The Un-franchise?

Factual Questions
1

Business/Law folks esp: Suppose I love Yoda’s donuts, a well-known national chain of donuts. And, my co-workers all love Yoda’s donuts. In fact, everyone within a few city blocks of my office loves Yoda’s donuts! But, Yoda’s donuts is not local to the downtown business area.

So, I decide to rent a little corner news stand to sell Yoda’s donuts. I stop by my local Yoda’s and purchase 12 dozen, let’s say. The, I come to my little corner stand and sell Yoda’s donuts!

Sure, I’m buying at retail prices, but with no competition, it doesn’t matter. People will buy Yoda’s donuts - even if I’m a little pricey.

Is this perfectly legal? Is there some law that, by purchasing a box of Yoda’s donuts, I have entered into some verbal agreement that I will not use said Yoda’s donuts for any other purpose than my personal consumption? Or, can the law FORCE me to enter into contract with Yoda’s? I mean, is it any much different than a kid setting up a lemonade stand and selling Oreo cookies, also?
Would Nabisco care if Oreo stands popped up everywhere just because they didn’t think of it first?

Just wondering…

  • Jinx
2

I’m pretty sure that it’s not legal to buy a bagful of Dunkin’ Donuts or Egg McMuffins or Whoppers or whatever, whether you pay retail for them or not, and take them around the corner and resell them, but IANA lawyer so I can’t tell you exactly why.

3

There is only one Krispy Kreme in Western Washington and it has become a common to hear about various small companies or individuals getting busted for selling their donuts. It mostly has to do with liability issues. Someone buys a donut from a secondary vendor, becomes ill or worse, KK gets sued for selling a bad donut. There are other areas that can cause legal headaches such as market rights, franchise agreements, etc. Plus your local health department may take a dim view on someone selling food items without health permits or a business license.

4

It’s not specifically related to the OP, but often mall owners are contractually obliged to ensure that there is no direct competition between franchisees within the bounds of the mall.

5

Hmmm… if you’re properly licensed, I don’t see the difference. You go to Sam’s club and buy Tyson chicken for your restaurant, what’s the difference with doughnuts?

6

Perhaps protection of the brand image would mean that the doughnut maker would object to his wares being sold somewhere out of his control.

7

You may like to consider an associated issue - that of ‘grey’ imports. Global companies sell goods at different prices around the world, and stop people buying at full price in a low cost country and selling at a higher price in a high cost country.

There has recently been a court case in the EU where a British company bought (perfectly legally) some Levi jeans sourced in South America, and was forbidden to sell them in the UK. It went to the European Court for a ruling, and I don’t understand why they were forbidden, but they were.

The argument from the manufacturers (on a similar case involving cheap perfumes) is that these products have ‘exclusivity’, and that paying high prices is part of the ‘experience’ of owning the product. So the manufacturers are really acting in our interests by stopping us buying expensive goods cheaply. With the Levis, for instance, Levi Co. argued that they should not be bought in low-class shops otherwise they would lose their cachet

8

So what about that commercial for Nestle’s Quik where the kids sell Quik to finance their clubhouse? That’d be illegal, right?

9

Quik is a retail product; there are no Nestle’s Quik stores. Different situation. If a produce is sold in supermarkets or other general purpose stores, there’s no rule against reselling them.

If you sell Yoda’s donuts, you are infringing on their trademarks. People have paid Yoda for the exclusive right to sell their donuts (MMM, good is!). If you tell people these are Yoda’s (and you would, since in your scenario, they will pay extra for Yodas), you are using the Yoda trademark to sell.

10

Ah ha! I’d have to argue then that at the very least in Michigan, donut-store donuts are “retail products” subject to the same argument as a Nestle Quik scenario.

If I go to Tim Horton’s or Dunkin’ Donuts or whereever, and buy a single donut or two donuts, maybe with coffee, I’m charged sales tax, since I’m purchasing food for presumably immediate consumption. But in the very same restaurant/store, whenever I purchase a dozen or more donuts, the transaction is not sales-taxed, because I am now purchasing “grocery” items.

11

Balthisar hit on the point “if you’re properly licensed”. Leaving aside the trademark infringement/franchise territorial infringement issues, in many states in order to sell retail to the public, you have to have a vendor’s license and collect point of sale sales taxes, which drive up your costs to the point where your little scheme about reselling Yoda’s donuts quickly becomes unprofitable. In theory, the same items apply to little kids reselling Nestle Quick and Kool-Aid from sidewalk stands, but generally the adverse publicity from busting little kids stops the tax collectors from shutting the place down. You, reselling Yoda’s donuts, wouldn’t get the same break.

12

This is my very first post at this board, so you’ll have to forgive any faux pas I may commit.

This thread caught my attention because I am, in RL, an actual franchise lawyer! (Please repeat in unison the usual disclaimers about my not giving legal advice.)

PatrickM has mentioned the key issue from my point of view - trademark infringement. By selling Yoda’s donuts to the public, you would be infringing on Yoda’s trademark rights. You would also be engaging in “unfair competition,” by giving the public the false impression that you are a Yoda’s franchisee and are authorised to use Yoda’s trademark. And if you were selling stale or moldy Yoda’s donuts, you would be damaging the goodwill of Yoda’s mark.

However, if Yoda’s sued you, you’d be safe from me.*

*That’s because they wouldn’t hire me. They would use an intellectual property lawyer, not a franchise lawyer, and I’m not a litigator (trial lawyer) anyway. Oh goody, I got to use fine print.

13

But what if you sold more than one brand of donut? You wouldn’t be Yoda’s Donuts, you’d be the Tri-County Donut Emporium, bringing you the Best in Donuts from Around The World.

14

That’s a harder case, Sunspace.

My guess is that you could sell Yoda’s donuts so long as you didn’t advertise them, put up signs with the mark, etc. But you couldn’t label them as Yoda’s donuts in any way without infringing the trademark.

What if the donuts all had the word “Yoda’s” stamped into the dough or were otherwise instantly recogtnizable as Yoda’s donuts because of something in the design? I’m not sure whether Yoda could stop you from reselling them, because I’m not an intellectual property lawyer, but I suspect that it might be able to do so.

What I am sure of, though, is that the Yoda’s franchisee from whom you buy the donuts is prohibited by his or her franchise agreement from selling the donuts to anyone but an ultimate consumer, and forbidden to sell them at wholesale (that is, for resale). If you told the franchisee what you were doing, or you bought lots of Yoda’s donuts every day and the franchisee caught on, it would be the franchisee’s legal obligation to stop selling to you.

15

Hmmm… so with a lawyer-like disclaimer, the OP couldn’t say “Donuts from Yoda’s (not an authorized reselller)” or some other such disclaimer. It seems that “fair use” of the trademark specifically would permit the reseller to state the source of the donuts.

For example, if I wanted to sell my Ford Crown Victoria, I have every right in the world to advertise it as such. A step further: as a used car dealer, I’d have the right to advertise any make and model, as long as I don’t proclaim to be an authorized dealer.

As per the franchisee’s responsibilities, it may be a contractual obligation to protect the parent company, so the burden would be on the local owner to stop Jinx from buying the donuts. But as long as the local owner doesn’t prevent this, there’s no contractual authority that says Jinx doesn’t have that right. It may be that the local owner approves of this – the agreement probably works to benefit the store such that there won’t be close-by local competition. And Jinx isn’t competition – he’s buying their product and reselling to people who wouldn’t otherwise shop there.

And finally, at work one of the electricians always brings in bagels to sell for a buck a piece. We KNOW he’s not purporting to be a representative of Detroit Donut Company, but is what he does subject to all of this discussion?

16

What if you don’t advertise them as Yoda’s Donuts at all? What if you bought your donut stock at Yoda’s and resold them as Jinx’s Donuts? Maybe you could even put up a sign “Just as tasty as Yoda’s”

17

One problem with that, Cheesesteak, is that you’d then lose whatever draw the name of “Yoda” would have. It’s like repackaging tortilla chips as a generic brand - won’t sell as well.

18

I thought I posted an answer, but I guess I did something wrong. OK, here goes again.

Here I am, sitting in the middle of a lawfirm with several intellectual property experts around. But I’m not going to ask them, unless one of you really wants me to, because it’s much more fun for me to make unreliable guesses based on limited knowledge.

Balthisar, your used car dealership example is interesting. I don’t know the extent of the ‘fair use’ doctrine. That means I don’t know exactly what Jinx can and can’t say about Yoda’s donuts (or the used car dealer either, except that the dealer would sound pretty weird boasting about his donuts).

I vaguely remember a common law principle of hostility against “general restraints on alienation” (in this context, a seller’s prohibiting a buyer from reselling the property after purchase). I’d guess that’s the principle that gives you the right to resell your Crown Victoria.

Since Jinx isn’t a party to the franchise agreement, of course he’s not contractually bound by it.

Your electrician should stop staying up nights worrying. Even if he’s selling branded donuts and even if the trademark owner had
a right to stop him (which I agree is doubtful), the owner isn’t going after him anyway.

Cheeseteak, your “Just as tasty as Yoda’s” sign moves us into a new area, the rules for comparative advertising. The FTC has been permitting comparative advertising for quite a few years, as long as it’s accurate. So maybe Jinx needs to have proof that his donuts are as tasty as Yoda’s before he can advertise like that (if so, his proof would have to be already on file, not just developed when the FTC comes to call).

Sometimes broad and unsupported advertising claims are OK as “just puffery,” but I have a feeling that this wouldn’t apply to comparative advertising.

I’m not an expert here, either, of course. Yoda’s would also try an “unfair competition” claim but if comparative advertisng were unfair competition, the advertisers would have been stopped so I assume it is not.

19

And of course, if you say they’re just as tasty as Yoda’s and then somehow someone finds out later that they’re actually Yoda donuts anyway… well then you’re up the creek, right? Isn’t that a sort of false advertising?

20

Sorry, dantheman, I missed that part. Of course if they’re Yoda’s, it’s false advertising.