NEW YORK (Reuters) - In a lawsuit that pits mom-and-pop store operators against retail behemoth Sears, a group of Sears store owners Monday sued the chain, claiming its acquisition by Kmart created unfair competition by making its products available at Kmart and other stores.

The Dealer Store Owners Association, which represents more than 200 Sears stores owned and operated by families or individuals, filed suit against Sears Roebuck & Co. in Minneapolis federal court, the group said in a statement.

Sears has about 800 dealer stores, which sell Sears appliances, electronics and tools in markets that are too small for a Sears department store -- typically small towns and rural areas. The concept was developed in the early 1990s, when Sears phased out its catalog stores.

"Most dealers invested their life savings and 401(k) plans in these stores," the group's president, Steve Granger, said. "Now they risk losing it all. ... This is hardly the way to build trust in a brand name."

The lawsuit charges that Sears convinced the owners to build up their small-town markets and promised that Sears would keep them in business for life.

Sears Roebuck was acquired by Kmart last year, and the combined company was renamed Sears Holding Corp. (Research)

"It's true that you can now find Sears brands like Kenmore and Craftsman at Kmart stores. In all likelihood, the combination of Sears Holdings is putting a lot of emphasis on popularizing these brands," said Kurt Barnard, president of Retail Forecasting Group. "I don't know to what extent this might impinge or inflict loss of market share to the dealers."

The suit charges Sears breached its contracts with the dealers by selling its products at discount chain Kmart, which has about 1,500 stores, and in other channels. It also claims the company has refused to renew the contracts of two dealers.

A spokesman of Sears Holdings said the exclusivity agreement only says that Sears cannot sell Kenmore products within the same ZIP code as a dealer store, and it is staying within those parameters.

"Any changes that are made to the Sears or Kmart stores located near the dealer stores are to enhance the shopping experience for our customers," Sears spokesman Larry Costello said.

The association charges that Sears is taking away business from these operators by selling the same products through competing Kmarts and other channels, with little or no compensation.

"We're seeking protection of our markets," Granger said. "We mean the actual market, not just the ZIP code. Otherwise we feel we should be compensated for it."

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