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Pepperidge Farm: Distributorship or Franchise

By Mario Herman, Esq.

It’s important to understand the difference between a franchise and other business relationships. This article presents an actual example of the difference between a franchise and distributorship.

In John R. Atchely and Michael Gilroy v. Pepperidge Farm, Inc., CV-04-0452-EFS, 2012 WL 777159 (E.D. Wash. Mar. 8, 2012), the United States District Court for the Eastern District of Washington found that a genuine issue of material fact existed as to whether Pepperidge Farm charged plaintiffs a franchise fee under the Washington Franchise Investment Protection Act (“WFIPA”) by deducting from commissions owed to plaintiffs a fee for services related to a pallet delivery program. Pepperidge Farm is a producer of baked goods, which it sells in retail food stores throughout the United States. Pepperidge Farm consigns its products to independent distributors who market and deliver them to retail outlets. Under the program, Pepperidge Farm delivered shrink-wrapped pallets of bakery products directly to large purchasers’ warehouses and deducted from those purchasers’ standard commissions up to $35 to cover its cost of shrink-wrapping and delivery.

In November 2004, the plaintiffs each filed separate actions in Spokane County Superior Court against Pepperidge Farms for rescission of contract, damages for breach of contract, misrepresentation, and violation of WFIPA. These actions were consolidated. Plaintiffs moved for summary judgment on their claim that the pallet delivery fee was a franchise fee under the WFIPA.

Plaintiffs did not argue that they paid a direct franchise fee to Pepperidge Farm. Rather, they argued that the roughly-thirty-dollar deduction from commissions related to palletizing, shrink-wrapping, and delivering the product to customers' warehouses is a charge for the mandatory purchase of services available only from Pepperidge Farm and none of the statutory exceptions applied. Pepperidge Farm argued that the commission deduction was not a franchise fee because the fee deducted from the commissions was an ordinary business expense designed to recover its costs. The District Court denied plaintiffs’ motion, finding that a fact issue existed as to whether the deduction was a “mandatory purchase of goods or services,” and thus a “franchise fee.”

Mr. Herman based in Washington, D.C., represents franchisees
202-686-2886 (ph)

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