AKRON-Out of the pages that constitute Goodyear's franchise agreement and G-110 dealer contract, it might be one simple sentence that decides the fate of two lawsuits filed against the tire maker by some of its Texas and California franchisees. It appears, according to two attorneys who specialize in franchise lawsuits, that the franchisees who filed the suits will have a tough time convincing courts that, as they contend, Goodyear infringed on its contractual and implied agreements when it began distributing tires through discounters and mass merchandisers, like Sears, Roebuck and Co. and Scottsdale, Ariz.-based Discount Tire Co.
Last June, Goodyear franchise and contract dealers in California filed what they hope will become a class-action lawsuit alleging just that. Seven months later, a group of Texas dealers filed a similar suit in their state.
These legal actions bring to light a growing friction between franchisees and their suppliers over changes in product distribution strategies. Similar lawsuits have been filed against Burger King Corp., Holiday Inns Inc. and Haagen-Dazs Co. Inc.
Devoid of virgin market territory, many large franchisers are turning to non-traditional channels of distribution to boost sales, said Francine Lafontaine, an associate professor of business at the University of Michigan.
As companies turn to non-traditional distribution channels, including mass merchandisers, discounters and electronic malls on the information superhighway, many of their traditional dealers have come to fear losing their own market share in the face of new and unexpected competition.
The root of the problem is not difficult to understand, according to Philip F. Zeidman, a founder of the Washington, D.C.-based law firm Brownstein, Zeidman and Lore, and general counsel to the International Franchise Association.
``Many older (franchise) agreements were written before people thought of alternate channels of distribution. Therefore, there are some contracts which are ambiguous,'' Mr. Zeidman said.
``In the newer contracts, as people have become more adapted to the notion that alternate channels of distribution are clearly essential to many types of marketing, (those channels are) increasingly being provided for in franchise and license and distribution arrangements.''
Specifically, courts have looked at the contract language to determine whether a franchiser reserved the right to open additional distribution outlets in a marketing area, Mr. Zeidman said.
The Goodyear franchise agreement attached as Exhibit A in both the California and Texas petitions states: ``Goodyear retains the right to sell to other customers in dealer's trade area and elsewhere.''
The G-110 contract agreement provided as an exhibit in both petitions states: ``Goodyear retains the right to establish its own outlets for the sale of Goodyear products or to sell Goodyear products to other customers in dealer's trade area or elsewhere.''
That language strongly suggests a court would favor Goodyear in an alternate site dispute, according to attorney Lee Wilkins of the Texas law firm Cantey & Hanger L.L.P. Mr. Wilkins, who specializes in franchise suits, also is a member of the International Franchise Association.
But while the attorneys for the Texas Goodyear dealers said they believe alternate site issues ``could become an issue'' in their suit, other allegations state Goodyear presented dealers with ``misleading'' information about their intentions to begin distributing through mass merchandisers and discount stores, causing the dealers to enter into contracts they might otherwise have rejected.
A ``negligent misrepresentation theory'' is a cause of action in Texas, according to Mr. Wilkins. ``(But) Goodyear doesn't have a lot to worry about in that kind of case,'' he said. ``Proving damages under a negligent misrepresentation theory is traditionally pretty difficult in Texas.''
During an interview, Mr. Wilkins spelled out what he considers the best arguments for both Goodyear and the dealers.
``The most favorable argument for Goodyear on this is that Goodyear has just recognized reality, which is: The lower the overhead of the reseller, the more Goodyear tires that can be sold. And they have located resellers such as Sears, Discount Tire and the like that have lower overhead.''
Goodyear flatly denies any wrongdoing alleged in the California lawsuit and said each of the dealer plaintiffs ``has signed a contract expressly acknowledging Goodyear's right to sell its product to anyone.''
But Mr. Wilkins said he understood the ``tough spot'' Goodyear's franchised dealers have found themselves in since the change in distribution strategy.
He said the franchisees' best argument seems to be: ``Well, I have spent considerable time contributing to your advertising.*.*.* (and) creating demand for Goodyear (tires), which otherwise would not have been there but for my effort and my advertising dollars. And you sort of owe it to me not to let somebody else in buying tires who is kind of riding on my coattails.''
So who wins?
``I really can't predict whether (the franchisees) are going to be able to make a case that's going to get them big damages-or even make a case that establishes liability-because of the scope of the contract, giving a non-exclusive territory allowing Goodyear to sell through other means,'' Mr. Wilkins said. ``But I am frankly glad to see the dealers not roll over.''
The most likely end result will be slight changes in Goodyear's marketing strategies, such as the Akron-based tire maker's recent announcement that it will begin providing specific tire lines solely for dealers, Mr. Wilkins predicted. Similar franchisee cases have been settled through marketing changes or monetary compensation, according to Messrs. Zeidman and Wilkins.
``Goodyear is going to have to either make some changes in the way they distribute tires, i.e. quit distributing through Sears, Discount Tire and the like and go back to the dealer organization, or they are going to have to basically figure a lot of dealers are going to desert them,'' Mr. Wilkins said.
But a number of securities analysts who follow the tire industry said they believe Goodyear was aware of the rift its new distribution strategy could cause in its existent dealer network.
Harry Millis of Fundamental Research Inc. said Goodyear has increased its U.S. replacement market share about 2 percent through mass merchandisers, although he had expected a boost of about 3 percent.
The tire manufacturer has done the volume it expected through the mass merchandisers, but the less-than-anticipated market share could be an indication of ``attrition in traditional areas,'' Mr. Millis theorized.
``Mass merchandising definitely has been a plus for Goodyear and its shareholders,'' Mr. Millis said. ``It has been a key part of Goodyear's earnings rebound.''
If tire makers like Goodyear are finding alternate distribution channels to be beneficial to business, franchised dealers can expect increasingly intense competition in their market areas, Mr. Wilkins said, and strongly advised franchisees and potential franchisees to pay more attention to exclusivity clauses in their contracts.