Source: https://www.pepperlaw.com/publications/loyalty-programs-all-fun-and-games-until-someone-wants-you-to-buy-them-a-harrier-jump-jet-2016-05-16/
Timestamp: 2019-08-21 14:41:13
Document Index: 570424108

Matched Legal Cases: ['§ 36', '§ 56', '§ 559', '§ 55', '§ 369', '§ 849']

Loyalty Programs: All Fun and Games Until Someone Wants You to Buy The...
Authors: A. Christopher Young, Jennifer L. Maher and Katherine B. Puccio
A version of this article was published in the Winter 2017 issue of The Franchise Lawyer, a publication of the American Bar Association.
While loyalty programs provide incentives for customers to remain loyal, they can also create contractual obligations. Typically, courts analyze loyalty and rewards programs like unilateral contracts: the program sponsor presents an offer of terms and conditions that the consumer(s) can accept by performance. Entering into unilateral contracts with thousands — if not millions — of consumers presents myriad liability issues with the potential for class actions based on contract breach, fraud and unfair competition, among other grounds.
Franchisors should explicitly reserve the right to change the terms and conditions of loyalty programs as they apply to franchisees. A provision in the franchise agreement that generally permits the franchisor to make changes to “systems standards” or “rules of operation” may not be sufficient to allow franchisors to change the terms and conditions of loyalty programs or unilaterally increase program fees.9 At the same time, franchisors do have the ability to force a franchisee to engage in a system-wide program if the franchise agreement specifically permits the franchisor to do so. Recently, a federal judge in Colorado granted summary judgment to a franchisor against a franchisee which refused to participate in a “4 Meals Under $4 Menu” promotion. Steak N Shake Enters v. Globex Co., LLC, 110 F. Supp. 3d 1057 (D. Colo. 2015). The franchisee had even gone so far as to print its own menu inserts with improper pricing. In its franchise agreement, Steak N Shake required franchisees to “fully participate in all local, regional, season, promotional and other programs, initiatives and campaigns adopted by Franchisor that Franchisor requires Franchisee to participate in.” The agreement also prohibited franchisees from printing menus without the franchisor’s approval. The Court found that the franchisee materially breached the agreements, noting that the franchise agreements made explicitly clear what the franchisee requirements were.
Regulatory Issues: State Legal Regimes
In addition to the various contractual pitfalls presented by loyalty programs, there are regulatory regimes in some states that can also impact these programs, especially rewards programs that provide incentive cash rewards, which may affect a marketer’s final sales price. Program sponsors need to consider how the cash rewards may affect compliance with competition laws, such as below-cost-sales statutes, which exist in a number of states.
1 This is based on the real life case of Leonard v. Pepsico, Inc. discussed below.
2 See Kearney v. Equilon Enters., LLC, No. 3:14-cv-00254-HZ, Plaintiff’s Memorandum of Points and Authorities in Support of Motion for Preliminary Approval at 11 (D. Or. filed Apr. 29, 2016).
3 Kearney v. Equilon Enters., LLC, 65 F. Supp. 3d 1033 (D. Or. 2014).
4 On January 4, 2016, in Kearney v. Equilon Enters., LLC, 2016 U.S. Dist. LEXIS 1226, *1 (D. Or. Jan. 4, 2016), Judge Marco A. Hernandez dismissed certain claims, but the opinion above was left undisturbed.
5 Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999), aff’d, Leonard v. Pepsico, Inc., 210 F.3d 88, 118-19 (2d Cir. 2000).
6 Kwok v. Delta Air Lines, Inc., 578 Fed. App’x 898 (11th Cir. 2014).
7 Gordon v. United Cont'l Holding, Inc., 73 F. Supp. 3d 472, 474 (D.N.J. 2014).
8 Monzingo v. Alaska Air Group, Inc., 112 P.3d 655 (Alaska 2005).
9 See, e.g., Bird Hotel Corp. v. Super 8 Motels, Inc., 2010 U.S. Dist. LEXIS 14124, *1, (D.S.D. Feb. 16, 2010) (franchise agreement generally permitting franchisor to change the rules of operation or systems standards did not give Super 8 the discretion to increase program fees).
10 See D.C. Code § 36-303.01 (discussing nonwaiverable conditions of marketing agreements for retail service stations).
11 McDonald’s is currently facing problems with its franchisees’ implementing the new all-day breakfast menu. Franchisees complain that all-day breakfast slows down service, reduces the price of the average meal sold and causes “chaos” in the kitchen due to the extra labor required. While customers may love the all-day breakfast, franchisees do not. “McDonald’s franchisees say all day breakfast is a nightmare,” Business Insider (Oct. 15, 2015), available at http://www.businessinsider.com/mcdonalds-franchisees-say-all-day-breakfast-is-a-nightmare-2015-10.
12 See N.J. Stat. § 56:6-2(e).
13 See Fla. Stat. § 559.03.
14 Sweepstakes are heavily regulated by state law, as sweepstakes have been a way that scammers have targeted customers in the past. For an overview of sweepstakes law, see, e.g., 3-55 The Law of Advertising § 55.09: Lotteries, Games of Chance, Sweepstakes, and Similar Promotional Marketing Schemes (2015); “Regulating the Sweepstakes Industry: Are Consumers Close to Winning?, ” 41 Santa Clara L. Rev. 581 (2001).
15 See N.Y. Gen. Bus. Law § 369-e; Fla. Stat. § 849.094. Virtually every state and the federal government regulates the use of gift cards, which are not discussed in this article. For an overview of the regulation of gift cards at the federal level, see Federal Trade Commission, Gift Cards: What Shoppers Need to Know About Gift Cards, available at https://www.ftc.gov/news-events/media-resources/truth-advertising/gift-cards (accessed Apr. 24, 2016).