LOYALTY PROGRAMS: FRANCHISE RELATIONSHIP, PRICING, & FRAUD ISSUES ; ABA Petroleum Marketing Attorneys' Meeting April 15, 2016 2:00pm - 3:00pm #38801...
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ABA Petroleum Marketing Attorneys' Meeting April 15, 2016 2:00pm - 3:00pm



Structure and long-term marketing effort

Provides incentives to repeat customers

Designed to motivate customers

Petroleum Marketing ➤

Discounts & rebate on fuel and retail purchases

Special offersPoints




Change of terms of loyalty program

Changes to program description

False advertising claims


Courts have permitted airlines to make changes to terms

American Airlines v. Wolens (SCOTUS 1995)

Retroactive changes to frequent-flyer program

Airline Deregulation Act of 1978 preempted claims under IL consumer fraud act

Breach of contract claims could proceed

Grossman v. USAir (PA CCP 1997) ➤

“Reservation of rights” provision permitted airline to increase number of credits needed to obtain tickets

Monzingo v. Alaska Air Group, Inc. (AK 2005) ➤

Plain language of mileage program reflected reasonable expectations to allow changes to all aspects of program


Kwok v. Delta Air Lines, Inc. (11th Cir. Ga. 2014) ➤

Even where plain language of mileage credit provision was ambiguous as to how award would be calculated, appellate court could not demonstrate method violated program rules

Gordon v. United Cont’l Holding, Inc. (D.N.J. 2014) ➤

MSJ for United granted where United charged members w/ higher account balances more for redemption of awards


Leonard v. Pepsico, Inc. (SDNY 1999) (aff’d 2nd Cir. 2000) ➤

High school student tried to buy jumbo jet with points

MSJ granted for Pepsico ➤

Advertisements are are merely invitations to negotiate

No reasonable person would think a serious offer was intended

Baird v. Sabre, Inc. (9th Cir. 2016) ➤

Plaintiff expressly consented to receiving texts from Defendant when she submitted cellphone number as part of Hawaiian Airlines flight reservation


Are franchisees protected from forcing them to comply with franchisor-sponsored programs?

Does agreement allow franchisor to impose system changes on franchisee?

Does agreement provide indemnification to franchisee or any litigation arising out of franchisor-sponsored loyalty program?


Bird Hotel Corp. v. Super 8 Motels Inc. (D.S.D. 2010) ➤

Super 8 had not reserved right to revise terms of agreements unilaterally

Could not impose new fees on franchisees

Non-contract based claims ➤

Claims for fraud, tortious interference, misappropriation of trade secrets/ confidential information

Violation of franchise disclosure or relationship laws, unfair competition, antitrust violations


Some states prohibit franchise agreements from requiring participation in loyalty programs

Examples: ➤

Maryland (Md. COMMERCIAL LAW Code Ann. § 11-304)

Utah (Utah Code Ann. § 13-12-3)

District of Columbia (D.C. Code § 36-303.01)


Cannot sell motor fuel below cost in many states

To establish liability, must show that below cost sales were done

(1) With intent to injury to substantially destroy competition or

(2) The effect of the below cost price is to injury competition

States have exceptions ➤

Ex: liquidation or clearance sale, sale pursuant to court order, or when below cost price is inadvertent or isolated


Recognized in most states

Allows retail dealer to sell motor fuel below cost in good faith effort to meet, not beat, price of competitors in same geographic area

Affirmative defense to be proven by defendant


If credit card rebate lowers sale price below cost, may violate below cost sales statute

Exception: if seller meets competitive prices when setting retail prices, will not consider its cost

May avoid liability by availing themselves of meeting competition defense


Retailer that sets price to match posted price of competitor may beat price if rebate on credit card lowers effective price ➤

*Courts will consider full effect of rebate on retail price to determine whether retailer meets or beats competitor’s price

Consider who pays the rebate ➤

If financial institution issuing credit card pays rebate, courts have found rebate does not reduce price of gas paid by customers


Star Fuel Marts v. Murphy Oil USA (W.D. OK 2003) ➤

Shell rebate program does not reduce price of gas paid by customer to retailer

Customer pays full price and financial institution gives 5% rebate on future purchases —> rebate does not go to fuel retailer

Campbell & Sons Oil Co. v. Murphy Oil USA (2001) ➤

Co-branded credit card rebate program does not affect price paid by credit card holder nor compensation received by retailer gas distributor because rebate was funded by bank issuing credit card

The Jobber/Dealer Perspective on Loyalty Programs Randy V. Thompson Nolan, Thompson & Leighton, PLC Bloomington, MN 2016 Petroleum Marketing Attorneys’ Meeting Washington, DC April 14-15, 2016

Defining Loyalty I’m very loyal in relationships. Even when I go out with my Mom I don’t look at other Moms. Garry Shandling

A Look At Loyalty If you want loyalty, get a dog. If you want loyalty and attention, get a smart dog. Grant Fairley

The Goal in Business Loyalty Loyal customers, they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you. Chip Bell

The Traditional Business View of Loyalty You cannot buy loyalty; you cannot buy the devotion of hearts, minds, and souls. You have to earn these things. (Clarence Francis – Michigan Business Review, May 1956)

The Modern Business View of Loyalty Some people aren’t loyal to you. . .they are loyal to their need of you. . .once their needs change, so does their loyalty. Modern Loyalty programs for business are centered on the premise that you can buy customer loyalty through financial incentives that will lead to a habit in purchases. The whole point of loyalty was not to change: Stick with those who stuck with you. Larry McMurtry

Factors Impacting the Rise of Loyalty Programs in Gasoline Marketing  Loyalty Programs have been around for over 50 years in gasoline marketing.  In the 1960s, primarily non-major oil companies gave away dishes or glassware to drive repeat purchases.  Prior to 1970, major oil brands relied upon brand value, trademark recognition and credit card programs.  The decline in brand value and the decline in oil company credit card programs have opened the door to loyalty programs to drive business even in major brand marketers.

Loyalty Programs Include: Discount on gasoline purchases with a sponsored credit card Cross-marketing efforts with other retailers

Operational and Contract Issues  Benefits of the Loyalty Program  Contract Requirements  Program Implementation Administration Expenses  Liability for Losses  The Cost of Technology and Changes to Technology  Incentives to Implement the Loyalty Program  The Impact of Losing a Third Party Participant  Who Bears the Costs of the Benefits the Loyalty Program Provides to the Consumer?

The Digital Future of Loyalty Programs Mobile phone apps are low-cost Alternative to the credit card or loyalty card the customer is required to carry Ability to communicate new offers and coupons Ability to communicate offers to mobile phones based upon geographical proximity to the station

State by State Analysis Required to Identify the Legal Issues for Loyalty Programs No uniform body of law like the PMPA The laws of each state must be examined to determine whether the program can be implemented in that state Examples include: State Franchise Laws Below-Cost Laws

State Franchise Laws May Bar the Requirement that a Retailer Participate in a Coupon or Rebate Program Minnesota State Franchise Laws as a Model for Analysis:  Different franchise laws govern the relationship between refiner and direct supply dealer and jobber and retail dealer  Both by rule and statute, no dealer can be required to use any promotion, premium, coupon, giveaway or rebate  The law doesn’t prevent voluntary participation  Despite the prohibition on requirements, loyalty programs have gained widespread acceptance in Minnesota  Objections over technology costs have been offset by incentives to the dealer

Below Cost Statutes in Each State May Impact How a Loyalty Program Can Be Implemented Minnesota’s Below Cost Statute as a Model:  Minnesota has a “Benchmark” Standard for what constitutes below cost sale of gasoline – terminal price + taxes + the lesser of 6% or 8¢ per gallon  Sales below cost as part of a promotion for no more than 3 days per calendar quarter is not a violation  By definition, a sale below cost is a sale “by way of posted price or indicating meter that is below cost. . .”

Minnesota’s Below Cost Statute as a Model (Cont.)  Traditional coupons are generally viewed as not in violation of the statute because they don’t change the indicating meter  Open question whether a loyalty program that “rolls back” the metered price on gasoline could result in a violation because the indicating meter would be below cost.  A loyalty program that credits the consumer on the credit card bill would not be in violation of the below cost statute.  Because of the differences between laws in each state, a method of loyalty program rewards that would be acceptable in one state may run afoul of the law in another.

Further Questions?

Contact Randy Thompson at [email protected]

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