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Sokoloff v. General Nutrition Companies

June 15, 2000

ERIC SOKOLOFF, ET AL., PLAINTIFFS,
v.
GENERAL NUTRITION COMPANIES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Simandle, District Judge

Not for Publication

OPINION

Filed: June 13, 2000

In the instant case, plaintiffs Eric and Heidi Sokoloff, who entered into an agreement with defendant GNC Franchising ("Franchising") to own and operate a General Nutrition Center store in Delran, New Jersey, selling vitamins, mineral supplements, and other health related products manufactured by defendant General Nutrition Companies, Inc. ("GNCI"), allege that defendants GNCI and GNC Franchising breached their franchise agreement with plaintiffs by allowing defendant Rite Aid Corporation to sell vitamins manufactured by GNC and called PharmAssure within plaintiffs' "protected territory," as set forth in the franchise agreement. Plaintiffs also assert that defendant Rite Aid, through its agreement with GNC to sell GNC PharmAssure products in a nearby Rite Aid drug store, tortiously interfered with plaintiffs' prospective economic advantage through their customers and potential customers in the protected territory. The case is before this Court sitting in its diversity jurisdiction, pursuant to 28 U.S.C. § 1332, for there is more than $75,000 in dispute and because the parties are completely diverse: plaintiffs are citizens of, and reside in, New Jersey, while all three defendants are Delaware corporations with their principal places of business in Pennsylvania.

There are currently two motions before the Court: (1) plaintiffs' motion for preliminary injunctive relief barring GNC and GNC Franchising from selling PharmAssure products at Rite Aids in plaintiffs' protected territory, and (2) Rite Aid's motion to dismiss the Complaint against them for failure to state a claim, which, for reasons that follow. At oral argument held on May 22, 2000, this Court denied the motion for preliminary injunctive relief, for reasons to be expressed in the instant Opinion and Order. At that time, the Court also converted Rite Aid's motion to dismiss into a motion for summary judgment and reserved decision pending further submissions. *fn1 For the reasons that follow, this Court will grant Rite Aid's motion for summary judgment and deny the motion for preliminary injunctive relief.

I. BACKGROUND/FINDINGS OF FACT

The facts of this case, at this stage, are largely undisputed. The dispute lies only over the meaning of contractual language.

A. Plaintiffs' Franchise

General Nutrition Corporation ("GNC"), defendant GNC Franchising ("Franchising"), General Nutrition Products, Inc. ("GNPI"), General Nutrition Distribution, L.P. ("GND"), and General Nutrition Investment Company ("GNIC") are wholly owned subsidiaries of General Nutrition, Inc. ("GNI"), which is, in turn, a wholly-owned subsidiary of defendant General Nutrition Companies, Inc. ("GNC"). Together, they are collectively referred to as the "GNC Companies." GNC operates more than 2,400 corporately-owned GNC stores throughout the U.S. GNC Franchising, on the other hand, grants franchises to third parties for the operation of GNC Stores. GNPI manufactures, or subcontracts the manufacture of, vitamins and dietary supplements for GNC and third parties. GND delivers both GNC and third party vitamins and dietary supplements to GNC's corporately-owned GNC stores and franchised GNC stores. GNIC owns the GNC Companies' intellectual property.

In early 1996, plaintiffs Eric and Heidi Sokoloff first expressed an interest in purchasing a GNC Store franchise. In connection with the sale, GNC Franchising delivered to plaintiffs a copy of its Uniform Franchise Offering Circular ("UFOC"), which contained comprehensive information about the GNC franchise system and the GNC franchised business, and included copies of all franchise-related contracts, including a copy of GNC Franchising's standard franchise agreement. The plaintiffs met with GNC Franchising representatives on several occasions at GNC Franchising's principal headquarters in Pittsburgh, Pennsylvania.

In March of 1997, plaintiffs entered into a Franchise Agreement with defendant GNC Franchising, and pursuant to that Franchise Agreement, operate a General Nutrition Center Store ("the Sokoloff GNC Store") in the Millside Shopping Center in Delran, New Jersey. Plaintiffs paid a franchise fee of $22,500, signed a Promissory Note for $81,098.98, executed a Purchase Money Security Agreement, and executed a Product Sales Agreement and a five year Sub Lease, which includes a gross rental in excess of $125,000. In addition, plaintiffs invested approximately $75,000 in additional monies into the operation of the Sokoloff GNC Store. Pursuant to the terms of the Franchise Agreement, the plaintiffs attended and completed GNC Franchising's initial training program at GNC Franchising's headquarters in Pittsburgh, Pennsylvania. They began to operate in 1997.

Plaintiffs' franchise agreement provided that GNC Franchising would provide valuable services (such as merchandising assistance, operational support, and accounting services) from its headquarters, and it provided that plaintiffs would deliver periodic sales reports and royalty payments to GNC Franchising at its headquarters. Additionally, the Franchise Agreement provided that franchisee has a protected territory within one mile of the location of the franchise location. The agreement further provides in § II., ¶ I.C for the protection of the area against further encroachment:

For a period of one year, Franchisor, shall not itself operate, nor grant a franchise for the operation of, another General Nutrition Center under the System within the Protected Territory, as described on page 1. If after expiration of such two year period Franchisor identifies within the Protected Territory a site for development of a franchised GNC store which is (1) a new available site or an existing company-owned GNC store; (2) a transfer of an existing franchised GNC store repurchased by or made available to Franchisor; or (3) an existing independent store that does not convert to a GNC store but is made available to Franchisor, then Franchisor shall grant to Franchisee the right and option to franchise such site by providing to Franchisee a written notice and a completed agreement or Development Agreement for such site along with Franchisor's then current Uniform Franchise Offering Circular ("UFOC"). To exercise its right and option to franchise such site, Franchisee must execute the agreement or Development Agreement, UFOC receipt and return the agreement and receipt to Franchisor together with the then-current Initial Franchise Fee or Development Fee on or before expiration of thirty (30) days from receipt of the notice. If Franchisee does not exercise its right to elect within such period, or waives its right to elect within such period, then Franchisor shall be free to develop such site or to grant it to another party, which may be Franchisor's affiliate, and Franchisee's right and option to such site shall expire and be of no further force or effect. (Compl. Ex. A, § II, ¶¶ I.C. ) The agreement further provides in § II, ¶ I.D that

Franchisor retains the right, among others, on any terms and conditions Franchisor deems advisable, and without granting Franchisee any rights therein, (i) to use, and to license others to use, the System and Proprietary Marks for the operation of General Nutrition Centers at any location outside of the Protected Territory; (ii) to sell and distribute, directly or indirectly, any goods or services, including, without limitation, GNC Brand Vitamins under the Proprietary Marks or any other proprietary marks to business or individual consumers located within or outside the Protected Territory, through the use of direct mail, mail order, catalog sales, or any other similar method and (iii) to use and license the use of other proprietary marks in connection with the operation of retail vitamin, health food, nutrition, or fitness stores which are the same as, similar to, or different from the Franchised Business, and which may be located at any location; provided, however, that such stores shall not carry or offer for sale GNC Brand Vitamins if located within the Protected Territory. Except as provided in Section I.C. herein, Franchisee acknowledges and agrees that this franchise is nonexclusive and is granted subject to the terms of Section VIII.C.(3) hereof. (Id. § II, ¶¶ I.D.) Paragraph VIII.C.(3) sets forth that

Except as provided in Section I.C. hereof, the right and license of the Proprietary Marks granted hereunder to Franchisee is nonexclusive, and Franchisor thus has and retains one right among others:

(a) To grant other licenses for the Proprietary Marks;

(b) To use the Proprietary Marks in connection with selling products and services at locations within or without the Protected Territory as described in Section I.C.; and

(c) To develop and establish other systems for the same or similar Proprietary marks, or any other proprietary marks, and grant license or franchises thereto without providing any rights therein to Franchisee. Id.

The agreement, in the recitals section, defines "Proprietary Marks" as the "certain trademarks, trade names, service marks, logos, emblems, and other indicia of origin, including but not limited to the GNC(TM) and GENERAL NUTRITION CENTER(TM) marks, and other such trade names, service marks, and trademarks as are now designated (and may hereafter be designated by Franchisor) for use in connection with the system. (Compl. Ex. A, Phase I, page 2.) It defines "GNC Brand Vitamins" as "a special selection of vitamins manufactured or distributed by Franchisor or its affiliates under labels bearing the mark `GNC' and related marks...." (Id.) The GNC Store Inventory Addendum attached to the Franchise Agreement as Attachment A (Compl. Ex. A.) Provides that Franchise shall carry, and offer for sale, the following lines and type of GNC Brand Vitamins:

GNC Complete Line

Natural Brand Complete Line

Pro Performance ...


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