Cal Poly v. Bello’s

Dueling court cases mark the latest chapter in the unfair competition story that's plagued Cal Poly since 1993

BY TRACY IDELL HAMILTON

Tom Bello looked small on the witness stand. Small, and a little tired. This was his third day answering questions about his family's store and its relationship to Cal Poly.

The trial to determine if Bello's Sporting Goods, the store his father opened back in 1945, will be allowed to keep selling Cal Poly—related merchandise was expected to last for seven to 10 days.

It's taken more than a month. Closing arguments finally wrapped up Friday, Feb. 16, in the battle pitting Cal Poly, the California State University Chancellor's Office, and Cal Poly Foundation against the tiny store on Monterey Street. Lawyers on both sides of the case expressed confidence that their side would prevail when Judge E. Jeffrey Burke hands down his decision sometime in the next ninety days..

At issue? A name and a history.

CSU officials claim that "Cal Poly" is a fully protectable proper name and that without a licensing agreement (which it has not offered) Bello's Sporting Goods has no right to sell merchandise bearing the words "Cal Poly."

Cal Poly Foundation is the nonprofit auxiliary organization formed in 1940 to handle the school's commercial operations, accept donations, and act as its banker. Since Foundation opened its for-profit Cal Poly Downtown store in 1983, it has successfully stopped other merchants from selling goods imprinted with the words "Cal Poly."

Preferring to open a store downtown rather than license the name to others, Foundation sent cease-and-desist letters to merchants ranging from Copeland's and Bello's to Sears and Mervyn's. After an informal meeting with Cal Poly's then—bookstore director, during which Bello claims he was told to "keep it down" and his store would be exempt, Bello's Sporting Goods continued as it always had.

Until 1997, when the Cal Poly Downtown wanted to expand. Then the threatening letters began again. This time, Tom Bello fought back. The CSU Chancellor's Office finally got involved in 1999, eventually filing suit to stop the retailer from selling Cal Poly-imprinted goods. Bello countersued, bringing Foundation into the suit as well. "They were threatening our suppliers," Bello said on the witness stand.

And while Judge Burke's decision could end this chapter of David v. Goliath, it's just the latest chapter in what many local business owners have seen as Cal Poly and Foundation overstepping their bounds, an "800-pound gorilla" competing unfairly with local businesses.

A for-profit foray

Cal Poly Downtown was the first chapter. Cal Poly Foundation created a for-profit subcorporation, then opened the store to "meet a significant demand for Cal Poly merchandise off campus," according to a Foundation staff report. Evidence of that demand included the fact that Bello's and other stores were selling Cal Poly items.

And while other downtown stores may not carry Cal Poly merchandise, the 1997 Cal Poly Downtown store expansion included other goods, including San Luis Obispo—themed items. The expansion brought a fresh wave of outrage from local businesses, which pointed to 1993 Foundation statements that the store wouldn't compete directly with local businesses.

"It's not fair competition," Don Wooley, who owns Penelope’s on Higuera Street, told New Times in 1997. "They have an enormous access to capital, and they don't pay taxes in the same sense that I do."

Even the SLO Chamber of Commerce, of which Cal Poly and Foundation are members, expressed concern. Direct competition with local businesses, said chamber President Dave Garth, "erode[s] the support for the university in the community, and they need that support."

Evidence of that erosion turned up in a chamber survey at the time, when only 15 percent of chamber members agreed with the statement, "I believe we can trust Cal Poly to do what's in the best interest of our community."

Regardless, Foundation officials said they would continue to pursue the start-up of private sector businesses as a means of generating additional income.

"Quite frankly, as a part of our overall strategy for the university, we are going to be looking at a variety of revenue-generating activities," Daniel Howard-Green, chairman of the Foundation Board of Directors and President Warren Baker's personal assistant, said at the time. "[PowerHouse Media] is one of them, and we'll want to be open to other opportunities as well."

Capturing the local market

PowerHouse Media was chapter two. It would turn out to be a short chapter.

In November 1997, flush with the success of Cal Poly Downtown, Foundation invested $250,000 to launch PowerHouse Media, a full-service media company offering public relations, marketing, and print media design and production. Housed in a big building glimmering with glass and brass, filled with top-of-the-line computers and other high-tech equipment, PowerHouse immediately made it known that it would be a presence to reckon with in San Luis Obispo.

"We expect to capture over 40 percent of the local market within a year," bragged the company's marketing plan. That statement would come into direct conflict with later claims that the company would only occupy its own niche and work with local companies, rather than against them, as Foundation officials found themselves backpedaling in the face of wide opposition.

Rejecting claims that the venture would be too powerful to compete against, then—executive director of PowerHouse Rick Smith claimed that the new company was no different than any other. "We can fail just like anyone else can fail," Smith said. "I don't understand the logic that for some reason we're being unfair."

The logic, of course, was the quarter-million dollars of Foundation backing. "It's a very scary thing when the government moves into the private sector," said Dave Cox of the Barnett Cox and Associates public relations firm when PowerHouse opened its doors. Cox said he felt betrayed by the university, which he said he has supported over the years both personally and professionally.

This time the hue and cry from local businesses–bolstered by a New Times story in December 1997 examining Foundation's finances, reach, and business practices–was too much for officials to ignore. The board of directors voted unanimously just two months later to shut the media company down, calling the venture a mistake.

PowerHouse may have closed, but Foundation retained its policy of pursuing for-profit ventures, keeping the for-profit corporation they had created, Polytechniques LLC.

Robert Griffin, Foundation's executive director, noted recently, as he sat outside the courtroom where the Bello's case was being heard, that while the corporation still exists "on paper, you'll notice we haven't done anything with it for, what, four years now."

And while he wouldn't comment on what future for-profit ventures Foundation might get involved in, he said the hoped-for research park and business incubator might be one place that having a for-profit corporation could come in handy.

"If the university wants Foundation to be involved, then the LLC would be appropriate," he said. Griffin wouldn't speculate, however, about whether Cal Poly's recent expansion into the egg distribution business is appropriate.

Paying its own way

It could be chapter three, or it could be just the only way the poor Poultry Unit can buy itself a new scale.

According to university officials, the "enterprise projects" of agriculture students are not supported by the state, at least not beyond faculty salaries and keeping the electricity on.

With "enterprise projects," students fire up the "learn by doing" creed of the school, becoming completely responsible for producing their ag product–beef, cheese, or eggs, for example–then marketing, selling, and distributing that product on the open market.

It's a crucial part of students’ education, say Poly educators, especially since future employers demand real-world experience from their college hires.

Bob Spiller, a professor in the Poultry Unit, said each department within the College of Agriculture is funded from three sources. One-third comes from the state (which covers salaries and other basics), and one-third comes from students. Spiller said departments are told, in effect, "You go out and find the other third." Much of that income comes from private gifts and endowments, he said. The rest comes from students' enterprise projects.

"I just bought us a new gram scale, to replace the one that's been here–no lie–since I was a student back in 1965," Spiller said. "Egg sales allowed that purchase."

Foundation used to absorb each unit's losses, Spiller said. "Now they just act as our banker. Each dean is responsible for balancing his books."

With the onus on each department to at least break even, and since each department's particular operation is fairly small, finding ways to bolster that source of income makes sense and shows students how the market really works, said Spiller. For future egg farmers at Cal Poly, that's meant getting into the egg distribution business.

In addition to selling the eggs it raises from its own chickens, the Poultry Unit now buys eggs from other suppliers as well. It packages the purchased eggs into Cal Poly—imprinted boxes and makes a small commission on every box sold.

The school says it's not trying to deceive those who buy what they think are Cal Poly—grown eggs. Tiny lettering on each carton informs consumers that the eggs are only being distributed by Cal Poly. Distributing eggs produced by others is a common practice in the egg industry, where distribution is often more lucrative than growing your own in the volatile egg market, say both professors and private egg sellers.

But the increasing scope of Cal Poly's egg distribution business has at least one local egg grower up in arms.

The war of the eggs

Steve Zaritsky has owned longtime local egg mainstay Rosemary Farms for about four years. An egg man like his father and his grandfather before him, Zaritsky moved to Santa Maria to take over Rosemary Farms in March 1997. A few months later he purchased Drake Farms from a local couple who wanted to retire.

Characterizing it as one of the smallest commercial egg operations in California, Zaritsky said Rosemary Farms is one of the largest producers of organic and cage-free eggs in the western United States. But since his purchase, he said, his business has grown smaller–"because of Cal Poly."

Fearing that he will be characterized as the Goliath in this particular fight, because Rosemary Farms does so much more egg business overall than the school, Zaritsky is cautious about how he characterizes his beef with the Poultry Unit. "I don't want people to think I'm against Cal Poly. I support the school. I don't want people to boycott my eggs," he said.

Zaritsky said Rosemary Farms used to distribute Cal Poly eggs for the Poultry Unit. "We would deliver a couple boxes of Cal Poly eggs along with our own brand" to local grocery stores, he said. "Then they started going after my accounts. Spiller said his kids needed the experience."

When Cal Poly began pursuing those new markets and increasing the percentage of purchased eggs to meet that new demand, Zaritsky got mad. Slights made by Spiller and others at Cal Poly about the quality of his eggs and his reputation made him even madder.

Spiller countered that Rosemary Farms used to put its eggs into Cal Poly boxes. "But the quality was too poor," he said.

Zaritsky said Rosemary Farms has lost several accounts to Cal Poly, including his entire Vons account.

"We're having to send drivers up to the Sacramento now to distribute our eggs," he said. "We used to do enough business right here."

Even local marketing columnist Vicki Clift noticed the increase in availability of Cal Poly eggs. "Wow, I thought," she wrote in a Dec. 21, 2000, Tribune column on the difficulty of competing with nonprofits, "I wonder how Drake Farms is taking this. Not only must they pay for labor and taxes, they're up against Cal Poly zealots."

Letters to Poly officials brought no relief, Zaritsky said. He said he even offered to pay Cal Poly the commission it received from distributing purchased eggs and allow Poultry Unit students to work on his ranch and ride with his distributors, if they would only back off.

No dice. No concessions at all, he said, even after three meetings with Foundation and poultry officials, letters to Assemblyman Abel Maldonado and state Sen. Jack O'Connell, and complaints to the Cal Poly Police Department, charging the Poultry Unit with unfair business practices.

Spiller and Andrew Thulin, head of the Animal Science Department within the College of Ag, hint at sour grapes and erratic customer service by Zaritsky's farms. But financial updates from the Poultry Unit back Zaritsky's claims of aggressive marketing.

"Egg sales exceed budget by 17 percent as the unit has made a concentrated effort to establish new accounts with local supermarkets and restaurants, and expand on-campus use," reads a March 2000 financial statement.

Thulin defended the expansion, pointing to the Poultry Unit's need to break even and keep students equipped with current equipment–and provide crucial real-life marketing and selling experiences. Besides, said Thulin, the total amount of eggs sales is "peanuts" compared to Zaritsky's operation.

"Look, if we really wanted to compete with Steve, we could take over a lot of Rosemary Farms' business. But we would never do that. That's not our mission."

But exactly what is that mission? Not only to grow eggs, it seems. A September 1999 financial statement notes that purchased eggs (rather than eggs grown on campus) were more than half of all eggs sold by Cal Poly. Thulin said buying and marketing–and expanding that market–are integral parts of that mission.

Employers, he said, are demanding that graduates understand the entire "value chain" of a product. "Value chain" refers to the continuum from genetic material to the finished product on your plate. The food industry is trying to control the entire chain, he said, and it's crucial that students understand the entire thing.

"Industry is behind us 100 percent," he said. "If it wasn't a requirement for students to understand the entire value chain, then no, we wouldn't do it. But doing it makes our students more competitive."

Zaritsky is not convinced. "I'm almost ready to take some legal action against them. I don't want to. There's no way I can fight fairly with Cal Poly. But I don't know what else to do."

What's in a name?

Tom Bello isn't convinced either. "The Vicki Clift article only scratched the surface," he said. "This is another example of a nonprofit, tax-exempt entity going off campus, with state backing, to compete with the private sector of small business."

Bello said he’s been surprised and hurt by how he has been treated by the university. "I expected more from higher education, you know?"

When Bello first decided to submit a cross-complaint against Cal Poly and Foundation, he said, it was an emotional thing. "We've been here a long time, and during the last 50 years we've been very supportive of that school. But it turns out we've got a legal basis for fighting too."

At issue? A name, and a history.

Cal Poly. California, Polytechnic. Bello's lawyers have spent the last month arguing that the name Cal Poly is too generic to warrant protection. California is a geographic place. Polytechnic is a generic term. There's even more than one Cal Poly: Cal Poly at San Luis Obispo, and Cal Poly at Pomona.

Their argument may have gotten a boost when the U.S. Federal Trademark Office denied the school's request for trademark protection of the name Cal Poly, arguing that it is too generic.

But CSU attorney LeRoy Anderson argues that the name is indeed a proper name and is easily identifiable as the common name for the California Polytechnic State University at San Luis Obispo.

"Something magic happens when you put them together," Anderson said. "‘Cal Poly’ is a composite term" that means more than the sum of its parts. Anderson turned to linguist John Hawkins of USC to make his arguments.

If Burke does rule that the name Cal Poly is unprotectable, it will open the doors to anyone who wants to manufacture and sell merchandise bearing the Cal Poly name. Quality of the merchandise would be impossible to control. Such a ruling would be a huge blow to the school, which now reaps millions of dollars in profits on sales of such merchandise in its on-campus bookstore and the downtown store.

Even if Burke rules that the name is protectable, Bello's could be allowed to sell Cal Poly merchandise under a rule of law known as estoppel by laches. ("Laches" is Latin for waiting.) Because Cal Poly officials were aware that Bello's has been selling Cal Poly goods since at least the 1950s–not just aware, but encouraging, according to Bello–and did nothing to stop him all those years, the school may have lost its right to stop him now.

"The law says that if you wait too long to enforce your rights," explained Bello attorney Neil Tardiff, "you can lose those rights."

Bello noted with distaste that each attempt to stop him was paralleled by Cal Poly's expansion into downtown–the first time when the store opened in 1993, then again in 1997 when the store expanded.

But CSU's Anderson argued that estoppel by laches is a "revocable license that can be terminated at any time." Bello's may have had the right to sell all these years from estoppel by laches, but now that the CSU has asked him to stop, he must comply.

Anderson also argued a point in the state Constitution that forbids the state from "giving away" any of its property, whether real estate or the name "Cal Poly." No one at the university, not even the president, has the right to give away the name to Bello's, he argued.

Tardiff took issue with the term "give away." While Bello's may never have paid a licensing fee, the Bello family has paid many times over for the right to sell goods with the Cal Poly name.

"The Bello family has been supporting Cal Poly since 1903," said Tardiff, "when Mary Bello, Tom's grandmother, was one of the first 12 students in the school." The former Bello ranch is now owned by Cal Poly, he said. Bello's Sporting Goods has sold tickets to Cal Poly games, posted schedules in its windows, special-ordered uniforms for its coaches and offered them discounts, and outfitted countless thousands in Cal Poly gear, Tardiff said, all of which have benefited the university.

The tension continues

While the characters in this particular chapter wait for the judge to hand down his verdict, Steve Zaritsky is still struggling to compete with Cal Poly's Poultry Unit. Polytechniques LLC still crouches in the wings, waiting for a directive from university President Warren Baker to spring onto the stage once more.

What might it take for to stop Cal Poly and Foundation, once and for all, from entering into ventures that compete with local businesses? Another lawsuit? Waning support from the community? When asked whether the university would ever consider drafting a more specific policy on such practices (it ostensibly has one now), Foundation's Griffin got thoughtful.

"There has always been a tension," he said, between benefiting students and unfair competition. "At what point do learning experiences begin and end? The college ought to be able to draw a line" between them.

On how the school might begin to do that, however, Griffin was less sure. Policy guidelines, he said, would probably have to begin at the departmental level, as each department has different goals and needs. "I think it would have to be on a sector-by-sector basis. But it's true, it is an ongoing tension."

As to whether Foundation might pull back from some of its more aggressive fund-raising strategies, or whether it could help fund departments like Animal Science more fully so students and professors would not have to hustle so much (or move into new markets to buy a new scale), Griffin indicated that his hands are essentially tied.

"President Baker pretty much drives where Foundation resources go," he said. "He sets those goals. And while the student ag programs are important, they're not the only ones who want that money." Æ

Tracy Hamilton is setting up her own Foundation. Donations may be funneled through her nonprofit Swiss bank account.