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; LOYALTY PROGRAMS: FRANCHISE RELATIONSHIP, PRICING, & FRAUD ISSUES ABA Petroleum Marketing Attorneys' Meeting April 15, 2016 2:00pm - 3:00pm #38801280v1

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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.

Further Questions?

Contact Randy Thompson at [email protected]