loyalty programs: franchise relationship, pricing, & fraud ... · loyalty programs: franchise...
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LOYALTY PROGRAMS: FRANCHISE RELATIONSHIP, PRICING, & FRAUD ISSUES
ABA Petroleum Marketing Attorneys' Meeting April 15, 2016
2:00pm - 3:00pm
#38801280v1
CUSTOMER LOYALTY PROGRAMS ➤ Structure and long-term marketing effort
➤ Provides incentives to repeat customers
➤ Designed to motivate customers
➤ Petroleum Marketing
➤ Discounts & rebate on fuel and retail purchases
➤ Special offersPoints
➤ Prizes
CURRENTLY EXISTING PROGRAMS
POTENTIAL LEGAL ISSUES ➤ Change of terms of loyalty program
➤ Changes to program description
➤ False advertising claims
CHANGE OF TERMS OF LOYALTY PROGRAM
➤ Courts have permitted airlines to make changes to terms
➤ American Airlines v. Wolens (SCOTUS 1995)
➤ Retroactive changes to frequent-flyer program
➤ Airline Deregulation Act of 1978 preempted claims under IL consumer fraud act
➤ Breach of contract claims could proceed
➤ Grossman v. USAir (PA CCP 1997)
➤ “Reservation of rights” provision permitted airline to increase number of credits needed to obtain tickets
➤ Monzingo v. Alaska Air Group, Inc. (AK 2005)
➤ Plain language of mileage program reflected reasonable expectations to allow changes to all aspects of program
➤ Kwok v. Delta Air Lines, Inc. (11th Cir. Ga. 2014)
➤ Even where plain language of mileage credit provision was ambiguous as to how award would be calculated, appellate court could not demonstrate method violated program rules
➤ Gordon v. United Cont’l Holding, Inc. (D.N.J. 2014)
➤ MSJ for United granted where United charged members w/ higher account balances more for redemption of awards
CHANGES TO PROGRAM DESCRIPTION
➤ Leonard v. Pepsico, Inc. (SDNY 1999) (aff’d 2nd Cir. 2000)
➤ High school student tried to buy jumbo jet with points
➤ MSJ granted for Pepsico
➤ Advertisements are are merely invitations to negotiate
➤ No reasonable person would think a serious offer was intended
➤ Baird v. Sabre, Inc. (9th Cir. 2016)
➤ Plaintiff expressly consented to receiving texts from Defendant when she submitted cellphone number as part of Hawaiian Airlines flight reservation
FALSE ADVERTISING
FRANCHISEE ISSUES ➤ Are franchisees protected from forcing them to comply with
franchisor-sponsored programs?
➤ Does agreement allow franchisor to impose system changes on franchisee?
➤ Does agreement provide indemnification to franchisee or any litigation arising out of franchisor-sponsored loyalty program?
FRANCHISEE ISSUES ➤ Bird Hotel Corp. v. Super 8 Motels Inc. (D.S.D. 2010)
➤ Super 8 had not reserved right to revise terms of agreements unilaterally
➤ Could not impose new fees on franchisees
➤ Non-contract based claims
➤ Claims for fraud, tortious interference, misappropriation of trade secrets/ confidential information
➤ Violation of franchise disclosure or relationship laws, unfair competition, antitrust violations
FRANCHISEE ISSUES ➤ Some states prohibit franchise agreements from requiring
participation in loyalty programs
➤ Examples:
➤ Maryland (Md. COMMERCIAL LAW Code Ann. § 11-304)
➤ Utah (Utah Code Ann. § 13-12-3)
➤ District of Columbia (D.C. Code § 36-303.01)
REGULATORY ISSUES: BELOW COST SALES STATUTES
➤ Cannot sell motor fuel below cost in many states
➤ To establish liability, must show that below cost sales were done
➤ (1) With intent to injury to substantially destroy competition or
➤ (2) The effect of the below cost price is to injury competition
➤ States have exceptions
➤ Ex: liquidation or clearance sale, sale pursuant to court order, or when below cost price is inadvertent or isolated
BELOW COST SALES EXCEPTION: MEETING COMPETITION DEFENSE
➤ Recognized in most states
➤ Allows retail dealer to sell motor fuel below cost in good faith effort to meet, not beat, price of competitors in same geographic area
➤ Affirmative defense to be proven by defendant
BELOW COST SALES: CREDIT CARD REBATES
➤ If credit card rebate lowers sale price below cost, may violate below cost sales statute
➤ Exception: if seller meets competitive prices when setting retail prices, will not consider its cost
➤ May avoid liability by availing themselves of meeting competition defense
CREDIT CARD REBATES ➤ Retailer that sets price to match posted price of competitor may
beat price if rebate on credit card lowers effective price
➤ *Courts will consider full effect of rebate on retail price to determine whether retailer meets or beats competitor’s price
➤ Consider who pays the rebate
➤ If financial institution issuing credit card pays rebate, courts have found rebate does not reduce price of gas paid by customers
CREDIT CARD REBATES ➤ Star Fuel Marts v. Murphy Oil USA (W.D. OK 2003)
➤ Shell rebate program does not reduce price of gas paid by customer to retailer
➤ Customer pays full price and financial institution gives 5% rebate on future purchases —> rebate does not go to fuel retailer
➤ Campbell & Sons Oil Co. v. Murphy Oil USA (2001)
➤ Co-branded credit card rebate program does not affect price paid by credit card holder nor compensation received by retailer gas distributor because rebate was funded by bank issuing credit card
The Jobber/Dealer Perspective on Loyalty
Programs
Randy V. Thompson Nolan, Thompson & Leighton, PLC
Bloomington, MN
2016 Petroleum Marketing Attorneys’ Meeting Washington, DC April 14-15, 2016
Defining Loyalty
I’m very loyal in relationships. Even when I go out with my Mom I don’t look at other Moms. Garry Shandling
A Look At Loyalty
If you want loyalty, get a dog. If you want loyalty and attention, get a smart dog. Grant Fairley
The Goal in Business Loyalty
Loyal customers, they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you. Chip Bell
The Traditional Business View of Loyalty
You cannot buy loyalty; you cannot buy the devotion of hearts, minds, and souls. You have to earn these things. (Clarence Francis – Michigan Business Review, May 1956)
The Modern Business
View of Loyalty
Some people aren’t loyal to you. . .they are loyal to their need of you. . .once their needs change, so does their loyalty. Modern Loyalty programs for business are centered on the premise that you can buy customer loyalty through financial incentives that will lead to a habit in purchases. The whole point of loyalty was not to change: Stick with those who stuck with you. Larry McMurtry
Factors Impacting the Rise of Loyalty Programs in Gasoline
Marketing Loyalty Programs have been around for over 50
years in gasoline marketing. In the 1960s, primarily non-major oil companies
gave away dishes or glassware to drive repeat purchases.
Prior to 1970, major oil brands relied upon brand value, trademark recognition and credit card programs.
The decline in brand value and the decline in oil company credit card programs have opened the door to loyalty programs to drive business even in major brand marketers.
Loyalty Programs Include: Discount on gasoline purchases with a
sponsored credit card Cross-marketing efforts with other
retailers
Operational and Contract Issues
Benefits of the Loyalty Program Contract Requirements Program Implementation Administration
Expenses Liability for Losses The Cost of Technology and Changes to
Technology Incentives to Implement the Loyalty Program The Impact of Losing a Third Party Participant Who Bears the Costs of the Benefits the Loyalty
Program Provides to the Consumer?
The Digital Future of Loyalty Programs
Mobile phone apps are low-cost Alternative to the credit card or loyalty
card the customer is required to carry Ability to communicate new offers and
coupons Ability to communicate offers to
mobile phones based upon geographical proximity to the station
State by State Analysis Required to Identify the Legal Issues for Loyalty Programs
No uniform body of law like the PMPA The laws of each state must be examined to
determine whether the program can be implemented in that state
Examples include: State Franchise Laws Below-Cost Laws
State Franchise Laws May Bar the
Requirement that a Retailer Participate in a Coupon or Rebate Program
Minnesota State Franchise Laws as a Model for Analysis: Different franchise laws govern the relationship between
refiner and direct supply dealer and jobber and retail dealer Both by rule and statute, no dealer can be required to use
any promotion, premium, coupon, giveaway or rebate The law doesn’t prevent voluntary participation Despite the prohibition on requirements, loyalty programs
have gained widespread acceptance in Minnesota
Objections over technology costs have been offset by incentives to the dealer
Below Cost Statutes in Each State
May Impact How a Loyalty Program Can Be Implemented
Minnesota’s Below Cost Statute as a Model: Minnesota has a “Benchmark” Standard for what
constitutes below cost sale of gasoline – terminal price + taxes + the lesser of 6% or 8¢ per gallon
Sales below cost as part of a promotion for no more than
3 days per calendar quarter is not a violation By definition, a sale below cost is a sale “by way of
posted price or indicating meter that is below cost. . .”
Minnesota’s Below Cost Statute as a
Model (Cont.) Traditional coupons are generally viewed as not in
violation of the statute because they don’t change the indicating meter
Open question whether a loyalty program that “rolls back” the metered price on gasoline could result in a violation because the indicating meter would be below cost.
A loyalty program that credits the consumer on the credit card bill would not be in violation of the below cost statute.
Because of the differences between laws in each state, a method of loyalty program rewards that would be acceptable in one state may run afoul of the law in another.
