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.