Emporium has been operating its web site, including
advertising this new web site as “Your neighbourhood pharmacy for
twenty years,” establishes a likelihood that the franchisees will
ultimately prevail in proving dilution of the licenses the
franchisees hold to use the Drug Emporium trademark in their
territories.
Michael Dady, the Minneapolis lawyer for the franchisees,
observed:
“When franchisees are given exclusive
territories to conduct their store operations, and pay substantial
royalties to obtain support from their franchisors, they do not
expect to have to compete with their franchisors. This decision
enforces the reasonable expectation of our franchisee clients - no
competition from their franchisor."
Rick Asbill, immediate former chair of the American Bar
Association Forum on Franchising, observed: "Internet encroachment
is one of the most important issues facing franchisors, franchisees
and their lawyers. This decision underlines the importance of
addressing and resolving the legal issues related to internet
marketing before a marketing program is implemented."
The order requires Drug Emporium and DrugEmporium.com to cease
selling in the franchisees' territories (representing 29 different
markets in the states of Texas, Louisiana, Arkansas and Kansas), to
advise prospective purchasers within the franchisees' territories
that DrugEmporium.com is unable to ship orders within those
territories, and to direct all such customers to the nearest Drug
Emporium franchise outlet.
