Antitrust Contractual Issues

Could Carter’s Clothing v. Nike Lead to Antitrust Litigation?

The following article was written by Benjamin Haynes, Esq.

The swoosh is getting sued for allegedly terminating a contract with a retailer without reasonable notice.

This is David vs. Goliath. On one hand, you have Carter’s Clothing and Footwear, a small clothing store located in Massachusetts.  On the other, you have Nike, the premier sports apparel company. Recently, the family owned store, Carter’s, filed a federal lawsuit against Nike. In this lawsuit, Carter ‘s alleges that Nike terminated its contract with Carter’s without providing reasonable notice, which is required under a provision in the contract. Thus, Carter’s claims include breach of implied contract, breach of implied provision of contract for fair dealing and unfair and deceptive trade practices on the part of Nike.

Nike filed a motion to dismiss in response to Carter’s lawsuit. This motion to dismiss essentially attacked the venue of the lawsuit, and not the merits of the complaint. Specifically, Nike is arguing that the proper venue for this lawsuit is not in Massachusetts, but in Oregon, where Nike is headquartered. On Friday, October 4, a federal judge held a hearing on the motion to dismiss. It was as simple as one side arguing that venue was proper in Oregon, and the opposition disagreeing. The judge took the decision under advisement and should make a decision in the next 10 to 20 days. The judge has stayed discovery issues until his decision on the motion to dismiss.

This abrupt termination of the contract severally impacts Carter’s business. Thirty percent of Carter’s sales come from Nike apparel. Thus, it is hard to imagine this small family operated store surviving without such a brand. It is safe to assume that Carter’s main reason for wanting to exercise its notice right is to allow the small company adequate time to pursue another contract with a power brand.

Looking at this case from a legal standpoint, it seems all this motion to dismiss would accomplish is to cause a delay in the main issues being resolved. If the judge does grant Nike’s motion to dismiss, it would be without prejudice and therefore Carter’s would have the opportunity to file a similar complaint in federal court in Oregon. What makes this burdensome upon Carter’s is that they are a small business that does not possess deep pockets like Nike. Litigation is expensive and attorney fees and costs could deter Carter’s from wanting to pursue this litigation if Nike is going to play procedural hooky.

However, there could be bigger legal implications from this case in the future. If other similarly small companies come forward with similar stories, there could be a potential anti-trust lawsuit against Nike. The attorney for Carter’s stated, “If there is a scheme there on Nike’s part to narrow its marketing to big boxes, big retailers and not to give the same opportunities for product to small retailers … then they have some serious legal problems called anti-trust.” This could open up the litigation flood gates against Nike if it is shown that it is essentially restraining trade under Anti-trust law.

What makes the termination of the Nike/Carter’s contract even more concerning is the fact that Nike apparently did not give a reason for the termination. At the motion to dismiss hearing, the judge asked Nike’s counsel why Nike terminated the agreement. Nike’s counsel responded with an, “I don’t know.” While for purposes of this specific lawsuit a reason for termination might not be that important, this lack of reasoning for termination of such a contract could give similar companies ammunition in the future for anti-trust litigation against Nike. Specifically, such a fact could be used to show that Nike was ousting smaller companies without adequate reasoning.

While Nike’s counsel may think they are being clever through their procedural delay tactics, the longer this case gains national attention the greater the chances similar companies come forward. This enhances the probability of an anti-trust lawsuit in the future. Thus, it would seemingly be in the best interest for Nike to settle and make this case go away.

If the judge denies the motion to dismiss, Nike could still provide an answer to the complaint which would potentially entail a valid legal reason for the termination. It is still too early to determine.