In Schlotzsky’s Ltd. v. Sterling Purchasing and National Distribution Co., Inc. (“Sterling”), 502 F.3d 393 (5th Cir. 2008), the Fifth Circuit reinforced the tough standard for proving an antitrust tying claim against a franchisor and clarified the broad scope of the Lanham Act’s unfair competition provision. The decision is important for franchisors defending claims of market power.
A Brief HistoryThe Schlotzsky’s® franchise system, now thriving, was once on the brink of disappearing. In August 2004, Schlotzsky’s, Inc. (“SI”) and its affiliates, including the former franchisor, filed for Chapter 11 bankruptcy protection. By that time, the company was insolvent, and it was struggling to ensure the distribution of Schlotzsky’s® proprietary and branded products to its franchisees. During the bankruptcy, interim management approved Sterling Purchasing and National Distribution (“Sterling”) as a non-exclusive supply chain manager for the franchise system. The approval letter made clear that the franchisor owned the trademarks and system and had the right to approve all products, suppliers, and distributors. The letter also expressly stated that the authorization was “effective unless and until revoked by Schlotzsky’s in writing to Sterling, the Suppliers and the Franchisees.”
