Weight Watchers sues CoolBrands over continued use of its brand

CoolBrands is also facing an investigation into trading of its stock because its shares were unusually active just before news of the lost Weight Watchers deal was announced last week.

National Post
August 6, 2004

Weight Watchers sues CoolBrands over continued use of its brand
Nancy Carr

TORONTO (CP) - A battle of the bulge is shaping up as Weight Watchers International Inc. takes CoolBrands International Inc. to court, alleging the Canadian frozen treats maker will violate a licence agreement if it continues to sell products carrying the diet company's name.

Michael Serruya, CoolBrands co-chairman, said Thursday the company will "vigorously defend" itself against the complaint because "we believe it's completely unfounded."

"The interesting thing is that they are alleging anticipatory breach by CoolBrands, so they're basically saying, 'CoolBrands hasn't done anything wrong, but we anticipate that they may.' "

CoolBrands announced last week that its contract to use the Weight Watchers name on Smart Ones products had not been renewed. It also said that although the deal expires Sept. 28, it has the right to manufacture, sell, distribute and market Weight Watchers Smart Ones frozen desserts for a year after that date.

CoolBrands co-chief executive David Stein maintained that stance Thursday.

"They are disputing the extent of our right during that time period, and we think the agreement states it very clearly," Stein said from the company's American headquarters in Ronkonkoma, N.Y.

According to the Weight Watchers complaint, filed in the Supreme Court of New York state, CoolBrands should be prevented from selling any of its branded products after Sept. 28.

The deal between CoolBrands and Weight Watchers, signed in 1995, allows the Canadian company to sell a limited amount of its products branded with the Weight Watchers logo after the contract ends, as long as CoolBrands doesn't stockpile inventory beforehand.

According to Weight Watchers, Stein said in a phone conversation last week that CoolBrands intended to stockpile components for making licensed products.

Weight Watchers also states that Stein predicted the year following the end of the agreement would be a "destructive year" because CoolBrands and the new licensee, Wells' Dairy Inc. of Iowa, would be competing to sell Weight Watchers products.

John McIlveen, an analyst with Dundee Securities Corp., said that with the inventory CoolBrands has on hand, it will likely be able to continue selling the Weight Watchers products for some time.

"I would say that will be sufficient grey area for CoolBrands probably to keep selling, if not the whole year close to it, because inventory wouldn't consist of just some finished packaged ice cream sitting in the freezers; they would also have some ingredients, they would also have probably a whole back room full of all these different labels," McIlveen said.

He also pointed out that CoolBrands will probably have heavyweight H. J. Heinz Co., owner of the Smart Ones brand, backing its attempts to continue selling Smart Ones desserts with Weight Watchers labels.

Aside from a court order stopping CoolBrands from selling its products, Weight Watchers is seeking punitive damages "because of its wanton and deliberate unlawful acts," as well as reimbursement of any money Weight Watchers loses due to CoolBrands' alleged misconduct.

Stein said CoolBrands "absolutely" plans to keep making and selling the Weight Watchers desserts after September.

Shares in CoolBrands (TSX:COB) traded down 25 cents at $10.35 Thursday afternoon on the Toronto stock market. Earlier in the day, the stock hit a 52-week low of $9.75.

That continued last week's meltdown, which saw the stock value halved after CoolBrands announced the end of the marketing agreement with Weight Watchers. Its shares were trading above $23 in mid-July.

Serruya said the fall in the stock price was overdone.

"I think at some point people will probably see that this may be an overreaction and at the end of the day the company continues to be strong and sound and we're open for business," Serruya said.

Weight Watchers ice cream bars, co-branded with the Heinz Smart Ones frozen desserts label, are expected to account for 32 per cent of CoolBrands' profit for its 2004 financial year ending Aug. 31.

The company has played down the significance of the loss of the licensing agreement with the world-renowned diet company, but with little effect.

CoolBrands, formerly called Yogen Fruz, will keep its licensing deal with Smart Ones and sell the same products as it does now when the Weight Watchers contract runs out. But the frozen treats won't carry the name of the popular dieting franchise.

CoolBrands is also facing an investigation into trading of its stock because its shares were unusually active just before news of the lost Weight Watchers deal was announced last week.

© The Canadian Press 2004


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