judicial update - International Franchise Association

Transcription

International Franchise Association
46th Annual Legal Symposium
May 5-7, 2013
JW Marriott Hotel, Washington DC
JUDICIAL UPDATE
Roberta F. Howell
Foley & Lardner LLP
Madison, Wisconsin
Gregg A. Rubenstein
Nixon Peabody LLP
Boston, Massachusetts
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THE AUTHORS ARE GRATEFUL AND WISH TO ACKNOWLEDGE AND THANK THE
ASSISTANCE OF OTHERS AT THEIR RESPECTIVE LAW FIRMS, WITHOUT
WHOSE HELP THIS WOULD NOT HAVE BEEN POSSIBLE.
MS. HOWELL WISHES TO THANK THE FOLLOWING ATTORNEYS AT FOLEY &
LARDNER: JODI FOX, KRISTA STERKEN, ADAM CRAWFORD, ERIC HATCHELL
AND KATE HENNINGSEN.
MR. RUBENSTEIN WISHES TO THANK THE FOLLOWING ATTORNEYS AT NIXON
PEABODY: SARA FARBER AND MELISA GERECCI.
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TABLE OF CONTENTS
I. DEFINITION OF A FRANCHISE .......................................................................... 1 A. FRANCHISE FEE ...................................................................................... 1 B. TRADEMARK USE OR CONTROL ........................................................... 3 C. COMMUNITY OF INTEREST .................................................................... 8 II. REGISTRATION AND DISCLOSURE ................................................................. 9 III. INTELLECTUAL PROPERTY ............................................................................ 17 IV. LIABILITY THEORIES ....................................................................................... 38 A. 14379022.3
BREACH OF CONTRACT ....................................................................... 38 1. Termination and Non-Renewal ..................................................... 38 2. Encroachment ............................................................................... 62 3. Operational and other issues ........................................................ 66 4. Non-Competition Covenants ......................................................... 71 5. Existence of Contract .................................................................... 89 B. IMPLIED COVENANT OF GOOD FAITH/FAIR DEALING....................... 90 C. FIDUCIARY DUTY CLAIMS .................................................................... 95 D. RELATIONSHIP LAWS ........................................................................... 99 1. General ......................................................................................... 99 2. Encroachment ............................................................................. 106 3. Transfer ....................................................................................... 106 4. Termination and Non-Renewal ................................................... 112 E. FRAUD .................................................................................................. 119 F. TORTIOUS INTERFERENCE ............................................................... 137 G. VICARIOUS LIABILITY .......................................................................... 142 H. UNFAIR BUSINESS PRACTICES AND LITTLE FTC ACTS ................. 158 I. RICO ...................................................................................................... 168 J. OFFICER/DIRECTOR INDIVIDUAL LIABILITY ..................................... 170 K. DEFENSES ........................................................................................... 172 1. Limitations ................................................................................... 172 2. Waivers ....................................................................................... 177 3. Releases ..................................................................................... 178 4. Preclusion ................................................................................... 180 ii
5. L. V. Unconscionability ........................................................................ 184 REAL ESTATE ...................................................................................... 186 DISPUTE RESOLUTION ................................................................................. 188 A. B. C. LITIGATION ........................................................................................... 188 1. Jurisdiction .................................................................................. 188 2. Venue and Forum Selection Clauses .......................................... 196 3. Conflicts of Law and Choice of Law Clauses (also RICO) .......... 208 4. Class Actions .............................................................................. 215 5. Evidentiary Matters ..................................................................... 220 6. Discovery Matters ....................................................................... 222 7. Standing ...................................................................................... 226 8. Necessary Party .......................................................................... 229 9. Default Judgment ........................................................................ 229 10. Relief from Final Judgment ......................................................... 231 ARBITRATION ....................................................................................... 233 1. Agreements to Arbitrate/Enforceability ........................................ 233 2. Scope of Arbitration Agreement Provisions ................................. 246 3. Arbitration Location Selection Clauses ........................................ 250 4. Confirming and Challenging Arbitration Awards .......................... 252 REMEDIES ............................................................................................ 256 1. Compensatory Damages ............................................................ 256 2. Lost Future Profits ....................................................................... 259 3. Lanham Act Damages................................................................. 264 4. Liquidated Damages ................................................................... 266 5. Injunctions ................................................................................... 267 7. Attorneys' Fees and Costs .......................................................... 282 8. Receiver ...................................................................................... 287 VI. ANTITRUST ..................................................................................................... 289 VII. MISCELLANEOUS CASES ............................................................................. 292 14379022.3
A. ADMIRALTY LAW ................................................................................. 293 B. BANKRUPTCY ...................................................................................... 293 C. PETROLEUM MARKETING PRACTICES ACT ..................................... 305 D. STATE SPECIAL INDUSTRY ACTS ..................................................... 315 iii
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E. STATE TAX ISSUES ............................................................................. 329 F. FRANCHISEE AS AN EMPLOYEE ....................................................... 330 H. UNIFORM COMMERCIAL CODE ......................................................... 333 L. DISQUALIFICATION OF COUNSEL ..................................................... 334 N. INSURANCE ISSUES............................................................................ 335 iv
TABLE OF CASES
Page(s)
7-Eleven, Inc. v. Dhaliwal,
2012 U.S. Dist. LEXIS 166691 (E.D. Cal. Nov. 20, 2012) .......................... 23, 50, 272
7-Eleven, Inc. v. Spear,
2012 U.S. Dist. LEXIS 66366 (N.D. Ill. May 11, 2012) ................................... 258, 264
A Love of Food I, LLC v. Maoz Vegetarian USA, Inc.,
870 F. Supp. 2d 415 (D. Md. 2012)........................................................................ 194
Aamco Transmissions, Inc. v. Dunlap,
2011 U.S. Dist. LEXIS 91130, 2011 WL 3586225 (E.D. Pa. Aug. 16, 2011).... 76, 269
Aamco Transmissions, Inc. v. Singh,
2012 U.S. Dist. LEXIS 141764 (E.D. Pa. Oct. 1, 2012).................................... 75, 268
Aamco Transmissions, Inc. v. Singh,
2012 U.S. Dist. LEXIS 163930 (E.D. Pa. Nov. 16, 2012) ................................. 76, 268
Abington Auto World, LP v. Bureau of Prof’l & Occupational Affairs,
2013 Pa. Commw. Unpub. LEXIS 75 (Pa. Commw. Ct. Jan. 22, 2013) ................. 106
Accor Franchising N. Am., LLC v. Gemini Hotels, Inc.,
2012 U.S. Dist. LEXIS 152988 (E.D. Mo. Oct. 23, 2012) ....................................... 125
Ace Hardware Corp. v. Advanced Caregivers LLC,
2012 U.S. Dist. LEXIS 150877 (N.D. Ill. Oct. 18, 2012) ................. 123, 185, 235, 246
Ace Hardware Corp. v. Landen Hardware, LLC,
2012 WL 2827180 (N.D. Ill. June 27, 2012) ........................................................... 177
Ace Hardware v. Landen Hardware,
2012 WL 2553532 (N.D. Ill. June 28, 2012) ........................................................... 120
AdvoCare Int’l, L.P. v. Ford,
2013 Tex. App. LEXIS 1162 (Tex. Ct. App. Feb. 5, 2013) ..................................... 160
Agne v. Papa John’s Int’l,
2012 U.S. Dist. LEXIS 162088 (W.D. Wash. Nov. 9, 2012) ........................... 145, 216
Alboyacian v. B.P. Prods. N. Am., Inc.,
2012 U.S. Dist. LEXIS 125889 (D.N.J. Sept. 5, 2012) ................................... 105, 284
Aleksick v. 7-Eleven, Inc.,
205 Cal. App. 4th 1176 (2012) ............................................................................... 330
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Allegra Network LLC v. Bagnall,
2012 U.S. Dist. LEXIS 48918 (E.D. Mich. Apr. 6, 2012) ........................................ 222
Allegra Network LLC v. Cormack,
2012 U.S. Dist. LEXIS 117014 (E.D. Mich. Aug. 20, 2012)...................................... 72
2012 U.S. Dist. LEXIS 178822 (E.D. Mich. Dec. 3, 2012)........................................ 73
Allegra Network, LLC v. Cormack,
2012 U.S. Dist. LEXIS 181640 (E.D. Mich. Nov. 2, 2012)................................ 72, 271
2013 U.S. Dist. LEXIS 13 (E.D. Mich. Jan. 2, 2013) ................................................ 73
Allegra Network, LLC v. Liames,
2012 U.S. Dist. LEXIS 173052 (E.D. Mich. Dec. 6, 2012)........................................ 73
Allegra Network, LLC v. Ruth,
2013 Bankr. LEXIS 133 (Bankr. E.D. Tex. Jan. 10, 2013) ............................... 74, 297
Allow Wheels, Inc. v. Wheel Repair Solutions, Int’l., Inc.,
2012 U.S. Dist. LEXIS 118600 (S.D. Fla. Aug. 21, 2012) ...................................... 197
Almasi v. Equilon Enters., LLC,
2012 U.S. Dist. LEXIS 128623 (N.D. Cal. Sept. 10, 2012)............................. 309, 324
AMTX Hotel Corp. v. Holiday Hospitality Franchising, Inc.,
2012 U.S. Dist. LEXIS 79139 (N.D. Tex. June 7, 2012)......................................... 136
Anderson v. Domino’s Pizza, Inc.,
2012 U.S. Dist. LEXIS 67847 (W.D. Wash. May 15, 2012) .................................... 156
Andy Mohr Truck Center v. Volvo Trucks N. Am.,
2012 U.S. Dist. LEXIS 145057 (S.D. Ind. Oct. 9, 2012) ......................................... 121
Arby’s Rest. Group, Inc. v. Kingsley,
2012 U.S. Dist. LEXIS 181713 (D. Md. Dec. 26, 2012)............................ 52, 224, 282
Ashbaugh v. Windsor Capital Group, Inc.,
2012 U.S. Dist. LEXIS 85088 (E.D.N.Y. June 19, 2012) ........................................ 150
Astral Health & Beauty, Inc. v. Aloette of Mid-Miss., Inc.,
2012 U.S. Dist. LEXIS 146671 (N.D. Ga. Oct. 1, 2012) ........................................... 40
Atchley v. Pepperidge Farm, Inc.,
2012 U.S. Dist. LEXIS 103830 (E.D. Wash. Jul. 24, 2012) .................................... 2, 7
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Atchley v. Pepperidge Farm, Inc.,
2012 U.S. Dist. LEXIS 173974 (E.D. Wash. Dec. 6, 2012) ........................................ 3
Atterbery Truck Sales, Inc. v. Navistar, Inc.,
2012 U.S. Dist. LEXIS 60330 (W.D. La. Apr. 30, 2012) and 2012 U.S. Dist.
LEXIS 100693 (W.D. La. Jul. 16, 2012) ................................................................. 327
Audi of Smithtown, Inc. v. Volkswagen of Am., Inc.,
2012 N.Y. App. Div. LEXIS 7586 (N.Y. App. Div. 2d Dep’t Nov. 14, 2012) ............ 100
Avengers Inc. v. QFA Royalties LLC,
2013 U.S. Dist. LEXIS 23097 (D. Colo. Feb. 20, 2013) ................................. 168, 192
Awuah v. Coverall N. Am., Inc.,
2012 U.S. App. LEXIS 26461 (1st Cir. Dec. 27, 2012)........................................... 237
B.A. Wackerli, Co. v. Volkswagen of Am., Inc.,
2012 U.S. Dist. LEXIS 115369 (D. Idaho Aug. 13, 2012)................................. 39, 316
Baymont Franchise Sys. v. Raj,
2013 U.S. Dist. LEXIS 8588 (D.N.J. Jan. 22, 2013) ....................................... 231, 257
Beaver v. Ink Mart, LLC,
2012 U.S. Dist. LEXIS 125050 and 2012 U.S. Dist. LEXIS 125051 (S.D. Fla.
Sept. 4, 2012) ........................................................................................................ 221
Bel Canto Design, Ltd. v. MSS HiFi, Inc.,
2012 WL 2376466 (S.D.N.Y. June 20, 2012) ......................................................... 290
Bell v. Bimbo Foods Bakeries Distrib., Inc.,
2012 U.S. Dist. LEXIS 90987 (N.D. Ill. July 2, 2012) ............................................. 118
Bellas Co. v. Pabst Brewing Co.,
2012 U.S. App. LEXIS 14422 (6th Cir. 2012) ......................................................... 328
BelVino LLC v. Empson (USA) Inc.,
2012 Ohio 3074 (Ohio Ct. App. 2012).................................................................... 319
Bergstrom Imports Milwaukee, Inc. v. Chrysler Group LLC,
2013 U.S. Dist. LEXIS 155902 (E.D. Wis. Oct. 31, 2012) .......................... 67, 90, 189
Beverage Distribs., Inc. v. Miller Brewing Co.,
690 F.3d 788 (6th Cir. 2012) .......................................................................... 112, 315
Bimal Enter., Inc. v. Lehigh Gas Corp.,
2012 U.S. Dist. LEXIS 140299 (E.D. Pa. Sept. 28, 2012) ...................................... 311
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Bonanza Rest. Co. v. Wink,
2012 Del. Super. LEXIS 167 (Del. Super. April 17, 2012).............................. 171, 262
BP W. Coast Prods., LLC v. SKR, Inc.,
2012 U.S. Dist. LEXIS 130198 (W.D. Wash. Sept. 10, 2012) ........................ 134, 325
BP W. Coast Prods. LLC v. Crossroad Petroleum, Inc.,
2012 U.S. Dist. LEXIS 55456 (S.D. Cal. Apr. 19, 2012)......................................... 305
BP W. Coast Prods., LLC v. Shalabi,
2012 U.S. Dist. LEXIS 82879 (W.D. Wash. June 14, 2012) ................................... 134
Brockman v. Am. Suzuki Motor Corp.,
2012 U.S. Dist. LEXIS 112424 (D.S.C. Aug. 10, 2012).................................... 38, 317
Brooks Place Props., LLC v. DiMaria,
2012 Mass. Super. LEXIS 203 (Mass. Super. June 18, 2012) ....................... 153, 166
Budget Blinds Inc. v. LeClair,
2013 U.S. Dist. LEXIS 7463 (C.D. Cal. Jan. 16, 2013) .................................. 254, 261
Burda v. Wendy’s Int’l, Inc.,
2012 U.S. Dist. LEXIS 145447 (S.D. Ohio Oct. 9, 2012) ................................. 43, 158
Cahill v. Alternative Wines, Inc.,
2013 U.S. Dist. LEXIS 14588 (N.D. Iowa Feb. 4, 2013)................................. 238, 247
California Bank & Trust v. Shilo Inn,
2012 U.S. Dist. LEXIS 72008 (D. Idaho May 22, 2012) ......................................... 288
Calvasina v. Wal-Mart Real Estate Bus. Trust,
2012 U.S. Dist. LEXIS 158733 (W.D. Tex. Nov. 5, 2012) ...................................... 144
Camac v. Dontos,
2012 Tex. App. LEXIS 2977 (Tex. App. Apr. 17, 2012) ......................................... 195
Campero USA Corp. v. ADS Foodservice, LLC,
2012 U.S. Dist. LEXIS 184497 (S.D. Fla. Dec. 13, 2012) ...................................... 223
Cano v. DPNY, Inc.,
2012 U.S. Dist. LEXIS 161284 (S.D.N.Y. Nov. 8, 2012) ........................................ 145
Capriotti’s Sandwich Shop, Inc. v. Taylor Family Holdings, Inc.,
857 F. Supp. 2d 489 (D. Del. 2012) ................................................................... 29, 70
Caputo v. BP W. Coast Prods., LLC,
2012 U.S. Dist. LEXIS 138702 (E.D. Cal. Sept. 26, 2012) ..................................... 315
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Carney v. Sibbernsen,
2012 U.S. Dist. LEXIS 63321 (D. Mass. May 7, 2012)........................................... 208
Carroll v. Farooqi,
2013 U.S. Dist. LEXIS 22329 (N.D. Tex. Feb. 19, 2013) ............................... 131, 162
Celsi v. H&R Block Tax Servs. LLC,
2012 Cal. App. Unpub. LEXIS 5275 (Cal. App. 1st Dist. July 17, 2012) ........ 105, 136
Century 21 Real Estate LLC v. All Prof’l Realty, Inc.,
2012 U.S. Dist. LEXIS 111744 (E.D. Cal. Aug. 8, 2012) ........................ 257, 262, 264
Century 21 Real Estate, LLC v. All Prof’l Realty, Inc.,
2012 U.S. Dist. LEXIS 78837 (E.D. Cal. June 6, 2012) ......................................... 221
Century 21 Real Estate LLC v. N. State Props., LLC,
2012 U.S. Dist. LEXIS 82876 (E.D. Cal. June 14, 2012) ................................. 29, 258
Chambers-Johnson v. Applebee’s Rest.,
2012 La. App. LEXIS 1130 (La. Ct. App. Sept. 11, 2012) ...................................... 153
Chicago Male Med. Clinic, LLC v. Ultimate Management, Inc.,
2012 U.S. Dist. LEXIS 183257 (N.D. Ill. Dec. 28, 2012) ...................................... 6, 10
Chinavasagam v. Equilon Enters., LLC,
2012 U.S. App. LEXIS 23464 (9th Cir. Oct. 19, 2012) ................................... 282, 307
Choice Hotels Int’l, Inc. v. Apex Hospitality LLC,
2012 U.S. Dist. LEXIS 94515 (W.D. Mich. June 13, 2012) ................................ 29, 58
Choice Hotels Int’l, Inc. v. Jagaji, Inc.,
2012 U.S. Dist. LEXIS 128048 (S.D. Ohio Sept. 10, 2012)................................ 30, 59
Choice Hotels Int’l, Inc. v. Kusum Vali, Inc.,
2012 U.S. Dist. LEXIS 62211 (S.D. Cal. May 3, 2012) ............................ 32, 231, 286
Choice Hotels Int’l, Inc. v. Special Spaces, Inc.,
2012 U.S. Dist. LEXIS 153005 (D. Md. Oct. 23, 2012) .......................................... 252
Cicero v. Richard L. Rosen Law Firm, PLLC,
36 Misc. 3d 1238(A) (N.Y. Civ. Ct. 2012) ................................................................. 99
City Cycle IP, LLC v. Caztek, Inc.,
2012 U.S. Dist. LEXIS 121589 (D. Minn. Aug. 24, 2012) ......................................... 18
Cold Stone Creamery, Inc. v. Nutty Buddies,
2012 U.S. Dist. LEXIS 142955 (D. Ariz. Oct. 3, 2012) ................................... 226, 233
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Comeaux v. Trahan,
2012 U.S. Dist. LEXIS 158527 (W.D. La. Nov. 5, 2012) ........................................ 144
Compass Motors Inc. v. Volkswagen Group of Am., Inc.,
2012 N.Y. Misc. LEXIS 2287 (N.Y. Sup. Ct. May 8, 2012)............................... 62, 327
Convenience Franchise Group, LLC v. Obed,
2012 U.S. Dist. LEXIS 25577 (S.D. Ohio Feb. 25, 2013) ....................................... 230
Cook v. Double R Performance, Inc.,
2011 U.S. Dist. LEXIS 52015 (W.D. Mo. 2011) ..................................................... 198
Cousins Submarines, Inc. v. Fed. Ins. Co.,
2013 U.S. Dist. LEXIS 17306 (E.D. Wis. Feb. 8, 2013) ......................................... 336
Creative Playthings Franchising Corp. v. Reiser,
463 Mass. 758, 978 N.E.2d 765 (2012) ................................................................. 175
Crown Auto Dealerships v. Nissan N. Am., Inc.,
2013 U.S. Dist. LEXIS 20875 (M.D. Fla. Feb. 15 2013) ......................................... 248
Cummings v. Jai Ambe, Inc.,
2013 U.S. Dist. LEXIS 20211 (S.D.N.Y. Feb. 13, 2013) ................................ 193, 204
Curves Int’l, Inc. v. Cleveland,
2013 U.S. Dist. LEXIS 6909 (N.D.N.Y. Jan. 17, 2013)..................................... 56, 232
Curves Int’l, Inc. v. Negron,
2012 U.S. Dist. LEXIS 142055 (E.D.N.Y. Aug. 31, 2012) ................................ 75, 229
DePianti v. Jan-Pro Franchising Int’l, Inc.,
2012 U.S. Dist. LEXIS 124604 (D. Mass. Aug. 31, 2012) .............................. 143, 330
Desert Buy Palm Springs, Inc. v. DirectBuy, Inc.,
2012 U.S. Dist. LEXIS 81116 (N.D. Ind. June 12, 2012)............................ 70, 99, 151
Dickey's Barbecue Rests., Inc. v. GEM Inv. Group, L.L.C.,
2012 U.S. Dist. LEXIS 54448 (N.D. Tex. Apr. 18, 2012) .......................................... 86
DirectBuy, Inc. v. Giacchi,
2012 U.S. Dist. LEXIS 87610 (N.D. Ill. June 25, 2012) .......................................... 298
DNB Fitness, LLC v. Anytime Fitness, LLC,
2012 U.S. Dist. LEXIS 74287 (N.D. Ill. May 30, 2012) ........................... 207, 219, 244
Dodge v. Dollarstore, Inc.,
2012 Cal. App. LEXIS 3976 (Cal. Ct. App. May 25, 2012) ..................................... 171
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Dontos v. Vendomation NZ Ltd.,
2012 U.S. Dist. LEXIS (N.D. Tex. Aug. 27, 2012) .................................................. 188
Dos Beaches, LLC v. Mail Boxes Etc., Inc.,
2012 U.S. Dist. LEXIS 73248 (S.D. Cal. May 25, 2012) .......................................... 95
Dunkin' Donuts Franchised Rests., LLC v. Naman Enters., Inc.,
2012 U.S. Dist. LEXIS 74590 (W.D.N.C. May 29, 2012)........................................ 284
Dunkin’ Donuts Franchising LLC v. Oza Bros., Inc.,
2012 U.S. Dist. LEXIS 140595 (E.D. Mich. Sept. 28, 2012) ............................. 60, 279
EA Indep. Franchisee Ass’n v. Edible Arrangements Int’l, Inc.,
2012 U.S. Dist. LEXIS 166082 (D. Conn. Nov. 21, 2012) ...................................... 236
Econo-Lube N’ Tune, Inc. v. Orange Racing, LLC,
2012 U.S. Dist. LEXIS 129219 (W.D.N.C. Sept. 10, 2012) ...................................... 81
Elkins Subaru, Inc. v. Subaru of Am., Inc.,
482 F. App’x 868 (4th Cir. 2012) .................................................................... 114, 318
Estate of Kriefall v. Sizzler U.S. Franchise, Inc.,
2012 WI 70 (Wis. 2012) ................................................................................. 157, 286
Eureka Water Co. v. Nestle Waters N. Am., Inc.,
690 F.3d 1139 (10th Cir. 2012) .......................................................... 17, 62, 137, 333
Evans Group, Inc. v. Foti Fuels, Inc.,
2012 VT 77 (2012) ................................................................................................. 312
Evelyn Brown v. K–Mac Enters.,
2012 WL 4321711 (N.D. Okla. Sept. 19, 2012) ..................................................... 331
Everett v. Paul Davis Restoration, Inc.,
2012 U.S. Dist. LEXIS 133682 (E.D. Wis. Sept. 18, 2012) ...................................... 82
F.C. Franchising Sys. v. Schweizer,
2012 U.S. Dist. LEXIS 74991 (S.D. Ohio May 30, 2012) ................................... 88, 90
Faith Enters. Group v. Avis Budget Group, Inc.,
2012 U.S. Dist. LEXIS 56181 (N.D. Ga. Apr. 19, 2012) ......................................... 170
Fantastic Sams Salons Corp. v. Maxie Enterps., Inc.,
2012 U.S. Dist. LEXIS 86136 (M.D. Ga. June 21, 2012) ....................................... 262
Forrester Lincoln Mercury, Inc. v. Ford Motor Co.,
2012 U.S. Dist. LEXIS 65737 (M.D. Pa. May 10, 2012) ......................................... 300
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Foulke Mgmt. Corp. v. Audi of Am., Inc.,
2012 N.J. Super. Unpub. LEXIS 2763 (N.J. App. Div. Dec. 18, 2012) ........... 114, 274
Fullington v. Equilon Enters.,
210 Cal. App. 4th 667, 148 Cal. Rptr. 3d 434 (2012) ..................... 110, 125, 178, 180
Garbinski v. Nationwide Mut. Ins. Co.,
2012 U.S. Dist. LEXIS 102706 (D. Conn. Jul. 24, 2012) ........................................ 225
Garbinski v. Nationwide Mut. Ins. Co.,
2012 U.S. Dist. LEXIS 102707 (D. Conn. Jul. 24, 2012) .................................. 99, 225
General Motors, LLC v. Bill Kelley, Inc.,
2012 U.S. Dist. LEXIS 156129 (N.D. W. Va. Oct. 31, 2012) .................. 182, 270, 294
General Motors, LLC v. Bill Kelley, Inc.,
2012 U.S. Dist. LEXIS 169621 (N.D. W. Va. Nov. 29, 2012) ................. 183, 270, 295
Gharbi v. Century 21 Real Estate LLC,
2012 U.S. Dist. LEXIS 95538 (W.D. Tex. July 10, 2012) ................................. 31, 302
Gles Inc. v. MK Real Estate Developer & Trade Co.,
2013 U.S. App. LEXIS 1668 (3d Cir. Jan. 23, 2013) ................................................ 69
GMAC Real Estate, LLC v. Fialkiewicz,
2012 U.S. App. LEXIS 26480 (2d Cir. Dec. 27, 2012) ........................................... 254
Goddard Sys. v. Overman,
2013 U.S. Dist. LEXIS 5468 (E.D. Pa. Jan. 14, 2013) ..................................... 98, 205
Gomez v. Jackson Hewitt, Inc.,
427 Md. 128, 46 A.3d 443 (2012) .......................................................................... 292
Gossett Motor Cars v. Hyundai Motor Am.,
2012 Tenn. App. LEXIS 542 (Tenn. Ct. App. Aug. 2, 2012) ................................... 323
Gray v. McDonald's USA, LLC,
874 F. Supp. 2d 743 (W.D. Tenn. 2012) ........................................................ 154, 332
Great Clips, Inc. v. Ross,
2013 U.S. Dist. LEXIS 12530 (D. Minn. Jan. 30, 2013) ......................................... 206
Gun Hill Rd. Serv. Station v. Exxon Mobil Oil Corp.,
2013 U.S. Dist. LEXIS 14199 (S.D.N.Y. Feb. 1, 2013) .............................. 53, 92, 138
H & R Block Tax Servs. LLC v. Franklin,
691 F.3d 941 (8th Cir. 2012) .................................................................................... 60
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Hamden v. Total Car Franchising Corp.,
2012 U.S. Dist. LEXIS 111432 (W.D. Va. Aug. 7, 2012) .......................................... 71
Hamden v. Total Car Franchising Corp.,
2012 U.S. Dist. Lexis 71251 (W.D. Va. May 22, 2012) .......................................... 245
Hanley v. Doctors Express Franchising, LLC,
2013 U.S. Dist. LEXIS 25340 (D. Md. Feb. 25, 2013) .................................... 132, 318
Happy’s Pizza Franchise, LLC v. Papa’s Pizza, Inc.,
2013 U.S. Dist. LEXIS 10130 (E.D. Mich. Jan. 25, 2013) ........................................ 26
Hayes v. Jani-King Franchising, Inc.,
2012 U.S. Dist. LEXIS 182690 (S.D. Miss. Dec. 28, 2012) ............................ 231, 331
Hidden Values, Inc. v. Wade,
2012 U.S. Dist. LEXIS 70474 (N.D. Tex. May 18, 2012).......................................... 30
Home Instead, Inc. v. Florance,
2012 U.S. Dist. LEXIS 134554 (D. Neb. Sept. 20, 2012) ....................................... 105
Hop & Wine Beverages v. Virginia Dept. of Alcoholic Beverage Control,
2012 Va. Cir. LEXIS 75 (Va. Cir. Ct. Jul. 18, 2012)................................................ 320
Howard Johnson Int’l, Inc. v. Kim,
2012 U.S. Dist. LEXIS 178026 (D.N.J. Dec. 17, 2012) .................................. 229, 266
Howard Johnson Int’l, Inc. v. Kim,
2013 U.S. Dist. LEXIS 770 (D. N.J. Jan. 3, 2013) .......................................... 230, 267
Hughes Indus. Sales, LLC v. Diamond Mfg. Co.,
2012 U.S. Dist. LEXIS 165072 (M.D. Pa. Nov. 19, 2012) ...................................... 225
Husain v. McDonald’s Corp.,
205 Cal. App. 4th 860, 140 Cal. Rptr. 3d 370 (2012) ....................................... 61, 280
In Lioy-Ryan v. Dep’t of Revenue,
2012 Ore. Tax LEXIS 375 (Ore. T. Ct. Nov. 19, 2012)........................................... 329
In re Chicago Invs., LLC,
470 B.R. 32 (Bankr. D. Mass. 2012) ...................................................................... 303
In re Motor Fuel Temperature Sales Practices Litig.,
2012 U.S. Dist. LEXIS 60879 (D. Kan. Apr. 30, 2012) ........................................... 152
In re Oil Spill by the Oil Rig “Deep Water Horizon in the Gulf of Mexico on April
20, 2010,
2012 U.S. Dist. LEXIS 141546 (E.D. La. Oct. 1, 2012) .................................. 143, 293
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In re Roger W. Soderstrom,
477 B.R. 249 (Bankr. M.D. Fla. 2012) .................................................................... 300
In re: Better Homes & Gardens Real Estate LLC v. Mary Holder Agency, Inc.,
2012 Bankr. LEXIS 3774 (Bankr. D.N.J. Aug. 14, 2012)........................................ 297
Int’l House of Pancakes, LLC v. Parsippany Pancake House Inc.,
2012 U.S. Dist. LEXIS 89112 (D.N.J. June 27, 2012) ............................................ 118
Ironson v. Ameriprise Fin. Servs., Inc.,
2012 U.S. Dist. LEXIS 128393 (D. Conn. Sept. 10, 2012) ..................................... 242
Irvin Kahn & Son, Inc. v. Mannington Mills, Inc.,
2012 U.S. Dist. LEXIS 116308 (S.D. Ind. Aug. 17, 2012) ...................................... 112
ITW Food Equip. Group LLC v. Walker,
2012 U.S. Dist. LEXIS 147746 (W.D. Mich. Oct. 15, 2012) ............................. 45, 209
Jackson Hewitt, Inc. v. Barnes Enters.,
2012 U.S. Dist. LEXIS 63784 (D.N.J. May 7, 2012) ....................................... 218, 279
Jackson v. Longagribusiness, L.L.C.,
2013 Tex. App. LEXIS 113 (Ct. App. Tex. Jan. 8, 2013)........................................ 101
Jaguar Land Rover N. Am., LLC v. Manhattan Imported Cars, Inc.,
2012 U.S. App. LEXIS 8260 (4th Cir. Apr. 23, 2012) ............................................... 58
Jennings Motor Co. v. Toyota Motor Sales, USA, Inc.,
2012 WL 3822134 (Va. Cir. Ct. Aug. 26, 2012) ..................................................... 321
Jimico Enters. v. Lehigh Gas Corp.,
2013 U.S. App. LEXIS 3600 (2d Cir. Feb. 20, 2013).............................................. 308
JJCO, Inc. v. Isuzu Motors Am., Inc.,
2012 U.S. App. LEXIS 13691 (9th Cir. Jul. 5, 2012) .............................................. 327
JOC Inc. v. ExxonMobil Oil Corp.,
2012 U.S. App. LEXIS 25870 (3d Cir. Dec. 18, 2012) ........................................... 274
Johnson v. Dunkin’ Donuts Franchising L.L.C.,
2012 U.S. Dist. LEXIS 69803 (W.D. Pa. May 18, 2012) .......................................... 38
Johnson v. Mossy Oak Props.,
2012 U.S. Dist. LEXIS 167605 (N.D. Ala. Nov. 27, 2012) ...................................... 103
Jolyssa Educ. Dev., LLC, v. Banco Popular N. Am.,
2012 U.S. Dist. LEXIS 136400 (D. Conn. Sep. 19, 2012) ...................... 135, 165, 177
14379022.3
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Joseph v. Sasafrasnet, LLC,
2012 U.S. Dist. LEXIS 182442 (N.D. Ill. Dec. 28, 2012) ................................ 275, 309
Joseph v. Sasafrasnet, LLC,
689 F.3d 683 (7th Cir. 2012) .................................................................................. 314
Kairy v. Supershuttle Int’l Inc.,
2012 U.S. Dist. LEXIS 134945 (N.D. Cal. Sept. 20, 2012)............................. 241, 249
Keith v. Back Yard Burgers of Neb., Inc.,
2012 WL 1252965 (D. Neb. Apr. 13, 2012) ............................................................ 151
KFC Corp. v. Kazi,
2012 U.S. Dist. LEXIS 180424 (W.D. Ky. Dec. 20, 2012) ...................................... 107
KFC Corp. v. Texas Petroplex, Inc.,
2012 U.S. Dist. LEXIS 144342 (W.D. Ky. Oct. 5, 2012) ................................. 189, 200
Kia Motors Am. Inc. v. Glassman Oldsmobile Saab Hyundai Inc.,
706 F.3d 733 (6th Cir. Feb. 7, 2013) ...................................................................... 101
Kim v. SUK Inc.,
2013 U.S. Dist. LEXIS 24703 (S.D.N.Y. Feb. 22, 2013) .................................. 14, 175
King Cole Foods, Inc. v. SuperValu, Inc.,
2013 U.S. App. LEXIS 2949 (8th Cir. Feb. 13, 2013)..................................... 239, 289
Kobrand Corp. v. Abadia Retuerta S.A.,
2012 U.S. Dist. LEXIS 165025 (S.D.N.Y. Nov. 19, 2012) ........................................ 49
Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC,
2013 U.S. Dist. LEXIS 25665 (S.D.N.Y. Feb. 22, 2013) .......................... 25, 257, 264
Kubista v. Value Forward Network, LLC,
2012 U.S. Dist. LEXIS 101420 (D.S.D. Jul. 20, 2012) ........................................... 245
Last Time Beverage Corp., v. F&V Distrib. Co., LLC,
951 N.Y.S.2d 77 (N.Y. App. Div. 2012) .................................................................... 64
Lawn Doctor, Inc. v. Rizzo,
2012 U.S. Dist. LEXIS 175139 (D.N.J. Dec. 11, 2012) ............................................ 78
Lawn Doctor, Inc. v. Rizzo,
2012 U.S. Dist. LEXIS 89678 (D.N.J. June 27, 2012) .............................................. 81
Leach v. Kaykov,
2013 U.S. Dist. LEXIS 8046 (E.D.N.Y. Jan. 20, 2013) ........................................... 148
14379022.3
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Legend Autorama, Ltd. v. Audi of Am., Inc.,
2012 N.Y. App. Div. LEXIS 7602 (N.Y. App. Div. 2d Dep’t Nov. 14, 2012) .. 64, 91, 96
Legg v. Bou-Matic, LLC,
2013 U.S. Dist. LEXIS 2827 (W.D. Wis. Jan. 7, 2013) ........................................... 183
Leisure Sys., Inc. v. Roundup LLC,
2012 U.S. Dist. LEXIS 155948 (S.D. Ohio Oct. 31, 2012) ................................. 19, 47
Lift Truck Lease & Serv., Inc. v. Nissan Fork Lift Corp.,
2012 U.S. Dist. LEXIS 127138 (E.D. Mo. Sept. 7, 2012) ............................... 104, 323
Little Caesar Enters., Inc. v. Sioux Falls Pizza Co.,
2012 U.S. Dist. LEXIS 108828 (D.S.D. Aug. 3, 2012).............................................. 28
Live, Inc. v. Domino’s Pizza, LLC,
2013 N.C. App. LEXIS 84 (N.C. Ct. App. Jan. 15, 2013) ................................. 25, 276
Long John Silver’s Inc. v. Nickleson,
2013 U.S. Dist. LEXIS 18391 (W.D. Ky. Feb. 11, 2013) ................................... passim
Long John Silver’s, Inc. v. Nickleson,
2013 U.S. Dist. LEXIS 2010 (W.D. Ky. Jan. 4, 2013)............................................. 296
Los Feliz Ford, Inc. v. Chrysler Group, LLC,
2012 U.S. Dist. LEXIS 147370 (C.D. Cal. April 9, 2012) ........................................ 302
Luxottica Retail N. Am., Inc. v. Haffner Enters., Inc.,
2012 U.S. Dist. LEXIS 56258 (M.D. Fla. Apr. 23, 2012) .......................... 33, 263, 265
Mangione v. Butler,
2012 Bankr. LEXIS 5689 (Bankr. W.D.N.C. Dec. 10, 2012) .............................. 9, 295
Marathon Petroleum Co., LP v. Future Fuels of Am.,.LLC,
2012 U.S. Dist. LEXIS 71814 (E.D. Mich. May 23, 120) .................................. 34, 314
MarbleLife, Inc. v. Stone Res., Inc.,
2012 U.S. Dist. LEXIS 68223 (E.D. Pa. May 16, 2012) ......................................... 280
Mariposa Express, Inc. v. United Shipping Solutions, LLC,
2013 UT App. 28 (2013) ................................................................................ 241, 248
Marpa LLC v. QFA Royalties LLC,
Martin, Inc. v. The Henri Stern Watch Agency, Inc.,
2012 U.S. Dist. LEXIS 58388 (D.N.J. Apr. 25, 2012) ..................................... 242, 251
14379022.3
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Mary Kay, Inc. v. Dunlap,
2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21, 2012)................................... 1, 292
Massey, Inc. v. Moe's Southwest Grill, LLC,
2012 U.S. Dist. LEXIS 53676 (N.D. Ga. Apr. 17, 2012) ........................................... 16
MB Light House, Inc. v. QFA Royalties LLC,
McPeak v. S-L Dist. Co., Inc.,
2012 U.S. Dist. LEXIS 179893 (D.N.J. Dec. 19, 2012) ...................................... 5, 217
Meade v. Kiddie Academy Domestic Franchising,
2012 U.S. App. LEXIS 21283 (3d Cir. Oct. 15, 2012) .................................... 123, 227
Medicine Shoppe Int’l, Inc. v. Edlucky, Inc.,
2012 U.S. Dist. LEXIS 67133 (E.D. Mo. May 14, 2012) ......................................... 250
Meena Enters., Inc. v. Mail Boxes Etc., Inc.,
2012 U.S. Dist. LEXIS 14606 (D. Md. Oct. 11, 2012) ...................... 44, 122, 184, 234
Meineke Car Care Ctrs., Inc. v. Martinez,
2012 U.S. Dist. LEXIS 55674 (W.D.N.C. Apr. 20, 2012) .................................. 84, 245
Meineke Car Care Ctrs., Inc. v. Vroeginday,
2012 U.S. Dist. LEXIS 56374 (W.D.N.C. Apr. 23, 2012) .......................................... 88
Midas Int'l Corp v. Chesley,
2012 U.S. Dist. LEXIS 54770 (N.D. Ill. Apr. 19, 2012) ........................................... 196
Midas Int’l Corp. v. Chesley,
2012 U.S. Dist. LEXIS 87922 (N.D. Ill. June 26, 2012) .................................. 187, 249
MMXII, Inc. v. QFA Royalties LLC,
Mobro, Inc. v. VVV Corp.,
2012 U.S. Dist. LEXIS 89141 (N.D. Iowa June 26 2012) ......................................... 89
Mody v. Quiznos Franchise Co.,
2012 N.J. Super. Unpub. LEXIS 1719 (N.J. App. Div. July 18, 2012) .................... 334
Motorscope, Inc. v. Precision Tune, Inc.,
2012 U.S. Dist. LEXIS 143735 (D. Minn. Oct. 4, 2012).......................................... 199
Mr. Elec. Corp. v. Khalil,
2013 U.S. Dist. LEXIS 15723 (D. Kan. Feb. 6, 2013) ...................................... 21, 161
14379022.3
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MSKP Oak Grove, LLC v. Venuto,
2012 U.S. Dist. LEXIS 86172 (D.N.J. June 20, 2012) .................................... 186, 298
Mt. Clemens Auto Ctr., Inc. v. Hyundai Motor Am.,
2012 U.S. Dist. LEXIS 147604 (E.D. Mich. Oct. 9, 2012) ........................................ 41
Murphy Bus. & Fin. Corp. v. Scivally,
2012 U.S. Dist. LEXIS 78472 (M.D. Fla. May 3, 2012) ............................................ 84
Myers v. Holiday Inns, Inc.,
2013 U.S. Dist. LEXIS 6250 (D.D.C. Jan. 16, 2013) .............................. 147, 190, 202
Myers v. Jani-King of Phila., Inc.,
2012 U.S. Dist. LEXIS 172782 (E.D. Pa. Dec. 5, 2012) ................................. 201, 211
Navistar, Inc. v. New Baltimore Garage, Inc.,
60 Va. App. 599 (Va. Ct. App. 2012)...................................................................... 323
NBT Assocs. v. Allegiance Ins. Agency CCI, Inc.,
2012 U.S. Dist. LEXIS 55041 (E.D. Mich. Apr. 19, 2012) .................................. 36, 85
NIACCF, Inc. v. Cold Stone Creamery, Inc.,
2012 U.S. Dist. LEXIS 70256 (S.D. Fla. May 21, 2012) ......................................... 244
Novus Franchising, Inc. v. Dawson,
2012 U.S. Dist. LEXIS 103025 (D. Minn. Jul. 25, 2012)............................. 36, 87, 196
Novus Franchising, Inc. v. Superior Entrance Sys., Inc.,
2012 U.S. Dist. LEXIS 115640 (W.D. Wis. Aug. 16, 2012) .................................... 208
Novus Franchising, Inc. v. Superior Entrance Sys., Inc.,
2012 U.S. Dist. LEXIS 182460 (W.D. Wis. Dec. 28, 2012) ...................................... 79
O'Kinsky v. Perone,
2012 U.S. Dist. LEXIS 56871 (E.D. Pa. Apr. 20, 2012).......................................... 119
Ohio Learning Ctrs., LLC v. Sylvan Learning, Inc.,
2012 U.S. Dist. LEXIS 102784 (D. Md. Jul. 24, 2012) ........................................... 137
Oliver Stores v. JCB, Inc.,
2012 U.S. Dist. LEXIS 144348 (D. Me. Oct. 5, 2012) .................................... 113, 158
One Pleasantville Rd., LLC v. Pleasantville Food & Gas, Inc.,
948 N.Y.S.2d 820 (N.Y. App. Div. 2012) ................................................................ 313
Oracle Am., Inc. v. Innovative Tech. Distribs. LLC,
2012 U.S. Dist. LEXIS 134343 (N.D. Cal. Sept. 18, 2012)................................. 8, 116
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Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc.,
2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012) .......................................... 87
Paccar Inc. v. Elliot Wilson Capitol Trucks LLC,
2012 U.S. Dist. LEXIS 166962 (D. Md. Nov. 21, 2012).................................... 94, 108
Paccar, Inc. v. Elliot Wilson Capitol Trucks LLC,
2013 U.S. Dist. LEXIS 21004 (D. Md. Feb. 7, 2013) .............................................. 109
Palermo Gelato, LLC v. Pino Gelato, Inc.,
2013 WL 285547 (W.D. Pa. Jan. 24, 2013) ............................................. 11, 128, 191
Patterson v. Domino’s Pizza, LLC,
207 Cal. App. 4th 385 (2d Dist. 2012) .................................................................... 155
Pauly v. Houlihan’s Rests., Inc.,
2012 U.S. Dist. LEXIS 180215 (D.N.J. Dec. 20, 2012) .......................................... 146
PC P.R. LLC v. El Smaili,
2013 U.S. Dist. LEXIS 28701 (D.P.R. Feb. 28, 2013) ................................ 25, 55, 277
Pekin Ins. Co. v. Equilon Enters. LLC,
2012 Ill. App. LEXIS 919 (Ill. Ct. App. Nov. 9, 2012) .............................................. 336
People v. JTH Tax, Inc.,
151 Cal. Rptr. 3d 728 (Cal. Dist. Ct. App. 2013) ............................................ 149, 164
Poland v. LA Boxing Franchise Corp.,
2012 Cal. App. Unpub. LEXIS 8399 (Cal Ct. App. Nov. 19, 2012) ................... 57, 133
Precision Franchising, LLC v. Gatej,
2012 U.S. Dist. LEXIS 175450 (E.D. Va. Dec. 11, 2012) ................. 68, 106, 222, 259
Precision Franchising, LLC v. Gatej,
2012 U.S. Dist. LEXIS 72075 (E.D. Va. May 23, 2012) ................................... 61, 195
Prim LLC v. Pace-O-Matic, Inc.,
2012 U.S. Dist. LEXIS 177203 (D. Haw. Dec. 14, 2012) ....................................... 1, 5
Progressive Foods, LLC .v Dunkin’ Donuts, Inc.,
2012 U.S. App. LEXIS 16815 (6th Cir. Aug. 9, 2012) ............................................ 172
PSP Franchising, LLC v. Dubois,
2013 U.S. Dist. LEXIS 28048 (E.D. Mich. Feb. 28, 2013) ...................................... 230
PSP Franchising LLC v. Dubois,
2013 U.S. Dist. LEXIS 28769 (E.D. Mich. Feb. 4, 2013) .................................. 21, 277
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PT Sak, LLC v. QFA Royalties LLC,
R+C+G Station, Inc. v. Urbieta Oil, Inc.,
2012 U.S. Dist. LEXIS 79033 (S.D. Fla. June 7, 2012) .......................................... 312
Ramada Worldwide, Inc. v. Petersburg Regency, LLC,
2012 U.S. Dist. LEXIS 142172 (D.N.J. Oct. 1, 2012) ......................................... 18, 41
Ranjer Foods LC v. QFA Royalties LLC,
2013 U.S. Dist. LEXIS 18132 (D. Colo. Feb. 8, 2013) ................................... 168, 192
Red Roof Franchising, LLC v. AA Hospitality Northshore, LLC,
877 F. Supp. 2d 140 (D.N.J. 2012) .......................................................... 70, 259, 285
Redmond v. Bank of N.Y. Mellon,
470 B.R. 594 (Bankr. D. Kan. 2012) ...................................................................... 293
Reid v. Supershuttle Int’l, Inc.,
2012 U.S. Dist. LEXIS 113117 (E.D.N.Y. Aug. 10, 2012) .............................. 215, 330
Riedlinger v. Steam Bros.,
2013 ND 14, 826 N.W.2d 340 (2013)................................................................. 27, 56
Rivera v. Simpatico, Inc.,
2012 U.S. Dist. LEXIS 67765 (E.D. Mo. May 15, 2012) ......................... 156, 194, 218
Rodriguez v. It’s Just Lunch Intl.,
2012 U.S. Dist. LEXIS 51687 (S.D.N.Y. Apr. 6, 2012) ........................................... 219
Ross v. Choice Hotels Int’l, Inc.,
882 F. Supp. 2d 951 (S.D. Ohio 2012)................................................................... 150
Rossi Ventures, Inc. v. Pasquini, LLC,
2012 U.S. Dist. LEXIS 90538 (D. Colo. Apr. 9, 2012) ........................................ 34, 65
Route 23 Auto Mall v. Ford Motor Co.,
676 F.3d 318 (3d Cir. 2012) ................................................................................... 103
Russell v. Happy’s Pizza Franchise, LLC,
2013 U.S. Dist. LEXIS 6390 (W.D. Mich. Jan. 16, 2013) ....................................... 147
Saleemi v. Doctor’s Assocs., Inc.,
292 P.3d 108 (Wash. 2013) ........................................................................... 240, 250
Scioto Ins. Co. v. Oklahoma Tax Comm’n,
279 P.3d 782 (Okla. 2012) ..................................................................................... 329
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SCSJ Enters. v. Hansen & Hansen Enters.,
2012 Ga. App. LEXIS 934 (Ga. Ct. App. Nov. 13, 2012) ....................................... 253
Senior Services of Palm Beach LLC v. ABCSP Inc.,
2012 U.S. Dist. LEXIS 79038 (S.D. Fla. June 7, 2012) .......................................... 243
Six Continents Hotels, Inc. v. CPJFK, LLC,
2012 WL 4057503 (E.D.N.Y. Sept. 11, 2012) ........................................................ 171
Smoot v. B&J Restoration Servs., Inc.,
2012 Okla. Civ. App. LEXIS 40 (Okla. Ct. App. May 16, 2012) .............................. 172
Smoothie King Franchises, Inc. v. Southside Smoothie & Nutrition Ctr., Inc.,
2012 U.S. Dist. LEXIS 67620 (E.D. La. May 14, 2012) .................................... 83, 167
Sotheby's Int'l Realty Affiliates LLC v. Mlj Holdings, LLC,
2012 U.S. Dist. LEXIS 96560 (N.D. Ill. Jul. 12, 2012) ............................................ 334
SSS Enters., Inc. v. Nova Petroleum Suppliers,
LLC, 2012 U.S. Dist. LEXIS 126225 (E.D. Va. Aug. 30, 2012) ...................... 289, 306
St. Louis Motorsports, LLC v. Ferrari N. Am., Inc.,
2012 U.S. Dist. LEXIS 68307 (E.D. Mo. May 16, 2012) ................................. 169, 326
Stanley Steemer Int’l, Inc. v. Hurley,
2013 U.S. Dist. LEXIS 10631 (S.D. Ohio Jan. 18, 2013) ................................. 26, 278
Stocco v. Gemological Inst. of Am.,
2013 U.S. Dist. LEXIS 1603 (S.D. Cal. Jan. 3, 2013) .................................... 127, 159
Stuller, Inc. v. Steak N Shake Enters., Inc.,
695 F.3d 676 (7th Cir. 2012) ............................................................................ 66, 267
Subway Int'l B.V. v. Bletas,
2012 U.S. Dist. LEXIS 46960 (D. Conn. Apr. 2, 2012) ........................................... 252
Summa Humma Enters., LLC v. Fisher Eng’g, Dist.,
2013 U.S. Dist. LEXIS 856 (D.N.H. Jan. 3, 2013) .................................................. 212
Tacoma Auto Mall, Inc. v. Nissan N. Am., Inc.,
279 P.3d 487 (Wash. Ct. App. 2012) ..................................................................... 322
Tantopia Franchising Co., LLC v. W. Coast Tans of Pa., LLC,
2013 U.S. Dist. LEXIS 8266 (E.D. Pa. Jan. 22, 2013) ..................................... 79, 278
Terrelle Ford v. Palmden Rests.,
2012 Cal. App. Unpub. LEXIS 5596 (Cal. App. 4th Dist. July 31, 2012) ................ 155
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TGA Premier Junior Golf Franchise, LLC v. B.P. Bevins Golf, LLC,
2012 U.S. Dist. LEXIS 147785 (D.N.J. Oct. 12, 2012) ............................. 76, 201, 269
The Business Store, Inc. v. Mail Boxes Etc.,
2012 WL 3962235 (D.N.J. Sept. 7, 2012) .............................................................. 229
The Land Man Realty, Inc. v. Weichert, Inc.,
94 A.D.3d 1221, 941 N.Y.S.2d 801 (3d Dep’t 2012) .............................................. 152
Third Wing, Inc. v. Columbia Cas. Co.,
2012 Ohio App. LEXIS 2109 (Ohio Ct. App. May 31, 2012) .................................. 337
Thomas v. Automotive Techs., Inc.,
2012 U.S. Dist. LEXIS 122666 (E.D. Mo. Aug. 29, 2012) ...................................... 198
Thomas v. Taco Bell Corp.,
2012 WL 3047351 (C.D. Cal. June 25, 2012) ........................................................ 142
Tower Ins. Co. of N.Y. v. Capurro Enters., Inc.,
2012 U.S. Dist. LEXIS 46443 (N.D. Cal. Apr. 2, 2012) .......................................... 335
Transbay Auto Serv., Inc. v. Chevron U.S.A., Inc.,
2013 U.S. Dist. LEXIS 17504 (N.D. Cal. Feb. 7, 2013) .......................... 115, 220, 307
Trescone v. Lotsadough, Inc.,
2012 Mich. App. LEXIS 1648 (Mich. Ct. App. Aug. 21, 2012) ................................ 228
Tutor Time Learning Ctrs., LLC v. KOG Indus.,
2012 U.S. Dist. LEXIS 162124 (E.D.N.Y. Nov. 13, 2012) ................................ 77, 271
United States Bank Nat'l Ass'n v. Nesbitt Bellevue Prop. LLC,
866 F. Supp. 2d 247 (S.D.N.Y. 2012) .................................................................... 287
Valvoline Instant Oil Change Franchising, Inc. v. RFG Oil, Inc.,
2012 U.S. Dist. LEXIS 118571 (E.D. Ky. Aug. 22, 2013) ....................................... 198
Viadeli, Inc. v. QFA Royalties LLC,
Victory Lane Quick Oil Change, Inc. v. Darwich,
2013 U.S. Dist. LEXIS 12877 (E.D. Mich. Jan. 31, 2013) ........................................ 80
Villano v. TD Bank,
2012 U.S. Dist. LEXIS 123013 (D.N.J. Aug. 29, 2012) .................................. 215, 233
Voltage Vehicles v. Arkansas Motor Vehicle Comm’n,
2012 Ark. 386 (2012) ............................................................................................. 116
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Volvo Constr. Equip. Rents v. NRL Tex. Rentals, LLC,
2013 U.S. Dist. LEXIS 20278 (D. Nev. Feb. 8, 2013) ............................................ 148
Volvo Trucks N. Am. v. Andy Mohr Truck Ctr.,
2012 U.S. Dist. LEXIS 145054 (S.D. Ind. Oct. 9, 2012) ........................................... 42
Western Sizzlin Corp. v. Pinnacle Bus. Partners, LLC,
2012 U.S. Dist. LEXIS 77490 (M.D. Fla. June 5, 2012) ........................................... 37
White v. 14051 Manchester, Inc.,
2012 U.S. Dist. LEXIS 178621 (E.D. Mo. Dec. 18, 2012) ...................................... 223
Window World of Chicagoland, LLC v. Window World, Inc.,
2012 U.S. Dist. LEXIS 71615 (N.D. Ill. May 23, 2012) ............................................. 15
Wine & Canvas Dev. LLC v. Weisser,
2012 WL 3260234 (S.D. Ind. Aug. 7, 2012) ........................................................... 207
Wingate Inns Int’l, Inc. v. Cypress Ctr. Hotels, LLC,
2012 U.S. Dist. LEXIS 179345 (D.N.J. Dec. 19, 2012) .......................................... 227
Wingate Inns Int’l, Inc. v. P.G.S., LLC,
2012 U.S. Dist. LEXIS 115745 (D.N.J. Aug. 16, 2012) .................................. 120, 266
Wingate Inns Int’l, Inc. v. Swindall,
2012 U.S. Dist. LEXIS 152608 (D.N.J. Oct. 22, 2012) ...................................... passim
Wireless Toyz Franchise, L.L.C. v. Clear Choice Commun., Inc.,
825 N.W.2d 580 (Mich. 2013) ................................................................................ 255
WMW, Inc. v. Am. Honda Motor Co., Inc.,
291 Ga. 683, 733 S.E.2d 269 (2012) ............................................................... 63, 226
WW, LLC v. The Coffee Beanery, Ltd.,
2012 U.S. Dist. LEXIS 121347 (D. Md. Aug. 27, 2012).......................................... 168
Zabaneh Franchises, LLC v. Walker,
972 N.E.2d 344 (Ill. App. Ct. 2012) .......................................................................... 84
Zad, LLC v. Bulk Petroleum Corp.,
368 S.W.3d 122 (Ky. Ct. App. 2012) ...................................................................... 313
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I.
DEFINITION OF A FRANCHISE
A.
FRANCHISE FEE
Prim LLC v. Pace-O-Matic, Inc., 2012 U.S. Dist. LEXIS 177203 (D. Haw. Dec.
14, 2012), involved a dispute arising out of the termination of an exclusive
distributorship. Prim had contracted to purchase and distribute electronic gamblingstyle games supplied by Pace-O-Matic. After Pace-O-Matic sent Prim a letter alleging
default and terminating the exclusivity of the distribution agreement, Prim brought suit
alleging breach of contract, tortious interference with prospective business advantage,
breach of warranties, unfair competition and violation of the Hawaii franchise statutes.
Pace-O-Matic sought summary judgment on some of the claims, including the franchise
law claim.
The court determined that there were enough facts presented by Prim to allow
the unfair competition claim to proceed, but granted the summary judgment motion on
the breach of warranty claims. As to the franchise act claim, Pace-O-Matic’s argument
was that there was never a franchise between the parties and therefore there could be
no violation of the franchise laws. The court agreed. Under Hawaii law, a franchise
requires (1) an agreement granting a license to use the trademarks and trade names of
the franchisor, and (2) the payment of a franchise fee. The court determined that
neitherelement was present in this case. The distributor agreement did not permit use
of Pace-O-Matic’s name or trademarks, but only authorized Prim to purchase the games
and distribute them. The court stated that the very essence of a franchise is that the
franchisee represents the franchisor to the public, and that relationship is simply not
present in a typical distributorship.
Further, there was no evidence that Prim paid a franchise fee, which Hawaii law
characterizes as an unrecoverable investment paid for the right to enter into the
business under a franchise agreement. Prim argued that the payments it made for
some of the game components constituted a franchise fee because the prices paid far
exceeded the costs. The court rejected that argument, stating that profit earned on a
distributorship agreement should not be characterized as payment of a franchisee fee
so as to transform the distributorship into a franchise. Concluding that there never was
a franchise, the court dismissed the franchise law claim on summary judgment.
Mary Kay, Inc. v. Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21,
2012), is an interesting case about the status of Mary Kay “Independent Beauty
Consultants” and its higher-level “National Sales Directors.” Here, Dunlap, a National
Sales Director, asserted counterclaims under the Texas Deceptive Trade PracticesConsumer Protection Act ("DTPA") and challenged her non-competition covenant under
the Sherman Act.
The key issue in analyzing the DTPA claim was whether Dunlap qualified as a
“consumer.” Dunlap argued that her status as a National Sales Director was equivalent
to being a franchisee which previous cases had recognized as having standing to
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pursue DTPA claims. May Kay, not surprisingly, begged to differ. The court ultimately
rejected Dunlap’s claim because she did not pay a franchise fee and simply received a
commission on her own sales and those below her. Specifically, Dunlap’s agreement
provided her with various “intangible rights and privileges,” but not with “the facilities,
equipment, or other necessary goods and services to operate a business as would a
common franchisee.” Id. *10-11. The court also rejected the Sherman Act claim on the
basis that her “allegations concerning the relevant product market fail[] to define [the]
proposed relevant market with reference to the rule of reasonable interchangeability and
cross-elasticity of demand.” In addition, “the allegations do not specify the precise
contours of the geographic market; instead, the relevant geographic market is described
as at least Texas, but could be much larger.” Accordingly, the court dismissed the two
counterclaims.
At issue in Atchley v. Pepperidge Farm, Inc., 2012 U.S. Dist. LEXIS 103830
(E.D. Wash. Jul. 24, 2012), was whether a Pepperidge Farm, Inc. (“PFI”) distributor
could assert claims under Washington’s Franchise Investment Protection Act (“Act”).
Here, the distributor challenged PFI’s Pallet Delivery Program (“PDP”) by which “PFI
would deliver its products directly to stores within the [Plaintiffs’] territories if a customer
preferred that PFI products be delivered only to their central warehouses and shrinkwrapped on pallets.” Id. at *3. Through that program the distributor allegedly lost
commissions and did not have the opportunity to obtain pallet services elsewhere.
Despite having unsuccessfully moved for summary judgment dismissing the claim under
the Act once before, PFI filed a second summary judgment motion again attempting to
show that the distributor was not a franchisee entitled to assert claims under it. PFI
fared no better the second time.
In resolving PFI’s second motion, the court recognized that remedies under the
Act are only available when a franchise exists. It further noted that a franchise exists
when the parties assent to an agreement – be it express or implied, oral or written – by
which they (1) are given the right to engage in the business via a marketing plan;
(2) operate a business that is substantially associated by an owner/franchisor; and
(3) pay a franchise fee. PFI claimed that neither the PDP commission deductions, nor a
“stale product charge” amounted to franchise fees under FIPA. The court, however,
disagreed and found that rulings from the district court required it find that questions of
fact existed as to whether the distributor paid a fee. PFI also claimed that the distributor
would not be able to demonstrate that its business was associated with the PFI
trademark, service mark, etc., because the parties’ consignment agreement only let the
distributor put the PFI logo on its truck, not to use the PFI trade name. The court again
disagreed and said there was a question as to whether the distributor’s business was
associated with the PFI trademark. The court also found that questions of fact existed
as to whether or not the distributor could show a “marketing plan element” pursuant to
the Consignment Agreement as one of its provisions required the distributor to solicit
retail stores in its area and work with PFI to assist in realizing the full potential of those
stores. Therefore, the court denied PFI’s second motion for summary judgment in its
entirety.
14379022.3
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Atchley v. Pepperidge Farm, Inc., 2012 U.S. Dist. LEXIS 173974 (E.D. Wash.
Dec. 6, 2012), is the latest decision in this long-running dispute, issued after the trial
necessitated by the court’s decisions denying summary judgment on the franchise fee
issue (described above).
To qualify as a franchise under Washington’s Franchise Investment Practices Act
(FIPA), there must be an agreement by which (1) a person is granted the right to
engage in business under a marketing plan required or suggested by the grantor, (2)
the operation of that business is substantially associated with a trademark, service
mark, or trade name, etc. of the grantor, and (3) the person pays, directly or indirectly, a
franchise fee. The court determined that none of these characteristics were proven by
the plaintiffs, that the distributorships were therefore not franchises under Washington
law, and the plaintiffs’ FIPA claims must accordingly be dismissed.
As to the marketing-plan requirement, the court relied on other court decisions
finding that the key to the existence of a marketing plan is whether there is a certain
level of control of the putative franchisee’s operation by the franchisor. The court
concluded that the plaintiffs failed to show that Pepperidge Farm exhibited control over
much, if any, of the relevant factors, including hours and days of operation, advertising,
retail environment, employee uniforms, pricing, hiring, sales quotas and management
training.
As to the trademark-association requirement, the court held that the plaintiffs
were required, and failed, to show a substantial association with Pepperidge Farm’s
trade name or trademarks beyond the mere act of distributing Pepperidge Farm’s
products. The plaintiffs’ unsubstantiated testimony of having business cards, some
business forms and delivery trucks bearing the Pepperidge Farm logo, even if accepted
as true, did not rise to the level of substantial association because no person could have
believed from those few items that the plaintiffs were associated with Pepperidge Farm
other than as mere distributors.
Finally, as to the franchise-fee requirement, the court described such a fee as
any payment required to engage in business as a franchisee, including payment for
mandatory goods or services or any payment that could be constituted as a
unrecoverable investment by the putative franchisee in the franchisor. The plaintiffs’
only contention as to payment of a franchisee fee – which was expressly not required
under the distributor agreements – was a charge of a pallet fee that was subtracted
from commissions that Pepperidge Farm paid the distributors for pallets that Pepperidge
Farm itself (not the distributors) sold to retail outlets. The court found that this was not a
franchise fee or unrecoverable investment; it was an ordinary-course business expense
for the cost of packaging and delivering the palletized product by Pepperidge Farm, and
one which greatly benefitted the distributors through the receipt of commissions.
B.
TRADEMARK USE OR CONTROL
Atchley v. Pepperidge Farm, Inc., 2012 U.S. Dist. LEXIS 173974 (E.D. Wash.
Dec. 6, 2012), is the latest decision in a long-running dispute regarding two former
14379022.3
3
distributorships that distributed products to retail outlets under exclusive-territory
consignment agreements with Pepperidge Farm. Pepperidge Farm secured dismissal
on a motion for summary-judgment of the plaintiffs’ claims and a trial victory on a
counterclaim against one of the plaintiffs for failure to repay a loan. On appeal, the
Ninth Circuit largely affirmed, but determined that summary judgment was improper on
the plaintiff’s franchise-law claims. At issue in this second trial after remand was
whether the distributor agreements created franchises such that the former distributors
could pursue claims under Washington’s Franchise Investment Protection Act, Wash.
Rev. Code ch. 19.100 (“FIPA”).
To qualify as a franchise under FIPA, there must be an agreement by which (1) a
person is granted the right to engage in business under a marketing plan required or
suggested by the grantor, (2) the operation of that business is substantially associated
with a trademark, service mark, or trade name, etc. of the grantor, and (3) the person
pays, directly or indirectly, a franchise fee. The court determined that none of these
characteristics were proven by the plaintiffs that the distributorships were therefore not
franchises under Washington law, and the plaintiffs’ FIPA claims must accordingly be
dismissed.
As to the marketing-plan requirement, the court relied on other court decisions
finding that the key to the existence of a marketing plan is whether there is a certain
level of control of the putative franchisee’s operation by the franchisor. The court
concluded that the plaintiffs failed to show that Pepperidge Farm exhibited control over
much, if any, of the relevant factors, including hours and days of operation, advertising,
retail environment, employee uniforms, pricing, hiring, sales quotas and management
training.
As to the trademark-association requirement, the court held that the plaintiffs
were required, and failed, to show a substantial association with Pepperidge Farm’s
trade name or trademarks beyond the mere act of distributing Pepperidge Farm’s
products. The plaintiffs’ unsubstantiated testimony of having business cards, some
business forms and delivery trucks bearing the Pepperidge Farm logo, even if accepted
as true, did not rise to the level of substantial association because no person could have
believed from those few items that the plaintiffs were associated with Pepperidge Farm
other than as mere distributors.
Finally, as to the franchise-fee requirement, the court described such a fee as
any payment required to engage in business as a franchisee, including payment for
mandatory goods or services or any payment that could be constituted as a
unrecoverable investment by the putative franchisee in the franchisor. The plaintiffs’
only contention as to payment of a franchisee fee – which was expressly not required
under the distributor agreements – was a charge of a pallet fee that was subtracted
from commissions that Pepperidge Farm paid the distributors for pallets that Pepperidge
Farm itself (not the distributors) sold to retail outlets. The court found that this was not a
franchise fee or unrecoverable investment; it was an ordinary-course business expense
for the cost of packaging and delivering the palletized product by Pepperidge Farm, and
one which greatly benefitted the distributors through the receipt of commissions.
14379022.3
4
Prim LLC v. Pace-O-Matic, Inc., 2012 U.S. Dist. LEXIS 177203 (D. Haw. Dec.
14, 2012), involved a dispute arising out of the termination of an exclusive
distributorship. Prim had contracted to purchase and distribute electronic gamblingstyle games supplied by Pace-O-Matic. After Pace-O-Matic sent Prim a letter alleging
default and terminating the exclusivity of the distribution agreement, Prim brought suit
alleging breach of contract, tortious interference with prospective business advantage,
breach of warranties, unfair competition and violation of the Hawaii franchise statutes.
Pace-O-Matic sought summary judgment on some of the claims, including the franchise
law claim.
The court determined that there were enough facts presented by Prim to allow
the unfair competition claim to proceed, but granted the summary judgment motion on
the breach of warranty claims. As to the franchise act claim, Pace-O-Matic’s argument
was that there was never a franchise between the parties and therefore there could be
no violation of the franchise laws. The court agreed. Under Hawaii law, a franchise
requires (1) an agreement granting a license to use the trademarks and trade names of
the franchisor, and (2) the payment of a franchise fee. The court determined that
neither element was present in this case. The distributor agreement did not permit use
of Pace-O-Matic’s name or trademarks, but only authorized Prim to purchase the games
and distribute them. The court stated that the very essence of a franchise is that the
franchisee represents the franchisor to the public, and that relationship is simply not
present in a typical distributorship.
Further, there was no evidence that Prim paid a franchise fee, which Hawaii law
characterizes as an unrecoverable investment paid for the right to enter into the
business under a franchise agreement. Prim argued that the payments it made for
some of the game components constituted a franchise fee because the prices paid far
exceeded the costs. The court rejected that argument, stating that profit earned on a
distributorship agreement should not be characterized as payment of a franchisee fee
so as to transform the distributorship into a franchise. Concluding that there never was
a franchise, the court dismissed the franchise law claim on summary judgment.
McPeak v. S-L Dist. Co., Inc., 2012 U.S. Dist. LEXIS 179893 (D.N.J. Dec. 19,
2012), involved a class-action complaint for alleged violations of New Jersey’s franchise
law on account of unilateral termination of contracts by the purported franchisor, a
distribution company. The defendant distribution company had entered into a distributor
agreement with the plaintiff and other members of the potential class, which granted the
exclusive right to sell and distribute certain products within defined territories. The
agreements specifically stated that they were not franchise agreements and that use of
the defendant’s name, trademarks or trade names was prohibited.
After the plaintiff had apparently created a successful business in his
distributorship, the defendant (for reasons unstated in the opinion) terminated the
agreement. The plaintiff filed suit, asserting a claim on behalf of himself and a
purported class of similarly situated individuals, and alleging that the terminations
violated New Jersey’s franchise law. The plaintiff thereafter sold his distributorship back
14379022.3
5
to the defendant. The defendant moved to dismiss the class-action complaint for lack of
standing and for failing to allege the existence of a franchise.
As to the standing issue, the defendant argued that the plaintiff had no standing
because he had no injury in fact since selling the distributorship back to the defendant.
The court disagreed, finding that the plaintiff had standing to pursue monetary relief for
the difference in value of the distributorship as a going concern and the price the
defendant paid to purchase it back from the plaintiff. The court did find that injunctive
relief as to the distributor agreement was no longer available to the plaintiff since he had
sold his distributorship.
However, the court concluded that the plaintiff failed to successfully plead that he
held a “franchise” within the meaning of the New Jersey statutes, and the court
dismissed the action. The court first pointed out that the franchise statutes were
enacted to protect franchisees from unreasonable termination by franchisors who enjoy
superior bargaining power, and that the New Jersey franchise statutes were recently
amended in 2010 to extend its protections to wholesale distribution franchisees. In
order to enjoy the protections of the statutes, however, a plaintiff must hold a franchise
as defined by the statutes. Under New Jersey law, a franchise is a written agreement
under which a person grants to another a license to use a trade name, trademark or
service mark, and in which there is a community of interest in the marketing and sale of
goods or services.
The court determined that there was no franchise in this case because the
plaintiff failed to plead facts showing that the defendant granted a license for use of the
defendant’s trademarks and trade name; the court did not reach the community of
interest requirement. The court remarked that the “hallmark” of the franchise
relationship is the use of the franchisor’s trade name so as to create a belief among the
public that there is a connection between the franchisor and franchisee by which the
franchisor vouches for the activity of the franchisee. In this case, the defendant’s
allowance of the plaintiff to use the defendant’s insignia or name on a limited basis did
not confer a license to use, particularly when the distributorship agreement expressly
prohibited the use of the defendant’s name or trademarks. The complaint was devoid of
any facts showing that a license to use the defendant’s name or trademarks existed,
and the plaintiff’s conclusory allegations that he was a “franchisee” did not make it so.
Chicago Male Med. Clinic, LLC v. Ultimate Management, Inc., 2012 U.S. Dist.
LEXIS 183257 (N.D. Ill. Dec. 28, 2012), involved a dispute between a male erectile
dysfunction treatment clinic and the defendant corporation that licensed and oversaw a
national affiliation of male medical clinics (including the plaintiff). The parties had
entered into a “consultation agreement” under which the defendant assisted the plaintiff
in setting up the clinic, consulted with the plaintiff on how to operate and market the
clinic effectively, and received from the plaintiff a $300,000 set-up fee plus ongoing
royalties.
Before the court were four separate motions – a motion to file a sur-reply on a
summary judgment motion (which was granted without discussion), a motion by the
14379022.3
6
defendant to dismiss certain claims and to strike portions of the complaint, a motion by
the plaintiff for summary judgment on certain claims, and a motion by the defendant to
transfer venue.
The defendant’s motion to dismiss certain claims was based on the plaintiff’s
failure to plead with sufficient particularly three claims that were based in fraud. The
court agreed that the plaintiff failed to meet the heightened pleading standard required
for fraud-based claims and dismissed two such claims without prejudice. The third
fraud-based claim – an alleged breach of the Illinois Consumer Fraud and Deceptive
Business Practices Act – was dismissed with prejudice because the plaintiff did not
have consumer standing in order to pursue that claim.
The defendant’s motion to strike dealt primarily with allegations in the complaint
that the defendant felt was unduly prejudicial and irrelevant to the dispute. One such
allegation was a claim that the defendant was committing fraud upon the court by
claiming that its agreement with the plaintiff was not a franchise agreement, but also
apparently selling on its website franchise agreements across the country. The court
found that the comment about committing fraud on the court was overly prejudicial and
struck that portion of the allegation. However, it did not find the rest of the allegation to
be irrelevant, and merely cautioned the plaintiff that if it chose to replead its complaint, it
should be more careful to allege that an affiliate of the defendant was the entity
currently selling franchises, not the defendant itself.
As to the motion to transfer venue, the court applied the typical 28 U.S.C.
§ 1404(a) factors and determined that transfer was appropriate.
Finally, with respect to the plaintiff’s motion for summary judgment, the plaintiff
argued it was entitled to judgment on its claims for violation of the Illinois Franchise
Disclosure Act because the agreement it entered into with the defendant was a
franchise agreement and the defendant failed to register that franchise with the state as
required by the statutes. The defendant contended that the agreement was merely a
consulting agreement and not a franchise. Illinois law defines a franchise as an
agreement under which (1) the franchisee is granted the right to engage in business
under a marketing plan prescribed or suggested by the franchisor, (2) the operation of
the franchisee’s business is substantially associated with the franchisor’s trademark,
and (3) the franchisee is required to pay a franchise fee of $500 or more. Because
there had been deposition testimony that the parties’ arrangement included the right to
use the defendant’s trademarks, but there was also an affidavit stating under oath that
the defendant did not even own any trademarks, the court determined that a material
question of fact precluded summary judgment.
At issue in Atchley v. Pepperidge Farm, Inc., 2012 U.S. Dist. LEXIS 103830
(E.D. Wash. Jul. 24, 2012) was whether a Pepperidge Farm, Inc. (“PFI”) distributor
could assert claims under Washington’s Franchise Investment Protection Act (“Act”).
Here, the distributor challenged PFI’s Pallet Delivery Program (“PDP”) by which “PFI
would deliver its products directly to stores within the [Plaintiffs’] territories if a customer
preferred that PFI products be delivered only to their central warehouses and shrink14379022.3
7
wrapped on pallets.” Id. at *3. Through that program the distributor allegedly lost
commissions and did not have the opportunity to obtain pallet services elsewhere.
Despite having unsuccessfully once before moved for summary judgment dismissing
the claim under the Act, PFI filed a second summary judgment motion again attempting
to show that the distributor was not a franchisee entitled to assert claims under it. PFI
fared no better the second time.
In resolving the PFI’s second motion, the court recognized that remedies under
the Act are only available when a franchise exists. It further noted that a franchise
exists when the parties assent to an agreement – be it express or implied, oral or written
– by which they (1) are given the right to engage in the business via a marketing plan;
(2) operate a business that is substantially associated by an owner/franchisor; and
(3) pay a franchise fee. PFI claimed that neither the PDP commission deductions, nor a
“stale product charge” amounted to franchise fees under FIPA. The court, however,
disagreed and found that rulings from the district required it find that questions of fact
existed as to whether the distributor paid a fee. PFI also claimed that the distributor
would not be able to demonstrate that its business was associated with the PFI
trademark, service mark, etc. They claimed this because the parties’ consignment
agreement only let the distributor put the PFI logo on its truck, not to use the PFI trade
name. The court again disagreed and said there was a question as to whether the
distributor’s business was associated with the PFI trademark. The court also found that
questions of fact existed as to whether or not the distributor could show a “marketing
plan element” pursuant to the Consignment Agreement as one of its provisions required
the distributor to solicit retail stores in its area and work with PFI to assist in realizing the
full potential of those stores. Therefore, the court denied PFI’s second motion for
summary judgment in its entirety.
C.
COMMUNITY OF INTEREST
In Oracle Am., Inc. v. Innovative Tech. Distribs. LLC, 2012 U.S. Dist. LEXIS
134343 (N.D. Cal. Sept. 18, 2012), Oracle’s predecessor company, Sun Microsystems,
entered into an agreement withInnovative Technology Distributors, LLC (“ITD”) to
become a “Sun Partner” and market and distribute Sun products. Id. at *4-6. The
agreement contained a clause that expressly stated that “[n]either the General Terms
nor any Agreement is intended to create a . . . franchise . . . relationship.” Id. at *4.
ITD then began selling Sun’s products from its office in Edison, New Jersey. Id. at *6.
After acquiring Sun, Oracle sought to shift the business model from an indirect sales
model to a direct sales one and terminated its relationship with ITD. Id. at *14-17. ITD
filed suit in New Jersey arguing, among other things, that Oracle had violated the New
Jersey Franchise Protection Act (the “Act”) by terminating the relationship. Id. at *1718. Oracle subsequently filed suit in California alleging breach of contract and $19.1
million in unpaid invoices and successfully had the New Jersey action transferred to
California and consolidated with its action. Id. Oracle then moved for summary
judgment dismissing ITD’s claim under the Act.
First, Oracle argued that the agreement between the parties expressly provided
that a franchise relationship was not being formed. Id. at *26-27. However the court
14379022.3
8
agreed with ITD in that under New Jersey law the court should focus on whether the
perception amongst customers was that the parties were “integrally related.” Id. at
* 27-32. The court found there was sufficient evidence to find customers would see Sun
and ITD as integrally related. Id. at *32-38. The court noted that Sun relied heavily on
resellers, whose added value was designed to promote proper functioning of Sun
products. Id. Furthermore, Sun directly warranted the products and negotiated the
pricing. Id. Also, ITD displayed Sun’s banner and logo in its corporate offices. Id. The
court thus concluded that a reasonable consumer would when buying products from
ITD, Sun was vouching for those products. Id. Second, the court found that there was
a community of interest between Sun and ITD because ITD had made substantial
investments in connection with the franchise, which were franchise-specific. Id. at *3843. ITD had been required by Sun to make substantial investments in developing Sunspecific training, skills, and knowledge regarding Sun products and services. Id. Third,
the court found that ITD’s office in Edison, New Jersey was sufficient to establish that
IDT held a place of business in the state. Id. at *43-49. Oracle argued that this was just
an office or warehouse and did not qualify as a place of business under the Act. The
court found that IDT’s offices were in fact sufficient because they were used as a
marketing facility, included a demonstration room, hosted events for Sun products and
was the place where the franchise’s personnel contacted customers and were the
goods were delivered to customers. Id.
Finally, the court found that there were questions of fact as to whether Oracle
had in fact terminated the franchise in good faith. Id. at *49-53. Oracle had sent notices
that did not explain the reason for the termination of the relationship. Although Oracle
argued that it had terminated the relationship because of ITD’s failure to pay invoices,
the court noted that Oracle had not demanded payment of these invoices until after the
litigation had commenced. What was more, it appeared that Oracle had decided to
terminate the relationship with ITD to shift to a direct sales business model. Id. The
court then denied Oracle’s motion for summary judgment. Id. at *53.
II.
REGISTRATION AND DISCLOSURE
Mangione v. Butler, 2012 Bankr. LEXIS 5689 (Bankr. W.D.N.C. Dec. 10, 2012),
was an action to establish a debt and determine the non-dischargeability of that debt in
bankruptcy, but the determination of the debt turned primarily on franchise-registration
requirements under New York law. The plaintiff had purchased from the franchisor the
right to open and operate twelve franchise locations in the state of New York in the
business of small-business marketing and promotion. The franchisor and franchisee
entered into a series of franchise agreements, and the franchisee paid $714,000 for his
franchise rights. Within months of selling those franchise rights to the plaintiff, the
franchisor was insolvent and folded. The evidence at trial suggested that the franchisor
was essentially a fraudulent enterprise, dissipating the proceeds from franchise sales to
its officers and principals.
Realizing that he had been had, the franchisee corresponded with the New York
Attorney General, who informed the plaintiff that the franchisor was not registered and
authorized to sell franchises in the state of New York at the time the plaintiff bought his
14379022.3
9
franchises, and that the franchisor was required to escrow the full amount of franchise
fees paid until such time that the franchisor could provide a franchise prospectus to
potential buyers that had been approved through the New York registration process.
The Attorney General and the former franchisee separately notified the franchisor that
the failure to be registered at the date of execution of the franchise agreements
permitted the former franchisee to rescind the agreements and recover the franchisee
fees paid, which should have been escrowed, together with interest and costs. The
franchisor, not unexpectedly, failed to refund the amounts paid upon demand made by
the franchisee.
The bankruptcy court determined that New York law required franchisors selling
franchises within the state’s borders to be registered, and the failure of this franchisor to
be registered at the time it entered into the franchise agreements with the franchisee,
along with the failure to escrow the franchise fees paid as required by law, entitled the
franchisee to rescission of the franchisee agreements and a refund of the $714,000 of
franchisee fees, plus costs and attorneys’ fees. The court also determined that the
individual bankruptcy debtors were responsible under New York franchise law for the
unlawful sale of franchises by the corporate franchisor that the debtors owned and
operated, and that the amount owed to the franchisee was not dischargeable in
bankruptcy under various dischargeability exceptions for debts incurred in a fraudulent
manner.
Chicago Male Med. Clinic, LLC v. Ultimate Management, Inc., 2012 U.S. Dist.
LEXIS 183257 (N.D. Ill. Dec. 28, 2012), involved a dispute between a male erectile
dysfunction treatment clinic and the defendant corporation that licensed and oversaw a
national affiliation of male medical clinics (including the plaintiff). The parties had
entered into a “consultation agreement” under which the defendant assisted the plaintiff
in setting up the clinic, consulted with the plaintiff on how to operate and market the
clinic effectively, and received from the plaintiff a $300,000 set-up fee plus ongoing
royalties.
Before the court were four separate motions – a motion to file a sur-reply on a
summary judgment motion (which was granted without discussion), a motion by the
defendant to dismiss certain claims and to strike portions of the complaint, a motion by
the plaintiff for summary judgment on certain claims, and a motion by the defendant to
transfer venue.
The defendant’s motion to dismiss certain claims was based on the plaintiff’s
failure to plead with sufficient particularly three claims that were based in fraud. The
court agreed that the plaintiff failed to meet the heightened pleading standard required
for fraud-based claims and dismissed two such claims without prejudice. The third
fraud-based claim – an alleged breach of the Illinois Consumer Fraud and Deceptive
Business Practices Act – was dismissed with prejudice because the plaintiff did not
have consumer standing in order to pursue that claim.
The defendant’s motion to strike dealt primarily with allegations in the complaint
that the defendant felt was unduly prejudicial and irrelevant to the dispute. One such
14379022.3
10
allegation was a claim that the defendant was committing fraud upon the court by
claiming that its agreement with the plaintiff was not a franchise agreement, but also
apparently selling on its website franchise agreements across the country. The court
found that the comment about committing fraud on the court was overly prejudicial and
struck that portion of the allegation. However, it did not find the rest of the allegation to
be irrelevant, and merely cautioned the plaintiff that if it chose to replead its complaint, it
should be more careful to allege that an affiliate of the defendant was the entity
currently selling franchises, not the defendant itself.
As to the motion to transfer venue, the court applied the typical 28 U.S.C.
§ 1404(a) factors and determined that transfer was appropriate.
Finally, with respect to the plaintiff’s motion for summary judgment on certain
claims, the plaintiff argued it was entitled to judgment on its claims for violation of the
Illinois Franchise Disclosure Act because the agreement it entered into with the
defendant was a franchise agreement and the defendant failed to register that franchise
with the state as required by the statutes. The defendant contended that the agreement
was merely a consulting agreement and not a franchise. Illinois law defines a franchise
as an agreement under which (1) the franchisee is granted the right to engage in
business under a marketing plan prescribed or suggested by the franchisor, (2) the
operation of the franchisee’s business is substantially associated with the franchisor’s
trademark, and (3) the franchisee is required to pay a franchise fee of $500 or more.
Because there had been deposition testimony that the parties’ arrangement included
the right to use the defendant’s trademarks, but there was also an affidavit stating under
oath that the defendant did not even own any trademarks, the court determined that a
material question of fact precluded summary judgment.
In Palermo Gelato, LLC v. Pino Gelato, Inc., 2013 WL 285547 (W.D. Pa. Jan.
24, 2013), Palermo signed a 2008 supply and license agreement with defendant Pino
under which Pino would supply gelato to Palermo’s gelato store. Pino representatives
allegedly represented that the Pino gelato was a unique recipe developed in Sicily. The
agreement gave Palermo the exclusive rights to sell Pino gelato in certain counties and
Palermo agreed to pay certain fees and to purchase gelato at a set price. Palermo
further agreed to operate each location exclusively under the Pino Gelato mark.
When the Palermo stores opened, Palermo allegedly discovered that Pino gelato
was not small batch gelato from Sicily, but rather was manufactured in bulk by a Florida
company and sold wholesale on its website. The wholesale website price was 30%
cheaper than the Pino price given to Palermo. Palermo notified Pino of its belief about
the gelato and its intention to rescind the Agreement because it was fraudulently
induced into believing it was purchasing high-end gelato from Pino’s own recipe.
Palermo further alleged that the Agreement established a franchise relationship and the
30% markup fees were essentially disguised royalties.
Plaintiff filed suit seeking (1) a declaration that the agreement was invalid and
void because the parties were in a franchise relationship in violation of the FTC
franchise rule, 16 C.F.R. § 436 (“Rule 36”) when Pino failed to provide Palermo with
14379022.3
11
pre-sale disclosure documents about its franchise; (2) unjust enrichment; (3) in the
alternative, a claim of fraud in the inducement. Pino moved to dismiss the claim,
arguing that the court lacked subject matter jurisdiction because (1) the parties were not
in a franchise relationship, meaning that Rule 36 did not apply, or (2) even if the parties
were in a franchise relationship, Rule 36 is only enforceable by the FTC and does not
provide any legal basis for voiding a contract between two parties.
The court reasoned that it only had jurisdiction if Palermo’s well pled complaint
established a right to relief that is necessarily dependent on the resolution of a
substantial question of federal law. The application of federal law must arise in the
plaintiff’s original cause of action, not as a defense to a cause of action. It was unclear
if Palermo’s claim attacking the validity of the contract was using federal law as a sword
or shield.
Palermo’s complaint was essentially that it was duped into entering an
agreement based on Pino’s misrepresentations concerning the source of the gelato.
Count I sought a declaration that the agreement was invalid due to its federal illegality,
which in essence is a defense that would only arise in response to a state law contract
action. As such, the claim did give rise to federal jurisdiction. However, it found, federal
law could arguably be considered a necessary element in the unjust enrichment claim.
That was not sufficient to keep the case in federal court. Federal courts only
allow state law claims that have a “substantial federal issue” to remain in federal court in
very limited instances, usually involving the action of a federal agency. The court found
that Palermo’s claims did not fit into the narrow category for several reasons. First, the
federal law on which Palermo claimed reliance was only enforceable by the FTC. When
a statute lacks a private right of action, courts interpret this an indication that Congress
did not intend to allow federal adjudication of claims regarding alleged violations of the
Federal Statute. Thus, because the Franchise Act did not have a private right of action,
Palermo could not use it to move its claims to federal court. Second, the claim did not
involve any action by a federal agency.
Third, every court that had considered whether a violation of the franchise law
voids a contract has rejected the argument. Palermo’s argument for federal jurisdiction
relied on the fact that its unjust enrichment claim depended on a federal statute. But, an
unjust enrichment claim cannot stand when there is a valid contract. Because franchise
law does not void a contract, Palermo’s claim that the contract was invalid would most
likely fail, meaning that Palermo could not bring its unjust enrichment claim. With no
unjust enrichment claim, there was no reason for the court to issue a determination
concerning federal law, and therefore the court had no jurisdiction. The court therefore
dismissed the complaint for want of jurisdiction.
Long John Silver’s Inc. v. Nickleson, 2013 U.S. Dist. LEXIS 18391 (W.D. Ky.
Feb. 11, 2013), involved breach of contract, trademark infringement, and unfair
competition claims against several A&W franchisees after the franchisees failed to pay
royalty and advertising fees owed to A&W and subsequently closed. The defendants
asserted three categories of counterclaims against A&W: (1) violation of the Minnesota
14379022.3
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Franchise Act; (2) rescission of the franchising contracts; and (3) common law fraud by
intentional misrepresentation and omission. A&W moved to for summary judgment on
all of the counterclaims.
The defendants’ counterclaims arose out of financial projections provided by
A&W to persuade Nickleson to enter into a franchise agreement to open a drive-in
franchise. The drive-in franchise performed poorly and the defendants claimed they
were forced to transfer equity from other franchises they operated in order to support
the drive-in franchise. All of the defendants’ franchises ultimately closed due to the
failure of the drive-in franchise.
The court first noted that the franchise agreement contained a choice of law
provision stating that Kentucky law governed its validity and enforcement. The choice
of law provision also stated that nothing in the agreement could abrogate or reduce any
of the franchisee’s rights under Minnesota law. The court concluded that Minnesota law
applied to the Minnesota Franchise Act and rescission claims and that Kentucky law
applied to the common law fraud claims.
The court next addressed standing, concluding that only Nickleson had standing
to maintain the counterclaims because it was the only signatory to the drive-in franchise
agreement and all of the counterclaims revolved around the financial projections A&W
used to persuade Nickleson to enter into that agreement. The court rejected another
defendant’s argument that he had standing to pursue the counterclaims because he had
executed a personal guaranty for Nickleson’s obligations under the drive-in franchise
agreement because the personal guaranty did not make him a party or third party
beneficiary of the franchise agreement.
The court next addressed the merits of Nickleson’s various counterclaims under
the MFA, dismissing the claim that the sale of the franchise violated MFA’s prohibition
on offering to sell a franchise before an effective registration statement is on file with the
state of Minnesota. Because Nickleson delayed more than three years in filing this
counterclaim, it was barred by the applicable statute of limitations and the court granted
A&W’s motion for summary judgment.
Nickleson’s other MFA claims survived summary judgment however. In one of
those claims, Nickleson claimed that A&W violated the MFA by failing to prove the
current Financial Disclosure Document (“FDD”) approved by the state of Minnesota at
least seven days before Nickleson first paid consideration for the franchise. Although it
was undisputed that A&W did not provide the current FDD to Nickleson, A&W had
provided the FDD for the previous year. The court rejected A&W’s argument that this
satisfied the MFA’s disclosure requirement. The court also rejected A&W’s argument
that it was entitled to summary judgment on this claim because Nickleson could not
establish any damages caused by the untimely disclosure. The court held that the issue
of damages was a disputed question of fact, making summary judgment inappropriate.
Finally, Nickleson claimed that A&W violated the MFA by making untrue statements of
material fact regarding the estimated costs, revenues, and profits of the drive-in
franchise, as well as misrepresenting the financial performance of other operating A&W
14379022.3
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franchises. A&W responded that the franchise agreement disclaimers specified that
Nickleson was responsible for its own investigation and that the agreement superseded
any other representations, so Nickleson could not establish reasonable reliance on the
financial projections and data provided. The court concluded that, because the MFA
contained a provision precluding parties from waiving its obligations, Nickleson could
have reasonably believed that the disclaimers were unenforceable. Accordingly,
whether Nickleson reasonably relied on the financial protections and data was a
disputed question of fact, making summary judgment inappropriate.
The court next addressed Nickleson’s common law fraud claims, also based on
A&W’s alleged misrepresentations about the current/past performance of other
franchisees and the likely future performance of the drive-in franchise. The court noted
that Kentucky law generally permitted misrepresentation claims only for current/past
information, but concluded that Nickleson’s allegations fell under exceptions to this rule
for future statements derived from misrepresentation of current/past events and
intentional misrepresentations. Because Nickleson’s misrepresentation allegations
raised disputed questions of fact, summary judgment was inappropriate. However, the
court granted summary judgment on Nickleson’s fraud by omission claim, concluding
that A&W did not have a fiduciary relationship with Nickleson and thus had no obligation
to provide it with any information.
Finally, the court denied summary judgment on Nickleson’s rescission
counterclaim, concluding that several of the remaining counterclaims could entitle it to
rescission.
Kim v. SUK Inc., 2013 U.S. Dist. LEXIS 24703 (S.D.N.Y. Feb. 22, 2013),
involved a motion to dismiss claims under the New York Franchise Sales Act as
untimely and ERISA claims as untimely and failing to state a claim. Kim worked as a
driver for Suk, which owned a car service company. In 2004 Suk forced Kim to sign the
signature page of an unknown document with threats of termination. In 2010, Kim
learned that document was a franchise agreement. Kim did not receive the full
franchise agreement until he was terminated and never received or reviewed a
franchise prospectus or financial disclosure document.
In 2010, Kim was fired for violation of a dress code and a mishandling of client
payments, but Kim alleged these were a pretext, and he was actually fired for his efforts
to organize labor over working conditions. Kim further alleged he suffered physical
violence in response to his organizing activities. Kim filed a complaint on March 2,
2012.
Defendants filed a motion to dismiss Kim’s New York Franchise Sales Act claims
as untimely and his ERISA claims as failing to state a claim and untimely.
In relation to the Franchise Sales Act claims, there is a three year statute of
limitations from the date of violation. Kim contends that the three years did not start
running until 2010 because he did not receive the franchise documents until he was
fired, and therefore was unaware of the violation until that time. This argument was
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contradicted by case law that states there is no discovery rule for fraud based claims.
In attempting to figure out when the statute of limitations did start, the court noted that
the statute of limitations does not always begin to run on the date the agreement was
executed. Rather, it is the time of the violative transaction, which would be the time of
the sale of the franchise for claims under § 683 and when the agreement was signed for
claims under § 687 of the Act. Plaintiffs did not allege that any part of the transaction
occurred within three years of the filing of the complaint, meaning the claims were time
barred.
For the ERISA claim, defendants argued that Kim failed to state a claim because
he did not state which ERISA section formed the basis of his claim. The court found
that Kim need not establish which specific ERISA section he was claiming a violation of
as long as he made allegations consistent with an ERISA claim. The court therefore
found dismissal to be improper at this stage. The court also found the claim was timely
because Kim became an employee when he did not renew the franchise in 2007, a
classification that was in effect when he was terminated in 2010. Kim’s claim arises
from the discrimination he faced over his organizing activities. The complaint fails to
state when exactly when this occurred in 2010, but because the plaintiff filed his
complaint in March 2012, the odds are that his alleged pretextual firing in 2010 forms a
timely basis for his ERISA claim. The court therefore ordered plaintiff to amend the
complaint to add the date of termination.
Window World of Chicagoland, LLC v. Window World, Inc., 2012 U.S. Dist.
LEXIS 71615 (N.D. Ill. May 23, 2012), involved alleged violations of the Illinois
Franchise Disclosure Act (“IFDA”) and a franchisor’s failed attempt to dismiss the
claims. The story begins with plaintiff David Hampton entering into “licensing
agreements” with Window World for certain territories in Illinois. Hampton alleged that
both before and after signing the licensing agreements, Window World told him that he
would have right of first refusal before territories adjacent to his were sold. When
Hampton later requested to purchase an adjacent territory, Window World told him it
was not for sale and then sold it to someone else. At around the same time, Window
World further advised Hampton that he was a franchisee, not a “licensee,” and that their
license agreements violated the IFDA. Window World gave Hampton 35 days to either
agree to sign a franchisee agreement or rescind the license agreements. Hampton
chose to sign a franchise agreement and then promptly filed suit thereafter.
In his suit Hampton claimed that Window World was not registered to sell
franchises in Illinois and did not have an approved form of Franchise Disclosure
Document. The seven-count complaint alleged violations of the IFDA, breach of
contract, fraud, breach of implied covenant of good faith and fair dealing, and civil
conspiracy. When Window World moved to dismiss for failure to state a claim, the court
largely denied the motion and allowed Hampton to proceed.
The district court denied the motion to dismiss the IFDA claims on the grounds
that (a) they were not time-barred because the license agreements were signed within
the 3-year limitations period and (b) Hampton’s declination of Window World’s
rescission offer did not bar his claims because the complaint alleged that Window
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World’s letter did not meet the IFDA’s requirements for a rescission offer. The court
also denied the motion on the breach of contract claim because the license agreements
required Window World to not “unreasonably withhold consent to [Hampton’s] request to
acquire an adjacent [territory]” and an issue of fact existed as to whether Window World
acted reasonably. The court dismissed the remaining claims, holding that (i) Hampton
failed to plead fraud with particularity under Fed. R. Civ. P. 9(b); (ii) the covenant of
good faith and fair dealing did not apply because it is not an independent source of
duties separate from the licensing agreements; and (iii) the complaint contained no
allegations that the individual defendants acted with an independent personal stake and
therefore did not overcome the intracorporate conspiracy doctrine under which a
conspiracy cannot exist between members of the same entity.
In Massey, Inc. v. Moe's Southwest Grill, LLC, 2012 U.S. Dist. LEXIS 53676
(N.D. Ga. Apr. 17, 2012) and 2012 U.S. Dist. LEXIS 109081 (N.D. Ga. Aug. 3, 2012),
the court addressed the effect of alleged undisclosed kickbacks from a supplier to the
franchisor’s CEO. Here, franchisees alleged that in 2002 SOS-Foodservice Consultants
(“SOS”) was created to participate in the franchisor’s supply chain in northern Georgia.
Although the exact fact pattern is complex and disputed, essentially a Moe’s employee
arranged in 2001 for a third-party supplier to broker franchisees’ food purchases and
distribution of them. The supplier then paid a percentage of its sales to the Moe’s
employee, who formed SOS to hold the contract and collect the fees. By 2004, Moe’s
CEO Martin Sprock became an equity owner of SOS and began receiving distributions.
It was undisputed that none of this was disclosed in Moe’s 2001, 2002 or 2003 FDDs.
In 2004, Moe’s disclosed SOS’ existence and that Sprock was projected to become a
minority owner during 2004. In its 2005 FDD, Moe’s went further and disclosed Sprock
as a 50% owner of SOS and that it was therefore indirectly related to Moe’s. Moe’s also
discussed Sprock’s ownership at a franchise advisory council meeting. Moe’s moved
for summary judgment dismissing the claims based on its contractual one year
limitations period and its 2004 and 2005 disclosures. As the court aptly stated, key to
resolving the motion was when each plaintiff received the 2005 FDD.
First, the court granted summary judgment dismissing the claims of a group of
franchisees that received the 2005 FDD before August 2005 but did not file suit until
March, 2007. In an attempt to avoid summary judgment, the franchisees cited federal
securities law to argue that they had no duty to read the FDD and therefore could not be
charged with knowledge of its contents. Instead, the limitations should begin to run
upon their actual knowledge of the kickback. While the court agreed that securities law
was analogous, it rejected an actual knowledge standard and instead adopted a due
diligence standard. Applying that standard, “the court finds a reasonably diligent plaintiff
would have read the 2005 UFOC – the document through which Defendants are
charged to provide plaintiffs notice of any kickbacks and other crucial information – [and
therefore] Plaintiffs had knowledge of Sprock’s ownership by virtue of receiving the
UFOC.” Id. at * 25-26. The court also dismissed a claim brought by a franchisee who
could not establish that he ever ordered product through SOS. As to the remaining
defendants and claims, however, the court denied summary judgment based on
material facts being in dispute, including when exactly SOS was formed, when Sprock
received his equity interest and whether SOS actually benefitted plaintiffs such that
14379022.3
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there were no damages. Accordingly, the court let proceed claims for fraud, negligent
misrepresentation and RICO violations. The court also denied Massey’s motion for
reconsideration in an order reported at 2012 U.S. Dist. LEXIS 109081 (N.D. Ga. Aug. 3,
2012).
III.
INTELLECTUAL PROPERTY
Eureka Water Co. v. Nestle Waters N. Am., Inc., 690 F.3d 1139 (10th Cir.
2012), presents an interesting variety of facts and issues sure to please the discerning
reader. The primary focus of the case involves a drinking water manufacturer that could
not meet the demand requirements of its distributor/franchisees. Id. at 1143. Realizing
this, the manufacturer and trademark owner sold Eureka Water Co. a $9,000 royaltyfree, paid up license to produce and sell “purified water and/or drinking water made from
OZARKA drinking water concentrates” under the Ozarka trademark. Id. at 1144. When
Nestle ultimately bought the manufacturer and began selling spring water under the
Ozarka trademark, Eureka brought suit for breach of contract, tortious interference and
promissory estoppel. Despite successfully obtaining a $14.2 million judgment in the trial
court, Eureka’s victory was short lived when it was largely reversed by the Tenth Circuit
on appeal.
The court began its analysis by deciding whether the contract was for the sale of
goods, e.g., mineral concentrates, and therefore governed by the UCC or was a license
to use intellectual property, the Ozarka trademark, and therefore not subject to the
UCC. The issue was critically important because the district court had admitted
extrinsic evidence to prove the parties’ intent on the scope of the contract based on its
determination that the contract was governed by the UCC. The Tenth Circuit disagreed,
held that the contract was “predominately” a license and therefore excluded the parole
evidence concerning the scope of the license because the contract was unambiguous
on its face. Id. at 1148-49. Giving the reference to “purified water and/or drinking water
made from OZARKA drinking water concentrates,” its “plain meaning,” the court held it
unambiguous that Eureka had no exclusive right to use or exclude Nestle from using the
Ozarka trademark with respect to spring water and reversed the breach of contract
claim in Eureka’s favor.
The court next addressed the tortious interference claim. This claim was based
on: (1) Nestle ceasing to sell Eureka spring water at discounted prices for Eureka to resell to customers in its territory; and (2) thereafter selling spring water directly to
Eureka’s customers. Id. at 1154. Relying on its determination that Eureka had no
exclusive rights to sell spring water, the Tenth Circuit reversed the judgment in Eureka’s
favor because Nestlé’s sales were privileged.
Finally, the court addressed Eureka’s claim for promissory estoppel that the
district court dismissed based the breach of contract judgment. Id. at 1155-56. Here,
the court again reversed the district court and reinstated the claim based on Nestle’s
actual payments to Eureka for spring water over a certain period of time.
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Although City Cycle IP, LLC v. Caztek, Inc., 2012 U.S. Dist. LEXIS 121589 (D.
Minn. Aug. 24, 2012), only tangentially relates to franchising, it provides a cautionary
tale to would-be franchisors about protecting their intellectual property and business
ideas. The case involves claims by City Cycle against, Young, a would-be franchisee
and/or business partner for a pedal-powered, multi-passenger tour concept. City Cycle
arranged for the design and production of a vehicle, spent a summer giving tours in
Minnesota and then moved operations to Florida. When negotiations between Young
and City Cycle over a franchise broke down, Young contacted the vehicle’s
manufacturer, purchased two of them and began operating in Minneapolis. Taking up
City Cycle’s motion for a temporary restraining order, the court denied City Cycle the
relief it sought.
While the court found multiple bases upon which to deny relief, of particular
import are its findings that City Cycle failed to secure any protection in its contract with
the vehicle’s manufacturer. Absent such protection, the court held, there was no basis
to stop Young from buying vehicles from the manufacturer. The court also relied upon
the absence of proof that City Cycle was in a position to actually franchise its concept.
Finally, City Cycle also asserts that injunctive relief is necessary “to
protect Plaintiffs’ ability to attract new franchises to the Minneapolis area.”
[citation omitted] But there is no evidence that City Cycle has the ability to
sell franchises in the Minneapolis area, that it is even interested in selling
franchises, or that there are any potentially interested buyers of the
franchises. Thus, City Cycle’s concerns regarding its possible sales of
franchises are entirely speculative.
Ramada Worldwide, Inc. v. Petersburg Regency, LLC, 2012 U.S. Dist. LEXIS
142172 (D.N.J. Oct. 1, 2012), involved a summary judgment motion filed by Ramada
relating to an alleged breach of a licensing agreement. The Licensing Agreement
allowed Petersburg the use of Ramada marks in relation to the operation and use of the
facility as part of Ramada’s franchise system. The Agreement was for a 15 year term
and required Petersburg to pay Ramada periodic payments for royalties, service
assessments, taxes, interest, reservation system user fees, annual conference fees,
and other fees, plus interest.
The licensing agreement permitted Petersburg to terminate the license without
cause or penalty after five years if Petersburg provided six months written notice and
was not in default under the licensing agreement at the time notice was provided. If
Petersburg terminated the agreement early, however, it was required to pay liquidated
damages to Ramada. If litigation ensued, the agreement provided that the nonprevailing party would pay all costs, expenses, and reasonable attorney’s fees, as well
as any liquidated damages. Robert Harmon signed a personal guaranty to cover
Petersburg’s obligations under the Agreement.
On around February 2, 2010 defendants terminated the Licensing Agreement. In
response, Ramada demanded that defendants immediately discontinue all use of the
Ramada mark, and pay Ramada premature termination damages and outstanding fees
14379022.3
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through the date of termination. The defendants continued to use the Ramada marks to
advertise and rent rooms and failed to make the required payments. As a result,
Ramada brought suit seeking a permanent injunction and damages for trademark
infringement, as well as liquidated damages, payment of the recurring fees with interest,
and attorney’s fees and costs of suits. Ramada then filed a motion for summary
judgment to which the defendants failed to respond.
The Court granted summary judgment on almost all counts, finding that there
was a breach of the agreement, no defense to the breach presented, and that the
defendants had the requisite intent to infringe the trademarks (allowing for treble
damages). The only claim denied by the court was Ramada’s claim for interest on the
liquidated damages. The court found that the liquidated damages provision of the
contract did not provide for interest, and as such, Ramada was not entitled to interest on
that amount.
Leisure Sys., Inc. v. Roundup LLC, 2012 U.S. Dist. LEXIS 155948 (S.D. Ohio
Oct. 31, 2012), relates to the enforceability of a damages provision in a franchise
agreement. Plaintiff Leisure Systems, Inc. (“LSI”) licenses the Yogi Bear trade and
service marks to franchises to build and operate Yogi Bear Jellystone Park CampResorts. The defendants were all Jellystone franchisees and all were managed by the
same entity (“Morgan”).
Under the franchise agreements, the franchisees are required to pay royalty and
service fees, marketing, advertising, and promotional fees, and reporting certain
information periodically. If a franchisee fails to pay the amount due to LSI for five days
following written notice, LSI is entitled to terminate. Many of the franchise agreements
further provided for liquidated damages in the event of termination.
LSI sent a variety of notices of default for failure to pay to all of the defendants
over a several month period of time. In September 2010, LSI sent certified letters to two
of the defendants informing them of defaults and the need to cure. The letters were
addressed to Morgan in Sarasota Springs where the defendants had instructed LSI to
direct correspondence. On December 16, 2010, LSI emailed Morgan regarding the past
due accounts for all three franchisees, requesting that all accounts be brought current
by December 23, 2010. LSI received an email response from someone at Morgan
whose signature block said he was the CFO. In January 2011, LSI sent letters to
Roundup, Yogi Michigan and Lakeside at an address in Pittsford, New York which
defendants claimed they did not receive because they were not sent to the Sarasota
Springs address. In February 2011, LSI sent termination letters to each campground’s
operating address plus the address in Pittsford by certified mail, return receipt
requested. In March 2011, LSI’s counsel sent an email to defendants’ counsel agreeing
to reinstate the franchises if the franchisees paid all outstanding fees and provide
personal guarantees for all future obligations. Defendants’ counsel stated that
guarantees were generally acceptable, but asked to see the specific terms first. In May
2011, the guarantees had not been signed, and re-started the terminations set forth in
the February 24, 2011 letters. On June 3, 2011, LSI sent a letter telling defendants to
stop using LSI’s trademarks.
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In or around June 2011, LSI received a phone call from a guest at Yogi Michigan
complaining about his stay. LSI stated that they had terminated Morgan for the reasons
listed by the complainant, and that Morgan, through poor decisions and bad money
management had taken a successful operation and made it despicable. Morgan head
about this and other “defamatory statements” LSI was making.
LSI sued for breach of contract, Lanham Act and common law trademark
infringement claims. Defendants brought a variety of counterclaims including breach of
contract. Plaintiff filed a summary judgment motion on its breach of contract claim, its
trademark claims; and all of defendant’s counterclaims. Defendants filed a motion for
summary judgment on LSI’s breach of contract claim, LSI’s trademark claims, and
defendant’s breach of contract counterclaim.
First, the court addressed LSI’s claim that defendants breached the agreements.
Defendant rebuts that LSI failed to perform under the contract, that defendants did not
breach the agreements, and the LSI was not damaged.
In terms of LSI’s performance, defendants claim LSI breached the notice
provisions regarding default and termination and anticipatorily repudiated the franchise
agreements by requesting personal guarantees. In terms of the notice argument, the
court found that even though notice was not delivered exactly as required by the
contract, LSI substantially performed its notice obligations when it sent emails to
defendants’ CFO, even though he was not listed as the proper person to receive notice.
The notice provision providing addresses was not mandatory and there is no doubt that
actual notice occurred. The court found that LSI also properly abided by the termination
provision because actual notice of termination was provided to Morgan representatives
who actually received the notices, even though LSI did not send the notices to
defendants’ counsel. The court also found that LSI did not breach the agreements by
anticipatory repudiation when it requested personal guarantees because defendants
had already materially breached the franchise agreements at the time they requested
the personal guarantees.
The court also found that defendants’ failed to perform under the agreement
because there is no dispute that they were in default of their obligations and failed to
cure. Finally, there is no question that LSI was entitled to damages, but that issues of
fact remained as to when the termination actually occurred, which will impact the
damages calculation. On the issue of liquidated damages, the court found that the
stipulated damages provisions in the Roundup and Yogi Michigan agreements were
unenforceable penalties that are unreasonable and disproportionate in amount. The
Lakeside agreement did not have a provision, and the court denied summary judgment,
stating that LSI would need to prove the damages it believed it was entitled to at trial.
LSI also sought summary judgment on its unfair competition/trademark claims.
Because LSI properly terminated the defendants, their use of the LSI trademarks was
without LSI’s consent. The court granted LSI’s motion for summary judgment in relation
to the trademark claims.
14379022.3
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Moving to defendant’s counterclaims, the court rejected defendant’s claim that
LSI breached the contract, as discussed above. In relation to the defamation claim, the
court found there was a genuine issue of material fact as to whether the statements
made by LSI regarding what LSI was referring to when it stated that it had terminated
the defendants for the reasons listed by the complainant. The court also found there
was a potential factual issue as to LSI’s intent in making the statements, which turns on
what LSI knew when it made the statements, which would impact if the statements were
false or not, which would go to whether there was actual malice. On the tortious
interference claim and the Ohio Deceptive Practices Act claims, the court similarly found
that there were issues as whether there was actual malice, and denied summary
judgment.
For the claims for injunctive relief, the court found that there was no proof of
irreparable injury, and granted LSI’s motion for summary judgment in relation to
defendant’s counterclaim for injunctive relief.
In PSP Franchising LLC v. Dubois, 2013 U.S. Dist. LEXIS 28769 (E.D. Mich.
Feb. 4, 2013), the court granted a plaintiff’s motion for default judgment and motion for a
permanent injunction. The plaintiff is a franchisor of pet food and supply stores
operating under the Pet Supplies Plus (“PSP”) trademark. Franchisees use PSP’s
propriety systems, trademarks, sales materials, and other proprietary information.
Defendant Dubois entered into a franchise agreement with PSP under which he agreed
to operate a PSP store for five years. Dubois transferred the agreements to codefendant Pets of Wellington but agreed to remain personally liable to PSP for all
obligations under the franchise agreement.
Defendants defaulted under the franchise agreement by failing to pay PSP
required royalties and for merchandise delivered to the franchise. PSP sent a notice of
termination providing a thirty-day cure period. Defendants failed to cure so PSP
terminated the franchise. Defendants continued to operate the franchise using PSP
proprietary materials and marks. PSP then filed a complaint alleging, trademark
infringement, common law unfair competition, breach of contract, and accounting.
Defendants failed to appear. Plaintiffs filed a motion for a default judgment, a
permanent injunction, and attorney’s fees. The court found that an injunction was
proper given the defendants’ use of the plaintiffs’ proprietary marks and the fact that
plaintiff demonstrated actual success on the merits in relation to the trademark claims.
Plaintiffs also showed irreparable based on their no longer having control over
defendants’ operations. Given that defendants would not suffer harm, and that the
injunction was in the public interest, the court entered the permanent injunction and
default judgment.
Mr. Elec. Corp. v. Khalil, 2013 U.S. Dist. LEXIS 15723 (D. Kan. Feb. 6, 2013),
is a trademark infringement, unfair competition, and breach of contract action. Mr.
Electric alleged that after terminating Khalil’s franchise agreement, Khalil started a
different business called Alber Electronics, and that Alber Electronics continued to use
Mr. Electric’s marks without permission and engaged in unfair competition in violation of
14379022.3
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the Lanham Act and Kansas common law. Khalil counterclaimed that Mr. Electric
breached the franchise agreement in violation of Kansas common law.
Khalil moved for summary judgment on the trademark and unfair competition
claims, arguing that he was not personally liable for the use of the marks and that any
action he took was only in his capacity as an employee of Alber Electronics. The court
reasoned that an officer or agent of a corporation who directs or actively participates in
a tortious act can be personally liable. The court found that Khalil’s sole argument, that
he was using the marks on behalf of his employer, was in contravention of the agreed
facts submitted in the pretrial order, and therefore could not be used to escape liability,
including that he could not use his position as an employee of a company he was an
owner of to get out of the trademark and unfair competition claims. The court also
found unpersuasive Khalil’s statement that he simply did not have time to re-label the
equipment or other assets. Because Khalil participated in and oversaw the acts of
infringement, he was personally liable for trademark infringement.
The court further found that there was a likelihood of confusion when a former
franchisee continues to use the franchisor’s marks, that there was evidence of intent to
infringe, that there was actual confusion, and that there was a similarity in services and
manner of marketing. These factors, plus the fact that Mr. Electric had been using and
enforcing the marks for 16 years led the court to grant the summary judgment motion in
relation to the infringement claim and the unfair competition claim, which have nearly
identical elements.
Defendant moved for summary judgment on all of the plaintiff’s claims and
defendant’s counterclaims. In relation to the trademark and unfair competition claims,
the court entered judgment for the plaintiff, as discussed above. On plaintiff’s contract
claims, the court found there were issues of fact regarding defendant’s willingness to
perform under the contract, as well as a dispute over whether defendant breached the
agreement. The court denied the summary judgment motion on plaintiff’s contract
claims.
In relation to the summary judgment motion filed by defendant on his breach of
contract counterclaims, the court found that there were genuine issues of material fact.
In relation to the breach for failure to train, the court found that defendant had failed to
prove that he was willing to perform and that he failed to prove that a multi-day event
was a seminar, not training. In relation to the breach for failure to provide on-going
support and sales analysis, the court found plaintiff had properly provided evidence of
its efforts to assist defendant. In relation to the breach for failure to maintain
confidentiality, the defendant cited to the fact that plaintiff showed Khalil’s financial
information to its auditor, another franchisee, supply houses, and Home Depot without
defendant’s consent. The court found that the agreement specifically allowed plaintiff to
show the information to other franchisors, and granted summary judgment for plaintiff in
relation to that part of the claim. In relation to the other parties, plaintiff set forth
sufficient facts to controvert defendant’s claim, so the court denied summary judgment.
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7-Eleven, Inc. v. Dhaliwal, 2012 U.S. Dist. LEXIS 166691 (E.D. Cal. Nov. 20,
2012), involved a motion for preliminary injunction to eject a terminated franchisee from
a 7-Eleven store, to enjoin the franchisee from using the 7-Eleven trademarks or from
holding himself out as a 7-Eleven franchise, and to require the franchisee to deliver
items with 7-Eleven’s marks back to 7-Eleven. The court granted 7-Eleven’s motion for
a preliminary injunction.
Defendant Brinderjit Dhaliwal (“Dhaliwal”) entered into a franchise agreement
with 7-Eleven to operate a 7-Eleven store in Roseville, an area in Northern California
(the “Roseville Agreement”). The Roseville Agreement ended prematurely, after the
property owner at the location of the 7-Eleven Roseville location chose not to renew
with 7-Eleven at the end of the lease agreement. A provision in the Roseville
Agreement allowed Dhaliwal to elect within 180 days of the termination either a refund
of part of his franchise fee or to transfer to any 7-Eleven store available for franchise
and open for business as a 7-Eleven store for at least twelve months. Dhaliwal
expressed multiple desires to transfer to another 7-Eleven store to avoid paying a new
fee. 7-Eleven offered Dhaliwal opportunities outside of Northern California, but Dhaliwal
declined those offers because he wished to remain in Northern California. Although
some 7-Eleven stores were available in Northern California, Dhaliwal was unwilling to
pay the purchase prices that those independent 7-Eleven franchise owners were
requesting. Instead, Dhaliwal entered into a second franchise agreement with 7-Eleven
to operate a new store in Rocklin, California (the “Rocklin Agreement”). Because the
store was new, it was ineligible for the franchise fee waiver under the terms of the
Roseville Agreement.
The Rocklin Agreement required Dhaliwal to maintain a net worth of at least
$15,000 at all times. The purpose of this requirement was to ensure that the franchisee
was fully invested in the operation of the store. Financial difficulties with the Rocklin
store led to Dhaliwal to fall below the $15,000 net worth requirement twice. After
receiving a notice of breach after the first time it fell below the threshold requirement,
Dhaliwal was able to raise the net worth. Dhaliwal received a second Notice of Material
Breach on August 13, 2012, but was unable to raise the net worth that time, so 7-Eleven
terminated the Rocklin Agreement for chronic failure to maintain the required minimum
net worth as set forth in the Rocklin Agreement.
Although terminated, Dhaliwal continued to operate the Rocklin store including
using 7-Eleven marks and offering 7-Eleven products in violation of the Rocklin
Agreement which terminated the right to occupancy upon breach. 7-Eleven continued
to inspect the Rocklin store on a weekly and monthly basis and the store received
exceptional marks in all evaluated categories. Nonetheless, 7-Eleven filed suit against
Dhaliwal for breach of the Rocklin Agreement, trademark infringement, unfair
competition under the Lanham Act, and for violations of the California Unfair
Competition Law.
Dhaliwal argued that his failure to keep a net worth of at least $15,000 was a
direct result of 7-Eleven’s refusal to allow him to transfer to the Rocklin store without
paying a transfer fee, in violation of the Roseville Agreement and that 7-Eleven
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fraudulently induced Dhaliwal to open the Roseville store by misrepresenting the store’s
likely sales. The court disagreed. Dhaliwal entered into the Rocklin Agreement after
determining he could not pay the purchase price for existing franchises in Northern
California and 7-Eleven was not obligated to waive the fee when Dhaliwal opened a
new store. Thus, 7-Eleven was likely to succeed on the merits of its breach of contract
claim.
Regarding the (disputed) allegations of the store’s likely yearly sales, the court
held that Dhaliwal’s allegations were unlikely to form the basis for an affirmative defense
of fraudulent inducement. Dhaliwal failed to allege any facts that 7-Eleven knew the
figures were inaccurate – a necessary fraud element under California law. Accordingly,
7-Eleven’s success on the breach of contract claims was also likely.
To succeed on its Lanham Act claims, 7-Eleven was required to prove that
Dhaliwal’s use of the protected trademarks was both unauthorized and likely to cause
confusion. A franchisee’s use of trademarks is unauthorized if the franchisor properly
terminated the franchisee agreement. California law provides that a franchisor may
terminate a franchise agreement for good cause, and good cause is satisfied if the
franchisee violated the terms of a franchise agreement and was given required notice
and opportunity to cure. All of the requirements were satisfied, and success on the
merits of the claim was likely.
7-Eleven maintained that Dhaliwal’s continued operation of the store interfered
with 7-Eleven’s property rights, was trespass, and the continued occupation would
cause irreparable harm because the franchisor may no longer make productive use of
his property. The court agreed.
The court also considered whether, once it found a likelihood of success in a
trademark infringement claim, if that alone was sufficient to create a presumption of
irreparable harm – which used to be the standard. That old standard was called into
question by the United States Supreme Court in eBay Inc. v. MercExchange, LLC, 547
U.S. 388 (2006), relating to a patent infringement claim. The court noted that the Ninth
Circuit recently applied eBay in the copyright infringement context, see Flexible Lifeline
Sys. v. Precision Lift, Inc., 654 F.3d 989, 998 (9th Cir. 2011), but it was an open
question whether eBay and Flexible Lifeline Sys. extended to trademark infringement
cases. Citing other district court cases, the court determined that applying the
presumption was likely inappropriate and required 7-Eleven to provide evidence that it
would suffer irreparable harm if Dhaliwal was allowed to continue using the trademarks.
7-Eleven argued that its lack of control over its trademarks due to Dhaliwal’s
unauthorized use was enough to show irreparable harm. The court agreed and noted
that 7-Eleven did not have to show that Dhaliwal would take actions that would damage
7-Eleven’s goodwill or reputation; 7-Eleven has the right to maintain control over its
trademarks to prevent customer confusion.
Not surprisingly, in light of the above findings, the court found that 7-Eleven’s
inability to control its trademarks – which could not be compensated monetarily – was
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greater than Dhaliwal’s monetary loss and loss of goodwill in the community (which
could be addressed satisfactorily through monetary damages). Preventing Dhaliwal’s
unlicensed use of 7-Eleven’s marks was in the public interest.
Accordingly, the court granted 7-Eleven’s motion for preliminary injunction.
Live, Inc. v. Domino’s Pizza, LLC, 2013 N.C. App. LEXIS 84 (N.C. Ct. App.
Jan. 15, 2013), involved Domino’s interlocutory appeal of a preliminary injunction
prohibiting Domino’s from terminating Live’s pizza franchise.
Domino’s had previously delivered a notice of termination of Live’s franchise,
citing Live’s alleged default on various obligations regarding quality, cleanliness, and
food safety under the franchise agreement. The district court the granted Live’s request
for a preliminary injunction prohibiting the termination.
In response, Domino’s sought interlocutory review, claiming that the substantial
right at risk necessary to justify interlocutory review was its “ability to control its brand
and to enforce its contractual right to terminate a franchisee whose failure to comply
with Domino’s standards not only [did] irreparable harm to the franchise system’s
goodwill, but also pose[d] a health risk.”
Because the preliminary injunction only affected a single franchise location in
Domino’s national network of pizza stores, because Live’s franchise continued to be
subject to Domino’s supervision and inspection, and because the preliminary injunction
merely resulted in a continuation of business operations, the court concluded that there
was no substantial right at risk or irreparable harm to Domino’s as a result of preserving
the status quo pending resolution on the merits. Accordingly, it dismissed the
interlocutory appeal.
Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC, 2013 U.S. Dist.
LEXIS 25665 (S.D.N.Y. Feb. 22, 2013), involved a claim by Krispy Kreme for breach of
contract and trademark infringement against its franchisee after its franchisee stopped
performing under the franchise agreement and eventually declared bankruptcy. The
court previously entered a default judgment against the franchisee and referred the
matter to the magistrate judge for a determination of damages. The magistrate found
that (1) Krispy Kreme failed to prove breach of contract damages because they sought
damages based only on New York law even though their franchise agreement stated
that North Carolina law governed, (2) Krispy Kreme violated Federal Rule of Civil
Procedure 54(c) because it attempted to recover damages from a contract that was not
previously alleged in its verified complaint, (3) Krispy Kreme was entitled to recover
damages under the Lanham Act for filing and related costs, and (4) Krispy Kreme was
entitled to post-judgment interest. The court ordered that Krispy Kreme show cause as
to why Rule 11 had not been violated by their violation of Rule 54(c).
PC P.R. LLC v. El Smaili, 2013 U.S. Dist. LEXIS 28701 (D.P.R. Feb. 28, 2013),
involved an action by PC Puerto Rico against defendants alleging failure to pay for rent
and gasoline due under a sub-lease agreement covering the sale of Texaco branded
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petroleum products, for abandoning the service stations and failure to comply with their
post-termination obligations by retaining some form of possession over the gas stations
and exhibiting Texaco marks at both stations. The court found that because defendants
had ceased operation at the gas stations, but had not covered or removed the Texaco
name and signs on the stations per the agreement, this affected the value of the Texaco
marks and accordingly granted the motion for permanent injunctive relief, enjoining
defendants from using and displaying all Texaco marks at both gas stations
immediately, and also granted the motion to evict defendants from both stations.
Finally, the court granted PCPR’s request for damages for loss of income, equipment
damage, overdue payments for gasoline and rent, and all attorneys’ fees and costs.
Stanley Steemer Int’l, Inc. v. Hurley, 2013 U.S. Dist. LEXIS 10631 (S.D. Ohio
Jan. 18, 2013), involved a motion for a temporary restraining order to enjoin and restrain
a franchisee in violation of a franchise agreement from using protected trademarks or
from holding itself out as a franchise.
Defendant Susan Hurley (“Hurley”) was a long-time franchise owner of a Stanley
Steemer carpet and upholstery cleaning business in Kentucky. On July 26, 2009,
Hurley and Stanley Steemer entered into a Franchise Agreement (the “Agreement”)
giving Hurley an exclusive license to operate a Stanley Steemer carpet business in
certain counties in Kentucky. The Agreement required Hurley to make certain royalty
payments and to spend not less than 10% of gross sales on advertising. An audit
performed in December of 2012 found that Hurley was under-reporting sales and not
meeting her 10% advertising requirements.
In January of 2013, Stanley Steemer learned that Hurley was operating another
carpet business under the name “Custom Clean.” Calls made to the Stanley Steemer
phone number were automatically forwarded to a number for Custom Clean. When
confronted about this, Hurley claimed she “liquidated” her Stanley Steemer carpet
cleaning business and sold and/or leased it to a third party. The Agreement required
that Stanley Steemer have a right of first refusal to purchase any Stanley Steemer
carpet cleaning machine and/or vehicles. Hurley’s new business continued to use the
Stanley Steemer vans, cleaning equipment, and phone number.
Stanley Steemer sued for breach of contract, trademark infringement, and unfair
competition. The court found that Stanley Steemer had a strong likelihood of success
on the merits of all of these claims and granted the motion for a temporary restraining
order.
Happy’s Pizza Franchise, LLC v. Papa’s Pizza, Inc., 2013 U.S. Dist. LEXIS
10130 (E.D. Mich. Jan. 25, 2013), involved alleged Lanham Act violations for trade
dress and unfair competition after a former franchise investor sold his shares and
opened competing pizza restaurants. Plaintiff Happy’s Pizza Franchise, LLC
(“Happy’s”) is a franchisor of pizza restaurants in the Michigan area. Phil Almaki
(“Almaki”) invested in one of the stores as a shareholder. In July of 2007, Almaki sold
all his shares in Happy’s Pizza and subsequently opened up numerous Papa’s Pizza
(“Papa’s”) restaurants in close proximity to Happy’s restaurants. Happy’s sued alleging
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trade dress infringement and unfair competition under Section 43 of the Lanham Act.
Happy’s moved for summary judgment which the court denied.
On the trade dress claim, the court noted that Happy’s must prove three
elements: (1) that the trade dress in question was distinctive in the market place,
thereby indicating the source of the good it dresses; (2) that the trade dress was
primarily nonfunctional; and (3) that the trade dress of the competition good was
confusingly similar.
Happy’s argued that Papa’s copied its expansive menu, granite countertops,
black industrial style rugs, back-lit signage, neon signage, steel shelving, stacked pizza
boxes, and ceramic tiled floors and walls. The court disagreed that these generic
elements created identifiable trade dress. Additionally, Happy’s failed to provide
evidence that these elements were not commonly used in the industry, thus failing to
demonstrate that its trade dress was primarily nonfunctional. Regarding customer
confusion, Happy’s merely submitted an affidavit from a manager of one of its
restaurants stating that customers have frequently expressed confusion between
Happy’s and a Papa’s pizza restaurant over the phone and in person. The court found
that this was insufficient to satisfy its burden and did not undertake an analysis of a
common seven factor test. Because likelihood of confusion is the essence of an unfair
competition claim, the court additionally concluded that Happy’s was not entitled to
summary judgment.
Riedlinger v. Steam Bros., 2013 ND 14, 826 N.W.2d 340 (2013), involved a
dispute over the interpretation of a license agreement. Steam Brothers, Inc. (“Steam
Brothers”) was founded by Adam Leier (“Leier”) in 1983 performing residential and
commercial carpet cleaning and related services in North Dakota. Steam Brothers
franchised independently owned businesses to use its cleaning systems and service
marks in designated geographic territories. Five relatives of Leier operated separate
Steam Brothers’ businesses which required the payment of an on-going franchise fee.
In 1991, the five relatives became dissatisfied with the business relationship
requiring the franchise fee payment. Leier agreed to eliminate the fee and enter into
new license agreements. Under the new agreements, each licensee paid Steam
Brothers a lump sum of $12,000 to terminate the prior agreements. Under the franchise
agreements, the parties were required to disclose certain information about the day-today operations of their businesses. The new license agreements were silent about this
obligation.
In October 2008, Leier sold Steam Brothers to Jerry Thomas. Thomas claimed
that he received complaints and negative comments about the quality of work done by
some of the licensees under the Steam Brothers’ name. Accordingly, he asked the
licensees to provide a list of certain business information including chemicals used,
customer lists, brochures, marketing materials, business methods, and operating
procedures. The licensees refused to provide the information. Thomas subsequently
terminated the agreements for their refusal.
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The five licensees sued for a declaration of their rights and obligations under the
license agreements. First, they claimed that they did not have to provide the business
information to Steam Brothers under the terms of the license agreement. Second, they
sought to enjoin Steam Brothers from terminating the agreements for failing to provide
the requested information. The licensees moved for summary judgment which was
granted by the trial court. The Supreme Court of North Dakota reversed.
Regarding the obligation to provide the business information, the court found that
the license agreement was ambiguous. For example, the agreements included a
confidentiality provision which precluded Steam Brothers from divulging certain
business information communicated by the licensees. This contemplated that Steam
Brothers was allowed to obtain some business information from the licensees. Because
the agreements were ambiguous, summary judgment was inappropriate and remand
was required to resolve the factual issue regarding the parties’ intent.
Regarding termination, the court also found the agreement to be ambiguous.
The licensees claimed that the language in the agreement gave them a lifelong license
that could not be terminated unilaterally by Steam Brothers. The court noted that the
agreement included broad enough language about remedies that would allow Steam
Brothers to unilaterally terminate for a material breach of the contract. Resolution of this
issue was inappropriate for summary judgment so the court reversed and remanded for
further proceedings.
In Little Caesar Enters., Inc. v. Sioux Falls Pizza Co., 2012 U.S. Dist. LEXIS
108828 (D.S.D. Aug. 3, 2012), Little Caesar sued its former franchisee for
misappropriation of trade secrets and trade dress violations and sought issuance of a
preliminary injunction. Id. at *1. The trade secret at issue was Little Caesar’s “system”
of offering all day, every day ready-for-pick-up pizzas. Little Caesar claimed that the
franchisee’s continued use of the trade secret in the operation of a competing pizza
restaurant following expiration of the franchise constituted misappropriation. Id. at *3-4.
The district court denied Little Caesar’s motion for a temporary restraining order
or preliminary injunction. Id. at *34. The district court held that Little Caesar did not
demonstrate a likelihood of success on the merits because it was not able to
demonstrate that the system was more than a “common method for making pizza
generally known in the restaurant business.” Id. at *23-*24. Furthermore, Little
Caesar’s claim that the former franchisee failed to alter the trade dress of its “Pizza
Patrol” restaurant to remove the elements unique to Little Caesars was rendered moot
by the franchisee’s voluntary efforts to remodel the store. Id. at *24. While the district
court recognized that Little Caesar demonstrated a risk of irreparable harm because
loss of goodwill and trade secret misappropriation can be an irreparable harm, it
nonetheless held that the balance of harms weighed in the former franchisee’s favor
because it ran only one business and Little Caesar was a national business. Id. at *32.
The district court also held that there is a public interest tipped “slightly towards
unrestrained competition” and against protecting Little Caesar’s trade dress or secrets.
Id. at *33.
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Choice Hotels Int’l, Inc. v. Apex Hospitality LLC, 2012 U.S. Dist. LEXIS 94515
(W.D. Mich. June 13, 2012), involves a claim against a former franchisee for trademark
infringement, unfair competition and violation of the Michigan consumer protection act.
Here, the former franchisee continued using the “ECONO LODGE” family of trademarks
after termination of its franchise and Choice Hotels sued. After the former franchisee
failed to file an answer or other responsive pleading, the court entered a default against
it and its owners. This matter then came before the court on an ex parte motion for
default judgment and permanent injunction. The court ruled in favor of plaintiff on the
entry of default judgment and also issued injunctive relief.
Due to the defendants’ continued use of the trademarks after the franchise was
terminated, the court categorized the defendants as holdover franchisees. This meant
that their continued unauthorized use of the trademarks was sufficient to establish per
se likelihood of confusion amongst the public. The court then analyzed each element
required to establish trademark infringement and for issuing a permanent injunction.
Ultimately, the court issued a permanent injunction and held that Choice Hotels was
entitled to default judgment, but reserved its right to consider the issue of damages until
after Choice Hotels defendants submitted a compliance statement in accordance with
15 U.S.C. § 1116(a).
Century 21 Real Estate LLC v. N. State Props., LLC, 2012 U.S. Dist. LEXIS
82876 (E.D. Cal. June 14, 2012), came before the court on Century 21’s motion for
summary judgment on several issues including a breach of the franchise agreement
and claim for a permanent injunction prohibiting use of its trademarks and unfair
competition. Century 21 brought suit following its “for cause” early termination of the
franchise for failure to pay royalty fees. Century 21 argued, and the court agreed, that
Defendants breached the franchise agreements and that they were “hold-over
franchisees” by continuing to use the trademarks subsequent to termination of the
franchise. Such continuing unauthorized use, the court held, created a likelihood of
confusion in violation of both sections 1114(1)(a) and 1125(a)(1)(A) of the Lanham Act.
Accordingly, the court granted summary judgment on the breach of contract claim and
issued a permanent injunction under the Lanham Act.
Despite an unusual combination of sandwiches and adult entertainment, the facts
of Capriotti’s Sandwich Shop, Inc. v. Taylor Family Holdings, Inc., 857 F. Supp. 2d
489 (D. Del. 2012), otherwise lead to a routine denial of an injunction application.
Franchisor Capriotti’s Sandwich Shop, Inc. sued franchisee Taylor Family Holdings, Inc.
(“Taylor”) for breaching the franchise agreement governing permissible use of
Capriotti’s trademarks, trade names, and trade secrets by partnering with a gentleman’s
club for a sandwich-and-dance deal. The Court denied Capriotti’s application for a
preliminary injunction to stop Taylor from operating as Capriotti’s franchisee.
The court held that whether the franchisee’s president breached the franchisee
agreement by failing to prevent the gentleman’s club’s unauthorized use of the
franchisor’s name and marks was a subjective determination that depended on the
credibility of the club’s owner. However, the owner’s testimony had not been available
by declaration or deposition. Accordingly, the court could not judge the likelihood of
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success on the merits on the record before it. The court also denied the franchisee’s
motion to dismiss on personal jurisdictional grounds because any jurisdictional defenses
were waived by the franchisee’s filing another action in Delaware court, which
demonstrated its consent to Delaware’s jurisdiction. Instead, the court granted the
franchisee’s motion to transfer the action to Nevada because only a Nevada court had
personal jurisdiction over the club’s owner, who was the critical fact witness.
Choice Hotels Int’l, Inc. v. Jagaji, Inc., 2012 U.S. Dist. LEXIS 128048 (S.D.
Ohio Sept. 10, 2012), involves the franchisor’s efforts to enjoin a former franchisee’s
continued use of its marks and collect past due amounts following termination. Here,
Choice Hotels terminated the franchise following the franchisee’s failure to respond to
guest complaints and pay its royalties. Although the franchisee submitted evidence that
it paid certain of the outstanding amounts, it admitted not doing so within the permitted
cure period. Id. at *4. After receiving the termination notice, the franchisee continued to
use the marks in, around, and in publicity for, the motel, apparently based on the belief
that the franchise would be reinstated once the disputes between the parties were
resolved. Id. at *5. When Choice Hotels demanded the former franchisee immediately
cease its use of the marks for a second time, the franchisee claimed it did so, but
admitted continuing to display signage at the motel that contained the marks. Id. at *6.
In ruling on Choice Hotel’s summary judgment motion, the court held that there
was no genuine issue of material fact over the franchisee’s liability for trademark
infringement because the franchisee admitted continuing to display the franchisor’s
marks after termination. Id. at *8-16. The court relied on authority that “proof of
continued, unauthorized use of an original trademark by one whose license to use the
trademark had been terminated is sufficient to establish ‘likelihood of confusion.’” Id. at
*13-14. Thus, the court did not have to consider the eight factors that are typically
analyzed to determine whether the defendant's use of another's trademark is likely to
cause consumer confusion, which is "the touchstone of liability” under the Lanham Act,
15 U.S.C. § 1114. Id. The court further held that the franchisee’s liability under 15
U.S.C. § 1114 for its unauthorized use and display of the franchisor’s registered
trademarks also established liability for the franchisor’s claims of federal unfair
competition under 15 U.S.C. § 1125(a), deceptive trade practices under Ohio Rev.
Code § 4165.01 et seq., and Ohio common law claims for trademark infringement and
unfair competition. Id. at *16-17. Pursuant to 15 U.S.C. § 1116, the court set a hearing
to determine the scope of injunctive relief, the proper measure of damages and lost
profits for the franchisee’s infringement of the franchisor’s marks, and attorneys’ fees.
Id. at *17-19.
Hidden Values, Inc. v. Wade, 2012 U.S. Dist. LEXIS 70474 (N.D. Tex. May 18,
2012), presents an interesting suit based upon trademark and trade dress infringement,
unfair competition and breach of contract arising out of the defendants’ publication of an
advertising directory for children that was confusingly similar to the plaintiff’s directory.
The plaintiff, Hidden Values, Inc. (“HVI”), created and published advertising directories.
HVI entered into a licensing agreement with defendants Anthony Wade and Jessica
Wade to publish an HVI advertising directory entitled “Kids Directory®” in the north
Georgia market. HVI contended that the Wades created a competing directory soon
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after entering the licensing agreement through Better Together LLC (“Better Together”)
that copied the “look and feel” of HVI’s directory. In response to the HVI’s complaint,
Jessica Wade and Better Together filed a joint answer and asserted eight
counterclaims. In the case at bar, the court was considering HVI’s motion to dismiss the
following counterclaims: violation of the Texas Consumer Protection Deceptive
Practices Act (“DTPA”); fraud; negligent misrepresentation; declaratory judgment;
trademark cancellation; money had and received; conspiracy; and alter ego.
In analyzing the claims for violation of the DTPA, negligent misrepresentation,
money had and received, conspiracy and alter ego, the court found that Better Together
was not a party to the licensing agreement between the Wades and HVI. Therefore, the
court granted HVI’s motion with respect to Better Together on the aforementioned
claims because Better Together could not have relied upon any “disclosures or
omissions” under the agreement to support the claims. Id. at *10. The court also
moved, sua sponte, to dismiss Better Together’s declaratory judgment claim based
upon the same reasoning.
Regarding Jessica Wade, the court determined that the DTPA, fraud, negligent
misrepresentation, conspiracy and alter ego claims were subject to the heightened
pleading standard under Rule 9(b) of the Federal Rules of Civil Procedure. The court
denied HVI’s motion as it related to the conspiracy and alter ego claims because the
court found that the Jessica Wade alleged sufficient facts in her counterclaims to
support both allegations. However, the court granted HVI’s motion with respect to
Jessica Wade’s fraud claim because she failed to specify what information was withheld
by HVI that she and Anthony Wade relied upon in entering into the licensing agreement
with HVI. Additionally, the court granted HVI’s motion with respect to the money had
and money received claim because, under Texas law, this cause of action is an
equitable remedy available only when no contract exist between the parties. Since
there was a contract that covered the subject matter of Jessica Wade’s money had and
money received claim, the court determined that it should be dismissed. Finally, the
court denied HVI’s motion with respect to the defendants’ trademark cancellation
counterclaim because the court found that the defendants alleged sufficient facts
relevant to the strength of HVI’s trademark in order to support a trademark cancellation
claim.
Gharbi v. Century 21 Real Estate LLC (In re Gharbi), 2012 U.S. Dist. LEXIS
95538 (W.D. Tex. July 10, 2012), arose out a bankruptcy court’s award of attorney’s
fees under the Lanham Act, 15 USC § 1117. Since 1999, Gharbi operated a real-estate
business as a franchisee of Century 21 pursuant to three franchise agreements for
different locations. These agreements gave Gharbi a limited right to use the Century 21
mark in performance of the franchise agreements. In 2005, Century 21 sent Gharbi a
notice of termination after he failed to pay amounts due under the agreements. Gharbi
later entered bankruptcy and listed ownership of several websites which used the
Century 21 name on his bankruptcy schedules. Century 21 filed claims against Gharbi
asserting that Gharbi: (1) violated 15 USC §§ 1114(1)(a) and 1125(a) (unauthorized use
of a registered mark and false designation); (2) violated 15 USC § 1125(d) (intentional
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cybersquatting); and requested statutory damages and judgment on the dischargeability
of damages under 15 USC § 523(a)(6). Id. at *3.
On April 26, 2010, the bankruptcy court granted Century’s 21 motion for
summary judgment on the unauthorized use of a registered mark and false description
claims and after a hearing found three violations of intentional cybersquatting under
section 1125(d). The bankruptcy court awarded $75,000 in damages, and held that
amount to be nondischargeable under section 523(a)(6). The district court affirmed this
decision and remanded to the bankruptcy court for a determination of Century 21’s
application for attorney’s fees. Id. at *4. On July 28, 2011, the bankruptcy court granted
an award of attorney’s fees in the amount of $147,996, the full award sought by Century
21. Gharbi appealed.
Section 1117 of the Lanham Act allows a court to award attorney’s fees to a
prevailing party in “exceptional cases” such as when “the defendant’s trademark
infringement can be characterized as malicious, fraudulent, deliberate, or willful, and… it
has been interpreted by courts to require a showing of a high degree of culpability.” Id.
at *5 (citation omitted). On appeal, Gharbi did not challenge the bankruptcy court’s
findings that Gharbi misused and misappropriated Century 21’s name and business
reputation, but nevertheless asserted that the amount of attorney’s fees awarded was
excessive. However, because Gharbi did not undertake any analysis or include any
supporting evidence in support of his argument, the district court found that the
bankruptcy court did not abuse its discretion in granting Century 21’s full claim for
attorney’s fees.
Choice Hotels Int’l, Inc. v. Kusum Vali, Inc., 2012 U.S. Dist. LEXIS 62211
(S.D. Cal. May 3, 2012) focused particularly on the nature and propriety of awarding
damages for violations of trademark law under the Lanham Act (15 USC §§ 1117).
Plaintiff Choice Hotel asserted claims against defendants for (1) infringement of a
federally registered trademark under 15 USC § 1114; (2) false designation of origin
under 15 USC § 1125(a); (3) trademark infringement under California law; and (4)
violation of the California Unfair Competition Act. The plaintiff had a franchise
agreement with defendants permitting defendants to operate an “ECONO LODGE” hotel
franchise in California. The plaintiff sent a notice of termination after defendants failed
to pay fees required under the franchise agreement. In July – August 2011, the court
entered separate default judgments against the defendants. Defendants moved to set
aside the default judgments.
The factors a court will consider in exercising discretion to enter a default
judgment include: (1) prejudice to plaintiff; (2) the merits of plaintiff’s claims; (3) the
sufficiency of the complaint; (4) the sum of money at stake; (5) the possibility of dispute
as to material facts; (6) any excusable neglect; and (7) the strong policy favoring
decisions on the merits. Id. at *4, citing Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986).
The court found that these factors weighed in favor of the plaintiff because defendants
did not participate in the litigation and the plaintiff would thus be left without a remedy in
the absence of default judgment. Further, the plaintiff established the merits of its
trademark infringement and false designation claims by showing that defendants
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continued to use the “ECONO LODGE” marks without the plaintiff’s consent from March
2010 to June 2011. Id. at *6. Accordingly, the plaintiff was also able to show likelihood
of success on the merits and irreparable harm to warrant granting a permanent
injunction against defendants’ continued use of the “ECONO LODGE” marks. Id. at *78.
Finally, the court analyzed actual damages under the Lanham Act which provides
that a trademark owner may recover: (1) the defendant’s profits; (2) any damages
sustained by the plaintiff; and (3) the costs of the action. 15 USC § 1117. Although the
plaintiff claimed that it was entitled to recover defendant hotel’s gross revenue during
the infringement period, the court found that the amount of royalties a plaintiff otherwise
would have received is the appropriate measure “in a case such as this”. Choice Hotels
at *9. Under the franchise agreement, the plaintiff was entitled to 8% of the monthly
gross room revenues. Accordingly, the court awarded plaintiff 8% of the defendant’s
estimated gross income for the infringing period (a total of $13,120). Id. at *10. The
court declined to award outstanding franchise and other related fees owed by
defendants as these were not the result of the infringement and the plaintiff had not
made a breach a contract claim. Finally, the court found defendant’s conduct to be
“willful” to warrant awarding plaintiff’s attorney’s fees as the defendants continued to
plaintiff’s marks for 15 months after the termination of the franchise agreement. Id.
Despite the “willful” conduct, the court also declined to award treble damages, finding no
“non-punitive reason” for such an award. Id. at *12.
Luxottica Retail N. Am., Inc. v. Haffner Enters., Inc., 2012 U.S. Dist. LEXIS
56258 (M.D. Fla. Apr. 23, 2012), addresses the remedies available to franchisors for
claims of breach of contract, trademark infringement, and unfair competition. Here, the
former franchisee owned two Pearle Vision franchises. When the franchise for the first
location expired, the franchisee immediately reopened under the name “New Tampa
Vision Center” in violation of a post-termination restrictive covenant. The franchisee
simultaneously closed and abandoned the second location, the franchise for which did
not expire for another ten months, and left a sign on the door directing customers to the
New Tampa Vision Center. Although the second location closed for business, the Pearl
Vision marquee remained hanging above its door.
Following the franchisee’s failure to respond to the law suit, the court granted
Pearl Vision’s motion for default judgment and awarded damages for: (1) past due
royalties, merchandise and advertising; (2) expectation damages for lost royalty
payments at the second location; and (3) attorneys’ fees and costs. The court was
more exacting, however, with regard to Pearl Vision’s claims for damages under the
Lanham Act and for breach of the restrictive covenant. While the court agreed that
Pearl Vision could seek recovery of defendants’ profits from the trademark infringement
in principle, it disagreed with Pearl Vision’s method for calculating those profits –
projecting forward the historical profits from the second location. Instead, the Court
ruled that the defendants realized no profits at the second location while infringing the
trademark because it did not begin until they had closed the location. Furthermore,
Pearl Vision submitted no evidence establishing that any business was diverted from
the abandoned second location to the New Tampa Vision Center. The Court likewise
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rejected Pearl Vision’s method for calculating lost profits from breach of the restrictive
covenant. Pearl Vision essentially sought expectation damages – lost royalty payments
based on historic royalty payments at the New Tampa location. But the Court ruled that
because the New Tampa franchise had expired by the terms of the contract, there could
be no claim for expectation damages at that location. Pearl Vision was also not entitled
to collect damages on the breach of restrictive covenant because it failed to submit any
evidence showing that it had lost profits at another location on account of the
defendants’ breach. Nonetheless, the Court concluded that Pearl Vision was entitled to
an injunction against the New Tampa location.
Marathon Petroleum Co., LP v. Future Fuels of Am.,.LLC, 2012 U.S. Dist.
LEXIS 71814 (E.D. Mich. May 23, 120) involved the use of trademarks after the
franchise agreement was terminated. Marathon Petroleum Company LP (“Marathon”)
terminated its franchise agreement with Future Fuels of America, LLC (“Future Fuels”)
that allowed Future Fuels to distribute Marathon-based products. Soon afterward,
several of the gas stations operated by Future Fuels were sold to Oasis Oil, LLC
(“Oasis”). The gas stations sold to Oasis continued to display Marathon’s trademarks
after the sale. Marathon filed a complaint against Future Fuels and Oasis and, among
other things, made claims of a Lanham Act violation and conversion against Oasis.
Oasis moved for summary judgment.
Oasis argued that Marathon did not establish actual consumer confusion and that
actual confusion is necessary to obtain damages under the Lanham Act. The court,
however, held that a plaintiff need not show actual confusion to obtain an award of
damages where recovery can be based on defendants’ profits. Moreover, even if actual
confusion were required, the court found that Marathon still put forth evidence of actual
confusion sufficient to defeat summary judgment on that basis. This evidence included
questions of fact as to Oasis’s involvement in operating stations that used Marathon’s
trademarks without permission. The court therefore denied Oasis’s motion for summary
judgment on the Lanham Act claim.
Oasis also argued that it did not control the stations in question and thus was
entitled to summary judgment on Marathon’s conversion claim. The court found a
genuine issue of fact as to Oasis’s control, however, and therefore denied the motion.
Rossi Ventures, Inc. v. Pasquini, LLC, 2012 U.S. Dist. LEXIS 90538 (D. Colo.
Apr. 9, 2012), is a story of a family business seemingly gone bad. The story begins with
siblings Melinda and Antonio “Tony” Pasquini opening a pizza restaurant using their
mother’s recipes (“Pasquini’s #1”). To own and operate the business Tony formed
Pasquini’s Pizzeria, Inc. (“PPI”) which he and Melinda owned. In 1994, Tony opened a
bakery, Pasquini’s Baking, in 1998 PPI entered into a license agreement with an outside
company for the operation of a second Pasquini’s Pizzeria (“Pasquini’s #2”) and in 2001
Tony and Melinda, as 50/50 partners, opened a third Pasquini’s Pizzeria (“Pasquini’s
#3”). In 2004, Tony decided to get out of the pizza business. Accordingly, for a total of
approximately $1.4 million, Melinda purchased from Tony and PPI their interest in
Pasquini’s #3 and Pasquini #1, along with related permits and licenses, the associated
goodwill and the “use of the name(s) ‘Pasquini’ Pizzeria’ or any variation thereof.” Id. at
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*8. As part of this transaction, Tony acknowledged that Melinda acquired an exclusive
area for the operation of Pasquini’s #1, although the boundary of the exclusive area was
not fixed by the agreement.
Tony closed Pasquini’s Baking in 2005, and Melinda purchased the equipment,
moving it to Pasquini’s #3. Also, by 2006, Melinda had relinquished all her stock in PPI
and Tony was the sole remaining shareholder. Pasquini’s #3 closed in 2007, and
Melinda moved the baking equipment to Pasquini’s #1. Beginning in 2007, Tony
(through PPI) entered into three franchise agreements for the operation of three more
Pasquini’s Pizzerias. Each of these agreements established an exclusive area or
territory for the franchise, and contained PPI’s warranty that it owned the exclusive right
to use the Names and Marks to establish Pasquini’s Pizzeria restaurants in the U.S. and
Canada. Melinda was aware that Tony was granting franchises for restaurants using the
name Pasquini’s Pizzeria, and assisted in training the franchisees and attended their
grand openings. Melinda testified that she did not object at this time because (1) she
“would never get in the way of letting [her] brother open a restaurant so long as he
doesn’t get in the way of [her and her] restaurants;” and (2) she was selling desserts
made by Pasquini’s bakery to the new franchises. Id. at *11.
Ultimately, however, Tony eliminated the requirement that the franchises
purchase desserts from Pasquini’s bakery. The bakery ultimately closed in 2010. The
relationship between Tony and Melinda continued to deteriorate after this fact. The
straw that broke the camel’s back occurred in 2011 when Tony announced that he
planned to open a seventh Pasquini’s (“Pasquini #7”) that Melinda contended would
directly infringe on Pasquini’s #1’s exclusive area. When the parties were unable to
reach a resolution, Melinda commenced litigation, asserting three claims for relief: (1)
unfair competition in violation of the Lanham Act; (2) common law unfair competition
and trademark and trade name infringement; and (3) deceptive trade practices. She
moved for a preliminary injunction, seeking to enjoin the defendant’s use of the name
“Pasquini’s Pizzeria” in connection with Pasquini’s #7.
The court first found that the operation of Pasquini’s #7 infringed on the exclusive
area acquired by Melinda when she purchased Pasquini’s #1. The court’s decision was
based on the following factors: (1) it made no sense that extremely valuable territory
would have been left as a “no man’s land;” (2) an advertising flier sent out by Pasquini’s
#1 when Tony owned a majority interest contained a map of the store’s delivery area,
and included the contested area; and (3) one of the principals involved in the operation
of Pasquini’s #2 testified at the hearing that Pasquini’s #1 territory included the
contested area. Id. at *16. The court also found that the requested preliminary
injunction would preserve and not disrupt the status quo. Id. at *20.
The court then analyzed Melinda’s likelihood of success on the merits. Id. at *2127. The court found that the mark at issue had acquired a secondary meaning and was
protectable, despite the fact that it was the defendant’s surname, that Tony and PPI
were using an identical mark, and that there was abundant evidence of actual customer
confusion. The court further found that Melinda’s acquiescence in Tony’s earlier
franchising efforts did not bar her requested relief since Tony’s opening of Pasquini’s #7
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had exceeded the scope of her consent. Finally, the court found that Tony’s
unauthorized use of the name Pasquini’s Pizzeria in connection with Pasquini’s #7
would result in irreparable injury to Melinda, and that defendants had caused their own
injury by opening Pasquini’s #7 in violation of Melinda’s exclusive area and in the face
of a cease and desist letter sent by Melinda’s lawyers prior to its opening. Accordingly,
the court granted Melinda’s motion for preliminary injunction and preliminarily enjoined
the defendants from using the name “Pasquini’s Pizzeria.”
NBT Assocs. v. Allegiance Ins. Agency CCI, Inc., 2012 U.S. Dist. LEXIS
55041 (E.D. Mich. Apr. 19, 2012), is a decision on the franchisor’s summary judgment
motion for trademark infringement, unfair competition, breach of franchise agreements,
breach of the confidentiality/non-competition covenants, unjust enrichment, implied-infact contract, and tortious interference with business relationship. The defendant
franchisees and their principals were insurance agencies in Phoenix, Arizona operating
under the name of Advasure. The franchisor ultimately terminated the franchises for
failure to pay royalties and breach of an interim settlement agreement. Unfortunately for
the franchisor, the court did not take kindly to its summary judgment motion and denied
it.
Specifically, the Court denied the motion on with respect to the franchisor’s
trademark infringement and unfair competition claims because genuine disputes of fact
existed as to whether the defendants engaged in unauthorized use of the Advasure
mark both before and after the November 2011 termination of the franchise
agreements. The court also denied the plaintiff’s motion as to his breach of contract
and breach of confidentiality and non-competition agreements because, under Michigan
law, he who commits the first substantial breach of a contract cannot maintain an action
against the other contracting party for failure to perform. Here, the court found a
question as to whether the franchisor breached the franchise agreements first by failing
to ensure that carriers were in place for the franchisees to sell policies in Arizona.
Further, the plaintiff offered no evidence of the reasonableness of the non-competition
agreement, a requirement to prevail on this claim. The court further denied the
plaintiff’s claims against the alleged silent partner for unjust enrichment, implied-in-fact
contract, and tortious interference with business expectancy because, even if these
doctrines could bind a non-party to an enforceable contract executed by other
individuals, the facts underlying these claims were far from undisputed.
In Novus Franchising, Inc. v. Dawson, 2012 U.S. Dist. LEXIS 103025 (D. Minn.
Jul. 25, 2012), the district reviewed a franchisor’s request for a preliminary injunction
prohibiting a former franchisee, Dawson, and his new company, “CarMike,” from using
Novus’ trademarks and operating a competitive business in violation of a posttermination non-competition covenant. There appears to have been no dispute over the
propriety of the franchise termination, but there was a lively dispute over both personal
jurisdiction and enforcement of the non-compete.
The court began by determining that it had personal jurisdiction over Dawson, but
not CarMike. It reached this conclusion based on Dawson’s decision to contract with
Novus, a Minnesota corporation, and his franchise agreement’s Minnesota forum
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selection clause. CarMike, however, had never purposefully availed itself of doing
business in Minnesota. Interestingly, Novus did not raise and the court did not address,
whether CarMike’s use of the Novus trademarks was a basis to assert jurisdiction over
it. The court next turned to the non-competition covenant which sought to prohibit
Dawson from engaging in any “’related business that is in any way competitive with or
similar to’ Novus's business for a period of two years following termination of the
franchise agreement.” Id. at *5. The court refused to enforce the agreement because
“a non-compete agreement that extends to all business products and services that
compete with the Novus business, even those products and services that do not involve
Novus trademarks or Novus products, is likely to be more restrictive than necessary to
protect Novus's legitimate business interests.” Id. at *6. The court did, however, grant
an injunction prohibiting Dawson from continuing to use Novus’ trademarks. Finally, the
court granted Novus’ request for default judgment as to all counts of its complaint
except for the non-compete based on Dawson’s failure to file an Answer. The court did,
however, give Dawson 60 days to file an Answer prior to entering a permanent
injunction on Dawson’s use of Novus’ marks and request for monetary judgment.
In its not so “sizzling” action, Western Sizzlin Corp. v. Pinnacle Bus. Partners,
LLC, 2012 U.S. Dist. LEXIS 77490 (M.D. Fla. June 5, 2012), Western Sizzlin
Corporation (“Western”) alleged that Pinnacle Business Partners, LLC (“Pinnacle”) was
committing trademark infringement. Following a bench trial the court found that
Western Sizzlin had a franchised location in Kissimmee, Florida from 1995-2005.
Following termination of that franchise, the building’s landlord and another person
formed Pinnacle and took over the restaurant. For some time Pinnacle and Western
discussed entering into a franchise and Pinnacle paid Western royalties for the use of
the “Western Sizzlin” marks during those negotiations. Ultimately, Pinnacle opened a
“Sizzlin Grill” at the location and distinguished itself from a Western franchisee by
(1) changing its name and sign, (2) renovating its interior and exterior, and (3)
changings its operating procedures. Despite these changes, Western alleged
trademark infringement based on: (1) the name “Sizzlin Grill” and its store design
shared the work “Sizzlin” and had similar “font, style and color scheme;” and
(2) Pinnacle’s operations, services and advertising methods were nearly identical to
Western’s. The ultimate issue, the court held, “[was] whether a customer would confuse
Sizzlin Grill with a Western franchise location.
In considering that issue the court found that (1) as to trade name and signage:
Western had a relatively strong mark, and that the signage was sufficiently different to
prevent customer confusion between the two brands, despite some similarity; (2)
customer confusion was unlikely due to (a) the interior and exterior renovations done by
Pinnacle, (b) the fact that the restaurant’s customer base was different in demographic
as Pinnacle’s clientele was primarily tourists visiting Walt Disney World, and Western
had no restaurants in the State of Florida; (3) the two restaurants’ operations were
distinct in that Pinnacle’s restaurant was a low-cost flat rate buffet, and Western was a
traditional family style restaurant. The Court did not find the similarity in the two
restaurant’s business to be a persuasive factor of infringement; and, (4) lastly, and most
importantly to the Court, Western could not produce credible evidence of actual
confusion.
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IV.
LIABILITY THEORIES
A.
BREACH OF CONTRACT
1.
Termination and Non-Renewal
Johnson v. Dunkin’ Donuts Franchising L.L.C., 2012 U.S. Dist. LEXIS 69803
(W.D. Pa. May 18, 2012), involves claims by would-be operators of a new bakery in
Pittsburgh to supply franchisees there. In 2006, Dunkin’ and plaintiffs began discussing
what became known as the “Pittsburgh Supply Plan.” The plan was expected to “bring
jobs and prosperity to Homewood, an area of the [c]ity with a large minority population,”
through the building of two commissaries, one of which was to be operated by plaintiff
Pittsburgh Bakers Dozen, Inc. (“PBD”), an entity owned by Edward Grandy. Id. at *6,
*61-*62. PBD was assisted in its efforts to become an approved supplier for Dunkin
Donuts by two independent contractors, Derrick Johnson and Charles Thompson, and
Dunkin’ ultimately entered into a contract for the new bakery with PBD. Johnson,
Grandy and Thompson were all African-American businessmen. When Dunkin’ later
withdrew for the contract because one franchisee allegedly objected to being required to
purchase goods manufactured by the African American community, plaintiffs sued
alleging breach of contract, promissory estoppel race discrimination under 42 U.S.C.
§ 1981. Dunkin’ moved to dismiss pursuant to Rule 12.
As to the promissory estoppel claim, the court largely rejected Dunkin’s motion.
The court held that under Pennsylvania law the existence of a written contract did not
per se prohibit a promissory estoppel claim, especially as to the individual plaintiffs who
were not parties to the contract, and with respect to a contracting party alleging
promises outside of the written agreement. The court did, however, dismiss some of
the plaintiffs’ promissory estoppel claims for failing to plead specific promises that
Dunkin’ allegedly made, but granted leave to file an amended complaint to address the
deficiencies. The court did, however, accept Dunkin’s argument concerning the racial
discrimination claims. The individual plaintiffs lacked standing, the court held, because
they were not parties to the written agreement or the oral Pittsburgh Supply Plan. In
addition, even though PBD had standing to sue Dunkin Donuts under §1981 as a party
to the written agreement, the court decided it failed to allege sufficient facts to show
purposeful discriminatory intent by Dunkin Donuts based upon “unwelcomed comments”
by one Dunkin Donuts franchisees.
In what can only be described as a convoluted, but interesting, fact pattern,
Brockman v. Am. Suzuki Motor Corp., 2012 U.S. Dist. LEXIS 112424 (D.S.C. Aug.
10, 2012), addresses what claims a would-be and former Suzuki dealership can bring
against Suzuki. The basic facts of this case are that between 2007 and 2009 Brockman
signed a series of four letters of intent with Suzuki to become a dealer. Based on those
letters of intent, Brockman rented land upon which it built a dealership. In February
2010, Brockman opened its dealership, but soon thereafter sold it to another dealer
pursuant to a buy-sell agreement. By the time Brockman tried to repurchase the
dealership, Suzuki had increased the minimum amount of floor-plan financing required
and Brockman could not secure the higher limit. It therefore decided to sue for a variety
14379022.3
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of claims under both common law and South Carolina’s Manufacturers, Distributors and
Dealers Act (“Act”). The basic premise of its suit was that Suzuki’s knowledge and
encouragement of another dealer’s deceptive marketing practices in 2007-2008 that
garnered significant negative press precluded Brockman from securing the increased
floor-plan financing and poisoned the local market. Suzuki moved for judgment on the
pleadings dismissing Brockman’s claims.
The court first took up Brockman’s claims under the Act for unconscionable
conduct, price discrimination, unfair competition and failure to renew. Although the
court rejected Suzuki’s argument that Brockman lacked standing to pursue any claims
under the Act because it was not a dealer, the court nonetheless dismissed the claims
because (1) the alleged unconscionable conduct did not in fact prevent Brockman from
opening its dealership; (2) only dealers could pursue price discrimination claims;
(3) there could be no unfair competition because Suzuki did not own the dealer that
engaged in the deceptive marketing; and (4) Brockman sold its franchise such that it
had none to “renew.” Despite dismissing all claims under the Act, the court did give
Brockman leave to re-file the unconscionable conduct claim, although it noted its
skepticism of the claim. Next, the court addressed the three common law claims which
did not fare significantly better. The court dismissed the unjust enrichment claim based
on Suzuki unfairly benefiting from increased sales by the deceptive dealer because the
other dealer, not Brockman, enriched Suzuki. The court let stand a negligence claim
after holding it to be timely. Finally, the court dismissed the breach of contract claim
because there was no contract after Brockman sold its dealership.
B.A. Wackerli, Co. v. Volkswagen of Am., Inc., 2012 U.S. Dist. LEXIS 115369
(D. Idaho Aug. 13, 2012), is the end of the line for a Volkswagen and Audi dealer that
failed to honor its commitment to build a new facility for its dealerships. The story
begins with Wackerli owning and operating a triple-breasted sales facility selling
Subaru, Volkswagen and Audi automobiles. Following some financial difficulties,
Wackerli filed for bankruptcy protection. To save its Subaru dealership, Wackerli
agreed to sell only Subaru vehicles from its existing facility. Not surprisingly, Audi and
Volkswagen were not pleased by this decision and moved to terminate Wackerli’s
dealerships. To prevent that termination, Wackerli signed a settlement agreement
promising to construct a new facility to house Volkswagen and Audi sales and
stipulating that its failure to do so by a specified date would be sufficient cause to
terminate the dealerships. When three months before the completion deadline it was
evident that Wackerli would not complete the facility on time and had no real intention of
ever completing it, Audi and Volkswagen began the termination process.
Wackerli’s first stop to prevent termination was the Idaho Transportation
Department. There it obtained an evidentiary hearing at which it argued that completing
the new facility was impossible because Audi and Volkswagen had not allocated
Wackerli sufficient inventory. Wackerli also obtained a four month stay of termination.
Eventually, however, the hearing officer specifically rejected Wackerli’s argument and
found no basis to prevent the termination. Finding that Wackerli’s agreement to build a
new facility and acknowledgment that failure to do so on time justified termination, the
hearing officer recommended permitting termination. Wackerli then appealed to the
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Director of the Transportation Department which eventually affirmed the decision. Next,
Wackerli filed two separate state court actions and obtained a TRO preventing
termination in one of them. Both cases were subsequently removed, leading to this
decision. Here, while acknowledging that Wackerli likely met three of the four prongs
necessary for a preliminary injunction, the court permitted termination to occur because
Wackerli had no likelihood of success on the merits. Adopting many of the hearing
officer’s findings, the court held that Volkswagen and Audi were justified in terminating
their dealership based on the failure to complete the facility. Moreover, the court held, if
supplying a specific quantity of inventory was necessary to permit Wackerli to build the
new facility, Wackerli needed to have negotiated that term. Having failed to do so, there
was no basis to prohibit termination.
In Astral Health & Beauty, Inc. v. Aloette of Mid-Miss., Inc., 2012 U.S. Dist.
LEXIS 146671 (N.D. Ga. Oct. 1, 2012), the plaintiff was a franchisor that sold skin care
and beauty products under the trade name Aloette through franchisees. Defendants,
two franchisees with separate but identical franchise contracts, had had their contracts
expire without undertaking the necessary affirmative acts to create a successor term to
the contract. After the expiration of the franchise agreements, however, the parties
continued to adhere to the agreement, with defendants accepting performance
incentives and paying royalty payments to plaintiff.
Plaintiff asserted that the continued adherence to the contract waived the
renewal terms. Plaintiffs filed suit alleging that defendants had breached the franchise
agreement by (1) competing with plaintiff; (2) purchasing beauty products from other
suppliers; (3) using advertising that contains marks other than plaintiff’s; (4) and
misusing plaintiff’s confidential information. The defendants counterclaimed seeking:
(1) a declaration that plaintiff has no confidential information or trade secrets associated
with the Aloette system; (2) a declaration that the covenants not to compete were not
valid; and (3) a finding of “commercial disparagement.”
Defendants then filed a motion for judgment on the pleadings on plaintiff’s breach
of contract claims, pointing out that the agreements expired in 2001 and 2004. The
court found that the complaint stated sufficient allegations that a contract existed, as the
interactions occurring after the original agreement’s termination demonstrated
expectations that went beyond the typical business customer relationship.
Plaintiff, in turn, filed a motion to dismiss defendants’ two declaratory judgment
counterclaims arguing that they would not resolve an uncertain and outstanding
controversy and because the claims simply mirror the complaint. Plaintiff also moved to
dismiss the “commercial disparagement claim” because no such claim is recognized
under Georgia law. The court rejected the motion to dismiss the declaratory
counterclaims, finding that they sought somewhat different relief from the complaint and
would serve a useful purpose. The court dismissed the “commercial disparagement
claim” because Georgia law does not recognize such a claim, but encouraged the
defendant to amend their complaint to allege a libel claim instead.
14379022.3
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Ramada Worldwide, Inc. v. Petersburg Regency, LLC, 2012 U.S. Dist. LEXIS
142172 (D.N.J. Oct. 1, 2012), involved a summary judgment motion filed by Ramada
relating to an alleged breach of a licensing agreement. The Licensing Agreement
allowed Petersburg the use of Ramada marks in relation to the operation and use of a
hotel as part of Ramada’s franchise system. The Agreement was for a 15 year term
and required Petersburg to pay Ramada periodic payments for royalties, service
assessments, taxes, interest, reservation system user fees, annual conference fees,
and other fees, plus interest.
The licensing agreement permitted Petersburg to terminate the license without
cause or penalty after five years if Petersburg provided six months written notice and
was not in default under the licensing agreement at the time notice was provided. If
Petersburg terminated the agreement early, however, it was required to pay liquidated
damages to Ramada. If litigation ensued, the agreement provided that the nonprevailing party would pay all costs, expenses, and reasonable attorney’s fees, as well
as any liquidated damages. Robert Harmon signed a personal guaranty to cover
Petersburg’s obligations under the Agreement.
On around February 2, 2010 defendants terminated the Licensing Agreement. In
response, Ramada demanded that defendants immediately discontinue all use of the
Ramada mark, and pay Ramada premature termination damages and outstanding fees
through the date of termination. The defendants continued to use the Ramada marks to
advertise and rent rooms and failed to make the required payments. As a result,
Ramada brought suit seeking a permanent injunction and damages for trademark
infringement, as well as liquidated damages, payment of the recurring fees with interest,
and attorney’s fees and costs of suits. Ramada then filed a motion for summary
judgment to which the defendants failed to respond.
The Court granted summary judgment on almost all counts, finding that there
was a breach of the agreement, no defense to the breach presented, and that the
defendants had the requisite intent to infringe the trademarks (allowing for treble
damages). The only claim denied by the court was Ramada’s claim for interest on the
liquidated damages. The court found that the liquidated damages provision of the
contract did not provide for interest, and as such, Ramada was not entitled to interest on
that amount.
Mt. Clemens Auto Ctr., Inc. v. Hyundai Motor Am., 2012 U.S. Dist. LEXIS
147604 (E.D. Mich. Oct. 9, 2012), involved a claim for wrongful termination that
occurred when Hyundai terminated Mt. Clemens dealer agreement after Mt. Clemens
lost its floor plan credit source. Mt. Clemens alleged a breach of the dealer agreement
and violation of Michigan law based on Hyundai’s refusal to transfer the dealer
agreement to another entity that was able to satisfy the floor plan requirements.
On April 14, 2011, Hyundai learned that Mt. Clemens had lost its wholesale
financing arrangement. On August 4, 2011, Hyundai sent the dealer a notice of
termination stating the termination date would be effective in 90 days, on November 7,
2011.
14379022.3
41
Mt. Clemens sued, seeking an injunction to prevent the termination, which was
granted. On January 24, 2012, the dealer sent Hyundai a letter with the proposed
transfer and, a week later, dismissed the lawsuit. That same day, Hyundai sent a letter
declining the transfer, reasoning that the dealer agreement was terminated the day the
lawsuit was dismissed. The dealer filed another lawsuit, which Hyundai removed to
federal court and then filed a motion for judgment on the pleadings.
Count I of the complaint claimed Hyundai breached the dealer agreement by not
approving the transfer of the dealership. Mt. Clemens claimed that the loss of floor plan
financing was a failure to perform which it had 180 days to cure, and that the request to
transfer the dealership to a new entity would have cured the breach. Since a qualified
buyer formed the new entity, Hyundai was required to approve the transfer.
Hyundai argued that the failure to maintain floor plan financing was an outright
breach not a mere failure to perform. Therefore, the dealer was only entitled to 60 days’
notice under the dealer agreement and 90 days under Michigan law, and that it was not
entitled to an opportunity to cure. Moreover, Hyundai asserted that the termination
became effective the instant that the state court suit was dismissed, and therefore
Hyundai had nothing to approve in relation to the transfer request, because the
dealership was terminated.
The court reasoned that the critical question was whether the failure to maintain
floor plan financing was a failure to perform or a breach of a non-sales performance
provision of the contract. The court found that the plain language of the contract
showed that it was a breach, not a failure to meet sales expectations. It was expressly
listed in a paragraph setting forth reasons why Hyundai could terminate the agreement.
Sales performance requirements were listed in a separate provision. Because the
breach was an express breach that did not require an opportunity to cure, because the
termination was effective upon dismissal, and because the requested transfer occurred
post termination, the court granted Hyundai’s motion for judgment on the pleadings.
In Volvo Trucks N. Am. v. Andy Mohr Truck Ctr., 2012 U.S. Dist. LEXIS
145054 (S.D. Ind. Oct. 9, 2012), Volvo sued one of its poorly performing dealers for
rescission of the dealer contract, fraudulent inducement, promissory estoppel,
declaratory judgment, equitable estoppel/constructive fraud, violation of the Indiana
Franchise Disclosure Act, and breach of contract. These claims arose from the dealer’s
alleged promises, representations, and unqualified guarantees in its dealer application.
The dealer moved to dismiss the fraudulent inducement, promissory estoppel, and
equitable estoppel/constructive fraud claim.
On the fraudulent inducement claim, Volvo claimed that defendants’ application
falsely asserted that it would capture 500 plus OTR sales per year, that defendants
would meet and secure 100% of the existing Volvo business, and that defendants would
win back a former customer, to name a few. 14 false statements were identified in total.
The defendants argued that the statements were of future intentions and not actionable
as fraudulent inducement. The court agreed and dismissed the fraudulent inducement
claim.
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The equitable estoppel/constructive fraud similarly claim failed because
constructive fraud requires a special or fiduciary duty between the parties, which did not
exist as a result of either the dealer agreement or the guarantees.
On the promissory estoppel claim, Volvo argued that the statements in the dealer
application were promises upon which the dealer expected Volvo to rely on, and which
induced Volvo’s detrimental reliance in awarding the dealership. The dealer responded
that the claim was barred by the integration clause in the contract and the parole
evidence rule. The court agreed.
Burda v. Wendy’s Int’l, Inc., 2012 U.S. Dist. LEXIS 145447 (S.D. Ohio Oct. 9,
2012), deals with cross motions for summary judgment filed by a franchisor and a
franchisee. Burda, the franchisee, sued Wendy’s for breach of contract and anti-trust
violations relating to the cancellation of 13 virtually identical franchise agreements.
In 1996, Burda signed franchise agreements for five Wendy’s restaurants. A sixth
was added in 1997. In 2000, Wendy’s began its Franchise Real Estate Development
Program (“FRED”) which encouraged franchisees to buy additional franchises by
assisting in building the new restaurants. Wendy’s would identify areas that could
absorb an additional restaurant and offer the new restaurant to existing franchisees in
the market. If the existing franchisee chose not to open the new restaurant, Wendy’s
would open the restaurant itself or offer the location to other franchisees, potentially
eroding the existing franchisees’ profits. Through this program, Burda opened 7
additional restaurants under the FRED Program. Around this same time, Wendy’s
began to require franchisees to purchase food and supplies from one distributor as part
of its attempt to optimize its distribution network. Wendy’s had no economic interest in
the appointed distributor.
After years of success, Burda began to have financial problems, and was
delinquent in paying Wendy’s royalties and advertising fees. By 2006, all of Burda’s
franchises were having financial problems, leading to a special financial arrangement
under which it was able to make interest only payment on past due royalties. In
exchange for the special financing, Burda signed a general release of all claims that
could have been asserted up to the date the release was signed, including any antitrust
and contract claims.
In 2007, Wendy’s sent several default notices to Burda. Burda then hired a
business restructuring expert who found that the business was completely insolvent.
Wendy’s subsequently terminated all of Burda’s franchises, citing repeated defaults,
failure to pay creditors, and financial insolvency.
Burda sued Wendy’s in March 2008 alleging breach of contract and antitrust
claims based on its switch to a different bun supplier in 1997, allegedly under pressure
from Wendy’s. The parties filed cross motions for summary judgment. On the contract
claims, Burda alleged that it did not receive 30 days’ notice of termination as required by
the contract and that the contract was therefore prematurely terminated. The court
found that Wendy’s had the right to immediately terminate because the contract
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expressly allowed immediate termination if the plaintiff committed the same default
within a six month period, which plaintiff did in relation to the failure to pay the royalty
and advertising fees. The court further found Wendy’s could terminate without notice
because of plaintiff’s insolvency.
On the remaining claims which related to the switch in bun suppliers, the court
found that Burda released those claims in 2006. The court found no proof of duress or
fraud, and thus, the release was enforceable. The court therefore granted Wendy’s
motion and dismissed all claims.
Meena Enters., Inc. v. Mail Boxes Etc., Inc., 2012 U.S. Dist. LEXIS 14606 (D.
Md. Oct. 11, 2012), arises out of UPS’ purchase of MBE and its conversion of the MBE
stores to UPS Stores. Meena purchased two existing MBE franchises shortly after UPS
had acquired MBE. UPS announced its intention to allow MBE stores to continue to
offer choices among delivery services. Meena claimed that MBE represented as part of
its transaction that the stores would continue as MBE stores.
Despite both UPS and MBE’s public assurances that the MBE stores would
continue as MBE stores, UPS began requiring most MBE franchises to change their
name to The UPS Store. As UPS stores, the franchisees were allowed to offer
competitors’ products if a customer specifically requested those services, but Federal
Express would not allow its products to be offered by UPS stores. One of the plaintiff’s
MBE locations was in the University of Maryland Student Center, which required its
shipping store to offer both UPS and FedEx. When UPS requested that the Student
Center location convert to a UPS store, plaintiffs stated that changing was not possible
and they requested that they be allowed to operate as an independent store after the
franchise agreement expired. They got no response. For the second location, Meena
was required to spend over $50,000 in renovations to renew the franchise agreement.
Meena informed MBE they could not afford this, but paid the renewal fee anyway.
Meena then filed suit in circuit court asserting claims against MBE for breach of
contract, fraudulent inducement, and negligent misrepresentation. Meena also sought a
declaratory judgment precluding MBE from enforcing the non-compete provision in the
franchise agreement. MBE removed to federal court and filed a motion to stay and
compel arbitration. Meena argued that it did not sign an agreement to arbitrate
(because (1) they were not signatories to the franchise agreement, College Park
Enterprises (its predecessor) was, and (2) MBE was not a signatory, a separate entity,
Mail Boxes Etc., USA was) and that the arbitration clause is unconscionable.
The court rejected Meena’s first argument, finding that it agreed to be bound by
the franchise agreement under the transfer agreement. Additionally, MBE could compel
arbitration even though it was not a signatory because all of plaintiffs’ claims against
MBE were based on rights they allegedly have under the franchise agreement. Meena
could not bring claims against MBE under the agreement, and then argue MBE could
not enforce provisions arising from the same document.
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Last, in relation to plaintiffs’ unconscionability argument, the court found that a
challenge to the validity of an arbitration provision is decided by the court unless the
parties clearly give this authority to the arbitrator. Here, the arbitration provision in the
franchise agreement clearly gave the arbitrator the power to decide issues of
enforceability. As such, the court did not have the power to decide whether the
arbitration provision was unconscionable.
ITW Food Equip. Group LLC v. Walker, 2012 U.S. Dist. LEXIS 147746 (W.D.
Mich. Oct. 15, 2012), deals with a dispute between Hobart, which is in the business of
manufacturing, installing, and maintaining equipment for food service and food retail
industries, and Walker, who was part of Hobart’s network of entities that sold parts and
provided installation, maintenance and repair service to customers. Walker’s territory
included several Michigan counties. The parties’ service contractor agreement
specifically stated Walker was an independent contractor, not a franchisee. The
contract also stated that it would be governed solely by Ohio law.
Hobart sued Walker alleging breach of contract, tortious interference, and
misappropriation of trade secrets. Walker counterclaimed, alleging that Hobart violated
the Michigan Franchise Investment Law by failing to repurchase Walker’s inventory after
the relationship ended. Hobart moved to dismiss the counterclaim claiming that
Michigan law did not apply. Reasoning that federal courts apply the conflict of law rules
of the state in which it sits, the court looked to Michigan’s conflict of law analysis. Under
Michigan conflict of law rules, a contractual choice of law provision governs unless the
chosen state has no relationship to the parties or transaction or if application of the
chosen law would be contrary to the fundamental policy of a state that has a materially
greater interest than the chosen state.
Walker did not dispute that Ohio had a substantial interest in the parties’
relationship, instead arguing that under the terms of the Michigan Franchise Investment
Law a party cannot contract away the statute’s protections. The court rejected this
argument because the statute specifically stated that while forum selection provisions
were void, it did not specifically state that Michigan law must govern the disputes. Thus,
the Michigan Franchise Investment Law did not prevent the application of contractual
choice of law provisions.
Walker also argued that application of Ohio law would be contrary to Michigan
public policy. The court pointed out that the relevant test is not whether it is counter to
Michigan’s public policy, but rather whether there is a substantial erosion of the quality
of protection that the Michigan Franchise Investment Law would otherwise provide.
The erosion can be shown by significant differences in the application of the law of the
two states.
The court found that Walker failed to show there were significant differences
between the laws of Ohio and Michigan. The only difference alleged was that under
Michigan law, a contract provision is void if it permits a franchisor to refuse to renew a
franchise without six months’ notice without fairly compensating the franchisee through
the repurchase of inventory. Under Ohio law, a franchisor may decide the conditions
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under which a franchise may be terminated or renewed. The fact that the two
provisions are different is not enough -- the difference must be repugnant to Michigan’s
public policy. Here, because Walker only pointed out one different between Michigan
and Ohio law, the Court concluded that Ohio law is not contrary to Michigan’s
fundamental policy, and therefore the choice of law provision was enforceable.
In Wingate Inns Int’l, Inc. v. Swindall, 2012 U.S. Dist. LEXIS 152608 (D.N.J.
Oct. 22, 2012), Swindall entered into a franchise agreement with Wingate to operate a
Wingate hotel for twenty years. Wingate alleged that after signing the agreement, it
learned that Swindall had transferred control of the property. It terminated the
agreement and filed suit for an accounting of the revenues earned at the facility when it
was operated as a Wingate and to recover any outstanding fees. Swindall
counterclaimed, alleging: (1) fraud in the inducement, based on Wingate’s promises the
hotel would be profitable; (2) violation of the New Jersey Consumer Fraud Act; (3)
breach of contract; (4) breach of the implied duty of good faith and fair dealing; (5) lost
income; (6) violation of the Georgia Fair Business Practices Act; and (7) violation of the
Florida Franchise and Distributorship Law. Wingate moved to dismiss all but the
contract counterclaims.
Wingate first argued that Swindall’s fraud claim failed because he could not
establish justifiable reliance on a false representation in light of the express disclaimers
of any such reliance and the integration clause in the agreement. The court agreed and
dismissed the fraud claim.
The New Jersey Consumer Fraud Act claimed failed because Swindall was not a
consumer with respect to this transaction and the sale of a franchise is not the sale of
merchandise.
With respect to her claim for lost income, Swindall alleged that she was deprived
of the opportunity of at least 25 years of employment and turned down the opportunity
to pursue a competing franchise. The court found these arguments were properly heard
at the damages phase of the litigation and dismissed the claim without prejudice,
allowing her to seek appropriate remedies for any remaining claims.
The claim for violation of the Georgia Fair Business Practices Act also failed.
The Georgia courts had held that private suits under the law are permissible only if the
individual injured is injured by a breach of a duty to the consuming public in general.
The court agreed that the law did not apply to the sale of franchises, that any injury was
not an injury to the general public, and that the purchase of the franchise was not for
personal , family or household purposes and dismissed the claim
The court also dismissed the Florida Franchise and Distribution Law
counterclaim. The parties’ agreement stated that New Jersey law would govern all
franchise disputes and New Jersey had significant contacts with the parties and
transaction since it was Wingate’s principle place of business. Moreover, Florida law
allowed parties to contract away the statute’s protections.
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Leisure Sys., Inc. v. Roundup LLC, 2012 U.S. Dist. LEXIS 155948 (S.D. Ohio
Oct. 31, 2012), relates to the enforceability of a damages provision in a franchise
agreement. Plaintiff Leisure Systems, Inc. (“LSI”) licenses the Yogi Bear trade and
service marks to franchises to build and operate Yogi Bear Jellystone Park CampResorts. The defendants were all Jellystone franchisees and all were managed by the
same entity (“Morgan”).
Under the franchise agreements, the franchisees are required to pay royalty and
service fees, marketing, advertising, and promotional fees, and reporting certain
information periodically. If a franchisee fails to pay the amount due to LSI for five days
following written notice, LSI is entitled to terminate. Many of the franchise agreements
further provided for liquidated damages in the event of termination.
LSI sent a variety of notices of default for failure to pay to all of the defendants
over a several month period of time. In September 2010, LSI sent certified letters to two
of the defendants informing them of defaults and the need to cure. The letters were
addressed to Morgan in Sarasota Springs where the defendants had instructed LSI to
direct correspondence. On December 16, 2010 LSI, emailed Morgan regarding the past
due accounts for all three franchisees, requesting that all accounts be brought current
by December 23, 2010. LSI received an email response from someone at Morgan
whose signature block said he was the CFO. In January 2011, LSI sent letters to
Roundup, Yogi Michigan and Lakeside at an address in Pittsford, New York which
defendants claimed they did not receive because they were not sent to the Sarasota
Springs address. In February 2011, LSI sent termination letters to each campground’s
operating address plus the address in Pittsford by certified mail, return receipt
requested. In March 2011, LSI’s counsel sent an email to defendants’ counsel agreeing
to reinstate the franchises if the franchisees paid all outstanding fees and provide
personal guarantees for all future obligations. Defendants’ counsel stated that
guarantees were generally acceptable, but asked to see the specific terms first. In May
2011, the guarantees had not been signed, and re-started the terminations set forth in
the February 24, 2011 letters. On June 3, 2011, LSI sent a letter telling defendants to
stop using LSI’s trademarks.
In or around June 2011, LSI received a phone call from a guest at Yogi Michigan
complaining about his stay. LSI stated that they had terminated Morgan for the reasons
listed by the complainant, and that Morgan, through poor decisions and bad money
management had taken a successful operation and made it despicable. Morgan head
about this and other “defamatory statements” LSI was making.
LSI sued for breach of contract, Lanham Act and common law trademark
infringement claims. Defendants brought a variety of counterclaims including breach of
contract. Plaintiff filed a summary judgment motion on its breach of contract claim, its
trademark claims; and all of defendants’ counterclaims. Defendants filed a motion for
summary judgment on LSI’s breach of contract claim, LSI’s trademark claims, and
defendant’s breach of contract counterclaim.
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First, the court addressed LSI’s claim that defendants breached the agreements.
Defendant rebuts that LSI failed to perform under the contract, that defendants did not
breach the agreements, and the LSI was not damaged.
In terms of LSI’s performance, defendants claim LSI breached the notice
provisions regarding default and termination and anticipatorily repudiated the franchise
agreements by requesting personal guarantees. In terms of the notice argument, the
court found that even though notice was not delivered exactly as required by the
contract, LSI substantially performed its notice obligations when it sent emails to
defendants’ CFO, even though he was not listed as the proper person to receive notice.
The notice provision providing addresses was not mandatory and there is no doubt that
actual notice occurred. The court found that LSI also properly abided by the termination
provision because actual notice of termination was provided to Morgan representatives
who actually received the notices, even though LSI did not send the notices to
defendants’ counsel. The court also found that LSI did not breach the agreements by
anticipatory repudiation when it requested personal guarantees because defendants
had already materially breached the franchise agreements at the time they requested
the personal guarantees.
The court also found that defendants’ failed to perform under the agreement
because there is no dispute that they were in default of their obligations and failed to
cure. Finally, there is no question that LSI was entitled to damages, but that issues of
fact remained as to when the termination actually occurred, which will impact the
damages calculation. On the issue of liquidated damages, the court found that the
stipulated damages provisions in the Roundup and Yogi Michigan agreements were
unenforceable penalties that are unreasonable and disproportionate in amount. The
Lakeside agreement did not have a provision, and the court denied summary judgment,
stating that LSI would need to prove the damages it believed it was entitled to at trial.
LSI also sought summary judgment on its unfair competition/trademark claims.
Because LSI properly terminated the defendants, their use of the LSI trademarks was
without LSI’s consent. The court granted LSI’s motion for summary judgment in relation
to the trademark claims.
Moving to defendants’ counterclaims, the court rejected defendant’s claim that
LSI breached the contract, as discussed above. In relation to the defamation claim, the
court found there was a genuine issue of material fact as to whether the statements
made by LSI regarding what LSI was referring to when it stated that it had terminated
the defendants for the reasons listed by the complainant. The court also found there
was a potential factual issue as to LSI’s intent in making the statements, which turns on
what LSI knew when it made the statements, which would impact if the statements were
false or not, which would go to whether there was actual malice. On the tortious
interference claim and the Ohio Deceptive Practices Act claims, the court similarly found
that there were issues as whether there was actual malice, and denied summary
judgment.
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For the claims for injunctive relief, the court found that there was no proof of
irreparable injury, and granted LSI’s motion for summary judgment in relation to
defendant’s counterclaim for injunctive relief.
At issue in Kobrand Corp. v. Abadia Retuerta S.A., 2012 U.S. Dist. LEXIS
165025 (S.D.N.Y. Nov. 19, 2012), was whether termination of a distribution agreement
to sell wine within an assigned territory was a breach of the contract.
Plaintiff Kobrand Corporation (“Kobrand”) entered into a distribution agreement to
be the exclusive distributor of three brands of wine produced by defendant Abadia
Retuerta S.A. (“Abadia”). Kobrand agreed to market and distribute the three brands of
wine in an assigned territory. Additionally, Kobrand agreed to meet minimum volumes
of sales at an established minimum price assuring Abadia of a floor revenue. Abadia
agreed to exclusively sell the wine only to Kobrand within the assigned territories and
provide Kobrand within minimum levels of product.
The distribution agreement provided two relevant options to terminate the
contract: (1) if either party was in material default, the other party could terminate after
giving 120 days written notice and opportunity to cure; and (2) Abadia could terminate
the contract without cause upon one year’s notice as long as Abadia paid Kobrand
liquidated damages. Abadia could not exercise its option to terminate the agreement if
production levels due to outside forces restricted Abadia’s ability to provide Kobrand
with the minimum levels of wine.
Kobrand had consistently low sales from 2006 through 2011, failing to meet the
floor requirements established in the distribution agreements, but Abadia did not
attempt to terminate the agreement until 2011. In 2010, Abadia did not supply its
required amount of wine, thus raising the question whether Abadia could terminate
Kobrand for failing to meets it sales requirements from 2006-2009 (when Abadia did
supply sufficient level or product), or if Abadia was prohibited from terminating Kobrand
because of its failure to provide enough product in 2010. Abadia gave notice that it was
terminating its agreement with Kobrand effective August 31, 2011, for failure to meet the
annual sales requirements. It did not give Kobrand 120 days written notice or the
opportunity to cure. Kobrand sued for breach of contract.
On cross-motions for summary judgment, Abadia argued that even if it did not
provide the required amount of wine in 2010, it could still terminate the agreement
based on Kobrand’s sales failures in 2006-2009. Kobrand argued that Abadia’s delay
was unreasonable as a matter of law and Abadia’s failure to provide sufficient product in
2010 violated the distribution agreement. The court disagreed with both parties and
denied both motions for summary judgment. First, the court could not find that the delay
in terminating the agreement was unreasonable as a matter of law. Rather, the issue of
“reasonable” termination was a factual issue determined on a case-by-case basis.
Second, the court found factual issues on whether Abadia provided sufficient amounts
of wine in 2010. Accordingly, both parties motion for summary judgment were denied.
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Abadia did not provide the contractual 120 day notice requirement to terminate
the agreement, but argued that it did not have to do so, citing case law that permits a
party to dispense with contractual notice requirements where notice would be futile.
Notice is futile when the non-performing party (1) expressly repudiated the parties’
contract; or (2) abandons performance thereunder. The court found that neither of
these existed and denied the motion for summary judgment.
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Competition Law.
claim.
terminate a franchise agreement for good cause, and good cause is satisfied if the a
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Arby’s Rest. Group, Inc. v. Kingsley, 2012 U.S. Dist. LEXIS 181713 (D. Md.
Dec. 26, 2012), granted the plaintiff franchisor’s motion for summary judgment on
breach of contract claims against a former franchisee. The franchisor had sued two
groups of related defendants – one group with whom the franchisor had nine franchise
agreements for the operation of Arby’s restaurants, and the other group with whom the
franchisor had one additional Arby’s franchise agreement. After one of the defendants
had received a notice of default from the franchisor for failing to pay royalties and dues,
and failed to cure the default, the franchisor noticed the termination of that defendant’s
franchise agreement. (Although it is not stated in the opinion) it appears that this single
termination led to termination of each of the other nine franchises held by the other
defendants.
Even after the franchises were terminated and after receiving from the franchisor
notices of trademark infringement, the franchisees continued to operate the ten Arby’s
restaurants and use Arby’s trademarks for over two months. During that period, the
franchisor brought suit for breach of contract/guarantee and trademark infringement.
The parties thereafter stipulated that the franchisees would close and cease operations
of all of the Arby’s restaurants, which essentially resolved the trademark infringement
claims. The case proceeded to discovery on the remaining breach of contract and
guarantee claims for failing to pay royalties and dues.
At the close of discovery, the franchisor moved for summary judgment, arguing
that it was entitled to judgment on the claims because (1) the franchisees had filed
responses to requests for admission two weeks late and those matters were therefore
conclusively admitted, and (2) the undisputed facts showed that the franchisees
breached by defaulting and not curing the default. While the motion for summary
judgment was pending, the group of defendants with nine of the franchise agreements
filed for bankruptcy, and the automatic stay operated to stay the franchisor’s claims
against those defendants.
As to the motion pending against the other group of defendants, the court
rejected the franchisor’s argument that responding to the requests for admission two
weeks late automatically admitted those requests, finding that no prejudice to the
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franchisor could be shown by the responses that were only two weeks late. However,
the defendants in responding to the franchisor’s motion failed to address to any extent
the breach of contract and guarantee claims against the group of defendants who did
not file for bankruptcy, and the court determined that the franchisor was entitled to
summary judgment on those claims on that basis. In addition to the approximately
$67,000 of unpaid royalties and dues that were awarded as damages to the franchisor,
the court also granted to the franchisor an award of reasonable attorneys’ fees because
of a fees provision in the guarantee upon which the franchisor had sued.
Gun Hill Rd. Serv. Station v. Exxon Mobil Oil Corp., 2013 U.S. Dist. LEXIS
14199 (S.D.N.Y. Feb. 1, 2013), involves allegations by Issa, the operator of the Gun Hill
gas station against ExxonMobil alleging wrongful termination in violation of the
Petroleum Marketing Practices Act (“PMPA”). Issa also alleged various state law claims
regarding the Gun Hill station and a second station at City Island. ExxonMobil moved
for summary judgment on all claims.
The claims are divided into two sets of facts: (a) facts relating to whether the
parties entered into a binding oral modification to the franchise agreement between Gun
Hill and Exxon and (b) facts that relate to whether Exxon tortiously interfered with Issa’s
prospective business relationship with a third party at the City Island station.
Exxon and Gun Hill’s franchise relationship started in 2000. On January 15,
2003, the parties entered into a new ten-year franchise agreement for the Gun Hill
station. Pursuant to that agreement, Gun Hill leased the premises form Exxon, agreed
to purchase gasoline from Exxon, and operate the station as a Mobil-brand service
station. The agreement allowed Exxon to electronically draft funds from Gun Hill’s
account in order to satisfy Gun Hill’s payment obligations. The agreement stated it
could be terminated in accordance with the PMPA, that the agreement was the entire
agreement, and that there could be no modifications unless agreed in writing by both
parties.
On the same date, the parties entered into the On the Road franchise
agreement, which was dependent upon the gas station franchise agreement.
Termination of either agreement triggered termination of the other. The On the Road
agreement also stated it was the entire agreement, superseded all prior agreements,
and could only be modified if agreed to in writing by both parties.
In April 2006, Exxon’s franchise specialist, aware of equipment and construction
problems, allegedly informed Issa that Exxon had agreed to not charge Issa any rent
until the problems were fixed and that Exxon would defer charges for equipment and
gas until the problems were corrected and the parties agreed on a payment schedule.
Exxon confirmed this in conversation several times. One email sent by Exxon in
September 2006 stated that Exxon had not charged rent since the station opened.
In fact, beginning in March 2006, Exxon did draft payments for rent. Issa alleged
he was told these drafts were for bookkeeping and that Exxon would deposit rent credits
in equal amounts. Exxon did deposit credits but oftentimes there was a lag between
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drafting and crediting resulting in insufficient funds, which, in accordance with Exxon
policy, affected the terms on which Issa could purchase gasoline. On February 8, 2007,
Exxon representatives allegedly told Issa that it would not charge rent until the parties
resolved their disagreement or agreed to a buyout of the station. On July 16, 2007,
Exxon informed Issa by email that due to his repeated insufficient funds, he would be
required to pay in advance for gasoline and that Exxon would not extend credit until
further notice. Issa could not afford to buy gasoline and did not purchase or sell any
after July 2007. On January 8, 2008, Issa received a termination notice based on its:
(1) failure to operate station for seven consecutive days; (2) failure to pay Exxon
amounts past due; and (3) violation of the provision requiring Issa use to his best efforts
to maximize the sale of fuel and pay amounts due to Exxon in a timely manner.
The court’s focus was on the question of whether the parties made a binding oral
modification to the Franchise Agreement that relieved plaintiffs of the obligation to pay
rent for the Gun Hill Station until Exxon remedied the construction and equipment
problems. The court noted that the Agreement stated that except for those permitted to
be unilaterally made by Exxon, no amendment change or variance from the agreement
is binding on either party unless agreed in writing.
Plaintiff tried to argue that the oral modification was valid because of the doctrine
of partial performance and the doctrine of equitable estoppel. In relation to partial
performance, the court found the conduct of the parties was not inconsistent with the
franchise agreement as written, and that Exxon’s behavior was not evidence of an
unequivocal modification as it could also be explained as an attempt to improve a
strained business relationship and keep a franchisee selling gasoline for the parties
mutual benefit. This is consistent with the franchise agreement because it specifically
stated that Exxon’s failure to insist upon strict compliance did not waive Exxon’s right to
demand strict compliance.
In relation to the equitable estoppel claim, the court found no evidence in the
record that Plaintiff took any actual steps in reliance on the alleged oral modification that
would be incompatible with the franchise agreement as written. As such, the court
found there was no evidence of an oral modification to the written agreement.
Plaintiff also made several common law claims, such as breach of contract,
breach of the implied covenant of good faith and fair dealing, and wrongful termination.
In relation to the Franchise Agreement, the court found that the because the Franchise
Agreement as written required payment of rent and prepay for gasoline, and there was
no binding oral modification, Exxon was within its right when it stopped delivering
gasoline to plaintiffs in July 2007. The court also found that the implied covenant did
not modify the express terms of the contract, and Exxon acted with good faith
compliance with the obligations under the agreement, Exxon was entitled to summary
judgment. Plaintiff further alleged that Exxon wrongfully terminated the Franchise
agreement in violation of the PMPA. Because no reasonable jury could find that plaintiff
did not fail to pay defendants in a timely fashion and did not operate the station for
seven consecutive days, Exxon was entitled to summary judgment.
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In relation to the OTR Agreement, the court found the cross default provisions
were valid and enforceable and, therefore, because the franchise agreement was validly
terminated, the OTR agreement was validly terminated. Likewise, the implied covenant
of good faith and fair dealing did not vary the OTR Agreement’s cross termination
provisions. The court also rejected plaintiff’s claims that the implied covenant was
breached based on any event predating the parties entry into the OTR or relating to
delayed construction. As to the problems encountered after the construction was
complete, a reasonable jury could find that the OTR site experienced problems caused
in part by Exxon, and that Exxon did not make a good faith effort to address the postproduction problems. But, the OTR agreement contained disclaimers concerning the
equipment, stating Exxon could not be held liable for any equipment problems. To the
extent the problems related to the maintenance of the computer systems or whether the
initial construction was performed in a workmanlike manner, Exxon was not entitled to
summary judgment because such issues were not covered by the disclaimer and issues
of fact existed.
Plaintiffs also alleged a variety of claims in relation to the City Island Avenue
Station. The City Island station was owned by a third party and leased to Sunoco, who
sublet the station to Issa. In 2004, Sunoco informed the owner of the property that it did
not intend to renew its lease when it expired in November 2005. The owner told Issa
that he would give Issa a twenty year lease if Issa could bring in a major oil company,
like Exxon, to make a significant investment to upgrade the City Island Station. Exxon
gave Issa mixed messages on its desire to lease the City Island Station. When Exxon
became nonresponsive to Issa’s request, the owner of the property continued
negotiations with other oil companies. The owner ended up signing a lease with a
different oil company in April 2005. Through a series of events, Issa ended up in
litigation with both the new oil company and Exxon seeking to enforce his right under
the PMPA to have Sunoco’s five year option to extend its lease at the City Island Station
assigned to him. The parties reached a settlement and discontinued the case in 2006.
After the owner of the property signed a second amendment with the new oil company,
Issa terminated his business operations and delivered possession to the owner in
March 2006.
The plaintiffs sued Exxon for tortiously interfering with Issa’s prospective contract
with the property owner to lease City Island Station. The court granted Exxon’s
summary judgment on the tortious interference claim because Issa failed to present any
evidence that Exxon acted with the sole purpose of harming plaintiffs, and there is no
dispute that Exxon acted with a normal economic self interest. The court found that no
reasonable jury could find that Exxon committed any act rising to the level of culpable
interference required for a tortious interference claim. The court also found the claim
was untimely because the three year statute of limitations began to ran when the
property owner signed a lease with the third party oil company, so any limitations period
expired on April 7, 2008, a month before this suit was filed.
PC P.R. LLC v. El Smaili, 2013 U.S. Dist. LEXIS 28701 (D.P.R. Feb. 28, 2013),
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petroleum products, for abandoning the service stations and failure to comply with their
post-termination obligations by retaining some form of possession over the gas stations
and exhibiting Texaco marks at both stations. The court found that because defendants
had ceased operation at the gas stations, but had not covered or removed the Texaco
name and signs on the stations per the agreement, this affected the value of the Texaco
marks and accordingly granted the motion for permanent injunctive relief, enjoining
defendants from using and displaying all Texaco marks at both gas stations
immediately, and also granted the motion to evict defendants from both stations.
Finally, the court granted PCPR’s request for damages for loss of income, equipment
damage, overdue payments for gasoline and rent, and all attorneys’ fees and costs.
In Curves Int’l, Inc. v. Cleveland, 2013 U.S. Dist. LEXIS 6909 (N.D.N.Y. Jan.
17, 2013), the issue was whether the plaintiff had pled sufficient facts for the court to
conclude that a defaulting defendant was liable on plaintiff’s claims.
Plaintiff Curves International, Inc. (“Curves”) sued defendant Nancy Cleveland
(“Cleveland”) for abandoning a franchise, in violation of the franchise agreement. After
Cleveland did not answer the complaint and Curves received an entry of default, Curves
moved for default judgment against Cleveland. The only factual allegation in the
complaint was that Curves had sent Cleveland correspondence acknowledging the
termination of her interests and rights under the franchise agreement as a result of
certain violations.
The court said this factual allegation was insufficient to enable the court to
determine whether Cleveland was liable. Although a non-answering party admits all
allegations in a complaint as true, it is the court’s obligation to determine whether
unchallenged facts constitute a legitimate cause of action since a party in default does
not admit conclusions of law. The factual allegations in the complaint were insufficient
to enable the court to conclude whether Curves had a legal basis to send the letter it
did, or whether Cleveland had in fact abandoned or otherwise violated the franchise
agreement.
The court denied Curves’ motion for default judgment, but without prejudice, to
allow Curves an additional opportunity to make a proper motion.
Riedlinger v. Steam Bros., 2013 ND 14, 826 N.W.2d 340 (2013), involved a
dispute over the interpretation of a license agreement. Steam Brothers, Inc. (“Steam
Brothers”) was founded by Adam Leier (“Leier”) in 1983 performing residential and
commercial carpet cleaning and related services in North Dakota. Steam Brothers
franchised independently owned businesses to use its cleaning systems and service
marks in designated geographic territories. Five relatives of Leier operated separate
Steam Brothers’ businesses which required the payment of an on-going franchise fee.
In 1991, the five relatives became dissatisfied with the business relationship
requiring the franchise fee payment. Leier agreed to eliminate the fee and enter into
new license agreements. Under the new agreements, each licensee paid Steam
Brothers a lump sum of $12,000 to terminate the prior agreements. Under the franchise
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agreements, the parties were required to disclose certain information about the day-today operations of their businesses. The new license agreements were silent about this
obligation.
In October 2008, Leier sold Steam Brothers to Jerry Thomas. Thomas claimed
that he received complaints and negative comments about the quality of work done by
some of the licensees under the Steam Brothers’ name. Accordingly, he asked the
licensees to provide a list of certain business information including chemicals used,
customer lists, brochures, marketing materials, business methods, and operating
procedures. The licensees refused to provide the information. Thomas subsequently
terminated the agreements for their refusal.
The five licensees sued for a declaration of their rights and obligations under the
license agreements. First, they claimed that they did not have to provide the business
information to Steam Brothers under the terms of the license agreement. Second, they
sought to enjoin Steam Brothers from terminating the agreements for failing to provide
the requested information. The licensees moved for summary judgment which was
granted by the trial court. The Supreme Court of North Dakota reversed.
Regarding the obligation to provide the business information, the court found that
the license agreement was ambiguous. For example, the agreements included a
confidentiality provision which precluded Steam Brothers from divulging certain
business information communicated by the licensees. This contemplated that Steam
Brothers was allowed to obtain some business information from the licensees. Because
the agreements were ambiguous, summary judgment was inappropriate and remand
was required to resolve the factual issue regarding the parties’ intent.
Regarding termination, the court also found the agreement to be ambiguous.
The licensees claimed that the language in the agreement gave them a lifelong license
that could not be terminated unilaterally by Steam Brothers. The court noted that the
agreement included broad enough language about remedies that would allow Steam
Brothers to unilaterally terminate for a material breach of the contract. Resolution of this
issue was inappropriate for summary judgment so the court reversed and remanded for
further proceedings.
Poland v. LA Boxing Franchise Corp., 2012 Cal. App. Unpub. LEXIS 8399
(Cal Ct. App. Nov. 19, 2012), involved a claim by a former independent contractor that
Anthony Geisler, the principal of defendant LA Boxing Franchise Corporation (“LA
Boxing”) had falsely promised the plaintiff, Christopher Poland, to make him a
franchisee, to give him stock, and to give him a commission on sales for life. The jury
found in part for Poland and awarded him $75,000 on the false promise claim.
Poland was a long-time independent contractor who assisted LA Boxing set up
franchises throughout the country. As the company expanded, Poland alleged that
Geisler offered him a one percent commission on gross franchise receipts to keep him
tied to the gyms forever. Poland interpreted this offer to mean he would receive the
commission for the rest of his life, regardless of whether he was working for LA Boxing.
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A few years later as the company continued to grow and expand, Poland alleged that
Geisler promised Poland a 10% equity share in the company as well as the opportunity
to open his own franchise. After Poland was eventually terminated due to several
complaints from various franchise owners, he filed suit for wrongful termination, labor
code violations, breach of oral contract, and for false promise. The jury rejected
Poland’s breach of oral contract claims, but awarded him $75,000 of his false promise
claim and $2,800 in unpaid wages. The special verdict did not indicate what the jury
found was falsely promised to Poland.
On appeal, Poland argued that the findings by the jury were inconsistent; that the
findings in his favor on the false promise claim contradicted the findings against him on
the breach of contract claims and were irreconcilable with each other. The court
disagreed, finding that each were separate causes of action and a favorable verdict on
one was not inconsistent with an unfavorable verdict on the other. The court also
rejected Poland’s argument that there was insufficient evidence to support the breach of
contract verdict.
Choice Hotels Int’l, Inc. v. Apex Hospitality LLC, 2012 U.S. Dist. LEXIS 94515
(W.D. Mich. June 13, 2012), involves a claim against a former franchisee for trademark
infringement, unfair competition and violation of the Michigan consumer protection act.
Here, the former franchisee continued using the “ECONO LODGE” family of trademarks
after termination of its franchise and Choice Hotels sued. After the former franchisee
failed to file an answer or other responsive pleading, the court entered a default against
it and its owners. This matter then came before the court on an ex parte motion for
default judgment and permanent injunction. The court ruled in favor of plaintiff on the
entry of default judgment and also issued injunctive relief.
Due to the defendants’ continued use of the trademarks after the franchise was
terminated, the court categorized the defendants as holdover franchisees. This meant
that their continued unauthorized use of the trademarks was sufficient to establish per
se likelihood of confusion amongst the public. The court then analyzed each element
required to establish trademark infringement and for issuing a permanent injunction.
Ultimately, the court issued a permanent injunction and held that Choice Hotels was
entitled to default judgment, but reserved its right to consider the issue of damages until
after Choice Hotels defendants submitted a compliance statement in accordance with
15 U.S.C. § 1116(a).
Jaguar Land Rover N. Am., LLC v. Manhattan Imported Cars, Inc., 2012 U.S.
App. LEXIS 8260 (4th Cir. Apr. 23, 2012), involves claims by a Jaguar franchisee/dealer
that 2 of 3 agreements it signed with Jaguar were unenforceable due to an integration
clause in the third agreement and that Maryland law precluded Jaguar from requiring
the franchisee to stop selling another car line at its Jaguar showroom. After losing both
claims on summary judgment at the district court, the franchisee again found itself on
the wrong side of a decision at the Fourth Circuit.
Relying on both Maryland law and the parties’ actual conduct, the Fourth Circuit
held that the presence of an integration clause in only one of the three simultaneously
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executed agreements was no bar to enforcement of the other two. Where, as here,
separately executed contracts between the same parties do not have conflicting
provisions and are entered into as part of a single transaction—even when the
agreements do not refer to each other—they together form a single transaction that
cannot be defeated by an integration clause in one agreement. The court went on to
hold that the Maryland Transportation Code did not preclude enforcement of the
franchisee’s promise not to sell non-Jaguar automobiles at its Jaguar showroom
because the franchisee made the promise before becoming a franchisee/dealer. The
undisputed facts established that the franchisee had agreed to relocate, make certain
renovations to one of its facilities and meet project milestones—before becoming a
franchisee. The franchisee had completed some renovations, but failed to meet several
project milestones. After the parties failed to agree to an extended schedule for the
dealer, the distributor suspended payments to the dealer which depended on the dealer
making renovations. Applying the plain text of the Maryland Act, the Fourth Circuit held
there was no violation because there was no franchise relationship between Jaguar and
the franchisee when the franchisee agreed to relocate and renovate.
Choice Hotels Int’l, Inc. v. Jagaji, Inc., 2012 U.S. Dist. LEXIS 128048 (S.D.
Ohio Sept. 10, 2012), involves the franchisor’s efforts to enjoin a former franchisee’s
continued use of its marks and collect past due amounts following termination. Here,
Choice Hotels terminated the franchise following the franchisee’s failure to respond to
guest complaints and pay its royalties. Although the franchisee submitted evidence that
it paid certain of the outstanding amounts, it admitted not doing so within the permitted
cure period. Id. at *4. After receiving the termination notice, the franchisee continued to
use the marks in, around, and in publicity for, the motel, apparently based on the belief
that the franchise would be reinstated once the disputes between the parties were
resolved. Id. at *5. When Choice Hotels demanded the former franchisee immediately
cease its use of the marks for a second time, the franchisee claimed it did so, but
admitted continuing to display signage at the motel that contained the marks. Id. at *6.
In ruling on Choice Hotel’s summary judgment motion, the court held that there
was no genuine issue of material fact over the franchisee’s liability for trademark
infringement because the franchisee admitted continuing to display the franchisor’s
marks after termination. Id. at *8-16. The court relied on authority that “proof of
continued, unauthorized use of an original trademark by one whose license to use the
trademark had been terminated is sufficient to establish ‘likelihood of confusion.’” Id. at
*13-14. Thus, the court did not have to consider the eight factors that are typically
analyzed to determine whether the defendant's use of another's trademark is likely to
cause consumer confusion, which is "the touchstone of liability” under the Lanham Act,
15 U.S.C. § 1114. Id. The court further held that the franchisee’s liability under 15
U.S.C. § 1114 for its unauthorized use and display of the franchisor’s registered
trademarks also established liability for the franchisor’s claims of federal unfair
competition under 15 U.S.C. § 1125(a), deceptive trade practices under Ohio Rev.
Code § 4165.01 et seq., and Ohio common law claims for trademark infringement and
unfair competition. Id. at *16-17. Pursuant to 15 U.S.C. § 1116, the court set a hearing
to determine the scope of injunctive relief, the proper measure of damages and lost
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profits for the franchisee’s infringement of the franchisor’s marks, and attorneys’ fees.
Id. at *17-19.
H & R Block Tax Servs. LLC v. Franklin, 691 F.3d 941 (8th Cir. 2012),
presents an interesting discussion of when a franchisor may terminate a franchise that
has no specific term. Here, the franchise agreements expressly stated that that the
franchisee could terminate the relationship at any time, but only allowed H & R Block to
do so for cause. When H&R Block provided notice that it was not going to renew the
franchise, it also filed a declaratory judgment action to resolve the issue. While the
franchisee won in the district court, H&R Block appealed and the 8th Circuit reversed.
The 8th Circuit found that the dispositive issue was whether the contracts’
language unequivocally expressed the parties’ intent that they be perpetual. Under
Missouri law, applicable here, the agreements’ duration provision must “unequivocally
express an intent of the parties to create a perpetual, never-ending franchise
agreement” to preclude one side from not renewing. Because the court was unable to
find any such express language, it disagreed with the district court that an eternally
enforceable obligation was created. It thus held that the district court erred in reading
such an right into the contracts and reversed and remanded for further disposition in
accordance with its opinion.
Dunkin’ Donuts Franchising LLC v. Oza Bros., Inc., 2012 U.S. Dist. LEXIS
140595 (E.D. Mich. Sept. 28, 2012), is yet another reminder that franchisees who
purposefully underreport sales will lose their franchises and find no sympathy in court.
Here, Dunkin’ Donuts began investigating the franchisee after receiving a tip from a
former employee that it was not reporting sales made to auto dealers. Three former
managers testified that dealership checks were given to Rajan Oza, one of the owners,
and that they had never seen him ring the dealership checks into the register. In
addition, corporate records showed that bank deposits substantially exceeded corporate
sales. While the franchisee claimed that the discrepancy was due to “shareholder
loans,” there was no evidence that such shareholder loans were ever made. Dunkin’
terminated the franchise, filed suit for damages and sought preliminary injunctive relief
prohibiting continued use of its marks.
The franchisee failed to produce any evidence beyond conclusory statements to
dispute Dunkin’s argument that it intentionally underreported sales. The court held that
the evidence establishing the dealership checks were deposited monthly coupled with
evidence showing that the owners had sole control over the checks established that
there was intentional underreporting of sales. As such, there was no genuine issue of
material fact and Dunkin’ was entitled to terminate the franchise. The court also
discounted the franchisee’s argument that, absent fraud, Dunkin’ could not terminate
without first providing an opportunity to cure, finding that no opportunity to cure was
required where, as here, the franchisee underreported to both Dunkin’ and the IRS.
Accordingly, the court granted Dunkin’ summary judgment and issued a preliminary
injunction enjoining further use of Dunkin’s marks.
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Husain v. McDonald’s Corp., 205 Cal. App. 4th 860, 140 Cal. Rptr. 3d 370
(2012), addresses McDonald’s attempt to secure preliminary injunctive relief shutting
down certain restaurants. At issue was language in an assignment agreement between
a buyer and seller of seven restaurants that provided “in consideration of McDonald’s
consent to this agreement and the issuance of a rewrite to assignee, assignor waives,
releases, and disclaims any claim for a rewrite of the franchise for a particular location.”
After the buyer failed to complete certain agreed-upon renovations, McDonalds stated
that it would not renew the franchises for some of the restaurants. The franchisee filed
suit claiming the language entitled it to renewal and obtained a preliminary injunction
prohibiting termination. McDonald’s appealed.
McDonald’s primary argument was that its franchise agreements with restaurant
operators are, in essence, contracts for personal services and therefore are not subject,
as a matter of law, to the remedy of specific enforcement by either party in the event of
a breach. McDonald’s emphasized language in its franchise agreement to the effect
that the maintenance of a “close personal working relationship” with McDonald’s is “the
essence” of the franchise. The court fundamentally rejected this argument and instead
held that the license agreement required franchisees to comply with all business
policies, practices, and procedures imposed by McDonald’s, to serve only those food
and beverage products McDonald’s designates, to maintain the building, equipment,
and parking area in compliance with standards designated by McDonald’s and to
purchase fixtures, lighting and other equipment in accordance with McDonald’s
designated standards. The court went on to note that a “close personal working
relationship” does not automatically equate to personal services as defined by law.
Although plaintiffs provided services to McDonald’s customers, they were doing so in a
manner which was strictly controlled by McDonald’s in every way possible and that it
could hardly be said that no performance save that of plaintiffs’ would have met the
obligations of the contract period. Finally, the court rejected McDonald’s argument that
Burger Chef Systems, Inc. v. Burger Chef of Florida, Inc., 317 So. 2d 795 (Fla. Dist. Ct.
App. 1975), precluded the specific performance plaintiffs sought as a matter of law
because it addressed a permanent injunction, not an interim injunction and in any event
did not find Burger Chef and its progeny to be persuasive.
Precision Franchising, LLC v. Gatej, 2012 U.S. Dist. LEXIS 72075 (E.D. Va.
May 23, 2012), involved an alleged breach of a franchise agreement. Plaintiff Precision
Franchising, LLC claimed that franchisee Gatej breached the terms of a franchise
agreement (the “Agreement”) between the parties by failing to spend $55,000 in
required advertising under the Agreement and by prematurely ceasing operations of his
franchise and transferring its assets to a third party in violation of the Agreement.
Precision Franchising alleged that it suffered more than $86,000 in lost profits as a
result of this premature cessation. Gatej answered the complaint and then moved to
dismiss for lack of subject matter jurisdiction and failure to state a claim. The court
treated the motion as a motion for judgment on the pleadings.
Gatej first argued that the complaint failed to demonstrate that the amount in
controversy exceeded the jurisdictional minimum of $75,000 and thus lacked subject
matter jurisdiction. The district court denied the motion because Gatej failed to
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demonstrate that it was legally certain that Precision Franchising would not recover the
$55,000 in past advertising expenditures or that it was legally impossible to recover
$86,000 in lost future profits based on the terms of the Agreement.
Gatej also argued that Precision Franchising was not the proper plaintiff in the
case and thus the complaint failed to state a claim. Gatej asserted that Precision Tune,
Inc. was the party to the Agreement and any assignment to Precision Franchising was
invalid because the Agreement was a non-assignable personal services contract. The
court denied the motion because (i) the only prohibition of assignment in the Agreement
was the assignment by franchisee without franchisor’s approval and thus assignment by
the franchisor was permitted; (ii) even if the Agreement was a personal services
agreement, a partnership or corporate entity can assign contracts to a successor entity
if the successor is substantially the same as the original entity; and (iii) Gatej expressly
renewed the Agreement with Precision Franchising.
In Compass Motors Inc. v. Volkswagen Group of Am., Inc., 2012 N.Y. Misc.
LEXIS 2287 (N.Y. Sup. Ct. May 8, 2012), the court denied cross-motions for summary
judgment concerning the propriety of terminating the franchisee’s dealership.
Volkswagen sought to terminate based on Compass’s failure to complete renovations to
its dealership in a timely manner. Compass countered that it had completed all
renovations reasonably and economically feasible and that Volkswagen’s real reason
for seeking termination was because of market conditions, currency fluctuations and its
desire to do away with dual manufacturer dealerships. In addition, Compass argued
that Volkswagen had failed to provide the notice necessary under New York’s
automobile dealer law.
The court began by addressing Compass’s motion and noting that it appeared
limited to whether the notice of termination needed to be 90 days or 180 days. Based
on its review the Act, the court held that only 90 days’ notice was required because the
180 day period only applied to dealer sales and performance deficiencies. Accordingly,
the court denied the franchisee’s summary judgment motion. Next, the court addressed
Volkswagen’s motion. While Compass based its motion on the 90-180 day distinction,
that was not the entire basis of its claim, the court held. Instead, it also asserted that
the termination was invalid because it was not for due cause and in bad faith. Since
Volkswagen offered no evidence that its decision was in good faith and it had the
burden of proof to do so, the court denied Volkswagen’s summary judgment motion.
2.
Encroachment
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on appeal.
favor because Nestle’s sales were privileged.
WMW, Inc. v. Am. Honda Motor Co., Inc., 291 Ga. 683, 733 S.E.2d 269 (2012),
involved a dispute concerning Honda’s proposed addition of a new dealership. WMW
operated a Honda dealership under an agreement which authorized WMW to sell and
service vehicles at its main location and operate a separate service only location.
Honda informed WMW that it intended to open another Honda dealership within eight
miles of its service only location, but more than 8 miles from WMW’s main location.
WMW sued, claiming the new dealership was within WMW’s relevant market
area. The lower court found that WMW had no standing to sue under the Georgia
Motor Vehicle Franchises Practices Act (the “Act”). The court of appeals upheld the
lower court’s decision and WMW sought review by the state supreme court. After the
Court of Appeals’ decision, but before a decision by the supreme court, Honda decided
it no longer was going to open a second service center in the relevant area, and moved
to dismiss the appeal as moot. Because Honda may attempt in the future to open a
second dealership in the relevant area, the court decided to review the lower court
decision, even though the specific controversy at issue was moot.
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On the merits, the supreme court upheld the decision that WMW had no standing
to sue. The court reasoned that under the Act, a relevant market area is only calculated
from where motor vehicle sales take place, not from service centers because a dealer is
protected under the Act only if it is in the business of selling automobiles. Because the
proposed new location was not within the relevant market area of WMW’s sales facility,
it had no standing.
Legend Autorama, Ltd. v. Audi of Am., Inc., 2012 N.Y. App. Div. LEXIS 7602
(N.Y. App. Div. 2d Dep’t Nov. 14, 2012), involved claims against Audi by multiple
dealers for (1) breach of the express terms of dealer agreements and breach of the
covenant of good faith and fair dealing implicit in those agreements; and (2) breach of
fiduciary duty resulting from Audi’s decision to permit a new dealership within 13 miles
of the existing (allegedly underperforming) dealers. After Audi’s motion for summary
judgment on both claims was denied, Audi appealed.
The court held that lower court had properly denied Audi’s motion for summary
judgment with respect to the dealers’ contract claims. The dealership agreement
required Audi to “actively assist dealer in all aspects of dealer’s operations through such
means as Audi considers appropriate.” There was deposition testimony that Audi’s
typical practice was to provide underperforming dealers with time to implement changes
to improve their performance before opening a new dealership in their territory. Further,
although the dealership agreement contained a nonexclusivity provision that gave Audi
the discretion to add newly franchised dealers within the existing dealers’ territories,
Audi still had a duty to exercise that discretion in good faith. Because material
questions of fact remained regarding whether Audi had provided appropriate assistance
to the existing dealers and whether it had exercised its discretion to establish new
dealerships in good faith, summary judgment was not appropriate.
However, the court held that the lower court had improperly denied Audi’s motion
for summary judgment with respect to the dealers’ fiduciary duty claim. The court
emphasized that a conventional business relationship, without more, is insufficient to
create a fiduciary relationship and that there is generally no fiduciary relationship
between franchisee and franchisor. The court found no evidence on the record that the
nature of the relationship between Audi and its dealership had created a fiduciary duty.
Accordingly, Audi was entitled to summary judgment on the fiduciary duty claim.
At issue in Last Time Beverage Corp., v. F&V Distrib. Co., LLC, 951 N.Y.S.2d
77 (N.Y. App. Div. 2012), was a soft drink franchisor’s alleged breach of its franchisees’
exclusivity rights and ability to sell their franchises. The trial court initially assigned the
matter to a referee who found that the 27 witnesses the franchisees presented were
“highly credible” and also that their expert witnesses were “familiar with the customs and
practices in the soft drink industry.” Accordingly, the court credited their testimony both
generally and as to custom and usage in the beverage distribution to give meaning to
certain terms in the franchise agreements. In addition, the court credited the experts’
testimony that “once a franchisor placed a new beverage on a distributor’s truck, the
distributor automatically acquired the exclusive right to distribute that beverage in its
territory.” Id. at 82. The court also discounted the franchisor’s two witnesses, one of
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which was the owner who the referee found to have “less than marginal credibility.”
Based on the referee’s aptly supported factual findings, the appeals court affirmed
judgment in the franchisees’ favor on all counts, including the claims of certain without
written franchise agreements based the franchisor’s alleged promise to them of
treatment on the same terms as those franchisees with written agreements.
Rossi Ventures, Inc. v. Pasquini, LLC, 2012 U.S. Dist. LEXIS 90538 (D. Colo.
Apr. 9, 2012), is a story of a family business seemingly gone bad. The story begins with
siblings Melinda and Antonio “Tony” Pasquini opening a pizza restaurant using their
mother’s recipes (“Pasquini’s #1”). To own and operate the business Tony formed
Pasquini’s Pizzeria, Inc. (“PPI”) which he and Melinda owned. In 1994, Tony opened a
bakery, Pasquini’s Baking, in 1998 PPI entered into a license agreement with an outside
company for the operation of a second Pasquini’s Pizzeria (“Pasquini’s #2”) and in 2001
Tony and Melinda, as 50/50 partners, opened a third Pasquini’s Pizzeria (“Pasquini’s
#3”). In 2004, Tony decided to get out of the pizza business. Accordingly, for a total of
approximately $1.4 million, Melinda purchased from Tony and PPI their interest in
Pasquini’s #3 and Pasquini #1, along with related permits and licenses, the associated
goodwill and the “use of the name(s) ‘Pasquini’ Pizzeria’ or any variation thereof.” Id. at
*8. As part of this transaction, Tony acknowledged that Melinda acquired an exclusive
area for the operation of Pasquini’s #1, although the boundary of the exclusive area was
not fixed by the agreement.
Tony closed Pasquini’s Baking in 2005, and Melinda purchased the equipment,
moving it to Pasquini’s #3. Also, by 2006, Melinda had relinquished all her stock in PPI
and Tony was the sole remaining shareholder. Pasquini’s #3 closed in 2007, and
Melinda moved the baking equipment to Pasquini’s #1. Beginning in 2007, Tony
(through PPI) entered into three franchise agreements for the operation of three more
Pasquini’s Pizzerias. Each of these agreements established an exclusive area or
territory for the franchise, and contained PPI’s warranty that it owned the exclusive right
to use the Names and Marks to establish Pasquini’s Pizzeria restaurants in the U.S. and
Canada. Melinda was aware that Tony was granting franchises for restaurants using the
name Pasquini’s Pizzeria, and assisted in training the franchisees and attended their
grand openings. Melinda testified that she did not object at this time because (1) she
“would never get in the way of letting [her] brother open a restaurant so long as he
doesn’t get in the way of [her and her] restaurants;” and (2) she was selling desserts
made by Pasquini’s bakery to the new franchises. Id. at *11.
Ultimately, however, Tony eliminated the requirement that the franchises
purchase desserts from Pasquini’s bakery. The bakery ultimately closed in 2010. The
relationship between Tony and Melinda continued to deteriorate after this fact. The
straw that broke the camel’s back occurred in 2011 when Tony announced that he
planned to open a seventh Pasquini’s (“Pasquini #7”) that Melinda contended would
directly infringe on Pasquini’s #1’s exclusive area. When the parties were unable to
reach a resolution, Melinda commenced litigation, asserting three claims for relief: (1)
unfair competition in violation of the Lanham Act; (2) common law unfair competition
and trademark and trade name infringement; and (3) deceptive trade practices. She
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moved for a preliminary injunction, seeking to enjoin the defendant’s use of the name
“Pasquini’s Pizzeria” in connection with Pasquini’s #7.
The court first found that the operation of Pasquini’s #7 infringed on the exclusive
area acquired by Melinda when she purchased Pasquini’s #1. The court’s decision was
based on the following factors: (1) it made no sense that extremely valuable territory
would have been left as a “no man’s land;” (2) an advertising flier sent out by Pasquini’s
#1 when Tony owned a majority interest contained a map of the store’s delivery area,
and included the contested area; and (3) one of the principals involved in the operation
of Pasquini’s #2 testified at the hearing that Pasquini’s #1 territory included the
contested area. Id. at *16. The court also found that the requested preliminary
injunction would preserve and not disrupt the status quo. Id. at *20.
The court then analyzed Melinda’s likelihood of success on the merits. Id. at *2127. The court found that the mark at issue had acquired a secondary meaning and was
protectable, despite the fact that it was the defendant’s surname, that Tony and PPI
were using an identical mark, and that there was abundant evidence of actual customer
confusion. The court further found that Melinda’s acquiescence in Tony’s earlier
franchising efforts did not bar her requested relief since Tony’s opening of Pasquini’s #7
had exceeded the scope of her consent. Finally, the court found that Tony’s
unauthorized use of the name Pasquini’s Pizzeria in connection with Pasquini’s #7
would result in irreparable injury to Melinda, and that defendants had caused their own
injury by opening Pasquini’s #7 in violation of Melinda’s exclusive area and in the face
of a cease and desist letter sent by Melinda’s lawyers prior to its opening. Accordingly,
the court granted Melinda’s motion for preliminary injunction and preliminarily enjoined
the defendants from using the name “Pasquini’s Pizzeria.”
3.
Operational and other issues
Stuller, Inc. v. Steak N Shake Enters., Inc., 695 F.3d 676 (7th Cir. 2012),
presents an interesting confluence of preliminary injunctive relief jurisprudence and
franchisors’ ability to enforce national pricing programs. At issue in Stuller was Steak N
Shake’s implementation of a new menu pricing policy throughout its system. Stuller, a
five unit franchisee operating since 1939, refused to implement the new policy because
it believed the new policy would significantly harm its business and that its franchise
agreement gave it the right to set prices. When Steak N Shake initially threatened
termination based on Stuller’s refusal to adopt the new policy, Stuller filed suit for a
declaratory judgment. Although Steak N Shake originally agreed not to pursue
termination while the suit was pending, it later changed its mind which prompted Stuller
to move for a preliminary injunction preventing termination.
The magistrate to whom the motion was referred for a report and
recommendation sided with Steak N Shake and found no likelihood of irreparable harm
because “Stuller could comply with the pricing policy during litigation without
dramatically hurting its business, and that if it refused to accept the pricing policy and
had its franchises terminated, this loss would be self-inflicted.” Id. at 678. The district
court disagreed, holding that termination of the franchises would constitute irreparable
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harm and that such harm was not “self-inflicted.” It then entered the preliminary
injunction and Steak N Shake took an interlocutory appeal to the Seventh Circuit.
The issue on appeal was whether Stuller’s refusal to adopt the new menu pricing
was a self-inflicted injury that could not constitute irreparable harm. While recognizing
that certain types of self-inflicted harm precluded a finding of irreparable harm, the
Seventh Circuit held that each claim of self-inflicted injury must be evaluated on a caseby-case basis and that Stuller’s harm was not truly self-inflicted. Crediting Stuller’s
evidence that adopting the new policy would “be a significant change to its business
model and that it would negatively affect its revenues, possibly even to a considerable
extent,” the Seventh Circuit affirmed the district court’s issuance of the preliminary
injunction. In addition to the harm to its revenues, the court also noted that “if Stuller
implemented Steak N Shake’s policy and subsequently prevailed on the merits of its
case, it would be difficult to reestablish its previous business model without a loss of
goodwill and reputation.” In an interesting final footnote, the court went out of its way to
mention that during the pendency of the appeal the district court had denied Steak N
Shake’s summary judgment motion and granted Stuller’s as further proof that the merits
here warranted issuance of the preliminary injunction.
Bergstrom Imports Milwaukee, Inc. v. Chrysler Group LLC, 2013 U.S. Dist.
LEXIS 155902 (E.D. Wis. Oct. 31, 2012), involved an action brought by Bergstrom
Corporation and its subsidiary, by multiple dealers Fiat, against the Chrysler Group.
Bergstrom Fiat claimed that Chrysler failed to timely provide inventory or to support the
Fiat brand with adequate marketing, alleging unconscionable and arbitrary conduct in
violation of the Wisconsin Motor Vehicle Dealer Law and asserting breach of contract
and good faith and fair dealing claims. Bergstrom Corporation alleged that Chrysler had
provided oral assurances that Bergstrom Corporation would have a right of first refusal
for any new Fiat dealerships that might be opened in Wisconsin. A year after opening,
Bergstrom Corporation learned that Chrysler planned to open another Fiat dealership in
Wisconsin using another dealer. Bergstrom Corporation sought to enjoin the opening of
the new dealership and asserted breached of contract and promissory estoppel claims.
The court first addressed Bergstrom Fiat’s claims, concluding as a matter of first
impression that the Wisconsin Dealer Law provides the exclusive remedy for an existing
dealer challenging a manufacturer’s decision to open another dealership. Accordingly,
Bergstrom Fiat’s sole remedy was to file a complaint with the State Division of Hearings
and Appeals to address this claim. The court further concluded that, although
Chrysler’s product rollout had been “botched,” Chrysler’s marketing failures constituted
mere business negligence rather than arbitrary or unconscionable conduct.
Accordingly, the court dismissed Bergstrom Fiat’s claims under the Wisconsin Dealer
Law.
The court also dismissed Bergstrom Fiat’s breach of contract claims, holding that
the dealer agreement merely required Chrysler to provide enough inventory to allow
Bergstrom Fiat to meet its minimum sales obligation under the agreement, rather than
enough for Bergstrom Fiat to achieve any particular level of profitability. Further, the
court noted that the agreement did not require Chrysler to provide marketing support,
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and rejected Bergstrom Fiat’s argument that there was an implicit agreement to do so.
The court also rejected Bergstrom Fiat’s allegation of discriminatory treatment because
nothing in the agreement prohibited different treatment of Bergstrom Fiat as compared
to other dealers. The court dismissed Bergstrom Fiat’s breach of good faith and fair
dealing claim for the same reasons, finding that Chrysler had not breached any
obligation to Bergstrom Fiat.
Next, the court addressed Bergstrom Corporation’s contract and promissory
estoppel claims. The court noted that the dealer agreement stated that Bergstrom Fiat
had not received any oral promises, that the agreement superseded any previous
agreements, that the dealership had no exclusive rights to the sales locality, and that
Chrysler was entitled to appoint other dealers throughout the state. The court rejected
Bergstrom Corporation’s argument that Chrysler had made oral promises to John
Bergstrom (acting on behalf of Bergstrom Corporation) that could be enforced
notwithstanding the dealer agreement with Bergstrom Fiat (which had been signed by
John Bergstrom). The court concluded that any oral promises made to John Bergstrom
during the negotiation were made solely to Bergstrom Fiat, not Bergstrom Corporation.
Therefore, the court dismissed Bergstrom Corporation’s contract and promissory
estoppel claims.
Dec. 11, 2012), involved a suit brought by a franchisor against a former franchisee
claiming breach of the parties’ franchise agreement and seeking damages including lost
profits. The former franchisee had failed to spend a certain amount of its weekly gross
sales on advertising, ceased operation of its auto-care business without notifying the
franchisor, and transferred the assets of the business to a third party without the
franchisor’s consent, all of which were violations of the parties’ franchise agreement.
The franchisor brought suit for breach of contract, claiming approximately
$150,000 in damages, over half of which were claimed lost profits arising from the
franchisee prematurely ceasing its business operations. The former franchisee
proceeded through the litigation with a host of discovery violations, such as failing to
timely respond to discovery requests including requests for admission, failing to file
oppositions to various motions by the franchisor, and failing to appear at certain court
hearings.
The franchisor moved for summary judgment, arguing that the deemed
admissions resulting from the franchisee’s failure to timely admit or deny the
franchisor’s requests for admissions, along with some other undisputed evidence,
required judgment in the franchisor’s favor. Not totally unexpectedly, the former
franchisee failed to file an opposition to the motion for summary judgment.
Although the franchisee had belatedly filed responses to the franchisor’s
requests for admission, the court decided to disregard those responses, finding that
allowing the defendant to disregard his discovery obligations in this way would prejudice
the plaintiff. The court, undoubtedly influenced by the former franchisee’s previous
discovery blunders, emphasized that that the decision whether to allow a party to
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withdraw admissions and submit untimely responses is an equitable one. Although the
sanction for the untimely responses in this case was a harsh one (effectively resulting in
judgment against the violator), the court noted that the result was necessary to ensure
orderly disposition of cases and compliance with discovery rules. The court then
granted summary judgment in favor of the franchisor, finding that the deemed
admissions and other undisputed evidence established all the elements of the breach of
contract claim and established the franchisor’s damages, including the claim for lost
profits.
Gles Inc. v. MK Real Estate Developer & Trade Co., 2013 U.S. App. LEXIS
1668 (3d Cir. Jan. 23, 2013), is an appeal from a judgment for a distributor awarding
damages based on a gasoline franchisee’s failure to pay for gasoline purchases and
branding expenditures.
Appellants, the Kohlis, operated retail gasoline businesses for distributor Sweet
Oil, a gasoline wholesale distributor. In December 2005, the parties entered into a
sales agreement that required the Kohlis to purchase a minimum quantity of gasoline
over a ten-year period. The sales agreement contained an addendum that stated the
Kohlis would convert two gas stations to the BP brand, and that the Kohlis would
receive a branding incentive of $30,000 per site plus 2 cents per gallon of gas
purchased the first 36 months of the sales agreement. The Kohlis were responsible for
paying for all materials used in the rebranding, and Sweet Oil was responsible for
ordering the branding materials and paying for the installation costs.
In March 2008, Sweet Oil filed a complaint alleging that the Kohlis failed to pay
several invoices for gasoline purchases and branding costs. The Kohlis filed a
counterclaim alleging that Sweet Oil did not properly credit them branding incentives
and did not reimburse them for labor expenses associated with the installation of
branding materials. Sweet Oil denied that a branding incentive agreement existed and
that BP had notified the Kohlis they were ineligible for the incentives because they failed
to fully brand their gas stations. Following a bench trial, the court entered judgment in
favor of Sweet Oil and the Kohlis appealed.
Specifically, the Kohlis appealed the rejection of their counterclaim asserting they
were entitled to an upfront lump sum of $60,000 for rebranding expenses plus the twocent per gallon gas credit due to the addendum to the sales agreement. The addendum
provided that BP would pay the incentives and that BP would set the branding
requirements. Because BP was not a party to the sales agreement, and there was no
evidence that BP had an agency relationship with Sweet Oil, BP cannot be liable under
the contract. The court rejected the Kohlis argument that Sweet Oil owed them the
incentives “based on past relations” because the Kohlis did not raise the argument in
the district court. Lastly, the court affirmed the district court’s finding that the Kohlis
were not entitled to the incentives because their stations were never fully branded.
Sweet Oil had repeatedly informed the Kohlis of their failure to install and comply with
BP branding standards. The court therefore affirmed the district court’s finding.
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Desert Buy Palm Springs, Inc. v. DirectBuy, Inc., 2012 U.S. Dist. LEXIS
81116 (N.D. Ind. June 12, 2012), alleges claims for breach of contract, conversion,
unjust enrichment and breach of trust by a failed franchisee against its former franchisor
and parent corporation. In support of its claims, the franchisee alleged that DirectBuy
wrongfully withheld membership, renewal and handling fees to which it was entitled and
wrongfully assessed charges. DirectBuy moved under Rule 12 to dismiss all claims.
The court largely denied DirectBuy’s attempt to dismiss the action. Construing
the allegations in the Complaint in the franchisee’s favor, the court first rejected
DirectBuy’s argument that the franchisee first breached the agreement and therefore
relieved DirectBuy of further performance. Instead, the court held that the allegations
sufficiently stated that DirectBuy first breached the agreement by withholding funds due
to the franchisee. Next, the court refused to dismiss the criminal and civil conversion
claims based on allegations that the franchisor and its parent “knowingly and
intentionally took unauthorized control over property belonging to [the franchisee] and
converted those funds to a use not contemplated or authorized by DirectBuy’s and [its
parent’s] positions as trustees of the funds.” Interestingly, the court also let stand the
breach of trust claims, despite the necessity of a fiduciary relationship for such claims to
proceed. To establish a fiduciary relationship the franchisee relied upon the franchisor’s
status as trustee of certain accounts in which it deposited money. Finally, the court
dismissed the unjust enrichment claim against DirectBuy based on the franchise
agreement between the parties, but let it continue as to DirectBuy’s parent corporation
based on the absence of between it and the franchisee.
Despite an unusual combination of sandwiches and adult entertainment, the facts
of Capriotti’s Sandwich Shop, Inc. v. Taylor Family Holdings, Inc., 857 F. Supp. 2d
489 (D. Del. 2012), otherwise lead to a routine denial of an injunction application.
Franchisor Capriotti’s Sandwich Shop, Inc. sued franchisee Taylor Family Holdings, Inc.
(“Taylor”) for breaching the franchise agreement governing permissible use of
Capriotti’s trademarks, trade names, and trade secrets by partnering with a gentleman’s
club for a sandwich-and-dance deal. The Court denied Capriotti’s application for a
preliminary injunction to stop Taylor from operating as Capriotti’s franchisee.
The court held that whether the franchisee’s president breached the franchisee
agreement by failing to prevent the gentleman’s club’s unauthorized use of the
franchisor’s name and marks was a subjective determination that depended on the
credibility of the club’s owner. However, the owner’s testimony had not been available
by declaration or deposition. Accordingly, the court could not judge the likelihood of
success on the merits on the record before it. The court also denied the franchisee’s
motion to dismiss on personal jurisdictional grounds because any jurisdictional defenses
were waived by the franchisee’s filing another action in Delaware court, which
demonstrated its consent to Delaware’s jurisdiction. Instead, the court granted the
franchisee’s motion to transfer the action to Nevada because only a Nevada court had
personal jurisdiction over the club’s owner, who was the critical fact witness.
In Red Roof Franchising, LLC v. AA Hospitality Northshore, LLC, 877 F.
Supp. 2d 140 (D.N.J. 2012), Red Roof seeks partial summary judgment on its claims for
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damages following the franchisee’s voluntary abandonment of its Red Roof franchise in
favor of an America’s Best Value Inn franchise. Red Roof alleged that it was owed
approximately $70,000 in unpaid royalties and that the franchisee continued to use Red
Roof’s system and marks following termination. The franchisee filed counterclaims
alleging that Red Roof’s earlier contract breaches, breach of the covenant of good faith
and fair dealing, and violation of the Minnesota Franchise Act excused its performance.
The court began its decision with a choice of law analysis. Although the
franchise agreement and personal guarantees contained Texas choice of law
provisions, an amendment to the franchise agreement incorporated Minnesota’s
franchise act that voids any choice of law other than Minnesota law. As a result, the
court held that Texas law was inapplicable and instead New Jersey choice of law
principles would determine whether to apply New Jersey or Minnesota law to each
claim. In the end, however, the choice of law had no substantive affect as the court
found no difference between Minnesota and New Jersey law with respect to the various
claims.
In an attempt to stave off summary judgment on Red Roof’s breach of contract
claim, the franchisee submitted an affidavit containing a veritable laundry list of alleged
breaches pre-dating its abandonment. While the court was skeptical if Red Roof was
under any contractual obligation to actually provide the services allegedly unperformed,
it sidestepped the issue by holding that the franchisee’s continued operation of the hotel
negated any breach by Red Roof. “[U]nder no circumstances may the non-breaching
party stop performance and continue to take advantage of the contract’s benefits.” Id.
at 150. Accordingly, it granted Red Roof summary judgment against both the corporate
franchisee and the individual guarantors for breach of contract and attorney’s fees, but
limited the claim to damages up to the franchisee’s abandonment and required Red
Roof to submit additional evidence documenting the precise damage calculation.
Finally the court addressed and essentially dismissed the franchisee’s counterclaims.
The only claim the court allowed to survive was the franchisee’s breach of contract
claim for damages following its abandonment of the franchise. Although skeptical of its
viability, the court allowed the claim to proceed until such time as Red Roof submitted
additional evidence upon which the court might rely to dismiss the claim.
4.
Non-Competition Covenants
This case from the Western District of Virginia, Hamden v. Total Car
Franchising Corp., 2012 U.S. Dist. LEXIS 111432 (W.D. Va. Aug. 7, 2012), takes an
interesting and somewhat unique approach to interpreting non-competition and nonsolicitation agreements. At issue here was whether covenants triggered by
“termination” of the franchise applied where a franchise “expired” because the
franchisee chose not to renew. For example, the non-competition covenant in the
franchise agreement stated: “For 2 years following the termination of this Agreement
neither you nor any of your partner(s) shall . . . .” A separate non-competition
agreement provided that “[i]f the Franchise Agreement is terminated before its
expiration date . . . then you covenant, for a period of 2 years after termination, transfer
or assignment . . . .”
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Applying Virginia law, the court held that “when the contract is reviewed as a
whole it is clear that termination has a particular meaning that is explained in detail in
Section 8 of the Franchise Agreement.” Section 8, entitled Violation and Termination,
stated that the agreement would terminate upon the happening of certain events, such
as abandoning the business, being found guilty of a felony or disclosing trade secrets.
In reaching its conclusion the court rejected three decisions from other jurisdictions
holding that “termination” meant only “ending” and could encompass both termination
for cause and expiration. Instead, because the court determined that the agreement
was never “terminated,” it held that the non-competition, non-solicitation and nondisclosure provisions were all inapplicable.
Allegra Network LLC v. Cormack, 2012 U.S. Dist. LEXIS 117014 (E.D. Mich.
Aug. 20, 2012), addresses a motion to enforce a non-competition covenant by
preliminary injunction. The franchisor successfully argued that enforcement was
necessary to protect its customer base, goodwill and confidential information. Of course
it didn’t hurt that the franchisee did not hire counsel or submit any response beyond a
letter stating that they were not financially viable if required to honor the non-competition
covenant.
In analyzing the non-competition covenant, the court quoted Michigan’s statute
addressing enforcement in the employment context.
An employer may obtain from an employee an agreement or covenant
which protects an employer’s reasonable competitive business interests
and expressly prohibits an employee from engaging in employment or a
line of business after termination of the employment if the agreement or
covenant is reasonable as to its duration, geographical area and the type
of employment or line of business.
Id. at *8 (citing Mich Comp. Laws § 445.774a(1)). Applying this “reasonableness”
standard, the court held that the two year covenant (which provided that it did not begin
to run until entry of an order enforcing it) specifically prohibiting competition within a ten
mile radius of the franchisee’s former location and a five mile radius of any other
franchised location easily satisfied the test. “In terms of duration, Michigan courts have
upheld non-compete agreement covering time periods of six months to five years.”
When coupled with a protectable interest in loss of customer goodwill, the court did not
hesitate in enforcing the non-competition covenant.
Several months later, in Allegra Network, LLC v. Cormack, 2012 U.S. Dist.
LEXIS 181640 (E.D. Mich. Nov. 2, 2012), the parties were back in court, with the
franchisor alleging that its former franchisees were violating the preliminary injunction.
The magistrate judge noted that the former franchisees did not deny that they were
currently operating a print and copying business within ten miles of their prior
print/copying franchise location and therefore ordered them to appear before a circuit
court judge to show cause why they should not be adjudged in contempt of the
preliminary injunction.
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Before the ink on that decision was barely dry, the court also decided the
franchisee’s motion to dismiss in Allegra Network LLC v. Cormack, 2012 U.S. Dist.
LEXIS 178822 (E.D. Mich. Dec. 3, 2012), with the former franchisee faring no better.
The franchisor had terminated the franchise agreement after first providing a notice of
default to the franchisee and the franchisee failed to cure the default. Following
termination, the franchisee began operating a competing business within ten miles of
the former franchise in apparent violation of the franchise agreement, and the franchisor
brought claims for trademark infringement, unfair competition and breach of contract.
A temporary restraining order was granted to the franchisor, enjoining the former
franchisee from conducting competing business within ten miles of the former franchise
location. The former franchisee, when represented by counsel, filed an answer, and
then later, proceeding pro se, moved to dismiss the franchisor’s complaint and to
reserve asserting a counterclaim against the franchisor for fraud in the inducement with
respect to the execution of the franchise agreement.
On the non-compete issue, the former franchisee argued that a typographical
error as to the franchise address listed in the franchise agreement meant that the new
business was not within the ten-mile non-compete radius, that the franchise agreement
was entered into by an LLC and therefore was not binding on him as an individual, and
that the notice-of-default and notice-of-termination correspondence were never received
by the former franchisee. The magistrate judge rejected each of these arguments as
without merit and with relatively little discussion. The magistrate judge also denied the
former franchisee’s request to reserve assertion of a counterclaim for fraud in the
inducement, finding that such a claim was a compulsory counterclaim arising out of the
same transaction or occurrence as the plaintiff’s claims under FRCP 13, which should
have been asserted when the defendant’s answer was filed nearly a year prior.
The magistrate’s recommended denial of the former franchisee’s motion was
accepted and adopted in full by the district court judge. Allegra Network LLC v.
Cormack, 2013 U.S. Dist. LEXIS 13 (E.D. Mich. Jan. 2, 2013).
In another decision involving the same franchisor, same court and same issue,
but against a different franchisee, the result was, not surprisingly, the same. In Allegra
Network, LLC v. Liames, 2012 U.S. Dist. LEXIS 173052 (E.D. Mich. Dec. 6, 2012), a
former franchisee’s failure to abide by its post-termination non-competition covenant.
The former franchisee had abandoned its franchise location, after which the franchisor
terminated the franchise agreement. A competing business then hired the former
franchisee as a project manager and account representative, engaging in the same
business of selling signs, graphics, trade-show displays and related products. The
franchisor notified the competing business that employment of this individual constituted
interference with the franchisor’s rights under the franchise agreement. The competing
business and former franchisee ignored that notice and continued to violate the noncompete provision.
The franchisor brought suit, seeking damages and injunctive relief. None of the
defendants answered or appeared, and the franchisor was awarded default judgment.
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The defendants thereafter did not comply with the judgment against them, and
continued to violate the non-compete clause. On the franchisor’s motion, the court
reopened the case and set a hearing for the defendants to show cause why they should
not be held in contempt for failing to comply with the court’s judgment. The defendants
did not appear at the show-cause hearing, but only sent the judge a letter (after the
hearing) asserting that they could not pay the judgment and that the competing
business actually serves different clientele than the former franchisee had.
The court found the former franchisee and the competing business/new employer
in contempt for violating the post-termination provisions of the franchise agreement and
not complying with the judgment against them. The court ordered that the former
franchisee immediately take steps to comply with the post-termination provisions and
that the new employee immediately cease interfering with the franchisor’s contractual
rights. In addition, the court imposed daily civil penalties payable to the franchisor
against the defendants until they comply with the court’s order, threatened additional
fines or incarceration if the defendants fail to comply after 56 days of the civil penalties,
and awarded attorneys’ fees to the franchisor for having to reopen the matter to enforce
the judgment.
Allegra did not fare quite so well, however, in a Texas bankruptcy court. Allegra
Network, LLC v. Ruth (In re Ruth), 2013 Bankr. LEXIS 133 (Bankr. E.D. Tex. Jan. 10,
2013), involved Allegra’s request for a declaration that its right to enforce a noncompete in a franchise agreement signed by the bankruptcy debtors Michael and
Elnoria Ruth was not a claim subject to discharge in bankruptcy. In 1984, the Ruths
executed a franchise agreement with Insty-Prints that contained a non-compete and a
choice of law provision selecting Michigan law. Insty-Prints (and later Allegra after
Insty-Prints assigned all of its rights under the franchise agreement to Allegra as part of
a larger transfer of assets) and the Ruths executed multiple addendums to the franchise
agreement, extending the original franchise agreement after its expiration. After Allegra
terminated the franchise agreement, the Ruths allegedly breached the non-compete.
When Allegra sought an injunction prohibiting any continued breach, the Ruths filed for
bankruptcy.
To evaluate Allegra’s request, the court held that it must first determine whether
the non-compete was enforceable. Until 1985, Michigan considered non-competes to
be absolutely void as a matter of public policy. Accordingly, the court had to determine
whether the subsequent versions of the 1984 franchise agreement constituted mere
extensions of one continuous agreement (making the non-compete void from its
inception) or whether each extension stood as a separate, individualized contract in its
own right (making the non-compete in the post-1985 versions enforceable). Because
the later versions were executed to “amend and revise certain provisions of the
franchise agreement between franchisee and franchisor dated October 23, 1984,” the
court concluded that the parties intended to construct one continuous contract.
Accordingly, the non-compete was void.
Although not required to reach the question of whether Allegra’s request for
equitable relief fell within the definition of a “claim” subject to discharge in bankruptcy,
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the court concluded that the non-compete could “give rise to a right of payment”
because Michigan law recognized the payment of monetary damages as an alternative
to equitable relief in enforcement of a non-compete. Accordingly, it constituted a claim
subject to discharge in bankruptcy.
In Curves Int’l, Inc. v. Negron, 2012 U.S. Dist. LEXIS 142055 (E.D.N.Y. Aug.
31, 2012), Curves brought suit to enforce its non-competition agreement against a
franchisee that chose not to renew and began operating a competing business. Suit
was originally brought against two individual guarantors and their corporation, but one of
the individuals and the corporation were subsequently dismissed. Following entry of a
default against the remaining individual for not responding to the lawsuit, the court took
up Curves’ request for a permanent injunction enforcing the non-compete and for
attorney’s fees. Despite accepting the allegations of the Complaint as true, the court
nonetheless recommended against issuance of the permanent injunction. Applying
Texas law, the court held that enforcement of the non-compete requires, among other
things, a wrongful act. Here, the Complaint contained no allegation that the remaining
individual actually engaged in the operation of the competing business such that no
injunction should issue. “Injunctive relief is improper where the party seeking the
injunction has a mere fear or apprehension of the possibility of injury.” Despite this, the
court did recommend that attorney’s fees be awarded in accordance with the loser pays
provision in the franchise agreement, but awarded only $15,000 instead of the $25,747
requested.
Aamco Transmissions, Inc. v. Singh, 2012 U.S. Dist. LEXIS 141764 (E.D. Pa.
Oct. 1, 2012), involved a dispute over a non-compete provision in the parties’ franchise
agreement. Aamco originally filed a complaint alleging Singh was in violation of the
parties’ franchise agreement by underreporting sales in an attempt to avoid payment of
franchise fees calculated as a percentage of sales. During the course of the litigation,
Aamco filed a motion for preliminary injunction to prevent Singh from operating an
automotive center at another address. The motion was based on the parties’ franchise
agreement that prohibited Singh from engaging in the transmission repair business
within a radius of ten miles of the former center or any other Aamco center for two years
after the termination of the franchise agreement.
The court found that as part of the franchise, Aamco disclosed to Singh
proprietary systems, information, and trade secrets, and that Singh was provided with
Aamco’s operating and training manuals, national customer lists, and specialized
software through Aamco’s extensive training class. Singh’s current operation of a
transmission and general repair business within ten miles of his former Aamco store
was a violation of his franchise agreement, especially as Singh was using his
knowledge of Aamco, its unique systems, and other confidential information in the
operation of his new business.
Analyzing the factors for a preliminary injunction, the court found Aamco was
very likely to succeed on the merits of its claim: The non-compete was not ambiguous,
and was reasonable in time and geographic scope under the Piercing Pagoda factors
(351 A.2d at 212). Additionally, the Court found Aamco suffered irreparable harm. If
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Aamco was unable to enforce the covenant not to compete, the values of all its
franchises would be lowered because the inability could induce other franchisees to
violate their franchise agreements and use Aamco’s goodwill to establish a competing
business. Moreover, the harm to Singh did not outweigh the harm to Aamco, as Singh
could still operate a non transmission repair business and because Singh was aware of
any potential harm when he signed the franchise agreement and then proceeded to
open a competing business in violation of that agreement. Therefore, Singh’s hardship
was not “undue” as it was merely Singh living up to the terms of the agreement he
entered. Lastly, the public interest was served by ensuring contractual rights and
obligations of parties are upheld.
In Aamco Transmissions, Inc. v. Singh, 2012 U.S. Dist. LEXIS 163930 (E.D.
Pa. Nov. 16, 2012), the court addressed the motion for reconsideration of its order
granting Aamco’s motion for a preliminary injunction. The complaint involved a dispute
over a non-compete provision in the parties’ franchise agreement. Aamco originally
filed a complaint alleging that defendant-Singh was in violation of the parties’ franchise
agreement by underreporting sales in an attempt to avoid payment of franchise fees
calculated as a percentage of sales. In exchange for Aamco releasing Singh from the
substantial debt he owed to Aamco, Singh sold the franchise to an Aamco affiliate and
the franchise agreement was terminated. During the course of subsequent litigation,
automotive center at another address within ten miles of an Aamco repair center.
In a motion for reconsideration, Singh argued that the court ignored its own
analysis in Aamco Transmissions, Inc. v. Dunlap, 2011 U.S. Dist. LEXIS 91130, 2011
WL 3586225 (E.D. Pa. Aug. 16, 2011), which found a non-compete clause that
prohibited the defendant from operating a transmission repair business within a radius
of ten miles of any Aamco was not reasonable, but a ten mile prohibition from the actual
site of the center at issue was reasonable. Because the non-compete clause here was
identical to the non-compete clause in Dunlap, Singh argued that the court erred.
The court disagreed with Singh’s argument and denied his motion for
reconsideration. First, the court noted that a district court opinion has no precedential
value when it is affirmed without a published opinion by the Court of Appeals. Second,
the court disagreed that Dunlap established under Pennsylvania law a rule that all noncompete covenants which prohibit a former franchisee from operating within a radius of
ten miles from any like business was per se unreasonable and not enforceable. Rather,
the court noted that several Pennsylvania cases held that a ten-mile geographic scope
in a non-compete clause was reasonable. Finding that Singh failed to demonstrate any
of the factors needed when seeking reconsideration, the court denied the motion and
affirmed the preliminary injunction.
In TGA Premier Junior Golf Franchise, LLC v. B.P. Bevins Golf, LLC, 2012
U.S. Dist. LEXIS 147785 (D.N.J. Oct. 12, 2012), TGA sought an injunction to prevent
Bevins from operating a golf instruction business that TGA claimed violated the noncompete provision of the parties’ franchise agreement that prohibited defendant’s
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ownership or operation of a similar business for three years after the franchise’s
expiration within a ten mile radius of the franchise.
Bevins filed a motion to dismiss claiming the franchise agreement had a forum
selection provision designating California as the proper forum for any disputes over the
franchise agreement. TGA argued that venue was proper in New Jersey and that the
forum selection clause may only be enforced by a motion to transfer venue.
The court rejected plaintiff’s arguments and dismissed the case. The Third
Circuit had expressly stated that a motion to dismiss is a permissible mechanism to
enforce a forum selection clause. The court found that the forum selection clause was
clear and unambiguous and not the result of fraud. Enforcement would not violate
public policy and would not result in serious inconvenience.
Tutor Time Learning Ctrs., LLC v. KOG Indus., 2012 U.S. Dist. LEXIS 162124
(E.D.N.Y. Nov. 13, 2012), involved Tutor Time’s request for a preliminary injunction
terminating KOG Industries’ continued operation of two tutoring facilities as violations of
the non-compete clause contained in KOG Industries’ franchise agreement with Tutor
Time.
KOG Industries’ tutoring facilities were originally established as Tutor Time
franchises. After Tutor Time terminated the franchise agreement with KOG Industries,
KOG Industries continued operation of both tutoring facilities under a different name.
Tutor time subsequently sought a preliminary injunction enjoining KOG Industries from
any continued use of Tutor Time’s trademarks and other intellectual property. The
parties entered into a settlement agreement in which KOG Industries agreed to cease
use of Tutor Time’s proprietary computer system, trademarks, curriculum, educational
materials, and forms, to send a letter to all existing customers that the tutoring facilities
were no longer licensed Tutor Time centers, and to disconnect all phone numbers
previously associated with Tutor Time.
Despite the settlement agreement, Tutor Time also sought a preliminary
injunction enjoining KOG Industries from continued operation of the tutoring facilities,
alleging that continued operation would irreparably harm Tutor Time through (1) public
confusion; (2) loss of good will; and (3) injury to current franchisees.
First, the court concluded that the terms of the settlement agreement alleviated
any risk of public confusion, as the customers were notified that KOG Industries’
tutoring facilities were no longer affiliated with Tutor Time and the facilities would no
longer be using any Tutor Time intellectual property or materials.
Second, the court concluded that there was no risk of loss of good will because
Tutor Time’s only interest in former customers of KOG’s Tutor Time franchises related
to their potential subsequent enrollment at another Tutor Time location. There were no
Tutor Time locations within the same neighborhoods, no evidence to suggest that Tutor
Time had attempted to recruit Kog Industries’ former customers, and no evidence to
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suggest that the former customers would have enrolled at another Tutor Time location if
solicited.
Third, the court concluded that there was no injury to current franchisees for the
same reasons – there was no evidence that KOG Industries’ former customers would
have enrolled at other Tutor Time locations even if KOG Industries ceased operations of
its two tutoring facilities.
In denying Tutor Time’s motion for a preliminary injunction, the court also noted
the potential harm to the public interest in closing tutoring facilities and forcing families
to locate alternative services.
Lawn Doctor, Inc. v. Rizzo, 2012 U.S. Dist. LEXIS 175139 (D.N.J. Dec. 11,
2012), involved a dispute over the terms of a settlement agreement between a
franchisor and former franchisee, in particular the sorts of competitive businesses that
were prohibited by the agreement’s covenant not to compete. The defendant was a
former franchisee who operated a lawn care business for nearly ten years under a Lawn
Doctor franchise agreement. The franchise agreement included a non-competition
clause, prohibiting the franchisee from engaging in a competitive business for eighteen
months following termination in the former area of responsibility, within 50 miles of the
boundary of the area of responsibility, in any other franchisee’s area of responsibility, or
within 50 miles of the boundary of any other franchisee’s area of responsibility.
Because the franchisee failed to pay certain fees and submit certain reports, the
franchisor issued a notice of default and, after the franchisee’s failure to cure, a notice
of termination. At a hearing regarding an injunction to enforce the franchise
agreement’s non-competition covenant, the court determined that the restriction was
unreasonable in geographic scope and therefore unenforceable, but, recognizing the
need of the franchisor to protect its trade secrets, customer relationships and goodwill,
left open the possibility of having a subsequent hearing on enforceability of a less
restrictive covenant not to compete.
The parties thereafter entered into a settlement agreement by which they agreed
to a non-compete agreement containing all the terms of the original covenant except the
prohibition on operating a competing business within 50 miles of the boundary of any
other Lawn Doctor franchisee’s area of responsibility. At the time of the settlement and
thereafter, the former franchisee operated an irrigation services company within the
geographic scope of the non-compete agreement. The parties disputed whether an
irrigation services company fell within the definition of a competing business that would
be subject to the restrictive covenant.
Lawn Doctor argued that irrigation services plainly fell within the meaning of
competing business because irrigation is related and ancillary to lawn care. The former
franchisee argued that it had never in nearly ten years of being a Lawn Doctor
franchisee provided irrigation services, and that Lawn Doctor could only identify two
franchisees, in different states, currently offering irrigation services. The court sided
with Lawn Doctor, determining that the plain language of the settlement agreement and
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non-compete provision controlled. Because irrigation was not tangentially related, but
was indeed directly related, to the establishment, care and conditioning of lawns, the
irrigation services business operated by the franchisee was prohibited by the parties’
settlement agreement and non-compete clause. The court remarked that non-compete
agreements in the franchise context, similar to non-competes following the sale of a
business, are entitled to more free enforcement than such agreements in the
employer/employee context. The franchisor had a legitimate interest in protecting its
trade secrets, confidential information, customer relationships and goodwill, and the
non-competition covenant (as modified by the parties’ settlement agreement) properly
protected those interests and was reasonable both temporally and geographically.
Novus Franchising, Inc. v. Superior Entrance Sys., Inc., 2012 U.S. Dist.
LEXIS 182460 (W.D. Wis. Dec. 28, 2012), determined the appropriate scope of a noncompetition covenant after termination of a franchise. The court had previously found
on summary judgment that the franchisor had not materially breached the franchise
agreement, that the franchise agreement was terminated in February 2012, and that the
franchisor was entitled to $12,600 in damages for franchise royalties and other
amounts. The parties thereafter entered into a conditional settlement agreement in
order to obviate the need for trial of any remaining issues in the case. The only issue
remaining for disposition on the merits by the court was the equitable relief the
franchisor sought under the post-termination non-competition provision of the franchise
agreement.
The former franchisee, an individual, was not in compliance with the noncompete clause by his operation of a company in the same business as the former
franchise. The court determined that the non-competition provision was too broad as to
persons restrained and as to geographic scope, but used a method of interpretation and
construction under Minnesota law called the “blue pencil” rule, whereby the court could
fashion an appropriate scope of non-competition obligations by enforcing only the
reasonable portions of the covenant. The court therefore altered the text of the original
covenant to provide that the former franchisee and his new company were prohibited
from operating a competitive business in the same geographic area as was served by
the former franchise for a period of two years. Because the covenant could only be
enforced against the individual former franchise, and not his new company (who was
not a party to the franchise agreement), but it was still necessary to prevent the new
company from competing in order to give the franchisor an effective remedy, the court
concluded that the individual could only be in compliance when he either completely
divested all financial interest in and connection with the new company or when the new
company ceased to perform the same business (auto glass repair) of the former
franchise.
At issue in Tantopia Franchising Co., LLC v. W. Coast Tans of Pa., LLC, 2013
U.S. Dist. LEXIS 8266 (E.D. Pa. Jan. 22, 2013), was whether a non-compete covenant
in a franchise agreement prohibited the franchisees from assisting or providing advice to
a third-party business offering a related product.
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Plaintiff Tantopia Franchising Co., LLC (“Tantopia”) operates a retail indoor
tanning salon franchise system. Defendants Donald and Richard Weiss entered into a
Franchise Agreement with plaintiff to operate a tanning salon. The Agreement included
a non-compete agreement which prohibited the defendants from offering services the
same or similar to the tan salon within a specified area for a period of two years
following the end of the Agreement.
Defendant filed a form with the Pennsylvania Department of Revenue to go out of
business. They did not inform plaintiff of this fact or that its salon ceased operations.
Subsequently, the space previously occupied by the defendants was leased out by a
new tanning business (the “CTG Salon”). This new company was owned ninety percent
by Donald Weiss’ wife, and the other 10% by Donald Weiss himself. Additionally,
another tanning salon (the “Southampton Salon”) was opened by a close acquaintance
of Donald Weiss. Both Donald and Richard assisted at this tanning salon, and provided
the necessary requirements to secure the loan for the business.
Plaintiff filed suit and sought a motion for preliminary injunction to prevent the
tanning salons from operating as they were in violation of the non-compete provision in
the franchise agreement. The court granted the motion. The court noted that it was
well-established law that a non-covenantor who benefits from the covenantor’s
relationship with a competing business must abide by the same restrictive covenant
agreed to by the covenantor. The court found that the other businesses had sham
owners and the businesses were really being run by Donald and Richard but through a
different name. Accordingly, the non-compete restriction applied and success on the
merits was likely.
Victory Lane Quick Oil Change, Inc. v. Darwich, 2013 U.S. Dist. LEXIS 12877
(E.D. Mich. Jan. 31, 2013), involved the reach of a non-compete provision in a franchise
agreement. Plaintiff Victory Lane Quick Oil Change, Inc. (“Victory Lane”) entered into a
Franchise Agreement (the “Agreement”) with defendants to operate a quick oil change
franchise in Saline, Michigan. The Agreement was with Darwich Brothers LLC
(“Darwich Brothers”) and Magid Darwich. The Agreement included a non-compete
covenant which prohibited defendants from operating a similar business.
In March 2011, the Darwich Brothers sold the assets of the Saline oil change
location to B. Darwich, who formed Mazh, LLC, and began operating an oil change
business there named Saline Quick Lube. The Darwich Brothers intended to transfer
the lease of the location to Mazh LLC, but the landlord refused to sign the transfer.
Victory Lane brought suit in April 2011, alleging that Saline Quick Lube violated
the terms of the Agreement it had with Darwich Brothers and Magid Darwich. It also
brought a Lanham Act claim alleging that the logo for the Saline Quick Lube store was a
colorable imitation of Victory Lane’s trademarked logo. The court granted Victory
Lane’s motion for a preliminary injunction in an earlier decision. Victory Lane then
sought partial summary judgment on its breach of contract and Lanham Act claims
against the defendants.
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The defendants argued that summary judgment was inappropriate on the breach
of contract claim because Darwich Brothers and Magid Darwich – the parties Victory
Lane has a contract with – disclaimed any interest in the Saline Quick Lube location.
Accordingly, defendants argued that the non-compete provision could not apply to them.
The court disagreed, noting that Darwich Brothers remained the tenant at the Saline
Quick Lube location and therefore was “connected with” a similar business thus
violating the terms of the Agreement.
On the Lanham Act claim, the court denied Victory Lane’s motion for summary
judgment because Victory Lane introduced no evidence that Darwich Brothers or Magid
Darwich had any responsibility in creating the logo for Saline Quick Lube. So even if
the court agreed that the logo infringed on Victory Lane’s trademark, Darwich Brothers
and Magid Darwich would not be liable for Lanham Act violations.
In Lawn Doctor, Inc. v. Rizzo, 2012 U.S. Dist. LEXIS 89678 (D.N.J. June 27,
2012), Lawn Doctor, Inc. sought a preliminary injunction enforcing its post-term noncompetition agreement. Although the franchisee raised certain arguments concerning
the propriety of the franchise termination, the court disregarded these and instead
focused on the reasonableness of the covenant. Here, the covenant prohibited the
franchise “and its owner(s) or the members of their immediate families from having any
interest as a disclosed or beneficial owner, investor, lender, partner, director, officer,
manager, consultant, employee, representative or agent, or in any other capacity, in any
Competitive Business located within (I) [the franchise territory]; (ii) fifty (50) miles of the
Franchise Territory's boundaries; (iii) any territory granted by [Lawn Doctor] to any other
[Lawn Doctor] franchisee; or (iv) fifty (50) miles of the boundaries of any territory
granted by [Lawn Doctor] to any other [Lawn Doctor] franchisee” for 18 months following
termination.
The court analyzed the restrictive covenant under New Jersey law, which
requires a three-prong inquiry into the reasonableness of the covenant. A covenant will
typically be found reasonable when it protects the legitimate interests of the employer,
imposes no hardship on the employee, and is not injurious to the public. Ultimately, the
court determined that the geographic scope of the covenant was so broad that it was
unreasonable. “Defendants operated a LD franchise in a relatively small area in
Bradenton-Sarasota, Florida. Considering LD seeks to impose a restrictive covenant in
at least 38 states, this covenant is not in reasonable proportion to LD's legitimate
interests in protecting customer relationships and good will.” Interestingly, the decision
contains no discussion of “blue penciling” the geographic scope which is something
New Jersey courts have done in the past. See e.g., Cmty. Hosp. Group, Inc. v. More,
183 N.J. 36 (2005). Finally, while the court refused to enforce the restrictive covenant,
the parties did agree to several other types of injunctive relief—including a prohibition
on enjoining the franchisee using Lawn Doctor trademarks, requiring return of customer
files and other confidential and proprietary information, and requiring the franchisee to
“de-identify” its location.
In Econo-Lube N’ Tune, Inc. v. Orange Racing, LLC, 2012 U.S. Dist. LEXIS
129219 (W.D.N.C. Sept. 10, 2012), the franchisor sought to enforce its non-competition
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agreement against both the corporate franchisee and individual guarantor following
termination of the franchise for operating a competing oil lube business. Here, the noncompetition covenant required the franchisee and guarantor to “cease and refrain, for a
period of one (1) year from the date they begin compliance with such covenant not to
compete, either directly or indirectly owning, operating, advising, being employed by, or
having any interest in any business performing tune-up services, brake services, or
lubrication and oil change services within a radius of twenty (20) miles of” the
franchisee’s business location. Id. at *1-2. In connection with its motion for preliminary
injunction, the franchisor also submitted evidence “that defendants have engaged in
post-termination violations, including . . . continuing to operate a competing business
known as Village Autocare within one (1) mile of” of the franchise location and “was
using [the franchisor’s] federally protected trademark in commerce without
authorization.” Id. at *4-5. The defendants did not appear for the preliminary injunction
hearing, and the court granted the injunction. Id. at *1-2, *14-15.
The court held that the franchisor was “likely to be able to prove that the noncompetition agreement is valid and enforceable” under North Carolina law because it (1)
was “reasonably necessary to protect the legitimate interests of the person seeking its
enforcement”; (2) was “reasonable with respect to both time and territory”; and (3) did
“not interfere with the interest of the public.” Id. at *7-10. Specifically, the court held
that “the covenant [was] reasonable as to time and territory.” Id. at *7. With respect to
time, “[t]he term [was] only for one year” and the court noted that terms in excess of that
duration were regularly upheld in North Carolina and federal courts. Id. at *7-8. With
respect to territory, the 20-mile radius was “reasonably required to secure the protection
of the franchisor's legitimate business interests,” allowing the franchisor “(1) to protect
its confidential and proprietary information and its customer goodwill (customer goodwill
is for the trademark and not the specific business) . . . (2) to protect its authorized
franchisees in the same area as defendants from unfair competition with an exfranchisee who has learned all of the confidential practices and procedures that make
plaintiff's franchisee successful in the marketplace; and (3) to ensure its ability to secure
another franchisee at or near the location formerly served by defendants.” Id. at *8-9.
Finally, the court also held that the absence of an injunction “would deprive plaintiff of
the customers and the market that it has established over the course of its franchise
relationship with defendants, and would thus make it difficult if not impossible for plaintiff
to re-establish an authorized, reputable franchise in the same area.” Id. at *10-11.
Indeed, “permitting these defendants to ignore and violate their contractually agreed
upon covenant not to compete would adversely affect the value of legitimate, law
abiding franchisees, thus harming the plaintiff's system as a whole.” Id. at *11-12.
At issue in Everett v. Paul Davis Restoration, Inc., 2012 U.S. Dist. LEXIS
133682 (E.D. Wis. Sept. 18, 2012), was whether a franchise owner’s wife who did not
sign the non-competition covenant was nonetheless bound by it. The franchisor argued
the wife was equitably estopped from avoiding the covenant because she actively
participated in running the franchise. The wife, not surprisingly, argued she was not
bound because she never signed the covenant. Although the court initially issued a
preliminary injunction compelling the wife to arbitrate her claims, thereby suggesting she
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was bound, it subsequently reversed itself and vacated the arbitration award enforcing
the covenant against her personally.
On competing motions to confirm and vacate the arbitration award, the court
ultimately relied upon Second Circuit case law to hold that equitable estoppel was
unavailable because the wife did not “directly” benefit from the franchise agreement and
was not seeking relief under the franchise agreement. “[I]n order to hold Ms. Everett to
a contract she did not sign, PDRI must show that she benefitted directly from the
contract, not the business that the contract made profitable.” If mere indirect benefit
from a franchise, such as profits from the business, could bind a person individually,
“PDRI would have no reason to have the owner of the legal entity operating the
franchise separately sign the Franchise Agreement in his individual capacity.” Here, as
demonstrated by the fact that the franchisor required the husband to sign individually,
the franchisor understood the importance of binding individuals. Having not secured the
wife’s promise not to compete, the court permitted her to continue operating the
previously-franchised business that the husband “sold” to her.
In Smoothie King Franchises, Inc. v. Southside Smoothie & Nutrition Ctr.,
Inc., 2012 U.S. Dist. LEXIS 67620 (E.D. La. May 14, 2012), Smoothie King (the
franchisor) filed a lawsuit alleging that its former franchisee violated a non-competition
covenant by operating several smoothie shops in the same location as the former
franchises and failed to pay all royalties owed under the franchise agreements. In
response, the former franchisor asserted several affirmative defenses, including that the
franchise agreements were unenforceable, relying on Kaiser Steel Corp. v. Mullin, 455
U.S. 72 (1982). Specifically, the former franchisee alleged that the agreements required
Smoothie King’s franchisees to engage in false and deceptive advertising in violation of
the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) by selling their
products as “real whole fruit” smoothies, when they had other added ingredients. The
former franchisee moved for summary judgment on, among other things, this defense.
In Kaiser Steel, the Supreme Court allowed a defendant to assert an illegality of
contract defense in response to a breach of contract claim based on the
unenforceability of the contractual provision at issue under certain federal law. Based
on this illegality, the Supreme Court “held that the defendant was not foreclosed from
raising the provision’s illegality as a defense to plaintiff’s contract claim.” Id. at *10.
Here, the court found that the provisions Smoothie King sought to enforce – the noncompetition clause and royalty provision – were “not inherently unlawful.” Id. “Neither
the Lanham Act, the FTC Act, nor the FDUTPA directly prohibits a franchisee from
voluntarily agreeing to pay its franchisor royalty fees, or from agreeing to refrain from
competing with its former franchisor for a certain period of time within a limited
geographic bounds. The same is true for the mandatory advertising provisions.” As the
contractual provisions at issue could be enforced, “without commanding unlawful
conduct,” the court denied summary judgment seeking to dismiss the claim.
The former franchisee also asserted that each of the franchisee agreements at
issue were null and unenforceable under Article 2030 of the Louisiana Civil Code
because “they were designed to implement a widespread system of unconscionable
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consumer fraud.” Id. at 14. The court found that the former franchisee failed to meet its
burden with this affirmative defense as well. Generally, “an obligation cannot exist
without a lawful cause.” Id. Under Article 2030, “‘[a] contract is absolutely null when it
violates a rule of public order, as when the object of a contract is illicit or immoral.’” Id.
However, the court stated that the “law presumes that individuals do not intentionally
enter into agreements to violate the law.” Id. The court found that the former franchisee
failed to offer any evidence that the franchise agreements were entered into “to
circumvent or violate the law.” Id. at *16. Rather, the evidence established that the
parties entered into the agreements “to establish a mutually beneficial franchise
relationship for anticipated commercial gain.” Accordingly, the court denied summary
judgment on this defense as well.
Zabaneh Franchises, LLC v. Walker, 972 N.E.2d 344 (Ill. App. Ct. 2012),
addresses whether an employee’s non-competition and non-hiring covenant with a
former owner is enforceable by a subsequent purchaser of the franchise. At issue here
was a two year covenant prohibiting the employee from preparing tax returns for clients
on whose behalf she prepared returns while at the franchise and a one year prohibition
on hiring employees of the franchise. Despite the trial court refusing to enforce the
covenants on the grounds that they were adhesions contracts, the appeals court
reversed and remanded, adopting the new Illinois test focusing on the reasonableness
of the limitations. The appeals court also saw the change in ownership as no
impediment to enforcement of the covenants.
At issue in Murphy Bus. & Fin. Corp. v. Scivally, 2012 U.S. Dist. LEXIS 78472
(M.D. Fla. May 3, 2012), was the franchisor’s request for a preliminary injunction
requiring defendants to turn over approximately 20 commercial real estate listings and
prohibiting defendants from acting as broker to individual franchisees. Murphy
Business and Financial Corporation (“Murphy”) licensed two types of franchisees –
independent agents and regional developers who acted as brokers for sales in which
the independent agents participated. Following its termination of the Scivallys’ regional
franchise, Murphy sought preliminary injunctive relief. Unfortunately for Murphy, the
court found its likelihood of success lacking and denied the motion. Specifically, the
court found that the record was not sufficiently developed with respect to the Scivallys’
alleged franchise agreements with the independent agents and the formation and
termination date of the regional franchise. The court further concluded that the essence
of Murphy’s alleged harm consisted of lost franchise fees, which did not constitute
irreparable harm. Id. at *16. As Murphy had not demonstrated how it would lose
business in Arizona if the preliminary injunction was not granted or that it would be
prohibited from acting as the broker of record for business listings with other agents in
the state the court denied Murphy’s preliminary injunctive relief.
Meineke Car Care Ctrs., Inc. v. Martinez, 2012 U.S. Dist. LEXIS 55674
(W.D.N.C. Apr. 20, 2012), involves enforcement of an arbitration agreement and a noncompetition covenant. Here, Meineke filed to suit to: (1) compel arbitration of its
damages claim for unpaid royalties and advertising fees; and (2) preliminary enjoin
operation of a competing business pending arbitration pursuant to a non-competition
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agreement. When the former franchisee failed to respond to the suit, the court awarded
Meineke a default judgment on both its claims.
At issue in Outdoor Lighting Perspectives Franchising, Inc. v. Harder, 2012
NCBC LEXIS 28 (N.C. Super. Ct. May 14, 2012), was the franchisor’s motion for a
preliminary injunction enforcing its non-competition and confidential information
covenants. After reviewing the general rules for enforcing non-competition covenants in
North Carolina, reasonableness as to geographic scope and time, protection of a
qualified interest such as good will, trade secrets or confidential information and
appropriately limited to protect the qualified interest, the court quickly turned to the one
factor at issue here: whether a two year prohibition on “directly or indirectly” engaging in
a “Competitive Business” was overbroad.
The court began its analysis by recognizing the more lenient standard applied to
enforcing non-competition covenants in the sale of business context as opposed to the
employment context. Although the court noted that prohibiting “direct or indirect”
competition in the employment context was generally considered too broad, it did not
invalidate the covenant on that basis. Rather, the court held that prohibiting
involvement in a “Competitive Business” was too broad to enforce. Although the
franchise agreement did not define “Competitive Business”, the absence of a definition
tying it to the business the former franchisees actually performed doomed enforcement.
[T]he language further restricts Defendants from any outdoor lighting
business and any business which competes with a business "similar to"
the Franchisee's business. This expansive language extends well beyond
activities that Defendants performed pursuant to the Agreement. It
likewise extends beyond the business [franchisor] itself conducts. The
language thus extends beyond [franchisor]'s legitimate business interests.
Despite refusing to enforce the non-competition covenant, the Court did grant a
preliminary injunction prohibiting the use of the franchisor’s proprietary and
competitively-sensitive information that the franchisee admitted to retaining and using
and requiring the franchisee to assign its former telephone numbers to the franchisor.
NBT Assocs. v. Allegiance Ins. Agency CCI, Inc., 2012 U.S. Dist. LEXIS
55041 (E.D. Mich. Apr. 19, 2012), is a decision on the franchisor’s summary judgment
motion for trademark infringement, unfair competition, breach of franchise agreements,
breach of the confidentiality/non-competition covenants, unjust enrichment, implied-infact contract, and tortious interference with business relationship. The defendant
franchisees and their principals were insurance agencies in Phoenix, Arizona operating
under the name of Advasure. The franchisor ultimately terminated the franchises for
failure to pay royalties and breach of an interim settlement agreement. Unfortunately for
the franchisor, the court did not take kindly to its summary judgment motion and denied
it.
Specifically, the Court denied the motion on with respect to the franchisor’s
trademark infringement and unfair competition claims because genuine disputes of fact
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existed as to whether the defendants engaged in unauthorized use of the Advasure
mark both before and after the November 2011 termination of the franchise
agreements. The court also denied the plaintiff’s motion as to his breach of contract
and breach of confidentiality and non-competition agreements because, under Michigan
law, he who commits the first substantial breach of a contract cannot maintain an action
against the other contracting party for failure to perform. Here, the court found a
question as to whether the franchisor breached the franchise agreements first by failing
to ensure that carriers were in place for the franchisees to sell policies in Arizona.
Further, the plaintiff offered no evidence of the reasonableness of the non-competition
agreement, a requirement to prevail on this claim. The court further denied the
plaintiff’s claims against the alleged silent partner for unjust enrichment, implied-in-fact
contract, and tortious interference with business expectancy because, even if these
doctrines could bind a non-party to an enforceable contract executed by other
individuals, the facts underlying these claims were far from undisputed.
In Dickey's Barbecue Rests., Inc. v. GEM Inv. Group, L.L.C., 2012 U.S. Dist.
LEXIS 54448 (N.D. Tex. Apr. 18, 2012), the reader is again reminded of the importance
of the specific facts at issue when seeking to obtain a preliminary injunction enforcing a
non-competition agreement. Here, defendants and former franchisees signed an area
development agreement and franchise agreement to develop three Dickey’s restaurants
in Washington State. After signing the agreements, defendants leased space for their
first restaurant and attended initial training in Texas, but quit after one week of a three
week program. Defendants returned all of the Dickey’s materials they had received
without making copies and never operated a Dickey’s franchise. Instead, upon
returning to Washington, defendants developed their leased building into a Jim Bob’s
Chuck Wagon restaurant.
In reviewing the franchisor’s preliminary injunction motion the court focused
exclusively on whether Dickey’s established a substantial threat of irreparable injury.
Dickey’s first claimed that the franchise agreement contained an acknowledgement that
violation of the covenant not to compete would result in irreparable harm. The court,
however, ruled that contractual stipulations of irreparable harm are insufficient by
themselves to support injunctive relief. Next, Dickey’s claimed irreparable harm by lost
goodwill, business and trade secrets. This too failed because, at the time, Dickey’s had
no stores in Washington and thus no customer goodwill to protect. Further, the
defendants had never operated the leased location as a Dickeys, had never advertised
or publicized the opening of a Dickey’s, had never put up a Dickey’s sign at the leased
location, and changed the interior of the leased restaurant so it would not resemble a
Dickey’s. As to trade secrets, the court found that Dickey’s produced no evidence that
the defendants learned any trade secrets during their abbreviated training or that the
defendants were in direct competition with Dickey’s. As the Court summarized, “[w]here
Defendants attended training for just over a week, returned all training materials, use
their own recipes, cook their barbecued meat in a different manner, offer a variety of
foods, and leased an existing restaurant building in a state where Dickey’s has no
established good will or customer base, Plaintiff has not met its burden of persuasion
that it will suffer irreparable injury with respect to its trade secrets.”
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In Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc.,
2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012), the court reached the opposite
conclusion of a North Carolina state court analyzing the same non-competition
agreement (see above) and granted a preliminary injunction enforcing the agreement as
modified. The covenant at issue prohibited the franchisee or any of its officers or
stockholders, from operating a competing business within 100 miles of the franchisee’s,
or any other franchisee’s territory. In enforcing the covenant, the court found that the
franchisor would be irreparably harmed if the defendants were not enjoined from
violating the covenant based on the franchisor’s substantial investment of time, money,
and other resources in developing its unique business system and associated
trademarks and trade names. Having utilized the franchisor’s system for five years, the
“franchisor's goodwill and reputation would be damaged if [the] terminated franchise
continued to operate a directly-competitive business in the same location (or market)
under a different name.” Further, OLP had a legitimate interest in maintaining the
integrity of its franchise system, and operation of a competing business in the territory
formerly serviced by the defendants would prevent OLP from re-entering that territory
and attracting new franchisees to service that territory. The court also found that there
is a public interest in the enforcement of a valid non-competition agreement, but struck
the 100 mile radius and limited enforcement to the franchisee’s former territory and that
of other franchisees’ territories.
Interestingly, the court also ordered that all named defendants, even those
individual defendants that did not sign the covenant not to compete, were enjoined from
violating the covenant. This holding was supported by the terms of the covenant itself,
which expressly applied to the former franchisee’s managers, officers, beneficial
owners, directors, employees, partners, members, principals and immediate family
members. Moreover, Federal Rule of Civil Procedure 65 allows courts to extend
injunctions to (A) the parties; (B) the parties' officers, agents, servants, employees and
attorneys; and (C) other persons who are in active concert or in participation with
anyone described in Rule 65(d)(2)(A) or (B). Fed. R. Civ. P. 65(d)(2). This included the
individual defendant David Perlmutter, whose bankruptcy did not void enforcement of
the covenant not to compete against him.
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In F.C. Franchising Sys. v. Schweizer, 2012 U.S. Dist. LEXIS 74991 (S.D. Ohio
May 30, 2012), the court granted a preliminary injunction enforcing a non-competition
agreement following the franchisee’s failure to respond to the litigation and entry of
default against it. F.C. Franchising operates a residential painting service system under
the trade name “Fresh Coat.” When, after a year in operation, Fresh Coat’s franchisee
Schweizer failed to provide its 2008 federal income tax returns, submit weekly sales
reports and pay royalties, Fresh Coat terminated the franchise. Upon learning that
Schweizer was still operating after termination of its franchise, Fresh Coat filed suit
seeking the past due amounts and enforcement of its two year 15 mile radius noncompetition agreement.
The court held that by virtue of Schweizer’s default, Fresh Coat had achieved
success on the merits on its breach of contract, theft of trade secrets and tortious
interference claims. The court also found that Fresh Coat had adequately pled facts to
demonstrate that failure to grant an injunction enforcing the non-competition covenant
would result in its continued exposure to harm with no method of recourse and therefore
entered a permanent injunction ordering that defendants: (1) cease to operate its their
Fresh Coat franchise or hold themselves out as a present or former Fresh Coat
Franchisee; (2) cease to use the Franchisor’s marks; (3) assign their business
telephone numbers to the Fresh Coat; and (4) otherwise comply with the non-compete
provision. Because a bankruptcy court had entered an order of discharge in
Schweitzer’s favor, the court declined to award money damages. The court also
rejected Fresh Coat’s claims that defendants Faith Painting LLC and North Texas
Spectrum Painting LLC were jointly and severally liable for the damages as
Schweitzer’s alter ego because the Complaint did not contain any evidence to support
that theory and those defendants were not parties to the franchise agreement.
In Meineke Car Care Ctrs., Inc. v. Vroeginday, 2012 U.S. Dist. LEXIS 56374
(W.D.N.C. Apr. 23, 2012) sought to enforce its post-termination non-competition
agreement. Following termination of the franchise for unpaid roaylties and advertising
contributions, Meineke sought preliminary injunctive relief enforcing its one year
covenant that prohibited defendants from directly or indirectly (such as through
corporations or other entities owned or controlled by [Defendants]) own[ing] a legal or
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beneficial interest in, manag[ing], operat[ing] or consult[ing] with: (a) any business
operating at the premises of [the franchised location] or within a radius of six (6) miles of
the premises of [the franchised location] which business repairs or replaces exhaust
system components, brake system components, or shocks and struts and (b) any
business operating within a radius of six (6) miles of any Meineke Center existing as of
the date Defendants' Franchise Agreement terminated which business repairs or
replaces exhaust system components, brake system components, or shocks and
struts.” Id. at *5-6. Notwithstanding their termination, the franchise owners continued
operating their facility to offer the same goods and services using the Meineke marks.
When they failed to respond to the Complaint, the court enforced the covenant without
modification.
5.
Existence of Contract
Mobro, Inc. v. VVV Corp., 2012 U.S. Dist. LEXIS 89141 (N.D. Iowa June 26
2012), involves the enforceability of an alleged oral promise by a “franchisor” to pay a
regional franchisee a commission for work that other franchisees performed in its
region. Here, Mobro was a ServiceMaster Clean Regional Account Manager (RAM) for
the Iowa region. Following the 2008 Cedar Rapids, Iowa flood, Mobro realized that it
would need help in providing services to all those affected by the flood. It therefore
contracted with VVV Corp., a ServiceMaster Clean franchisee that provided services on
a nationwide basis, which had the capacity to assist Mobro. Pursuant to their
agreement, VVV agreed to pay Mobro a 5% commission on gross revenues collected
on flood remediation work that Mobro referred to VVV and on gross revenues for all
flood remediation work that VVV or its subcontractors performed in Mobro’s territory as
a result of any walk-up customers that VVV obtained. Soon after reaching their
agreement, VVV informed Mobro that another ServiceMaster franchisee was soliciting
business in Mobro’s RAM territory. Mobro then contacted Clark Co., which was acting
as Mobro’s franchisor pursuant to an assignment from ServiceMaster Clean. Mobro
told Clark that if it was not going to receive a 5% commission on all services performed
in its territory, it would stop soliciting leads for other franchisees and instead secure
contracts to perform itself. Clark assured Mobro that it “would be paid” the 5%
commission and Mobro continued to solicit work for VVV and other franchisees. When
remediation work from the flood was complete and Mobro did not receive the 5%
commission from VVV and other ServiceMaster franchisees, Mobro filed suit against
Clark Co. and Clark Co moved to dismiss.
On the breach of oral contract claim, the court concluded that Mobro failed to
allege facts sufficient to state a plausible claim. The court found that Clark never stated
that it would pay the 5% commission to Mobro. Instead, Clark assured Mobro that it
“would be paid” the 5% commission. By not identifying who would be responsible for
paying the 5% commission, the parties left great uncertainty as to the terms of the
alleged contract. Similarly, the court held that the allegations were insufficient to show
that Clark made a clear and definite promise to pay Mobro a 5% commission to support
a promissory estoppel claim. By stating that Mobro “would be paid” the commission, the
court found that it was unclear whether Clark was stating that it would pay the 5%
commission, or whether he was assuring Mobro that VVV would pay the commission
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that it owed Mobro pursuant to Mobro’s contract with VVV. There was too much doubt
and ambiguity as to what Clark meant when he made these statements and, therefore,
insufficient facts to show the plausible existence of a “clear and definite promise.”
In F.C. Franchising Sys. v. Schweizer, 2012 U.S. Dist. LEXIS 74991 (S.D. Ohio
May 30, 2012), the court granted a preliminary injunction enforcing a non-competition
agreement following the franchisee’s failure to respond to the litigation and entry of
default against it. F.C. Franchising operates a residential painting service system under
the trade name “Fresh Coat.” When, after a year in operation, Fresh Coat’s franchisee
Schweizer failed to provide its 2008 federal income tax returns, submit weekly sales
reports and pay royalties, Fresh Coat terminated the franchise. Upon learning that
Schweizer was still operating after termination of its franchise, Fresh Coat filed suit
seeking the past due amounts and enforcement of its two year 15 mile radius noncompetition agreement.
B.
IMPLIED COVENANT OF GOOD FAITH/FAIR DEALING
Corporation and its subsidiary, Bergstrom Fiat, against the Chrysler Group. Bergstrom
Fiat claimed that Chrysler failed to timely provide inventory or to support the Fiat brand
with adequate marketing, alleging unconscionable and arbitrary conduct in violation of
the Wisconsin Motor Vehicle Dealer Law and asserting breach of contract and good
faith and fair dealing claims. Bergstrom Corporation alleged that Chrysler had provided
oral assurances that Bergstrom Corporation would have a right of first refusal for any
new Fiat dealerships that might be opened in Wisconsin. A year after opening,
Law.
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estoppel claims.
fiduciary duty as a result of Audi’s decision to permit a new dealership within 13 miles of
the existing (allegedly underperforming) dealers. After Audi’s motion for summary
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The claims were divided into two sets of facts: (a) facts relating to whether the
parties.
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in part by Exxon, and that Exxon did not make a good faith effort to address the post14379022.3
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production problems. But, the OTR agreement contained disclaimers concerning the
of fact existed.
March 2006.
Paccar Inc. v. Elliot Wilson Capitol Trucks LLC, 2012 U.S. Dist. LEXIS
166962 (D. Md. Nov. 21, 2012), denied a truck manufacturer’s motion to dismiss its
dealer’s counterclaims in an action regarding the unauthorized transfer of a dealership.
Plaintiff Peterbilt Motor Company (“Peterbilt”) is a manufacturer of heavy and
medium-duty tracks and auto parts. Peterbilt entered into a dealer agreement with
George Wilson III to operate two dealer locations in Maryland. The contracts were nonexclusive; Wilson could sell both Peterbilt and other lines of trucks and auto-parts and
the Maryland locations.
Peterbilt filed suit alleging that Wilson had materially breached its dealer
agreement by selling rights to the dealership without prior approval. Wilson
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counterclaimed, alleging that Peterbilt was aware of the potential sale and that, by
refusing its approval, Peterbilt had failed to act in good faith in violation of various
statutes. Wilson also claimed that Peterbilt had breached the dealer agreement
because it failed to make its “best efforts” to approve the proposed transfer.
Wilson alleged eleven different instances of Peterbilt’s misconduct. Peterbilt
moved to dismiss ten of those claims, arguing that they were not pled sufficiently to
survive a motion to dismiss. Regarding the bad faith claim, the court noted that even
one unchallenged instance of misconduct, if pled in a sufficiently specific and plausible
manner, would be enough to prevent dismissal. Accordingly, the court declined to
dismiss the bad faith claim, but cautioned that the claim could only succeed at trial if
Wilson could demonstrate that Peterbilt violated a contractual provision, a statute, or
was responsible for tortious conduct.
The court also found plausible Wilson’s claim for breach of the dealer agreement
based on Peterbilt’s failure to use its best efforts to approve the proposed transfer. The
court interpreted the dealer agreement as including an obligation that Peterbilt not
unreasonably reject a proposed transfer. This meant that the supplier still could reject
any proposal that it deemed unacceptable as a rational business matter. The court
found, however, that Wilson had plausibly alleged that Peterbilt improperly rejected the
proposed transfer because of its insistence that the business be transferred to its
preferred buyer. Furthermore, the court found that Wilson had sufficiently alleged a
claim for tortious interference with contract because Peterbilt’s preferred buyer had
exerted influence on Peterbilt to ignore or reject Wilson’s proposed transfers.
Dos Beaches, LLC v. Mail Boxes Etc., Inc., 2012 U.S. Dist. LEXIS 73248 (S.D.
Cal. May 25, 2012) involved the application of the covenant of good faith and fair
dealing to a franchise agreement. Dos Beaches filed an amended complaint alleging
that Mail Boxes Etc. (“MBE”), the franchisor of a UPS store operated by Dos Beaches,
breached the covenant of good faith and fair dealing in their contractual relationship.
Dos Beaches alleged seven separate breaches of the covenant by MBE. MBE moved
to dismiss the complaint
The district court granted the motion in part and denied in part. The court denied
the motion based on Dos Beaches’ claim that the franchise agreement gave Dos
Beaches the responsibility and right to negotiate a lease, but MBE allegedly inserted
itself into the lease renegotiations and thwarted Dos Beaches’ objectives. The court
granted MBE’s motion to dismiss on the six remaining allegations because they either:
(1) involved conduct that pre-dated the execution of the franchise agreement; (2) would
eviscerate particular discretions the franchise agreement gave to MBE; or (3) attempted
to ladle onto the franchise agreement obligations on MBE’s part that simply didn’t
appear in, or weren’t contemplated by, its express terms.
C.
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95
fiduciary duty as a result of Audi’s decision to permit a new dealership within 13 miles of
the existing (allegedly underperforming) dealers. After Audi’s motion for summary
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rescission.
Goddard Sys. v. Overman, 2013 U.S. Dist. LEXIS 5468 (E.D. Pa. Jan. 14,
2013), involved Lisa Overman’s motion to dismiss for improper venue Goddard’s claims
that she usurped a business opportunity owned by Goddard and breached her
obligation not to use Goddard’s trade secrets for the benefit of anyone other than
Goddard.
Overman and Goddard entered into a franchise agreement under which
Overman would run a Goddard preschool. When Overman later decided to serve as
the educational director of the school, the parties executed an addendum to the
franchise agreement, releasing Overman as a franchisee because Goddard did not
allow educational directors to simultaneously serve as a franchisees. The addendum
contained a forum selection clause designating the county of Goddard’s Pennsylvania
headquarters as the place for resolution of any disputes.
While employed by Goddard as an educational director, Overman obtained
proprietary and trade secret demographic information from Goddard about the area of
another Goddard franchise under the auspices of an interest in running the second
franchise. Shortly after obtaining this information, Overman left her job with Goddard
and began plans to open her own preschool in the location of the second franchise.
The court explained that venue would be proper if an enforceable forum selection
clause applied to this action or if venue was appropriate under 28 U.S.C. § 1391(b).
The court first concluded that the forum selection clause in the addendum was
enforceable because the case would require inquiry into the effect of the addendum
(specifically, whether it released all of Overman’s confidentiality obligations). Further,
the forum selection clause applied to “any disputes” between Goddard and Overman
and was therefore broad enough to extend to this action.
The court also concluded that venue was proper under 28 U.S.C. § 1391(b)(2)
because a substantial part of the events giving rise to the claim occurred in the Eastern
District of Pennsylvania. Although Overman allegedly intended to use the
misappropriated trade secrets in Florida, she learned (and allegedly misappropriated)
those secrets in Pennsylvania. Accordingly, the court denied Overman’s motion to
dismiss for improper venue.
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Cicero v. Richard L. Rosen Law Firm, PLLC, 36 Misc. 3d 1238(A) (N.Y. Civ.
Ct. 2012), involves a malpractice claim and fee dispute over challenging a settlement
Cicero’s sons entered into with Sunoco. Specifically, the sons owned a gasoline
franchise located on land that Cicero owned and Cicero contended that his sons
conspired with Sunoco to settle a matter without his consent. Unfortunately, the
challenge did not proceed as Cicero expected which led to his challenging the
approximately $33,500 legal bill he received.
The court largely dismissed Cicero’s challenge. After a lengthy trial, the court
rejected Cicero’s malpractice, breach of contract and breach of fiduciary duty claims.
The court did, however, ultimately disallow certain hours billed by an associate of the
firm and discounted the number of hours billed by the named partner. In addition, the
court allowed the firm to recover for time it spent reviewing materials the client provided
prior to signing an engagement letter under quantum meruit.
D.
RELATIONSHIP LAWS
1.
General
In Garbinski v. Nationwide Mut. Ins. Co., 2012 U.S. Dist. LEXIS 102707 (D.
Conn. Jul. 24, 2012), former insurance salesman Garbinski sued National and for
breach of contract, violation of the Connecticut Franchise Act (“CFA”), violation of the
Connecticut Unfair Trade Practices Act, and interference with business expectancy
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following termination of his agency for lewd behavior. Before the court was
Nationwide’s motion for summary judgment as to those claims that had not been
previously dismissed. The Court granted Nationwide’s motion in its entirety.
Of importance here, Nationwide claimed that summary judgment was appropriate
as to Garbinski’s CFA claims because it is inapplicable to insurers and their agents, or
in the alternative that no jury could conclude that Nationwide did not have good cause to
cancel Garbinski’s agency agreement. The Court agreed and held that the CFA did not
apply to the parties’ relationship and that no jury could find that Nationwide was without
cause to cancel Garbinski’s agency. The Court found that neither an insurance agency
generally, nor Garbinski’s agency in particular rose to a franchise or franchise
relationship under the CFA. The Court also held that regardless of whether or not a
franchise relationship existed, there was no question Nationwide had good cause to
terminate Garbinski’s agency agreement.
Audi of Smithtown, Inc. v. Volkswagen of Am., Inc., 2012 N.Y. App. Div.
LEXIS 7586 (N.Y. App. Div. 2d Dep’t Nov. 14, 2012), involved allegations by two Audi
dealers that Volkswagen Group of America, Inc.’s dealer incentive programs constituted
unlawful price discrimination in violation of New York’s Franchised Motor Vehicle Dealer
Act. Both incentive programs aimed to encourage dealers to purchase previouslyleased Audi vehicles to be sold as pre-owned vehicles.
The first incentive program, “CPO Purchase Bonus,” provided a payment to
dealers that met a set purchase objective, which was determined based on the number
of maturing lease-returns that the dealer had. Because newly franchised dealers did
not have a portfolio of maturing lease-returns, these dealers could receive the bonus
payments by meeting a sales objective for the sale of certified pre-owned vehicles.
The second incentive program, “Keep It Audi,” provided increasing discounts on
the purchase of lease-returns depending on the particular dealer’s qualification level for
the program. There were three qualifying levels – qualifier, performer, and champion,
which required the dealers to purchase increasing percentages of their quarterly
purchase objectives. New dealers were automatically qualified as champions for three
years and were not required to meet any purchase objectives.
The court held that the incentive programs constituted unlawful price
discrimination in violation of the Franchised Motor Vehicle Dealer Act because they
allowed some dealers to obtain cars at a lower price than others. The court rejected
Volkswagen’s argument that the programs were permissible because they provided a
discount after purchase rather than adjusting the price at the time of purchase. The
court emphasized that regardless of when the payments were made, they resulted in a
lower actual price. The court further held that the exception to the Franchised Motor
Vehicle Dealer Act permitting preferential prices pursuant to a promotional program
reasonably available to all dealers was inapplicable because the programs favored new
franchisees. Finally, the court held that Volkswagen could be found in violation of the
Franchised Motor Vehicle Dealer Act even though the challenged payments were
actually made by a Volkswagen subsidiary.
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Jackson v. Longagribusiness, L.L.C., 2013 Tex. App. LEXIS 113 (Ct. App.
Tex. Jan. 8, 2013), involved Robert Jackson’s appeal of a jury’s damage award for
failure to make a payment required under the parties’ dealership agreement for the
purchase of Farmtrac farm equipment.
One of Jackson’s grounds for appeal concerned the trial court’s refusal to instruct
the jury on his cross-claim against Farmtrac. Shortly after Jackson notified Farmtrac
that he intended to terminate his agreement with Farmtrac, several pieces of Farmtrac
equipment were stolen from Jackson’s property. Jackson alleged that the theft occurred
because Farmtrac was negligent in failing to remove the equipment from his property as
soon as he had terminated the dealer agreement. The court noted that nothing in the
dealer agreement required Farmtrac to be responsible for Farmtrac equipment in
Jackson’s possession post-termination. The court further rejected Jackson’s argument
that Farmtrac’s practice of locating another dealer to take inventory remaining after
termination was insufficient to give rise to a duty distinct from Farmtrac’s contractual
duties. As such, the court affirmed the trial court’s refusal to instruct the jury on
Jackson’s negligence claim.
Kia Motors Am. Inc. v. Glassman Oldsmobile Saab Hyundai Inc., 706 F.3d
733 (6th Cir. Feb. 7, 2013), deals with the applicability of an amendment to the Michigan
Motor Dealer’s Act to a franchise relationship. Kia Motors entered into a franchise
agreement with Glassman in 1998. In 2010, an amendment to Michigan Motor Dealer’s
act required a manufacturer to provide notice and an opportunity to bring a declaratory
judgment action to dealers within a nine-mile radius of a new dealership. Shortly after
the amendment became effective, Kia informed Glassman that it intended to establish a
new dealer seven miles from Glassman. Glassman protested the lack of written notice
prompting Kia to file an action for declaratory judgment that the 2010 amendment did
not require it to give notice to Glassman.
The district court granted summary judgment to Kia and Glassman appealed.
Glassman argued that the parties agreed to comply with subsequent changes to the act,
including the 2010 amendment when the agreement stated that Kia could establish new
dealers “as permitted by applicable law.” The court found that the language cited by
Glassman did not apply to this case because the language cited discussed adding a
new dealer within Glassman’s area of primary responsibility, a contractually defined
term that was separate from the term relevant market area in the act.
Moreover, changes to the law will not be deemed incorporated into the contract
unless the language of the agreement clearly indicates the intent of the parties to
incorporate to include such changes. The language, “as permitted by applicable law”
could refer to the provision in the Act at the time the agreement was signed, and as
such, does not clearly demonstrate intent to have the 2010 amendment apply.
Additionally, the court found that the amendment was not supposed to apply
retroactively. Statutes are presumed to apply only prospectively unless contrary intent
is evident. The amendment contains no language evidencing an intent to apply
retroactively. As such, the court declared that Kia was not required to notify Glassman
under the 2010 amendment.
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rescission.
Johnson v. Mossy Oak Props., 2012 U.S. Dist. LEXIS 167605 (N.D. Ala. Nov.
27, 2012), involved a ten-claim suit brought by a franchisee against its franchisor. The
franchisor moved for summary judgment on an Alabama statutory claim. The court
found that the Alabama State Sales Representative Commission Contracts Act (“Act”)
did not apply to the franchise-franchisee relationship and granted summary judgment on
this claim. Under the Act, the franchisor must meet the definition of “principal” and the
franchisee must meet the definition of “sales representative.” Both of these definitions
required the sale of a “product.” The court concluded that “product” included only
tangible goods and the sale of franchises was not a tangible good. The court went on to
reason that even if the sale of a franchise was a “product” under the Act, the Act still did
not apply because the franchise was not sold at a wholesale level where the franchisee
was the end-user of the product and the franchise agreement expressly prohibited a
franchisee from “wholesaling” franchisees.
In Route 23 Auto Mall v. Ford Motor Co., 676 F.3d 318 (3d Cir. 2012), the
Third Circuit affirmed the order of the District of New Jersey granting summary judgment
to Ford that: (1) Ford’s New Jersey Cost Surcharge program did not violate the New
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Jersey Franchise Protection Act (“NJFPA”); and (2) dismissing Ford’s dealers
reimbursement claims. As a vehicle manufacturer and wholesaler, Ford reimbursed
dealers for labor and parts used to repair certain defective vehicle components under
Ford’s manufacturer warranty. Because Ford provides its dealers with a mark-up for the
cost of most parts, but the NJFPA required Ford to reimburse its dealers at the
prevailing retail rate, Ford had been paying its dealers 140% of the costs they incurred.
Accordingly, Ford implemented a series of surcharge programs to recover the increased
cost of reimbursing its New Jersey dealers.
Purporting to construe the statute as the New Jersey Supreme Court would and
looking to the First Circuit’s interpretation of an analogous Maine statute, the Third
Circuit held that Ford’s program fell outside the NJFPA’s scope because it concerned
wholesale price increases—not warranty reimbursement claims, which would have
fallen within the NJFPA’s regulation. The program at issue consisted of a flat surcharge
assessed on all wholesale vehicles sold within New Jersey, regardless of the amount of
warranty claims submitted by each Dealer. Reading a restriction against wholesale
price increases, the court reasoned, would create a rule unsupported by the NJFPA’s
plain language—which did not regulate retail or wholesale transactions. The district
court also properly denied summary judgment for the dealers on certain reimbursement
claims because they had not been properly pled and there was no implied consent
between the parties to try those particular claims.
In Lift Truck Lease & Serv., Inc. v. Nissan Fork Lift Corp., 2012 U.S. Dist.
LEXIS 127138 (E.D. Mo. Sept. 7, 2012), a Nissan power equipment distributor brought
suit challenging Nissan’s notice of its intent not to renew its status as the exclusive the
distributor of Nissan’s products in the St. Louis area. Specifically, the distributor brought
claims under the Missouri Merchandising Practices Act (“Franchise Act”), the Illinois
Franchise Disclosure Act (“IFDA”), the Missouri Merchandising Practices Act (“Power
Equipment Act”), and for tortious Interference with business expectancy. Nissan moved
to dismiss.
Nissan’s first argument was that the Franchise Act was inapplicable to power
equipment dealers who were instead limited to claims under the Power Equipment Act.
The court rejected this argument and found that nothing in the Franchise Act makes it
and the Power Equipment Act mutually exclusive. As the distributor had adequately
pleaded the existence of a franchise relationship under Missouri law it was free to
pursue relief under both statutes. Next, Nissan argued that the IFDA claim must be
dismissed because the distributor was not an Illinois resident and had not sufficiently
alleged all required elements. The court rejected the residency argument finding that
the IFDA applies to franchisees “located in Illinois,” and that the distributor’s territories
contained several Illinois counties. The court nonetheless dismissed the IFDA claim
because the distributor did not allege an essential element of a franchise under the
statute – that it paid Nissan a franchise fee in excess of $500. Finally, Nissan moved to
dismiss the Power Equipment Act and tort claim on the basis that the distributor had not
sufficiently pled facts to support the required elements of either claim, but the court
rejected both these arguments.
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Alboyacian v. B.P. Prods. N. Am., Inc., 2012 U.S. Dist. LEXIS 125889 (D.N.J.
Sept. 5, 2012),addresses whether a franchisee who successfully brought an action for
injunctive relief against its franchisor to prevent a violation of the New Jersey
Franchises Practices Act (“NJFP:) was entitled to attorneys’ fees. The statute provides
that franchisees who are “successful” in bringing actions for violations of the Act shall be
entitled to attorney’s fees. The court held that being “successful” included successfully
obtaining injunctive relief before a violation occurs, reasoning that the NJFPA allows for
actions to prevent violations and awards of attorney’s fees for injunctive relief preventing
a violation squares with the requirement of New Jersey law that “remedial statutes must
be construed broadly to give effect to their legislative purpose.” Accordingly, the court
awarded attorney’s fees.
Celsi v. H&R Block Tax Servs. LLC, 2012 Cal. App. Unpub. LEXIS 5275 (Cal.
App. 1st Dist. July 17, 2012), concerns the effect of the parol evidence rule on a written
franchise agreement and the running of the two year statute of limitations of the
California Franchise Investment Law Act (“CFIL”). Here, Celsi purchased two H&R
Block franchises in 1999 for Eureka and McKinleyville, California and alleged that when
he bought them H&R Block orally promised him rights to an Arcata franchise when he
was ready. When H&R Block awarded the Arcata franchise to someone else, Celsi
sued for fraudulent inducement and breach of the CFIL. The trial court dismissed
Celsi’s claims and he appealed.
The appeals court affirmed dismissal of both of Celsi’s claims. As to the CFIL
claim, the court rejected Celsi’s argument that the breach occurred when H&R Block
sold the territory to someone else. Instead, the court held that any CFIL violation
occurred in 1999, when Celsi purchased his franchises, because the conduct at which
the statute is directed occurs at the time of an “offer” or a “sale of a franchise.” Id. at
*10. The court also affirmed dismissal of the breach of contract claim based on the
parole evidence rule. Citing to “words of integration” in the franchise agreements
stating that any prior oral understandings were superseded, the court applied the
“longstanding, well-known principle that promotes fairness and predictability by
encouraging parties to specify the entirety of their agreements in writing.” Id. at *22.
Home Instead, Inc. v. Florance, 2012 U.S. Dist. LEXIS 134554 (D. Neb. Sept.
20, 2012), presents an interesting analysis of what it means to require franchisees to
renew franchises by signing the “then-current” form of agreement. Here, the franchise
agreements provided franchisees with a right to renew subject to signing the then
current agreement. The only exception was that a franchisee may keep its old royalty
rate if the new rate was higher. When the new franchise agreement included a higher
minimum performance requirement, $70,000 instead of $30,000, and the franchisees
balked, the franchisor filed suit to enforce the new requirement. The franchisees, in
turn, challenged the requirement and sought a preliminary injunction requiring the
franchisor to restore services such as web site and email during the pendency of the
lawsuit.
The court dismissed the franchisees’ motion because “the probability that
[franchisees] will succeed on the merits is nil.” The court found this because the new
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term—“at least $70,000”—is included in the old term—“at least $30,000”—and because
the provisions in the arrangement provided for protection of both the franchisor and
franchisee.
2.
Encroachment
In Abington Auto World, LP v. Bureau of Prof’l & Occupational Affairs, 2013
Pa. Commw. Unpub. LEXIS 75 (Pa. Commw. Ct. Jan. 22, 2013), the court determined
when a franchise is “established.”
Under Pennsylvania statute, manufacturers who have a vehicle dealership and
seek to establish an additional vehicle dealership are exempt from protests by same
line-make dealers if the proposed vehicle dealerships are established within two miles
of a location at which a former licensed new vehicle dealer for the same line-make of
new vehicle had ceased operating within the previous two years. See 63 P.S. §
818.27(b)(2). Chrysler entered into a Sales and Service Agreement authorizing
Abington Auto World (“Abington”) to sell Chrysler, Jeep, and Dodge vehicles lines at a
location 1.3 miles from a defunct prior Chrysler dealership. A different Chrysler
dealership (the “Barbara Dealership”), located approximately five miles from the
proposed site of the Abington dealership, filed a protest to Chrysler’s appointment of
Abington asserting that the new dealership had not been established within two years of
the termination of the prior dealership. The State Board of Vehicle Manufacturers,
Dealers and Salespersons (the “Board”) agreed and barred the establishment of the
Abington dealership. The Board acknowledged that Chrysler had appointed Abington
as a dealer within the requisite two year time period, but the appointment did not meet
the requirements that the dealership was “established.” Rather, the Board reasons that
a dealership is “established” when the dealer files its initial dealer application, and here,
that occurred after the two year period.
The Commonwealth Court of Pennsylvania reversed. Analyzing and reviewing
the plain language of the statute, the court concluded that the meaning of “established”
in the statute is used in relation to the execution of the franchise agreement. Waiting for
the dealer application erroneously focuses on the action of the dealer while the statute
is aimed at the actions of the manufacturer. Accordingly, the Abington dealership was
“established” within two years and the Barbara dealership had no statutory right to
protest.
3.
Transfer
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hearings.
profits.
KFC Corp. v. Kazi, 2012 U.S. Dist. LEXIS 180424 (W.D. Ky. Dec. 20, 2012),
involved a motion by the defendant franchisees to enforce the terms of a settlement
agreement they entered into with the plaintiff franchisor. The defendants were
franchisees of numerous KFC restaurants throughout the country, and the franchisor
had brought suit in August 2011 for alleged violations of the franchise agreements for
restaurants located in California, Louisiana and Colorado. The parties entered into a
settlement agreement in May 2012, which was made part of the court’s judgment to
retain the court’s jurisdiction to resolve any disputes relating to the settlement
agreement.
Part of the settlement agreement required the defendants to sell their Colorado
restaurants by November 30, 2012. The defendants were required to submit to the
franchisor for consideration and approval proposed asset purchase agreements for
these sales, by certain dates and with certain requirements as specified in the
settlement agreement. In the event that the restaurants were not successfully sold by
November 2012, the settlement agreement required the defendants to close the
restaurants by the end of 2012.
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The defendants had submitted three different asset purchase agreements to the
franchisor for consideration. All three were rejected by the franchisor. The first involved
100-percent financing arrangements that did not meet the franchisor’s financial
requirements; the second, involving a purchaser who was not an existing franchisee,
was not submitted within the appropriate time period for having a purchaser of that type;
and the third was also not timely submitted far enough in advance of the November 30,
2012 date. The defendants thereafter moved the court to enforce the terms of the
settlement agreement and to require the franchisor to accept the third proposed asset
purchase agreement.
The court refused the defendants’ request. It determined that each asset
purchase agreement was non-compliant in some respect with the terms of the
settlement agreement, and therefore the franchisor’s withholding of approval of these
asset purchase agreements was permissible. The court was not persuaded by the
franchisees’ argument that the franchisor waived the requirements imposed by the
settlement agreement by continuing communications with the franchisees, because the
settlement agreement had included a non-waiver provision. The court also rejected the
franchisees’ arguments that the franchisor had acted in bad faith in rejecting each of the
asset purchase agreements. The court pointed out that good faith does not preclude a
party from enforcing a contract’s terms, and the franchisor was well within its rights to
enforce the bargained-for conditions that the parties agreed would govern submission of
proposed asset purchase agreements by the franchisees.
Paccar Inc. v. Elliot Wilson Capitol Trucks LLC, 2012 U.S. Dist. LEXIS
166962 (D. Md. Nov. 21, 2012), denied a truck manufacturer’s motion to dismiss its
dealer’s counterclaims in an action regarding the unauthorized transfer of a dealership.
Plaintiff Peterbilt Motor Company (“Peterbilt”) is a manufacturer of heavy and
medium-duty tracks and auto parts. Peterbilt entered into a dealer agreement with
George Wilson III two operate two dealer locations in Maryland. The contracts were
non-exclusive; Wilson could sell both Peterbilt and other lines of trucks and auto-parts
and the Maryland locations.
Peterbilt filed suit alleging that Wilson had materially breached its dealer
agreement by selling rights to the dealership without prior approval. Wilson
counterclaimed, alleging that Peterbilt was aware of the potential sale and that, by
refusing its approval, Peterbilt had failed to act in good faith in violation of various
statutes. Wilson also claimed that Peterbilt had breached the dealer agreement
because it failed to make its “best efforts” to approve the proposed transfer.
Wilson alleged eleven different instances of Peterbilt’s misconduct. Peterbilt
moved to dismiss ten of those claims, arguing that they were not pled sufficiently to
survive a motion to dismiss. Regarding the bad faith claim, the court noted that even
one unchallenged instance of misconduct, if pled in a sufficiently specific and plausible
manner, would be enough to prevent dismissal. Accordingly, the court declined to
dismiss the bad faith claim, but cautioned that the claim could only succeed at trial if
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Wilson could demonstrate that Peterbilt violated a contractual provision, a statute, or
was responsible for tortious conduct.
The court also found plausible Wilson’s claim for breach of the dealer agreement
based on Peterbilt’s failure to use its best efforts to approve the proposed transfer. The
court interpreted the dealer agreement as including an obligation that Peterbilt not
unreasonably reject a proposed transfer. This meant that the supplier still could reject
any proposal that it deemed unacceptable as a rational business matter. The court
found, however, that Wilson had plausibly alleged that Peterbilt improperly rejected the
proposed transfer because of its insistence that the business be transferred to its
preferred buyer. Furthermore, the court found that Wilson had sufficiently alleged a
claim for tortious interference with contract because Peterbilt’s preferred buyer had
exerted influence on Peterbilt to ignore or reject Wilson’s proposed transfers.
Paccar, Inc. v. Elliot Wilson Capitol Trucks LLC, 2013 U.S. Dist. LEXIS 21004
(D. Md. Feb. 7, 2013), is the decision on summary judgment in the same case. Both
parties moved for summary judgment on Peterbilt’s claim that it properly exercised its
right of first refusal with respect to the proposed transfer. The issue was whether
certain information sent by Elliot to Peterbilt constituted sufficient notice to trigger the 30
day period within which Peterbilt had to exercise its right of first refusal. Peterbilt
initially received notice of the proposed transaction in an August 2011 letter from Elliot,
and additional information in October, November and December 2011 and January
2012. Peterbilt exercised its right of first refusal on February 1, 2012.
Under the Franchise Agreement, Peterbilt has a right of first refusal when the
dealer has entered into a “bona fide arms length written agreement governing such a
transfer or sale.” The purchase price and other terms of sale should be in the
agreement and other related materials. Peterbilt is able to request additional
information it may require to assess the bona fides of the agreement.
When it received the October 2011 letter, Peterbilt sent a response on November
3, 2011 detailing four reasons why the transaction was deficient and did not trigger the
30 day clock. Wilson sent a second letter on November 11, 2011 adding more specifics
on what assets would be transferred. On December 23, 2011, Peterbilt’s attorney wrote
Elliot’s counsel asking for confirmation of the rental amount. Elliot’s counsel responded
on December 28, 2011 attaching a lease confirming the rental amount for the facility.
Peterbilt argued that the October letter omitted several material terms and that it
did not become fully aware of the terms of the proposed transaction until January 2012,
less than 30 days before it attempted to exercise its right of first refusal. The court,
however, found that the October letter presented the identity of the buyer, the operating
structure of the proposed new entity, and informed that all assets would be transferred
to the new entity, and that the November communications informed Peterbilt that the
Peterbilt assets would be transferred and that what the lease price would be. While this
notice was not perfect, the court found that it was sufficient to trigger the right of first
refusal rights under the agreement. Thus, Peterbilt did not exercise its right of first
refusal in the contractually mandated time.
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In relation to the claim of whether Peterbilt properly denied the proposed transfer
in August 2011, Peterbilt argued that it properly terminated the agreement under the
Maryland Transportation Code regulating the sale assignment or transfer of an
automobile dealership or franchise. Maryland Code § 15-211 provides a manufacturer
can refuse to consent to a transfer if the consent is not unreasonably withheld. The
court found that the rejection of a proposed transfer must be grounded on reasonable,
business related concerns regarding the transferee’s ability to effectively operate the
franchise. The court found that Peterbilt reasonably withheld consent. At the time of
the refusal, Peterbilt knew that the proposed transferee had misappropriated Peterbilt
trademarks, and was in a lawsuit with Norris regarding the use of the trademarks. As
such, the refusal to consent was reasonable and justified.
Fullington v. Equilon Enters., 210 Cal. App. 4th 667, 148 Cal. Rptr. 3d 434
(2012), was an appeal of a trial court decision granting summary judgment in favor of a
franchisor on a former franchisee’s claims for fraud and violation of Cal. Bus. & Prof.
Code § 21148 caused by the franchisor’s alleged interference in the franchisee’s
attempts to sell his franchise.
In 1998, Equilon was formed when Shell and Texaco merged their retail
marketing and refining activities, formed Equilon, and contributed to Equilon all of their
western refining and marketing assets, gas station leases, and dealer agreements.
After its formation, Equilon terminated a “variable rent program” formerly offered to Shell
dealers. This lead to a variety of lawsuits between Equilon and those dealers. In 1999,
Fullington and other independent Shell dealers in the United States sued Equilon in
Texas state court, alleging breach of contract and a variety of torts. The court granted
Equilon’s motion for summary judgment, dismissing the claims.
After Shell and Texaco transferred their assets to Equilon, 43 independent
dealers in Southern California filed suit alleging that by transferring the dealer’s leases
to Equilon without giving the dealers an opportunity to purchase the stations, Shell and
Texaco violated Cal. Bus. & Prof. Code § 20999.25 which prohibits a franchisor from
selling, transferring, or assigning an interest in the premises to another person unless
he or she first makes a bona fide offer to sell that interest to the franchisee. The
defendants moved for summary judgment, saying that the contribution of the gas
stations to Equilon was not a sale, transfer, or assignment of the stations to another
person. The district court agreed, and dismissed the claims, but the Ninth Circuit
reversed. It held that Equilon was another person within the meaning of the statute, and
that Shell and Texaco had transferred the leases within the meaning of the statute.
In 2002, 21 Shell and Texaco dealers, including Fullington, filed a new suit, also
alleging claims under section 20999.25. After the Ninth Circuit’s decision, above,
Fullington settled his claims and released all claims against defendants except for any
other lawsuit currently pending as of the date of the settlement agreement (July 2,
2003).
Shortly before the settlement agreement was signed in the 2002 action,
Fullington and others brought this case against Equilon alleging a violation of section
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21148, which prohibits a franchisor from withholding consent to the sale, transfer or
assignment of a franchise under certain circumstances. Fullington alleged that Equilon
violated this section by intentionally interfering with Fullington’s attempts to sell his
franchise, resulting in his losing his station and business.
Fullington also brought a separate fraud claim alleging that Equilon lied to him
about the ability to reduce his contract rent. Fullington alleged that before Equilon was
formed, Shell routinely allowed its dealers to reduce their rent through the variable rent
program. Equilon eliminated the program in 1998, converted the rents to the higher
“contract rents” and created the “interim rent challenge” to allow a dealer to challenge
the contract rent by obtaining an appraisal. When Fullington inquired about his contract
rent, no one told him about the interim rent challenge, and instead Fullington was told
that the contract rent came from Houston and there was nothing that could be done
about. Fullington alleged this was a knowingly false statement that caused Fullington to
pay commercially unreasonable and excessively high contract rent for two years.
Equilon moved for summary judgment based on res judicata, because the claims
arose from the same facts as those litigated in the Texas action, and because the
claims were released by settlement in the 2002 action. The trial court agreed and
granted summary judgment on both counts. Fullington appealed.
The court of appeals reversed. It found that the Texas action and California
action did not arise out of the same set of facts, and that the record did not conclusively
establish that the section 21148 claim was ripe at the time when the Texas court
entered its judgment. The facts at issue in the Texas lawsuit occurred between 1982
and 1995. The Texas lawsuit was filed in 1998 and settled in 1999. The proposed
sales that Equilon allegedly interfered with happened in 1999 and 2000. Because the
full injury suffered by the interference may have been realized significantly after the
lawsuit was dismissed, the claim was not necessarily ripe at the time of the Texas
judgment. Neither party submitted evidence to the issue of date of injury, so the court
could not make a ripeness determination based on the evidence before it.
In relation to the fraud claim, the court of appeals also found that the trial court
erred in granting summary judgment. The trial court had granted summary judgment
because it found that Fullington could not establish he suffered any damages as a result
of the fraud claim because he received a refund of all rent paid after the implementation
of the interim rent challenge as part of the settlement he entered into previously.
Fullington argued that he is still potentially owed punitive damages because the
fraudulent conduct caused actual injury. Equilon argued that Fullington could not obtain
punitive damages because the release signed by Fullington in connection with the
settlement undermined his ability to pursue any cause of action in relation to the alleged
overpayment.
The court of appeals narrowed the issue to whether a plaintiff’s recovery of
compensatory damages in a first suit eliminates his tort causes of action in a second
suit. California law allows an award of punitive damages only if the plaintiff suffered
actual injury. The court found that there was reason why a party should be permitted to
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avoid an award of damages in one action by paying compensatory damages in another.
The court held that Fullington’s recovery of compensatory damages in the prior action
did not preclude his fraud claim in the current action. The court therefore reversed the
grant of summary judgment in relation to both claims.
4.
Termination and Non-Renewal
At issue in Beverage Distribs., Inc. v. Miller Brewing Co., 690 F.3d 788 (6th
Cir. 2012), was whether a joint venture created by the Miller and Coors beer companies
to better compete with Anheuser Busch constituted a “successor manufacturer” under
Ohio law that permitted the joint venture to terminate distributor agreements.
Resolution of the issue required interpreting the relevant Ohio statute that in one place
defined a “successor corporation” as one that “acquires all or substantially all of the
stock or assets of another manufacturer through merger or acquisition . . .” but in
another place prohibited termination when a manufacturer sold, assigned or transferred
its product or brand to another manufacturer over which it exercises control. Compare
Ohio Rev. Code. § 1333.85(D) with § 1333.85(B)(4). Here, both Coors and Miller
retained significant control over the joint venture by directly appointing directors and
staff and provided in their joint venture that appointed directors owed their duty of loyalty
to the appointing entity, not the joint venture. The district court granted summary
judgment in favor of the distributors and manufacturers appealed.
Recognizing that the statute was ambiguous on this issue, the Sixth Circuit
“follow[ed] the lead of Ohio courts addressing this question and look[ed] to the Act’s
broader text and legislative purpose to define ‘successor manufacturer.’” Id. at 794.
Citing to multiple Ohio decisions addressing this issue, the court first determined that if
Coors and Miller exercised control over the joint venture, it would not qualify as a
successor corporation. Otherwise, the court held, it would be too simple to defeat the
protections the Act afforded distributors by allowing manufacturers to engage in creative
paper transactions that created successor corporations still controlled by the original
manufacturer. Next, the court examined Coors and Miller’s ability to in fact exercise
control over the joint venture. While recognizing that neither Coors nor Miller had
complete control over the joint venture, as each could effectively veto any decision of
the other, the court nonetheless held that each exercised sufficient control to trigger the
Act’s distributor protection provisions and affirmed the district court’s decision.
Irvin Kahn & Son, Inc. v. Mannington Mills, Inc., 2012 U.S. Dist. LEXIS
116308 (S.D. Ind. Aug. 17, 2012), addresses the scope of the anti-termination provision
of the Indiana Deceptive Franchise Practices Act, Ind. Code § 23-2-2.7-1 et seq. Kahn,
a flooring distributor, challenged Mannington’s termination of its distributorship.
Unfortunately for Kahn, the parties’ agreement expressly provided for unilateral
termination for any reason on 30 days’ notice. At first, the court dismissed Kahn’s claim
as untimely because it had been aware of the unilateral termination provision on which
Mannington relied for more than two years. Kahn then moved to amend its complaint to
assert that the Indiana Act not only prohibited provisions allowing for termination without
cause, but independently prohibited actual terminations without cause. Despite
Mannington’s argument that termination without cause was not one of the Indiana Act’s
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specified unlawful acts and practices, the court credited a line of cases to the contrary
and permitted the amendment. “Kahn points to a line of cases for the proposition that
the Act can be used not only to challenge a provision of a franchise agreement that
allows for unilateral termination of the franchise agreement absent good cause, but to
challenge the actual termination of such an agreement absent good cause.” Id. at * 7
(citing Cont’l Basketball Ass’n, Inc. v. Ellenstein Enter., 669 N.E.2d 134 (Ind. 1996); Ray
Skillman Oldsmobile & GMC Truck, Inc. v. Gen. Motors Corp., 2006 U.S. Dis.t LEXIS
26142 (S.D. Ind. Mar. 14, 2006); Hubbard Auto Ctr., Inc. v. Gen. Motors Corp., 422 F.
Supp. 2d 999 (N.D. Ind. 2006)). These cases, the court held, expressly permitted a
claim based on an actual termination without cause such that Kahn’s motion to amend
was not futile.
Oliver Stores v. JCB, Inc., 2012 U.S. Dist. LEXIS 144348 (D. Me. Oct. 5, 2012),
involved a dispute between a manufacturer of heavy machinery, JCB, and a distributor
of the machinery, The Oliver Stores. JCB terminated the relationship on June 21, 2011.
In response to the termination, The Oliver Stores filed suit alleging violation of the Maine
Franchise Act, the Maine Unfair Trade Practices Act, and breach of contract. JCB
moved to dismiss or stay and compel arbitration. The court referred the breach of
contract claim to arbitration, but retained jurisdiction over the statutory claims. JCB then
moved for judgment on the pleadings on the Maine Unfair Trade Practices Act claim
arguing that a commercial franchisee may not bring a claim under the private remedies
provision in Section 213 of the Act.
In 1993, the Maine legislature had made changes to the Maine Franchise Act,
adding in the penalty section that a violation of the Maine Franchise Act constitutes an
unfair trade practice under the Maine Unfair Trade Practices Act. The Oliver Stores
contended that this signaled the legislature’s intent to provide with franchisees with a
private remedy under the Unfair Trade Practices Act. JCB countered that remedies
under the Unfair Trade Practices Act are only available to persons who purchase or
lease goods, services or property primarily for personal, family, or household purposes,
neither of which applied to The Oliver Stores.
Looking at the statutory history of the Franchise Act, the court found no
suggestion that it was meant to alter the clear limitation in the Unfair Trade Practices
Act to claims relating to goods purchased for personal, family, or household purposes.
Because the legislature is presumed to know the existing law, and because the
legislature then must have known of the limitation in the Unfair Trade Practices Act and
made no attempt to change it to accommodate actions by commercial franchisees, the
court found that the Unfair Trade Practices Act by its plain terms applies only to
consumers, and not commercial parties like The Oliver Stores.
The Oliver Stores also argued that even if there was no private right of action
under the Unfair Trade Practices Act, dismissal was not appropriate because it had also
requested a declaration that JCB had violated the Unfair Trade Practices Act. The court
disagreed. Because under both state and federal law, a court will only undertake to
declare rights of the parties where some relief would be provided as a result, the
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declaration sought by The Oliver Stores would be meaningless. Thus the court granted
the motion for judgment on the pleadings.
Elkins Subaru, Inc. v. Subaru of Am., Inc., 482 F. App’x 868 (4th Cir. 2012),
involved an appeal of a district court decision rejecting dealership Elkin Subaru, Inc.’s
claim against distributor Subaru of America for reasonable rental value payments posttermination under West Virginia Code § 17A-6A-8(2). This statute provides that a
distributor is not liable for any reasonable rental value payments if (1) the dealership
owns, manages, or establishes another make of new motor vehicles in the same
dealership facilities; and (2) the dealership is terminated because the dealership lost its
floor plan financing or failed to substantially comply with its dealership agreement with
the distributor.
The court summarized Elkins Subaru’s admissions that (1) its dealership shared
ownership and management with a General Motors dealership and that the two
dealerships operated out of the same facility; and (2) the dealership agreement was
terminated by Subaru of America because Elkins Subaru failed to maintain floor plan
financing as required by the agreement and because Elkins Subaru shut down its
business operations. Noting that Elkins Subaru challenged the district court’s decision
“on a variety of fronts” (without specifying any of the bases of challenge), the court
summarily agreed with the district court that Elkins Subaru was not entitled to
reasonable rental value payments because it was a multi-line dealership and had
breached the dealership agreement.
Foulke Mgmt. Corp. v. Audi of Am., Inc., 2012 N.J. Super. Unpub. LEXIS 2763
(N.J. App. Div. Dec. 18, 2012), was part of a motor vehicle franchise termination
litigation. Over the course of a few years, the franchisee’s sales had suffered, and
eventually the franchisor sent a notice of termination, reciting as grounds the poor sales
performance, poor customer service satisfaction ratings, and an alleged change in
ownership without the franchisor’s prior approval. The franchisee filed a complaint
seeking to prevent the termination, alleging that the franchisor was not appropriately
allocating vehicles to the dealership.
As required by the New Jersey Franchise Practices Act, the termination was
stayed pending the resolution of the litigation. A further requirement of the New Jersey
Act is that the franchisee must be afforded all the rights and privileges of a franchisee
as if the notice of termination had not been given. Accordingly, the franchisee sought
an injunction from the trial court that prevented termination of the franchise while the
litigation was pending and required the franchise to allocate a certain number of
vehicles each month to the franchisee. The trial court granted an injunction in both
respects, staying the termination and also requiring the franchisor to allocate the same
number of vehicles as the franchisor had “expected” the franchisee to sell during the
year (which amounted to over 100 more vehicles than had been allocated to that dealer
in the previous year). The court believed that such an allocation requirement was
necessary in order to grant all rights and privileges to the franchisee as the statutes
required.
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The franchisor appealed this second portion of the injunction. Under the
franchise agreement and the franchisor’s long-standing allocation practices that were
applied nationwide, dealers earned allocation of additional vehicles according to how
quickly they were able to turn over their existing inventory. The franchisor argued that,
rather than requiring the franchisee to earn vehicles as it had in the past and as
required by the franchise agreement, the trial judge instead improperly rewrote the
parties’ agreement and required the franchisor to deliver a guaranteed number of
vehicles regardless of the franchisee’s sales.
The appellate court agreed. While it pointed out that the intent of the entire
Franchise Practices Act was to level the playing field between franchisees and
franchisors (who enjoy superior bargaining power), the court determined that the intent
of the automatic-stay provision of the termination statute was to preserve the status quo
while termination litigation between a franchisor and franchisee is pending. The trial
judge’s order actually upset the status quo and granted more rights and privileges to the
franchisee than the franchise agreement provided and which were afforded to other
franchised dealers across the country. Therefore, the trial court erred in essentially
rewriting the parties’ prior business relationship and giving the franchisee more rights
during the period of the stay than it had enjoyed under the terms of the franchise
agreement. The franchisor was simply required to allocate vehicles to the franchisee in
accordance with the long-standing allocation formula and practice, and the trial court
was directed to order as much on remand. On an alternative basis, the appellate court
also determined that the franchisee had not met its heavy burden of submitting clear
and convincing evidence that it should be entitled to the “affirmative” injunctive relief that
had been granted, as the trial judge did not even conduct a hearing to weigh the
controverted facts submitted by both parties.
Transbay Auto Serv., Inc. v. Chevron U.S.A., Inc., 2013 U.S. Dist. LEXIS
17504 (N.D. Cal. Feb. 7, 2013), involved a franchisor (“Chevron”)’s motions for
judgment notwithstanding the verdict and for a new trial following a jury’s decision that it
had violated the Petroleum Marketing Practices Act (“PMPA”) by failing to make a bona
fide offer to sell its interest in the franchisee (“Transbay”)’s gas station to Transbay after
electing to terminate the franchise for business reasons, as required under the PMPA.
Chevron argued that there was insufficient evidence to support the jury’s
conclusion that its offer was not bona fide. Specifically, Chevron challenged the
adequacy of Transbay’s expert appraisals of the gas station’s value. Although both
parties’ experts agreed that the highest and best use of the property was for something
other than a gas station, Transbay’s experts did not provide a valuation for the property
if it were used for something other than a gas station. Transbay’s experts contended
that a San Francisco conversion ordinance was a significant impediment to conversion
of the property to another use, and had accordingly included the costs and uncertainty
associated with this ordinance in valuing the gas station. The court held that a
reasonable jury could conclude that the ordinance lowered the value of the gas station
based on this expert testimony. The court also concluded that there was sufficient
evidence from which a reasonable jury could conclude that Chevron’s proposed
purchase price was too high, noting testimony about Chevron’s extensive efforts to
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market the gas station to another buyer. The offers Chevron received supported the
jury’s conclusion that Chevron’s proposed price was too high. Accordingly, the court
denied Chevron’s motion for judgment notwithstanding the verdict.
Chevron also argued that it was entitled to a new trial because of two allegedly
erroneous evidentiary rulings. First, Chevron argued that the court should have
excluded Transbay’s experts because their conclusions were based on an
unreasonable limitation imposed by Transbay to only value the gas station based on its
use as a gas station. The court rejected this argument, holding that any limitations
placed on the experts’ appraisals went to the weight rather than admissibility of the
evidence. Second, Chevron argued that the court should have admitted an appraisal
used by the franchisee to obtain financing to purchase the gas station as an admission.
The court rejected this argument, emphasizing that the franchisee’s owner testified that
he had never even read the contents of the appraisal. Accordingly, the court denied
Chevron’s motion for a new trial.
In Voltage Vehicles v. Arkansas Motor Vehicle Comm’n, 2012 Ark. 386
(2012), a dealer sought to terminate its dealer agreement with Voltage. It sent a letter
to Voltage and the Commission on October 27, 2009. The commission acknowledged
receipt of the letter on November 12, 2009, and set the termination date as January 1,
2010. After termination, Voltage refused to repurchase six 2008 vehicles that had been
subject to a safety recall for defective parts. The dealer had never received
replacement parts to replace the defective parts in the six 2008 vehicles. When Voltage
refused to repurchase the 2008 vehicles, the dealer filed a complaint with the Arkansas
Motor Vehicle Commission (the “Commission”) seeking a finding that Voltage was
required to repurchase the six 2008 vehicles in the dealer’s inventory.
The Commission found that Voltage was required to purchase the 2008 vehicles,
and pay transportation costs and interest. Voltage appealed, and the appellate court
affirmed the Commission’s decision, leading to an appeal to the Arkansas Supreme
Court. The court reviewed the decision on an arbitrary or capricious standard of review.
Voltage argued that the Arkansas Motor Vehicle only required it to repurchase inventory
for the current model year and one year prior model year. Because the termination was
effective January 1, 2010, Voltage argued that the 2008 vehicles were not within the
definition of current or prior model year. The Commission responded that Voltage did
not follow a traditional sales model year starting in October. Indeed, in November and
December 2008, only 2008 models were available, not 2009. The 2008 model year did
not end in Voltage’s fourth quarter 2008. Thus, upon the notice of termination in
November 2009, the current model year was 2009 and the prior model year was 2008.
The state supreme court found that the commission’s finding failed to account for
the actual termination date in its analysis, that it only mentioned the day of notification.
The court therefore remanded back to the commission for the commission to determine
what the current model year was as of January 1, 2009.
In Oracle Am., Inc. v. Innovative Tech. Distribs. LLC, 2012 U.S. Dist. LEXIS
134343 (N.D. Cal. Sep. 18, 2012), Oracle’s predecessor company, Sun Microsystems,
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entered into an agreement with Innovative Technology Distributors, LLC (“ITD”) to
become a “Sun Partner” and market and distribute Sun products. Id. at *4-6. The
agreement contained a clause that expressly stated that “[n]either the General Terms
nor any Agreement is intended to create a . . . franchise . . . relationship.” Id. at *4.
ITD then began selling Sun’s products from its office in Edison, New Jersey. Id. at *6.
After acquiring Sun, Oracle sought to shift the business model from an indirect sales
model to a direct sales one and terminated its relationship with ITD. Id. at *14-17. ITD
filed suit in New Jersey arguing, among other things, that Oracle had violated the New
Jersey Franchise Protection Act (the “Act”) by terminating the relationship. Id. at *1718. Oracle subsequently filed suit in California alleging breach of contract and $19.1
million in unpaid invoices and successfully had the New Jersey action transferred to
California and consolidated with its action. Id. Oracle then moved for summary
judgment dismissing ITD’s claim under the Act.
First, Oracle argued that the agreement between the parties expressly provided
that a franchise relationship was not being formed. Id. at *26-27. However the court
agreed with ITD in that under New Jersey law the court should focus on whether the
perception amongst customers was that the parties were “integrally related.” Id. at * 2732. The court found there was sufficient evidence to find customers would see Sun and
ITD as integrally related. Id. at *32-38. The court noted that Sun relied heavily on
resellers, whose added value was designed to promote proper functioning of Sun
products. Id. Furthermore, Sun directly warranted the products and negotiated the
pricing. Id. Also, ITD displayed Sun’s banner and logo in its corporate offices. Id. The
court thus concluded that a reasonable consumer would when buying products from
ITD, Sun was vouching for those products. Id. Second, the court found that there was
a community of interest between Sun and ITD because ITD had made substantial
investments in connection with the franchise, which were franchise-specific. Id. at *3843. ITD had been required by Sun to make substantial investments in developing Sunspecific training, skills, and knowledge regarding Sun products and services. Id. Third,
the court found that ITD’s office in Edison, New Jersey was sufficient to establish that
IDT held a place of business in the state. Id. at *43-49. Oracle argued that this was just
an office or warehouse and did not qualify as a place of business under the Act. The
court found that IDT’s offices were in fact sufficient because they were used as a
marketing facility, included a demonstration room, hosted events for Sun products and
was the place where the franchise’s personnel contacted customers and were the
goods were delivered to customers. Id.
Finally, the court found that there were questions of fact as to whether Oracle
had in fact terminated the franchise in good faith. Id. at *49-53. Oracle had sent notices
that did not explain the reason for the termination of the relationship. Although Oracle
argued that it had terminated the relationship because of ITD’s failure to pay invoices,
the court noted that Oracle had not demanded payment of these invoices until after the
litigation had commenced. What was more, it appeared that Oracle had decided to
terminate the relationship with ITD to shift to a direct sales business model. Id. The
court then denied Oracle’s motion for summary judgment. Id. at *53.
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In Int’l House of Pancakes, LLC v. Parsippany Pancake House Inc., 2012
U.S. Dist. LEXIS 89112 (D.N.J. June 27, 2012) and 2012 U.S. Dist. LEXIS 89112
(D.N.J. June 27, 2012), the court refused to order a former IHOP franchisee convicted
of child endangerment to immediately stop using the chain’s trademarks because the
conviction did not directly relate to the franchise’s business, but later did so after 60
days’ advance notice was given. In the first case, IHOP sought an injunction against
franchisee Parsippany Pancake House Inc. and its president and majority owner Cregg
following his April 2012 guilty plea to a charge of endangering the welfare of a child.
Because of this plea, Cregg was sentenced to a minimum of three years in prison and
required to register as a sex offender. Although IHOP notified Cregg in May 2012 that it
was immediately terminating the franchise, the Parsippany Pancake House continued to
operate and use IHOP’s trademarks. In opposition to IHOP’s preliminary injunction
motion, Parsippany Pancake House argued its continued operation as an IHOP
franchise was proper because IHOP’s termination of the franchise agreement was
invalid under New Jersey’s Franchise Practices Act.
The New Jersey Franchise Practices Act requires that a franchisor give a
franchisee 60 days’ notice before terminating a franchise agreement unless the
franchisee has been convicted of a crime directly related to the franchise. IHOP argued
that its franchise agreement with the Parsippany Pancake House allowed it to terminate
the franchise immediately and without prior notice upon Cregg’s conviction. The court
disagreed and held that under the Act, IHOP was entitled to an immediate termination of
the franchise agreement only if Cregg's conviction was “directly related to the business
conducted pursuant to the franchise.” The court rejected IHOP’s argument that Cregg’s
conviction was directly related to the business because of its potential to damage the
IHOP brand and noted that no court filings suggested that the crime occurred at the
Pancake House, that IHOP had received adverse publicity or that the Pancake House
or other IHOPs had become less profitable as a result of the conviction. Thus, the
court denied IHOP’s motion for an injunction.
Undeterred, IHOP served an amended notice of termination that provided for
termination after 60 days from IHOP’s original notice of termination. After the 60 days
passed, IHOP again moved for issuance of a preliminary injunction. This time, in 2012
U.S. Dist. LEXIS 89112 (D.N.J. June 27, 2012), the court found IHOP had complied with
the FPA and the only issue was whether IHOP had “good cause” to terminate the
agreement. The court found good cause existed because (1) IHOP is a family-friendly
restaurant with an interest in protecting that image, which could be tarnished by
association with a president that has pled guilty to sexually assaulting a minor and must
register as a sex offender; (2) Cregg’s prison sentence will prevent him from actively
participating in PPH’s day-to-day operations as required under the agreement; (3) less
severe crimes have supported good cause under the Act.
The court in Bell v. Bimbo Foods Bakeries Distrib., Inc., 2012 U.S. Dist.
LEXIS 90987 (N.D. Ill. July 2, 2012), found that the Illinois Franchise Disclosure Act
implicitly recognized a “constructive termination” claim. Plaintiff represented a proposed
class of individuals in a suit against Bimbo alleging violations of the Fair Labor
Standards Act, rescission, unjust enrichment, breach of contract, and wrongful
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termination under the Illinois Franchise Disclosure Act, 815 ILCS 705/19. Lead plaintiff
Steven Bell had worked as a distributor for Bimbo since August 1993. Bimbo classified
Bell and others like him as “independent contractors” governed by a “distributor
agreement.” Id. at *2. Bell and others had purchased the right to serve specified retail
outlets within a designated territory. Bimbo reserved the right to distribute products to
“non-Outlets” in that territory. Id. at *3.
Bell alleged that Bimbo violated the Franchise Disclosure Act by selling Sara Lee
bakery products within the contracted territories, the sale of which “essentially voided, or
terminated” his and his fellow class members’ distribution agreements. Id. at *5. The
first question the court answered in analyzing Bimbo’s motion to dismiss was whether
the Illinois Franchise Disclosure Act recognized a “constructive termination claim.”
Drawing analogy to the Illinois Human Rights Act and similar state franchise protection
suits, the court found that a constructive termination claim “should qualify as a
‘termination’” under the Illinois Franchise Disclosure Act. Id. at *8-9.
However, the court found that Bell had not alleged constructive termination of the
distributorship (“that the actual distributorship has come to an end”) because he
continued to operate the business. Id. at *9. The court cited the Supreme Court
decision in Mac’s Shell Service & Shell Oil Products Co., 130 S. Ct. 1251 (2010), where,
although the Supreme Court did not decide that the Petroleum Marketing Practices Act
created a cause of action for constructive termination, it determined that a necessary
element of the claim (if it existed) would be that the franchisor’s conduct “force[d] an end
to the franchise.” The Illinois district court therefore dismissed Bell’s claim because the
complaint “contained no allegation that Bimbo has driven Bell out of business or made
his competitive circumstances so desperate that he feels he must quit,” noting that, “to
the contrary, the franchise remains intact.” Id. at *11 (emphasis added).
E.
FRAUD
The issue the court addressed in O'Kinsky v. Perone, 2012 U.S. Dist. LEXIS
56871 (E.D. Pa. Apr. 20, 2012), is whether to dismiss plaintiff’s breach of contract and
fraud claims based on the parol evidence rule. According to O’Kinsky, he and
defendants entered into an oral agreement permitting defendants to franchise
O’Kinsky’s technology and system for firefighter equipment testing and receive a
percentage of the franchise sales and profits in exchange for O’Kinsky receiving an
annual salary and maintaining sole control of the company. Id. at *2-3. The problem,
according to O’Kinsky, was that the written contract defendants later gave to him to
sign, which he did, contained very different terms. Id. at *3.
The court first addressed the breach of contract claim. Citing Pennsylvania law
on the parol evidence rule, the court recognized a distinction between claims of “fraud in
the inducement” and “fraud in the execution.” Id. at 8. Parol evidence of the former, the
court held, is prohibited, but parol evidence of the latter is permitted. Here, O’Kinsky
claimed defendants “fraudulently altered and omitted terms they told him would be in
the contract” such that his was a claim for “fraud in the execution” and could therefore
rely upon parol evidence. The court went on to hold that O’Kinsky must show
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“excusable ignorance” between the actual written agreement and the alleged oral
agreement to ultimately succeed. Id. at 11. Reasoning that O’Kinsky was a firefighter,
not a “sophisticated contractor,” and due to the great length of the contractual
documents, the court allowed the breach of contract claim to go forward.
O’Kinsky was less successful with his fraud claim. Apply Pennsylvania’s
infamous “gist-of-the-action doctrine,” the court held that O’Kinsky’s fraud claim was “no
more than a violation of the terms of the alleged verbal agreement” and therefore not
fraud, but rather breach of contract. Id. at 14. While O’Kinsky could maintain a claim
for fraud against defendants for telling him that their attorneys also represented him, the
court dismissed all other fraud claims.
In Ace Hardware v. Landen Hardware, 2012 WL 2553532 (N.D. Ill. June 28,
2012), the franchisee sought reconsideration of dismissal of its counterclaim for
negligent misrepresentation, or, alternatively, certification of the order pursuant to 28
U.S.C. § 1292(b). The court denied both motions. Defendant argued that the court’s
ruling was premised on the idea that the Illinois economic loss doctrine barred
defendant’s counterclaim because Ace was “not a pure information provider and its
business does not center around providing location information to its franchisees.” Id. at
*1. The court rejected this reading, explaining that its finding was that the economic
loss doctrine did not apply to a company such as Ace, who was not “in the business of
supplying information for the guidance of others in their business transactions,” but
instead “supplies information that is ‘merely ancillary to the sale or in connection with
the sale of merchandise or other matter.’” Id. (quotation omitted).
The court found that under the economic loss doctrine, “the key inquiry is
whether Ace’s business is guiding others in their business transactions.” Id. Previously,
defendant had not disputed that “Ace’s business centers on setting up and supporting
Ace’s franchises,” and as the court had previously found, Ace’s business “extends far
beyond providing advice to its franchisees regarding the desirability of potential store
locations,” with activities such as providing merchandise, credits, a non-exclusive
license to use Ace trademarks, and the right to patronage dividends. Id. As defendant
sought to obtain a more fully developed record concerning the importance placed on the
information Ace provided to its franchisees and such inquiry would not alter the
conclusion of the court, it denied the motion to reconsider.
The court also denied defendant’s motion to certify the order on the grounds that
interlocutory appeal could “lead to unnecessary delay and expense,” and that nothing
about the case warranted “deviation from the normal rule that a dissatisfied party must
appeal from a final order.” Id. at *2. Moreover, as the court had granted Ace’s motion
for summary judgment, but a final order could not be granted as co-defendants had filed
for bankruptcy, the court could not entered a final judgment anyway, meaning that
certification might “not have any meaningful impact on the timing of an appeal.” Id.
Wingate Inns Int’l, Inc. v. P.G.S., LLC, 2012 U.S. Dist. LEXIS 115745 (D.N.J.
Aug. 16, 2012), involves one of many claims by a franchisee that it was fraudulently
induced to purchase its franchise and therefore, in this case, that it should not be liable
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to fully repay a note and liquidated damages upon terminating its franchise. The key
issue here is the franchisee’s claim that he was promised damages would be limited to
$250,000 upon termination and that 30% of reservations would be provided by the
franchisor. In support of that claim the franchisee relied upon the testimony of its owner
and an internal Wingate email stating “Please cap damages at $250,000.”
Unfortunately for the franchisee, the court held this to be insufficient and granted
summary judgment to the franchisor.
First, the court rejected the franchisee’s claim of a promised cap of $250,000 in
damages. It did so based on the parole evidence rule and the franchise agreement’s
unambiguous limit of $250,000 in liquidated damages. “The alleged fraudulent
representation here concerned an express provision of the written agreement. The
language in the written contract is unambiguous that it only caps liquidated damages.”
Id. at *10. Next, the court easily disposed of the claim that Wingate promised to provide
30% of the franchisee’s reservations. Holding that promises concerning future events
not within the promisor’s absolute control are not actionable as fraud, the court
dismissed the claim and granted summary judgment in Wingate’s favor for past due
royalties, liquidated damages and an unpaid promissory note.
In Andy Mohr Truck Center v. Volvo Trucks N. Am., 2012 U.S. Dist. LEXIS
145057 (S.D. Ind. Oct. 9, 2012), Mohr entered into an agreement with Volvo to sell its
Volvo truck franchise. It did so with the understanding that Volvo would grant it a Mack
Truck franchise in a separate transaction. Plaintiff never received the Mack Truck
franchise. The complaint claimed that Volvo was aware at the time it made the promise
that Volvo would not fulfill its promise to award a Mack Truck franchise. Mohr’s
complaint alleged violation of the Indiana Franchise Disclosure Act, unfair practices
under Indiana Code § 9-23-3, theft under the Indiana Crime Victims Act, breach of
written contract, breach of oral contract, and promissory estoppel. Volvo moved to
dismiss the theft, breach of written contract, and breach of oral contract claims.
Indiana’s Crime Victim’s Act provides a person who suffered a pecuniary loss in
violation of Indiana Code § 35-43 may bring a civil action against the person who
caused the loss. It states in relevant part that a “person who knowingly or intentionally
exerts unauthorized control over property of another person with intent to deprive the
other person of any part of its value of use commits common theft.” Volvo argued that
there was no theft because the allegations clearly show that the money Volvo allegedly
“took” was not theft, but payment for technology, tools, trucks, and parts. The court
reasoned that the definition of theft in the statute sweeps “broader than it would in the
street.” Control is “unauthorized” if it is exerted by creating, confirming or failing to
correct a false impression in another person and relied upon by that person, or by
promising performance that the promisor knows will not be performed. Here, Mohr
sufficiently alleged that Volvo received payments which were predicated on Mohr’s
belief that it would be awarded a Mack Truck dealership. Therefore the court denied
Volvo’s motion to dismiss on this claim.
Volvo moved to dismiss the breach of written contract claim claiming the
complaint failed to allege a breach and therefore Volvo had insufficient notice of the
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claim. The court soundly rejected this argument. Volvo’s motion to dismiss the claim
for breach of oral contract, arguing that the claimed failed because Mohr did not
adequately plead an offer or mutual assent, fared no better. Mohr’s allegations that
Volvo told Mohr it was just a matter of time before it got the Mack Truck franchise, and
that Volvo was “making progress” towards fulfilling its end of the bargain, was sufficient.
Meena Enters., Inc v. Mail Boxes Etc., Inc., 2012 U.S. Dist. LEXIS 14606 (D.
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Meade v. Kiddie Academy Domestic Franchising, 2012 U.S. App. LEXIS
21283 (3d Cir. Oct. 15, 2012), involved an appeal of a district court decision dismissing
Mark Meade’s complaint against Kiddie Academy Domestic Franchising, a franchisor of
child care learning centers, for lack of standing.
Meade established the Dasoda Corporation and was Dasoda’s president and
principal shareholder. When Dasoda’s franchise was unsuccessful, Meade filed suit
against Kiddie Academy and several of its employees, claiming that they had made
various fraudulent misrepresentations to induce him to sign the franchise agreement,
including overstating financial performance data and understating operating costs.
Meade also claimed that the defendants breached the franchise agreement by failing to
assist in finding a location for the franchise and failing to assist with teacher instruction,
classroom set up, training, and licensing requirements. Finally, Meade alleged multiple
statutory violations, including consumer rights laws, federal racketeering violations,
bank fraud, and others.
The court concluded that the appeal did not present a substantial question and
therefore summarily affirmed the district court’s dismissal. Because Meade’s claims all
involved injuries to Dasoda stemming from the franchise agreement between Dasoda
and Kiddie Academy, and because Meade did not allege that the defendants took any
actions against him in his individual capacity, the court concluded that he did not have
standing to sue for injuries sustained by Dasoda.
Ace Hardware Corp. v. Advanced Caregivers LLC, 2012 U.S. Dist. LEXIS
150877 (N.D. Ill. Oct. 18, 2012), involved a proposed franchisee class action against
Ace alleging Ace fraudulently induced the franchisees to acquire and develop Ace
Franchises. Ace filed a motion to compel arbitration pursuant to the Federal Arbitration
Act.
Ace’s network consists of 4,000 independent Ace retailers operating by 3,000
individual members. Each member executed a Hardware Membership Agreement and
an Ace Brand Agreement and paid a $5,000 fee. These agreements did not contain an
arbitration provision. Ace sent a letter tentatively approving the agreements contingent
upon receiving further documentation, followed by a formal approval of membership and
fully executed Brand and Membership Agreements. Several months later, Ace notified
the retailers by letter that the agreements contained an error regarding the address of
respective store, and asked the retailer to sign new documents reflecting the right
address. The retailers signed the second set of documents. This second set of
agreements contained an arbitration provision that was not in the first set. The second
set of agreements also deleted a clause allowing Ace to bring any dispute arising out of
the relationship in Illinois courts.
In January 2012, the retailers filed an action in Florida on behalf of themselves
and a putative nationwide class action alleging Ace defrauded them in connection with
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their decision to acquire an Ace franchise. Ace claimed that all of the allegations fall
within the arbitration provisions in the second set of agreements and sought to compel
arbitration. The retailers countered that they were unaware they were agreeing to
arbitrate when they received the second set of agreements, considering that the first set
did not contain one. Thus, they claimed, the inclusion of the arbitration clause in the
second set of agreements was a unintentional mistake; alternatively, the arbitration
clause was unenforceable because Ace failed to provide notice of it so the arbitration
clause is procedurally unconscionable; or they were induced to agree to the arbitration
provision by fraud.
The court granted the motion to compel arbitration. The court first analyzed
whether the parties had an agreement to arbitrate, which requires a meeting of the
minds and a manifestation of mutual assent. In determining the parties’ intent,
consideration is given to what is in the writing, not the parties actual subjective intent.
Because the retailers signed the second set of agreements, and the arbitration clause
was clearly in writing in the agreements, they were presumed to know the terms of the
agreements they signed. Thus, there can be no mutual mistake.
The court also held that it is not one party’s duty to inform the other of its duties
or obligations under the contract so there was breach of a duty that would provide the
retailers’ relief. Similarly, the court rejected the claim of procedural unconscionability
because the arbitration provision was in bold and underlined, and inserted directly
above the signature line. Finally, the court rejected the fraud claim because
respondents could have easily discovered any “fraud” by simply reading the contracts in
the three weeks before receiving them and signing them.
merchandise.
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personal, family or household purposes and dismissed the claim
Accor Franchising N. Am., LLC v. Gemini Hotels, Inc., 2012 U.S. Dist. LEXIS
152988 (E.D. Mo. Oct. 23, 2012), involved an action to recover for alleged breaches of
a franchise agreement and breach of a personal guarantee of the franchisee’s
obligations. Gemini counterclaimed for fraud, alleging that the Plaintiff made false
representations regarding the increase in business defendant could realize if it used the
Motel 6 brand and system. Plaintiff moved to dismiss the counterclaims for failing to
allege the elements of fraud with sufficient specificity.
The court agreed with the plaintiff and dismissed the counterclaim. Gemini failed
to identify any specific persons, statements, timing, or circumstances surrounding the
alleged statements, or how they were injured by the false statements. The court
therefore granted the motion to dismiss.
Fullington v. Equilon Enters., 210 Cal. App. 4th 667, 148 Cal. Rptr. 3d 434
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2003).
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overpayment.
Stocco v. Gemological Inst. of Am., 2013 U.S. Dist. LEXIS 1603 (S.D. Cal.
Jan. 3, 2013), involved franchisor Gemological Institute of America (“GIA”)’s motion to
dismiss franchisee Frederick and Kathleen Stocco’s (“the Stoccos”) claims of (1) breach
of contract; (2) fraud in the inducement; (3) failure to provide franchise offering circular
in violation of California franchise law; and (4) unfair business practices in violation of
California’s Unfair Competition Law.
GIA is a company providing gem-grading services. As employees of GIA, the
Stoccos relocated to Italy to establish GIA’s first European location. In exchange for
GIA’s agreement to open a GIA school and gem grading location, the Florence
Chamber of Commerce agreed to provide GIA with substantial financial support. Two
years later, GIA offered the Stoccos the opportunity to enter into a franchise agreement,
which the Stoccos accepted. Several years later, GIA notified the Stoccos that it would
no longer permit the creation of a GIA gem grading location, causing Florence to
withdraw its financial support.
The Stoccos’ breach of contract claim alleged that GIA breached an agreement
with Florence to open a GIA school/gem grading location, which was contained in the
GIA Italy’s articles of incorporation. The articles of incorporation were signed by
Frederick Stocco on behalf of GIA and representatives of the Florence Chamber of
Commerce and University of Florence several years before the Stoccos became GIA
franchisees. The court concluded that the Stoccos had no rights under the articles of
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incorporation, as Frederick Stocco signed only on behalf of GIA and there were no facts
to suggest that they were third-party beneficiaries or direct beneficiaries. Accordingly,
the court dismissed this claim.
The Stoccos’ fraud in the inducement claim alleged that they reasonably relied
on GIA’s false representations that it would open a gem grading location when they
entered into the franchise agreement. However, the court noted the franchise
agreement expressly prohibited the Stoccos from opening such a location, and
therefore concluded that it was unreasonable for the Stoccos to have relied on any oral
representation to the contrary. Accordingly, the court dismissed this claim.
The Stoccos also alleged that GIA willfully failed to provide them with the
franchise offering circular in violation of Cal. Corp. Code § 31119. The court concluded
this claim was barred by the statute of limitations.
The Stoccos’ unfair business practices claim alleged that GIA had engaged in
unfair business practices by offering scholarships to students at some GIA locations, but
not at the Stoccos’, and by withdrawing its support for a gem grading location after
persuading the Stoccos to enter into a franchise agreement. The court concluded that
California’s Unfair Competition Law did not apply because of all of the challenged
actions took place in Italy. Accordingly, the court dismissed this claim.
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The court reasoned that it only had jurisdiction if Palermo’s well plead complaint
or shield.
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rescission.
Carroll v. Farooqi, 2013 U.S. Dist. LEXIS 22329 (N.D. Tex. Feb. 19, 2013),
involves an unsuccessful sale of a Salad Bowl franchise by Carroll to Farooqi. Carroll
was chairman, CEO, president, and CFO of Salad Bowl. In 2009, Farooqi began
negotiating with Carroll to obtain a Salad Bowl franchise. As part of the negotiations,
Farooqi signed a 30-day option to purchase and paid a $25,000 franchise fee that would
ultimately be applied to the total purchase price. During the 30-day window, Farooqi
was to obtain financing for the purchase of the franchise. He was unable to do so, and
demanded the $25,000 back. Carroll did not return the money.
Farooqi eventually filed suit for fraudulent inducement, fraud, and violations of
the Texas Deceptive Trade Practices Act (“DTPA”). Carroll filed for bankruptcy and the
claims were transferred to the bankruptcy court. The court found that Farooqi proved
his claims against Carroll for fraudulent inducement and violations of the DTPA and
awarded him actual and exemplary damages in the amount of $88,500 which, because
founded in fraud, were not dischargeable in the bankruptcy.
Carroll appealed, claiming the bankruptcy court improperly exercised jurisdiction,
that the bankruptcy court erred in finding the complaint met the standards of Fed. R.Civ.
P. 9, and that the bankruptcy court erred in its application of the DTPA. The court found
that the bankruptcy court properly exercised jurisdiction because it simply made a final
determination of the dischargeability of a creditor’s claim against a debtor, which
requires the liquidation of the state law claim. The court also found that the complaint
met the standards of Fed. R.Civ. P. 9 because it set forth the representations allegedly
made, as well as what damages were claimed. Third, the court upheld the
determination of liability under the DTPA. The court found that Farooqi was a consumer
under the DTPA and that the franchise purchase was a good or service under Texas
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law. Although the inducements were to make Farooqi sign the option agreement, the
ultimate goal was to purchase a franchise. Because Texas law looked at a plaintiff’s
central objective in determining if the plaintiff was a consumer, and the principle desire
was to purchase a franchise, it is that proposed transaction that is at issue. The court
therefore upheld the bankruptcy court’s determination that Farooqi was a consumer
under the DTPA.
Hanley v. Doctors Express Franchising, LLC, 2013 U.S. Dist. LEXIS 25340
(D. Md. Feb. 25, 2013), involved a suit by a franchisee (“Hanleys”) against a franchisor
of urgent medical care clinics (“Doctors Express”) and a franchise broker (“Rhino”)
alleging that both defendants made numerous material misrepresentations and nondisclosures about the franchise. Specifically, the Hanleys alleged (1) violations of
Maryland Franchise Registration and Disclosure Law, (2) fraud, and (3) constructive
fraud and sought $1.3 million in damages and recession of the franchise agreement.
Both defendants moved to dismiss the suit.
The misrepresentations and nondisclosures alleged by the Hanleys were
numerous and included (1) the estimated amount of the initial investment that would be
required to operate a franchise, (2) the amount of capital needed for the first three
months of operation, (3) the typical turnaround time for payment of franchisees’
insurance claims, (4) the ability of Doctors Express to assist in credentialing and
contracting with health care professionals, (5) the date certain insurance contracts
would become effective, and (6) the projected financial performance of the clinic.
The court (1) denied both defendants’ motions to dismiss with respect to the
Maryland Franchise Registration and Disclosure law claim, (2) it granted both motions
with respect to the constructive fraud claim, and (3) denied Doctors Express’ motion
with respect to fraud, but granted Rhino’s motion.
The court first examined the constructive fraud claim and determined that
constructive fraud usually requires a relationship of trust and confidence. Because
plaintiffs did not allege a confidential relationship among the parties, or cite any case
where a violation of the Maryland Franchise Law could support a claim for constructive
fraud, the court granted defendants’ motion to dismiss on this claim.
The court next examined the Maryland Franchise Law and fraud claims against
Doctors Express. Doctors Express claimed that it was not liable because its projections
were mere estimates or opinions and not facts. The court disagreed. It found that
future projections can be fraudulent if the defendant knew they were inaccurate at the
time they were made. It also found that the Maryland Franchise Law does not merely
prohibit affirmative misrepresentations, but also prohibits omissions that make the
statements misleading. Finally, analyzing the facts of the case, the court found that
plaintiffs had articulated significant discrepancies between Doctors Express’ projections
and the actual results realized by the plaintiffs, and that the projections were based on
concrete facts within Doctors Express’ possession, meaning that Doctors Express’
financial estimates could form the basis of Maryland Franchise law and fraud claims.
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Doctors Express also argued that it was unreasonable, as a matter of law, for
plaintiffs to have relied on representations made outside of the Franchise Disclosure
Document, including emails and marketing plans, where the terms of FDD stated that
plaintiffs could not rely on any such statements made outside of the FDD. The court
disagreed, finding that the Maryland Franchise Law—prohibiting the release or waiver of
liability as a condition of the sale of a franchise—precluded Doctor Express’ reliance on
the disclaimer to defeat liability.
Rhino argued that it could not be liable to plaintiffs for violations of the Maryland
Franchise Law or for fraud because it was a franchise broker and a mere agent of
Doctors Express. The court granted Rhino’s motion to dismiss as to the fraud claim
because “an agent is not liable for fraudulent representations of its principal that it
conveys to a third party, unless the agent knows of the falsity of the representation.”
The court found that plaintiffs’ complaint did not allege any facts or circumstances to
show that Rhino knew of the falsity of the its alleged misrepresentations and the court
therefore granted its motion to dismiss the fraud claim.
The court denied Rhino’s motion to dismiss with regard to the Maryland
Franchise Law. Rhino argued that franchises brokers are not covered under the statute
but the court analyzed the statutory language and found that the term “franchisor” is
specifically defined to mean a person who grants a franchise and this language is
sufficiently broad to include an agent who participates in making the sale of a franchise.
The court also stated that while common law fraud requires a showing of knowledge,
under the Maryland Franchise Law, the burden is shifted and the defendant’s lack of
scienter is an affirmative defense and therefore the court would not dismiss the claim at
this stage merely because Rhino claimed it had no knowledge. An affirmative defense
cannot be resolved by a 12(b)(6) motion.
Poland v. LA Boxing Franchise Corp., 2012 Cal. App. Unpub. LEXIS 8399
(Cal Ct. App. Nov. 19, 2012), involved a claim by a former independent contractor that
Anthony Geisler, the principal of defendant LA Boxing Franchise Corporation (“LA
Boxing”) had falsely promised the plaintiff, Christopher Poland, to make him a
franchisee, to give him stock, and to give him a commission on sales for life. The jury
found in part for Poland and awarded him $75,000 on the false promise claim.
Poland was a long-time independent contractor who assisted LA Boxing set up
franchises throughout the country. As the company expanded, Poland alleged that
Geisler offered him a one percent commission on gross franchise receipts to keep him
tied to the gyms forever. Poland interpreted this offer to mean he would receive the
commission for the rest of his life, regardless of whether he was working for LA Boxing.
A few years later as the company continued to grow and expand, Poland alleged that
Geisler promised Poland a 10% equity share in the company as well as the opportunity
to open his own franchise. After Poland was eventually terminated due to several
complaints from various franchise owners, he filed suit for wrongful termination, labor
code violations, breach of oral contract, and for false promise. The jury rejected
Poland’s breach of oral contract claims, but awarded him $75,000 of his false promise
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claim and $2,800 in unpaid wages. The special verdict did not indicate what the jury
found was falsely promised to Poland.
On appeal, Poland argued that the findings by the jury were inconsistent; that the
findings in his favor on the false promise claim contradicted the findings against him on
the breach of contract claims and were irreconcilable with each other. The court
disagreed, finding that each were separate causes of action and a favorable verdict on
one was not inconsistent with an unfavorable verdict on the other. The court also
rejected Poland’s argument that there was insufficient evidence to support the breach of
contract verdict.
BP W. Coast Prods., LLC v. Shalabi, 2012 U.S. Dist. LEXIS 82879 (W.D.
Wash. June 14, 2012), involves a slew of claims (summarized elsewhere in this update)
made by the franchisor, franchisee and third-party defendants against one another.
This decision addresses BP’s motion to dismiss Shalabi’s counterclaims that he was
deceived by BP and Jeffrey Cary’s misrepresentations about expected sales volume
and revenues.
In assessing BP’s motion to dismiss, the court analyzed Shalabi’s counterclaims
under Washington’s Franchise Investment Protection Act (“FIPA”), Gasoline Dealer Bill
of Rights (“GDBR”), and Consumer Protection Act (“CPA”). In concluding that Shalabi
sufficiently alleged CPA claims premised on FIPA and GDBR violations, the court
explained that it is unlawful under both laws for “any person in connection with the offer,
sale, or purchase of any franchise to make an untrue statement of material fact, omit a
material fact” or otherwise deceive any person. Id. at *14. The court found that
Shalabi’s claims under the FIPA and GDBR were sufficiently pled to withstand
dismissal. Ultimately, however, the court dismissed several of Shalabi’s other fraudrelated claims and granted in part and denied in part BP’s motion to dismiss.
In BP W. Coast Prods., LLC v. SKR, Inc., 2012 U.S. Dist. LEXIS 130198 (W.D.
Wash. Sept. 10, 2012), a gas station franchisor sued its franchisee and its principals for
refusing to sell Arco branded gasoline and am/pm products. Id. at *2. The franchisor
alleged that this refusal was a violation of the parties’ franchise agreements, certain
deed restrictions, and real estate agreements. Id. The franchisee filed counterclaims
against the franchisor for (1) breach of contract; (2) violations of Washington’s
Franchise Investment Protection Act (“FIPA”), Oregon’s Motor Fuel Franchise Act
(“OMFFA”) and Washington’s Gasoline Dealer Bill of Rights Act (“GDBRA”); (3)
violations of the Consumer Protection Act (“CPA”); (4) fraud and misrepresentation; (5)
equitable relief; and (6) declaratory relief and the franchisor moved to dismiss them. Id.
at *3.
For the franchisee to establish common law fraud or misrepresentation, it must
establish: “(1) representation of an existing fact; (2) materiality; (3) falsity; (4) the
speaker’s knowledge of its falsity; (5) intent of the speaker that it should be acted upon
by the plaintiff; (6) plaintiff’s ignorance of its falsity; (7) plaintiff’s reliance on the trust of
the representation; (8) plaintiff's right to rely upon it; and (9) damages suffered by the
plaintiff.” Id. at *5-6. Relying on authority holding that “[p]redications as to future results
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or events cannot support a fraud claim,” the court dismissed the franchisee’s fraud
claims to the extent they were based on alleged statements that merely “predicted
future increases in revenue or expected profits” and were “not misrepresentations or lies
about existing facts.” Id. at *6-7.
The court then addressed the franchisor’s argument that the remaining
Washington common law and statutory fraud and misrepresentation claims were barred
by the governing three-year statute of limitations. Id. at *7-9 (citing RCW 4.16.080(4);
RCW 19.120.902). After noting that the statute of limitations was subject to the
discovery rule, the court held that even though certain misrepresentations were made
outside of the limitations period, the franchisee might be able to establish that the
statute should be tolled until “sufficient time [has passed] to verify that the statements
made were untrue.” Id. at *7-8. The court thus denied dismissal on this basis. Id. at *8.
With respect to another alleged misrepresentation that the franchisee’s septic system
tank did not need to be hooked up to the city’s sewer, the court held that the franchisee
alleged that it learned the opposite was true more than three years before the claim was
filed. Id. at *8-9. The court thus granted dismissal on this claim. Id. at *9.
The court then dismissed all non-fraud based OMFFA claims “given [the
franchisee’s] total lack of opposition and the inadequacy of the allegations pursuant to
Rule 8(a).” Id. at *9-10. The court noted that unlike FIPA and the GDBRA, the OMFFA
does not contain anti-discrimination and reasonable price provisions. Id. at *9. The
court also dismissed the franchisee’s request for declaratory judgment that it had “a
right to terminate the am/pm agreements,” because the franchisee “failed to identify any
provisions of the am/pm agreements that BP has purportedly breached that might
enable [the franchisee] to terminate the agreements.” Id. at *10. Based on
Washington’s two-year catch-all statute of limitations, the court dismissed the
franchisee’s vertical price-fixing claims under the GDBRA that accrued more than two
years before the claim was filed. Id. at *10-11 (citing RCW 4.16.130).
The court’s decision did contain some good news for the franchisee. The court
denied the motion to dismiss with respect to the franchisee’s equitable claims for quasicontract relief, because the franchisee had alleged a viable challenge to the validity of
the franchise contract through its allegations that it was fraudulently induced into
purchasing the service stations. Id. at *11-12. The court also ruled that the franchisee
would be permitted leave to amend its counterclaims, finding that the franchisor’s
request that leave to amend be denied was “inequitable.” Id. at *12.
Jolyssa Educ. Dev., LLC, v. Banco Popular N. Am., 2012 U.S. Dist. LEXIS
136400 (D. Conn. Sep. 19, 2012), is an interesting case about a franchisee trying to
blame everyone but itself for failure. Here, the franchisor allegedly encouraged Jolyssa
to consult with The Business Resource Center as a loan consultant for assistance in
securing an SBA loan. Id. Jolyssa did so and upon the consultant’s recommendation
applied to Banco Popular North America for an SBA loan. Id. In connection with the
loan application, Banco Popular asked for a pro forma financial projection. Id. Before
submitting the pro forma, Jolyssa submitted it to the consultant who increased the
projections to satisfy Banco Popular’s expectations and get the loan approved. Id.
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When the franchise failed approximately a year later, Jolyssa sued for negligence,
breach of contract, fraud and unfair trade practices based on the theory that Banco
Popular knew or should have known that the franchisee was likely to default due to the
performance of other franchisees in the same system to which Banco Popular had
made loans. Id. at *3-7. Jolyssa further alleged that the franchisor had a usual practice
of referring its franchisees to the Business Resource Center, who in turn had the usual
practice of referring these franchisees to Banco Popular. Banco Popular moved to
dismiss on the bases that the claims were untimely and failed to state claims upon
which relief could be granted.
Jolyssa argued that the statute of limitations on its claims should be tolled to
2011 for the time that Banco Popular continued to send it monthly statements. Id. at *67. The court, however, found that the statute of limitations on Jolyssa’s claims, as
pleaded, started to run from the date the loan was approved on April 2007. Id. at *7-9.
The court therefore held that Jolyssa’s complaint was based on the Banco Popular’s
decision to approve Jolyssa’s SBA loan application and that decision was made more
than four years before Jolyssa filed suit in 2011. Id. The court held that Jolyssa’s claims
were thus barred by the applicable statute of limitations and granted Banco Popular’s
motion to dismiss. Id. at ** 9-12.
AMTX Hotel Corp. v. Holiday Hospitality Franchising, Inc., 2012 U.S. Dist.
LEXIS 79139 (N.D. Tex. June 7, 2012), is an excellent example of a franchisor
successfully dismissing most, but not all, of a franchisee’s claims for fraudulent
inducement. Here, AMTX purchased a ten year franchise with Holiday permitting AMTX
to operate a Holiday Inn. AMTX claimed that before it purchased the franchise Holiday
promised that the franchise would be renewed and that no other Holiday Inns were “set
to be licensed” in the Amarillo, Texas area. The agreement, however, expressly
provided for nonrenewal of the licensing term, stated that the license was non-exclusive
and contained a merger and bar clause. When Holiday refused to renew the license
and granted another franchise in the Amarillo, Texas area, AMTX filed suit.
The court dismissed AMTX’s breach of contract, breach of implied covenant of
good faith and fair dealing, promissory estoppel and detrimental reliance claims, stating
that each of AMTX’s factual allegations supporting those claims were expressly and
fully addressed in the franchise. The court did not dismiss the fraud claim, however,
due to the case not being fully developed at the time of the order, but noted that there
was no allegation of a fiduciary or confidential relationship between AMTX and Holiday
that would give rise to a duty to disclose that a franchise had been promised to another
group in Amarillo.
Celsi v. H&R Block Tax Servs. LLC, 2012 Cal. App. Unpub. LEXIS 5275 (Cal.
App. 1st Dist. July 17, 2012), concerns the effect of the parol evidence rule on a written
franchise agreement and the running of the two year statute of limitations of the
California Franchise Investment Law Act (“CFIL”). Here, Celsi purchased two H&R
Block franchises in 1999 for Eureka and McKinleyville, California and alleged that when
he bought them H&R Block orally promised him rights to an Arcata franchise when he
was ready. When H&R Block awarded the Arcata franchise to someone else, Celsi
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sued for fraudulent inducement and breach of the CFIL. The trial court dismissed
Celsi’s claims and he appealed.
The appeals court affirmed dismissal of both of Celsi’s claims. As to the CFIL
claim, the court rejected Celsi’s argument that the breach occurred when H&R Block
sold the territory to someone else. Instead, the court held that any CFIL violation
occurred in 1999, when Celsi purchased his franchises, because the conduct at which
the statute is directed occurs at the time of an “offer” or a “sale of a franchise.” Id. at
*10. The court also affirmed dismissal of the breach of contract claim based on the
parole evidence rule. Citing to “words of integration” in the franchise agreements
stating that any prior oral understandings were superseded, the court applied the
“longstanding, well-known principle that promotes fairness and predictability by
encouraging parties to specify the entirety of their agreements in writing.” Id. at *22.
In Ohio Learning Ctrs., LLC v. Sylvan Learning, Inc., 2012 U.S. Dist. LEXIS
102784 (D. Md. Jul. 24, 2012), franchisees sued Sylvan Learning Centers, LLC and
Educate, Inc. (collectively “Sylvan”) for numerous causes of action stemming from
Sylvan’s allegedly fraudulently inducing plaintiffs to purchase, finance and run a learning
center franchise. Sylvan’s moved to strike plaintiffs’ demand for a jury trial, to dismiss
and for immediate summary judgment. The Court denied Sylvan’s motion to strike
plaintiffs’ jury demand and motion for summary judgment. It did, however partially grant
plaintiffs’ motion to dismiss.
Sylvan sought to strike plaintiffs’ jury demand because three of the four contracts
between the parties contained jury trial waivers. The Court, however denied that motion
because the fourth contract, a License Agreement, which primarily governed the
plaintiffs’ claims, did not contain such a waiver. Because that agreement contained an
integration clause that terminated and superseded any prior agreement between the
parties, the Court refused to find that the plaintiffs had otherwise waived their
constitutional right to a jury trial. As to Sylvan’s motion to dismiss, the Court granted
that motion as to several counts of plaintiffs’ First Amended Complaint, due to plaintiffs’
failure to plead certain counts with adequate particularity, failure to state a claim under
relevant franchise statutes, and failure to bring claims within the timeframe proscribed
by the relevant statute of limitations.
F.
TORTIOUS INTERFERENCE
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on appeal.
favor because Nestle’s sales were privileged.
The claims were divided into two sets of facts: (a) facts relating to whether the
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parties.
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in part by Exxon, and that Exxon did not make a good faith effort to address the postproduction problems. But, the OTR agreement contained disclaimers concerning the
of fact existed.
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March 2006.
Hawk Enters., Inc., v. Cash Am. Int’l, Inc., 282 P.3d 786, (Okla. Civ. App.
2012), is an appeal of the trial court’s order granting summary judgment in favor of Cash
America International, Inc. (“Cash America”), the apparent parent company of franchisor
Mr. Payroll, dismissing Hawk Enterprises, Inc.’s (“Hawk”) action alleging tortious
interference. Hawk purchased a Mr. Payroll franchise with the exclusive right to operate
Mr. Payroll check cashing facilities in Oklahoma City. Cash America signed the
franchise agreement as Mr. Payroll’s guarantor. Although the exact relationship
between Cash America and Mr. Payroll is not established in the record, Mr. Payroll
appears to be a Cash America subsidiary. When Cash America subsequently began
operating check cashing businesses in Oklahoma City, Hawk sued for tortious
interference and breach of the implied covenant of good faith and fair dealing. This
appeal pertains only to the tortious interference cause of action.
Oklahoma law is not settled, the court held, with respect to whether or not a
parent company can be held liable for tortious interference with a contract of its
subsidiary. The court found that the issue should be addressed on a case-by-case basis
analyzing the following factors from the Restatement (Second) of Torts §767:
(a) the nature of the actor's conduct,
(b) the actor's motive,
(c) the interests of the other with which the actor's conduct interferes,
(d) the interests sought to be advanced by the actor,
(e) the social interests in protecting the freedom of action of the actor and
the contractual interests of the other,
(f) the proximity or remoteness of the actor's conduct to the interference
and
(g) the relations between the parties.
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Unfortunately, the appeals court’s analysis of the above factors was confounded
by the lack of evidence in the record regarding the nature of the relationship between
Cash America and Mr. Payroll. Accordingly, the order granting summary judgment in
favor of Cash America was reversed and remanded for further proceedings.
G.
VICARIOUS LIABILITY
At issue in Thomas v. Taco Bell Corp., 2012 WL 3047351 (C.D. Cal. June 25,
2012), was the extent of a franchisor’s vicarious liability under the Telephone Consumer
Protection Act (“TCPA”). Plaintiff filed a putative class action against Taco Bell
asserting a claim for receipt of unauthorized text messages in violation of the TCPA.
This text marketing campaign was conducted by the Chicago Area Taco Bell Local
Owners Advertising Association (the “Association”), but plaintiff argued that Taco Bell
was vicariously liable for sending the text message. The court granted Taco Bell’s
amended motion for summary judgment, because plaintiff had “not shown that Taco Bell
controlled the manner and means by which the text message was created and
distributed.” Id. at *1.
The Association was a non-profit corporation whose twelve members included
Taco Bell and eleven franchisees. Taco Bell also filled one of the three director
positions. Id. at *2. The promotional plan at issue, which included a text message
component, involved an in-store contest to promote the Chicken and Steak Nachos Bell
Grande. Once approved by the Association it was sent to Taco Bell’s advertising
compliance analyst. Id. Thereafter, the text message was sent to 17,000 recipients and
the cost of the promotion was paid for by Taco Bell’s national Marketing Fund. Id. at *3.
Plaintiff alleged that she received that message. Id.
The court disagreed with plaintiff’s argument that Taco Bell was vicariously liable
for the text, because “[t]he plain language of the TCPA assigns civil liability to the party
who ‘makes’ a call,” but is “silent as to the issue of vicarious liability.” Id. at *4. As such,
the court “must presume that Congress intended to apply the traditional standards of
vicarious liability with which it is presumed to be familiar, including the alter ego and
agency doctrines.” Id. Vicarious liability would thus only attach to Taco Bell if the
Association and its two agents in the promotion “acted as an agent of Taco Bell: that
Taco Bell controlled or had the right to control them and, more specifically, the manner
and means of the text message campaign they conducted.” Id. The court found plaintiff
failed to meet her burden, as she “did not present any evidence to the Court that Taco
Bell directed or supervised the manner and means of the text message campaign . . .
created or developed the text message . . . [or] played any role in the decision to
distribute the message by way of a blast text.” Id. The court rejected plaintiff’s “purse
strings” theory of Taco Bell’s control over the promotional program, finding that “[m]ere
approval and funds administration cannot be equated with control over the manner and
means by which the campaign was designed an executed.” Id. at *5. The court also
rejected plaintiff’s argument that the presence of Taco Bell representatives as voting
members in the Association established agency, as such would be “evidence of
approval not agency,” even if the votes had constituted a majority vote (which they did
not). Id. Moreover, plaintiff presented no evidence that the Association could not have
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proceeded with the campaign without a vote. Id. Emails from a Taco Bell
representative describing the campaign were similarly insufficient to “constitute[]
approval of the form and context of the text message, let alone direction and
supervision of the creation and distribution of the text message as is required to impose
vicarious liability.” Id. at *6. As “knowledge, approval, and fund administration do not
amount to controlling the manner and means of the text message campaign,” Taco
Bell’s motion for summary judgment was granted. Id.
DePianti v. Jan-Pro Franchising Int’l, Inc., 2012 U.S. Dist. LEXIS 124604 (D.
Mass. Aug. 31, 2012), is one in many decisions addressing the status of franchisees in
Massachusetts. Like the similar cases brought against Coverall and Jani-King, DePianti
is a class action claim by janitorial franchisees alleging they were misclassified as
independent contractors instead of employees under Massachusetts law. Unlike the
Coverall and Jani-King systems, Jan-Pro is a three-tier franchise system, which raises
the additional question of whether Jan-Pro, which has no direct relationship with
plaintiffs, can be liable for any of their claims. This decision is the court’s determination
to certify two particular issues to the Massachusetts Supreme Judicial Court for
resolution. First, the court certified the question of what standard is applicable to
plaintiffs’ vicarious liability claims against Jan-Pro for unfair and deceptive trade
practices and misrepresentation. Recognizing that other jurisdictions had adopted
special tests applicable to franchise relationships, the court decided to certify this
question rather than predict how Massachusetts would resolve the issue. Second, the
court certified the issue of whether a putative “employer,” here Jan-Pro, can be liable for
misclassification when it has no contract with the putative employee.
Oral argument on these important questions was held on February 5, 2013, but
no decision was available at the time this paper was submitted for publication.
In re Oil Spill by the Oil Rig “Deep Water Horizon in the Gulf of Mexico on
April 20, 2010, 2012 U.S. Dist. LEXIS 141546 (E.D. La. Oct. 1, 2012), deals with
economic claims by BP dealers against BP for losses based solely on consumers’
decisions not to purchase fuel or goods from BP fuel stations and convenience stores
following the Deep Water Horizon explosion and oil spill. The dealers attempted to
bring these claims under the Oil and Petroleum Act (OPA) and state law. BP filed a
motion to dismiss.
The court rejected the attempt to bring the claims under Subsection B of the
OPA, because the section cited required physical injury to the property owned or leased
by Plaintiffs. Because the “BP brand” is not tangible property, it is not susceptible to
physical injury and, therefore, the dealers do not have a valid claim under Subsection B
of the OPA.
Likewise, the court rejected the dealers’ attempt to bring these claims under state
law. The court found that the dealers were attempting to use state law to circumvent
the Robins Dry Dock rule, a substantive rule of admiralty that bars unintentional tort
claims for economic loss when they do not involve physical injury to a proprietary
interest. Because the claims dealt with an event that occurred under admiralty
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jurisdiction (the nexus was the explosion at sea), the dealers cannot attempt to use
state law to bring their claims. As such, the court granted the motion to dismiss.
Comeaux v. Trahan, 2012 U.S. Dist. LEXIS 158527 (W.D. La. Nov. 5, 2012),
involved a plaintiff’s allegations of racial discrimination in the sale of a residential home
against a real estate brokerage franchisee and its franchisor. The franchisor filed a
motion to dismiss for failure to state a claim, arguing that it could not be held liable for
its franchisee’s actions. In support of its argument, the franchisor relied on a provision
in the franchise agreement specifying that the franchisee
ha[d] no authority to create or assume in Franchisor’s name
or on behalf of Franchisor, any obligation, express or
implied, or to act or purport to act as agent or representative
on behalf of Franchisor for any purpose whatsoever. Neither
Franchisor nor Franchisee is the employer, employee, agent,
partner, fiduciary or co-venturer of or with the other, each
being independent. Franchisee agrees that it will not hold
itself out as the agent, employee, partner or co-venturer of
Franchisor. All employees hired by or working for
Franchisee shall be the employees of Franchisee and shall
not for any purpose be deemed employees of Franchisor nor
subject to Franchisor’s control.
The court rejected the franchisor’s argument that the above provision was
dispositive, emphasizing that there were facts to suggest that the franchisor might have
exerted sufficient control over the franchisee’s employees to be liable. For example, the
franchisor provided training for the franchisee, prescribed its hours of operations, and
periodically supervised its employees. Accordingly, the court denied the franchisor’s
motion to dismiss.
Calvasina v. Wal-Mart Real Estate Bus. Trust, 2012 U.S. Dist. LEXIS 158733
(W.D. Tex. Nov. 5, 2012), involved the question of whether a franchisee and franchisor
could be liable to an individual injured while working at the franchisee’s business
location. Both the franchisee and franchisor filed a motion for summary judgment,
contending that they owed no duty to the injured individual.
The court first concluded that the Wal-Mart franchisee could be liable to the
injured individual because the franchisee operated the premises on which the individual
was injured. Accordingly, the court denied the franchisee’s motion for summary
judgment.
Next, the court addressed whether the franchisor could be liable for the
individual’s injuries, which required the court to determine whether the franchisor had
the contractual or actual right to control workplace safety at the franchisee’s business
location. The court first examined the franchise agreement, which provided that the
franchisor had a “continuing advisory relationship” with the franchisee regarding
workplace safety but made the franchisee responsible for maintaining the business
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premises and providing employee training consistent with the standards provided by the
franchisor. The court concluded that the agreement did not give the franchisor sufficient
contractual control over the means, methods, or details of the work to create a general
duty to ensure safety.
The court next addressed whether the actions of the franchisor and franchisee
evidenced the franchisor’s right to control safety in practice. The court concluded that
the franchisor’s provision of a resource manual to franchisees, stating that the
franchisor intends to comply with all applicable laws and regulations and requires
employees to complete various safety training, was insufficient to demonstrate control
by the franchisor over workplace safety. Similarly, the franchisor’s requirement that
each franchisee assemble a safety team and provide safety training did not evidence
control by the franchisor over workplace safety. The franchisor’s right to inspect the
franchisee’s premises was also insufficient to establish a right to control workplace
safety because there was no showing that the franchisor was aware of unsafe premises
or that it had any right to interview if it was aware. Accordingly, the court granted the
franchisor’s motion for summary judgment because it concluded that the franchisor did
not owe any duty to ensure the safety of an individual working on the franchisee’s
premises.
Cano v. DPNY, Inc., 2012 U.S. Dist. LEXIS 161284 (S.D.N.Y. Nov. 8, 2012),
involved plaintiffs’ motion for leave to amend their complaint to add franchisor Domino’s
Pizza as a defendant in a lawsuit seeking overtime wages under the Fair Labor
Standards Act and the New York Labor Law. Plaintiffs were previous and current
employees of several Domino’s franchisees.
The court concluded that the franchisor could constitute an employer within the
meaning of the Fair Labor Standards Act and the New York Labor Law based on the
plaintiffs’ allegations that the franchisor promulgated compensation polices and
implemented those policies through a franchisor-controlled software program, created
management and operation policies that were implemented at the franchisees’
locations, monitored employee performance, and developed and implemented hiring
policies relating to screening, interviewing, and assessing applicants. Collectively,
these facts suggested that the franchisor may have exercised sufficient control over the
franchisees’ employees such that it could qualify as an employer under Fair Labor
Standards Act and the New York Labor Law.
Because the court found that the plaintiffs had not unduly delayed in seeking
leave to amend and had not evidenced any bad faith in not seeking leave to amend
earlier, the court granted the plaintiffs’ motion for leave to amend the complaint to add
the franchisor as a defendant.
Agne v. Papa John’s Int’l, 2012 U.S. Dist. LEXIS 162088 (W.D. Wash. Nov. 9,
2012), involved a putative class action against several Papa John’s pizza franchisees,
Papa John’s, and OnTime4U, a marketing company. The named plaintiff alleged that
several franchisees retained OnTime4U to send text message advertising to their
customers, with the encouragement of Papa John’s, without obtaining customer consent
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in violation of the Telephone Consumer Protection Act (“TCPA”). The named plaintiff
moved for class certification. In response, the defendants argued that plaintiff lacked
standing to pursue her claims and had not met the requirements for class certification in
Federal Rule of Civil Procedure 23.
The court first evaluated defendants’ standing arguments. The defendants
argued that plaintiff’s injury was only fairly traceable to a few Papa John’s franchisees
and as a result, the plaintiff lacked prudential standing to represent class members with
potential claims against other franchisees. The court rejected this argument because
the plaintiff had not included franchisees other than the one that allegedly caused her
injury and franchisees that intermingled their operations with the franchisee that caused
her injury. The court also rejected defendants’ argument that plaintiffs’ injury was not
fairly traceable to the Papa John’s, noting that Papa John’s had produced documents
that indicated that it did play a role in the franchisee-level decisions to hire OnTime4U.
The court rejected defendants’ argument that many of the class members would not
have been injured by the specific franchisees named as defendants because all class
members would have at least been injured by one of the defendants, OnTime4U.
Finally, the court concluded that the plaintiff had statutory standing under the TCPA
even though her cell phone plan was registered under her husband’s name because
she was the authorized and sole user of the phone that received the messages.
Next the court analyzed whether the class could be certified under Rule 23. The
court found the ascertainability requirement satisfied because the defendants had
already produced documents reflecting many of the individuals that received the text
messages. The court found the numerosity requirement satisfied because there are
hundreds or thousands of potential class members. The court found the commonality
requirement satisfied because there were multiple common questions, including
whether Papa John’s controlled, participated in, or authorized OnTime4U’s marketing
and whether Papa John’s is vicariously liable for the acts of its franchisees. The court
also found the adequacy of representation requirement satisfied because there was no
reason the plaintiff could not fairly and adequately represent the class members’
interests. Finally, the court found that common issues predominated over individual
issues and that a class action was superior to individual litigation because the small
individual damages involved. As such, the court granted the plaintiff’s motion for class
certification.
Pauly v. Houlihan’s Rests., Inc., 2012 U.S. Dist. LEXIS 180215 (D.N.J. Dec.
20, 2012), involved a putative class action for unjust enrichment and breach of contract
brought by a plaintiff who alleged that he was discriminatorily overcharged for drinks he
ordered and consumed at a Houlihan’s restaurant in New Jersey. The plaintiff alleged
that he ordered several beers and mixed drinks, that the prices for these beverages was
not listed on the menu, and that the prices he paid for these drinks exceeded
reasonable prices for such beverages and were discriminatorily applied to him (while
other customers paid other prices for the same drinks).
The defendant, a restaurant franchisor, moved to dismiss both counts of the
complaint for failure to state and claim and because the franchisor claimed it was not a
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proper party to a litigation involving events relating to one of its franchisees. As part of
its motion to dismiss, the franchisor included a declaration to support its contentions that
each of its franchisees controls its own menu and its own prices, and that the franchisor
therefore could not be sued for breach of contract or unjust enrichment relating to the
menu and the prices charged.
The court rejected the defendant’s argument, determining that the declaration
was outside the four corners of the complaint and inappropriate for a motion to dismiss.
The court found that the plaintiff’s allegations that the franchisor owned, operated and
controlled the operations of its franchised restaurants and that the menus were created
by or on behalf of the franchisor were enough to demonstrate a sufficiently direct
relationship between the franchisor and the plaintiff to support the plaintiff’s claims for
breach of contract and unjust enrichment. The court stated that the franchisor would be
permitted to raise this same argument that it was not a proper defendant at the
summary judgment stage when factual matters can be properly considered.
Having found the franchisor to be a proper defendant, the court denied the
franchisor’s motion to dismiss for failure to state a claim, holding that the plaintiff had
adequately stated claims for breach of contract and unjust enrichment with respect to
his beverage-price complaints.
Russell v. Happy’s Pizza Franchise, LLC, 2013 U.S. Dist. LEXIS 6390 (W.D.
Mich. Jan. 16, 2013), involved a lawsuit by employees of a pizza franchisee against
both the franchisee and its franchisor seeking overtime wages under the Fair Labor
Standards Act (“FSLA”). The franchisor filed a motion for summary judgment,
contending that it could not be liable for an FSLA violation involving a franchisee’s
employees. In its summary judgment motion, the franchisor emphasized a provision in
the franchise agreement prohibiting the franchisor from exerting control over the wages
and hours of franchisee employees. The plaintiffs responded with a motion for leave to
conduct discovery to respond to the franchisor’s motion for summary judgment.
The court concluded that the provision in the franchise agreement was not
dispositive and the plaintiffs were entitled to conduct discovery into the extent of the
franchisor’s control over franchisees’ employees, including their compensation and
hours, in practice.
Myers v. Holiday Inns, Inc., 2013 U.S. Dist. LEXIS 6250 (D.D.C. Jan. 16, 2013),
involved a District of Columbia resident’s negligence claims against a Georgia Holiday
Inn franchisee, the franchisor Holiday Inn, Inc., and Holiday Hospitality Franchising, Inc.
(a licensing corporation) as a result of physical injuries she received after falling at the
Georgia hotel. The defendants moved to dismiss for lack of personal jurisdiction and
improper venue.
The court first determined that it lacked personal jurisdiction over the defendants
because all of the relevant events occurred in another jurisdiction. Holiday Inn’s
advertising in the District of Columbia was insufficient to establish personal jurisdiction
because the advertisements were for the company generally, not the Georgia
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franchisee specifically, and because the advertisements were unrelated to the plaintiff’s
injury because the plaintiff did not choose to stay at the Georgia franchisee as a result
of the advertisements (rather, her employer made the reservation). Accordingly,
defendants did not have substantial or continuous contacts with the District of Columbia.
The court also concluded that venue was improper because none of the
defendants were located in the District of Columbia and none of the events or omissions
giving rise to the claim occurred in the District of Columbia. Accordingly, the court
transferred the case to Georgia, where the allegedly negligent acts occurred and the
witnesses to the occurrences resided.
Volvo Constr. Equip. Rents v. NRL Tex. Rentals, LLC, 2013 U.S. Dist. LEXIS
20278 (D. Nev. Feb. 8, 2013), involved a lawsuit filed by Volvo Construction and
Equipment Rentals (“Volvo”) against NRL Texas Rentals, LLC (“NRL”), its distributor,
various individuals employed by NRL, and various investors in NRL’s Volvo
distributorships, among others, following the failure of several NRL distributorships.
After the close of Volvo’s case in chief, defendants moved for judgment on partial
findings pursuant to Federal Rule of Civil Procedure 52(c). The court granted the
motion in its entirety, concluding that there was no evidence presented to support
Volvo’s various fraud, negligence, negligent misrepresentation, unjust enrichment,
conversion, or civil conspiracy claims against any of the defendants.
The court also concluded there was no evidence that the investor defendants
engaged in conduct justifying an alter ego liability for a judgment previously entered
against NRL in favor of Volvo for breach of various loans. First, there was no evidence
that NRL was influenced or governed by the investors, who had no day-to-day
involvement in NRL’s operations. Second, there was no evidence of unity of interest
and ownership because there was no evidence that the investors commingled funds
with NRL, that NRL was undercapitalized, that the investors improperly diverted NRL
funds, that the investors treated NRL assets as their own, or that NRL failed to
sufficiently observe corporate formalities. Third, the court concluded that there were no
equitable considerations weighing in favor of alter ego liability because Volvo had not
demonstrated that the investors had done anything improper, because Volvo had
contributed to the franchisees’ failure by opening another franchise in the immediate
vicinity of an NRL franchise, and because the franchisees’ failure likely was a result of a
challenging economy.
At issue in Leach v. Kaykov, 2013 U.S. Dist. LEXIS 8046 (E.D.N.Y. Jan. 20,
2013), was whether a car-service franchisor exercised enough control over its
franchisees to establish a relationship of employer-employee for a claim of contribution
relating to a negligence action stemming from injuries in an automobile action.
Plaintiff Robert Leach sued defendant J. Fletcher Creamer, Inc. (“JFC”) for
damages sustained while a back-seat passenger in a traffic accident. JFC sought
contribution from Royal Dispatch Services, Inc. (“Royal”) on the basis that it was an
employer of the franchisee driver and thus liable for any damages.
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The driver of the car – Rafail Kaykov (“Kaykov”) – entered into a Franchise
Agreement (the “Agreement”) with Royal. Kaykov would receive radio dispatches to
pick up Royal clients and transport them by car. The Agreement required that the
franchisees follow certain requirements such as vehicle type and age requirements,
vehicle maintenance, and dress code, but it did not restrict a franchisee from accepting
jobs from other dispatch companies. Royal did not supervise drivers who received
dispatches.
The question was whether or not Kaykov was an independent contractor with
respect to work done for Royal, or whether Royal exercised such control over the
manner and means by which Kaykov performed his work that the relationship was
closer to that of employer-employee. The court found the relationship to be one of
principal-independent contractor and thus JFC’s motion for contribution was denied.
Prescribing the model and year of the vehicle to be used by Royal franchisees was
insufficient to establish the requisite control to find that Royal was liable for the alleged
negligence of its independent contractor.
People v. JTH Tax, Inc., 151 Cal. Rptr. 3d 728 (Cal. Dist. Ct. App. 2013),
involved a complaint filed by the Attorney General of California against defendant
Liberty Tax alleging that defendant’s print and televising advertising relating to tax
preparation and loan services violated the California unfair competition and false
advertising laws.
Liberty Tax has more than 2,000 franchised and company-owned stores
throughout the United States, including 195 franchised stores in California. Liberty Tax
offers tax preparation services, efiling, refund anticipation loans (“RAL”) and electronic
refund checks (“ERC”). The complaint alleged that there were misleading or deceptive
statements in print and television advertising by Liberty and its franchisees regarding
Liberty’s RAL’s and ERC’s and inadequate disclosures to customers in Liberty’s RAL
and ERC applications. After a bench trial, the judge found for the plaintiff and assessed
approximately $1.6 million in civil penalties in addition to restitution and permanent
injunctions. Liberty Tax appealed.
One issue on appeal was whether the trial court erred in finding Liberty liable
under agency theory for its California franchisees’ misleading advertising. Liberty
argued that the franchisor-franchisee relationship required a higher level of control than
that considered by the court, and that Liberty was not liable under agency theory
because it acted only to protect its trademark and goodwill, and it should be excepted
from liability because it was ignorant of the illegal advertising, did everything it could to
stop it, and refused to accept its benefits. The court rejected all of Liberty’s arguments.
The court disagreed that the agency theory did not apply to franchisor-franchisee
relationships. Liberty, citing out-of-state authority, argued that agency theory didn’t
apply because the franchisor-franchisee relationship is fundamentally different than the
typical employer-employee relationship and that vicarious liability is a bad fit in the
modern franchise context. The court noted that Liberty could not overcome the general
rule in California where a franchise agreement gives the franchisor the right of complete
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or substantial control over the franchisee, an agency relationship exists and that
determining whether substantial control over the franchisee exists is a question of fact.
The court affirmed the trial court’s finding of substantial evidence that Liberty had
enough control of the franchisees to be found vicariously liable.
In Ross v. Choice Hotels Int’l, Inc., 882 F. Supp. 2d 951 (S.D. Ohio 2012), an
African-American patron sued Choice Hotels, its franchisee and the franchisee’s
management company for discrimination under 42 U.S.C. § 1981. Id. at 952. In
support of her claim, Ross alleged that an employee of the Comfort Suites East Hotel
lied to her and said there was a “no party policy” at the hotel, asked her and her
companions to leave, and then called the police. Id. at *952. Choice Hotels moved for
summary judgment dismissing the claims against it.
In support of its motion, Choice Hotels argued that it is not in the business of
renting rooms, that it neither employed nor was able to exercise control over Comfort
Suites East employees, and that it did not set or consult on the setting of hotel policies.
Choice Hotels also submitted affidavits supporting these contentions. The district court,
however, rejected the arguments and instead credited Ross’s argument that Choice
Hotels could be liable based on theories of apparent agency. In doing so, the court
focused on Ross’s claimed reliance on the Choice Hotels name in selecting the hotel.
In addition, the court stated that it:
was cognizant of Choice Hotels' argument that it did not hold GNA or
Shree out as its agents, but “[r]ather, GNA and Shree have held out
themselves as Choice's agent.” [citation omitted] What Choice Hotels
does not credit is that reasonable inferences suggest that Choice Hotels
enabled if not actively endorsed such holding out; that is the point of
apparent agency or agency by estoppel.
Id. at 956. Not surprisingly, the court denied Choice Hotel’s summary judgment motion
both as to the discrimination and breach of contract claims based on the apparent
agency.
Ashbaugh v. Windsor Capital Group, Inc., 2012 U.S. Dist. LEXIS 85088
(E.D.N.Y. June 19, 2012),is a negligence claim against a franchisee and its franchisor
based on bed bug bites Ashbaugh allegedly received while staying at a Marriott hotel.
Specifically, Ashbaugh alleged that after spending two nights at the Georgia hotel
without incident of bed bug bites, she awoke after her third night to welts on her body.
Plaintiff’s husband and father, as well an extermination company all inspected the room
on several occasions for bugs but found no evidence of them. Undeterred, Ashbaugh
filed suit in New York and Marriott moved for summary judgment dismissing the claims
against it.
In support of its motion, Marriott argued: (1) that as franchisor it had “no control
over the day-to-day operations of the Residence Inn” and therefore could not be
vicariously liable; and (2) there was no evidence that plaintiff contracted bites from her
room. Id. at *6. Putting aside the negligence issue, for which the court held that
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defendants did not breach their duty, the court agreed with Marriott. Citing Georgia law,
the court stated that “to impose liability on a franchisor for the acts of a franchisee, a
plaintiff must show that the franchisor has obligated itself to pay the franchisee’s debts
or that the franchisee is not a franchisee in fact but a mere agent or alter ego of the
franchisor.” As there was no evidence that Marriott obligated itself to pay the
franchisee’s the debts, no evidence that the franchisee was Marriott’s agent or alter ego
and Ashbaugh failed to offer any substantive arguments in opposition, the court granted
summary judgment in Marriott’s favor.
Keith v. Back Yard Burgers of Neb., Inc., 2012 WL 1252965 (D. Neb. Apr. 13,
2012), involves a vicarious liability claim against a franchisor based its franchisee’s
alleged violation of the Fair and Accurate Credit Transaction Act of 2003 (“FACTA”) by
printing the expiration date of plaintiff’s debit card on a cash register receipt. Backyard
Burgers, Inc., the franchisor, moved for judgment on the pleadings based on it not
having “printed” the receipt at issue. The court denied the franchisor’s motion.
Observing that this was only the second case to address whether a franchisor
exercises sufficient control over a franchisee to be vicariously liable under FACTA, the
court followed the lead of Patterson v. Denny’s Corp., 2008 WL 250552 (W.D. Pa. Jan.
30, 2008) to hold that it could be vicariously liable. In Patterson the court denied
Denny’s Rule 12 motion based upon statements in its SEC reports and an allegation in
the complaint that it exercised actual control over all material aspects of franchisees’
operation. Here, the court relied on a similar allegation that the franchisor exercised
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actual control over the business operations of its franchisee, particularly with respect to
the franchisee’s point of sale processes, and that the franchisor is directly involved in
and controls the day-to-day operations of its franchisee. The court also rejected the
franchisor’s reliance on Shlahtichman v. 1-800 CONTACTS, INC., 615 F.3d 794 (7th
Cir. 2010) cert. denied, 131 S. Ct. 1007 (2011), because vicarious liability was not at
issue in that case. There, the Seventh Circuit held that the term “printed” excluded an
electronic receipt viewed or printed by a consumer. Thus, plaintiff’s claim survived the
franchisor’s motion for judgment on the pleadings.
In The Land Man Realty, Inc. v. Weichert, Inc., 94 A.D.3d 1221, 941 N.Y.S.2d
801 (3d Dep’t 2012), the court examined whether a real estate franchisor, Weichert,
Inc., could be vicariously liable for its franchisee’s alleged failure to pay a commission to
another real estate agent. Although the trial court denied the franchisor’s summary
judgment motion, the appellate court summarily reversed.
In support of their motion for summary judgment, defendants presented
evidence that Weichert’s relationship with Weichert Northeast was limited
to that of a franchisor and that Weichert had no control over Weichert
Northeast’s operations or finances. This was sufficient to establish that
Weichert cannot be held liable for the acts allegedly undertaken by
Weichert Northeast with respect to plaintiff’s claims (see Repeti v
McDonald’s Corp., 49 A.D.3d 1089, 1090, 855 N.Y.S.2d 281 [2008]).
Plaintiff’s bare claim in opposition that discovery was necessary to reveal
the nature of Weichert’s role in the transaction at issue was insufficient to
demonstrate that a material issue of fact exists (see Joseph P. Carrara &
Sons, Inc. v A.R. Mack Constr. Co., Inc., 89 A.D.3d 1190, 931 N.Y.S.2d
813 [2011]). Accordingly, summary judgment dismissing both causes of
action against Weichert is warranted.
94 A.D.3d at 1222.
As the above passage makes clear, at least in upstate New York, demonstrating
a franchise relationship is sufficient to avoid vicarious liability absent specific proof that
the franchisor exercised control over the particular instrumentality of harm.
In In re Motor Fuel Temperature Sales Practices Litig., 2012 U.S. Dist. LEXIS
60879 (D. Kan. Apr. 30, 2012), the plaintiff, on behalf of a class of motor fuel
consumers, sued Circle K and other motor fuel stations for injunctive relief and
damages under the Kansas Consumer Protection Act. The court granted Circle K’s
motion for summary judgment and held that Circle K’s franchisees were not its apparent
agent with respect to selling motor fuel. Thus, plaintiffs could not hold Circle K
vicariously liable for the acts of its franchisees in selling fuel. The court held that
plaintiffs failed to produce any evidence permitting a jury to find that Circle K had actual
control over its franchisees’ decisions regarding either the price of fuel or method of
selling it. Despite showing that Circle K controls its franchised convenience stores,
marks, and the premises on which the stores are located, there was no issue of material
fact that Circle K did not control its franchisees’ method of selling fuel—which was the
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particular instrumentality that allegedly harmed plaintiffs. Accordingly, there was no
actual authority. As for apparent authority, the court held that a franchisee’s use of a
franchisor’s marks alone was insufficient to permit third parties to reasonably believe
that an agency relationship existed. In sum, the court held that the existence of a
franchisor-franchisee relationship does not by itself make a franchisor vicariously liable
for the acts of its franchisee because the franchisor’s retention of certain rights is not the
same as the control required for vicarious liability.
In Chambers-Johnson v. Applebee’s Rest., 2012 La. App. LEXIS 1130 (La. Ct.
App. Sept. 11, 2012), the reader has found one of this year’s body-part related vicarious
liability cases. Here, the appeals court affirmed the lower court’s grant of summary
judgment to Applebee’s, dismissing it from plaintiff’s action for physical and
psychological injuries she sustained after purchasing a salad that allegedly contained
the tip of a human finger. The court held that plaintiff had failed to show that
Applebee’s, as a franchisor, breached any duty owed to her as a patron of the
franchised restaurant. The franchise agreement provided that Applebee’s supplied the
franchisee, Southern River Restaurants LLC (“SRR”), with manuals and operating
procedures, but SRR was responsible for the restaurant’s compliance with these
procedures. Nothing in the agreement affected SRR’s control over the daily operations
in the restaurant. Therefore, the court concluded that Applebee’s did not owe a duty to
plaintiff and was properly dismissed from the case.
The issue is Brooks Place Props., LLC v. DiMaria, 2012 Mass. Super. LEXIS
203 (Mass. Super. June 18, 2012), was whether Century 21 was vicariously liable for
the actions of its franchisee and franchisee’s independent contractors. Brooks Place
Properties (“BPP”) was a private lender who provided loans to home buyers. It sought
to hold Century 21, franchisee Heritage Realty Associates, Inc. (“Heritage”) and Arthur
Vekos, a Heritage real estate agent, liable for misrepresenting the value of four homes
for which BPP provided mortgages. Specifically, BPP alleged that Vekos asked BPP to
provide loans to the buyers of the four properties and represented that he was a “very
experienced Century 21 real estate agent,” he was “very familiar” with the properties he
was selling, and the properties were “well valued.” Id. at * 3-4. BPP believed, based on
Century 21’s national advertising campaigns, that Century 21 had a reputation for
honesty, reliability, and fair dealing. Assuming that, because Vekos represented himself
as a Century 21 agent, he shared those same characteristics, BPP credited Vekos’s
representations regarding the value of the properties and provided loans to the four
home buyers. Subsequently, BPP discovered that the properties were worth a fraction
of their purchase price and their titles were subject to defects, encumbrances, and liens.
When all four home buyers defaulted on their loans BPP sued and sought to hold
Century 21 vicariously liable.
In granting summary judgment dismissing the claim against Century 21, the court
explained that, “[t]o prove vicarious liability, the plaintiff must first establish a masterservant relationship, either through an employer-employee or principal-agent
relationship, at the time of injury.” Id. at *7-8 (citation omitted). “In the franchise
context, a master-servant relationship may be established when the franchisor has the
right to control the franchisee’s day-to-day operations or the instrumentality that caused
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the harm.” Id. at *8 (citation omitted). However, “[i]n the absence of actual agency,
vicarious liability may still be imposed when there is apparent agency,” which “occurs
when the principal’s conduct causes a third party to believe that a particular person is
the principal’s agent.” Id. at *9. Applying these principals to the facts of the case, the
court concluded that there was no agency relationship between Century 21 and Vekos
and therefore Century 21 could not be held liable for Vekos’s actions. In doing so, the
court emphasized the fact that Century 21 played no role in Vekos’s hiring or
supervision. In fact, the franchise agreement between Century 21 and Heritage
expressly forbade Century 21 from hiring, firing, or controlling any of the details of the
work performed by Heritage’s salespeople. Id. at *8. The court also took special note
of the fact that Century 21 had no control over how real estate listings were obtained
and sold. Id. at *2-3, 8. The court also concluded that Century 21 had done nothing to
create an apparent agency between itself and Vekos. The fact the BPP could not
describe the contents of any specific Century 21 advertisements was particularly
relevant to this finding. Also important was the fact that, while Vekos had a Century 21
e-mail address, BPP never received e-mail from that address.
BPP also brought a claim for unfair and deceptive business practices against
Century 21 premised on the allegation that Century 21 misled the public into believing
that Century 21 agents were directly affiliated with Century 21, trustworthy, and reliable.
The court also granted Century 21’s motion for summary judgment on this claim on the
grounds that BPP was unable to point to any specific statements by Century 21 that
were either unfair or deceptive.
Gray v. McDonald's USA, LLC, 874 F. Supp. 2d 743 (W.D. Tenn. 2012),
addresses a failed attempt by a franchisee’s employee to hold McDonald’s liable for an
alleged racial assault. Gray claimed that he was assaulted by his supervisor while
working at a McDonald’s franchise owned by Century Management, LLC (“Century”).
Gray filed suit and sought to hold the supervisor, Century, Century’s managing
members, McDonald’s and three unidentified other managers liable. With respect to
McDonald’s the Fourth Amended Complaint asserted claims for: (1) negligent failure to
ensure an adequately safe workplace and adequate management; (2) discriminatory
practices, employment-related discrimination, and malicious harassment in violation of
the Tennessee Human Rights Act (THRA); (3) discrimination in violation of 42 U.S.C.
§ 1981; (4) hostile work environment in violation of 42 U.S.C. § 1981; (5) outrage and
intentional infliction of emotional distress against; (6) negligent infliction of emotional
distress; (7) negligent training, supervision, and discipline; and (8) premises liability.
McDonald’s moved for summary judgment dismissing all claims and succeeded.
With respect to the civil rights and THRA claims, the court held that McDonald’s
was not Gray’s “employer” and therefore could not be liable. Applying the “single
employer” test adopted in Swallows v. Barnes & Noble Book Stores, Inc., 128 F.3d 990,
992-93 (6th Cir. 1997), that considers “whether two entities are so interrelated that they
may be considered a ‘single employer’ or an ‘integrated enterprise’ and therefore liable
under Title VII . . .,” the court determined that McDonald’s and Century did not have
interrelated operations and did not share common management. Although McDonald's
provided discrimination and harassment training for Century's management-level
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employees, there was no evidence that McDonald's retained the ability to hire, fire, or
discipline an employee. In addition, the franchise agreement’s requirements concerning
personnel – relating to matters such as restaurant hours, supplies, and uniforms, were
“far too general to constitute control rising to the level of employment.” The court further
found that “deferential language in the McDonald's Manual” such as instructing
franchisees how to “effectively execute [their] training program" indicated that
McDonald's actually retained minimal control over personnel.
The court also rejected Gray’s apparent authority argument. Again, the court
found no evidence to indicate that McDonald's hired Gray or that it had the right to fire,
supervise, or set Gray's work schedule. Finally, the court cited Kerl in dismissing the
tort claims and holding that McDonald’s could not be held vicariously responsible for the
injuries the supervisor allegedly inflicted on Gray “because it did not exercise control
over the aspects of the restaurant that allegedly gave rise to Gray's injuries — that is, it
did not control the hiring, firing, and discipline of Martin or any other Century employee.”
In one of the most important cases of 2012, Patterson v. Domino’s Pizza, LLC,
207 Cal. App. 4th 385 (2d Dist. 2012), the California appeals court addressed a
franchisor’s liability for harassment claims brought by a franchisee’s employee. The
plaintiff, a 16 year old minor, claimed that she was sexually harassed by her direct
supervisor at a Domino’s Pizza franchise. Specifically, the plaintiff alleged causes of
action for sexual harassment, failure to prevent discrimination, retaliation for exercise of
rights, infliction of emotional distress, assault, battery and constructive wrongful
termination. Domino’s moved for summary judgment on the grounds that (1) the
franchisee was an independent contractor pursuant to the terms of a written franchise
agreement, and (2) there was no principal-agency relationship between the franchisee
and Domino’s.
The trial court granted summary judgment, relying on language in the franchise
agreement stating that the franchisee was responsible for “supervising and paying the
persons who work in the Store.” The appeals court reversed. Here, the court found that
there were issues of fact that precluded the grant of summary judgment. The bare
language of the franchise agreement was not sufficient to overcome evidence that
Domino’s asserted significant control over the franchisee’s employee management.
Specifically, there were factual issues as to how much control Domino’s actually
asserted over the franchisees ability to hire, train, manage, and fire employees. As a
result, the appellate court held that summary judgment was inappropriate and the
matter should proceed to trial for a factual determination as to whether Domino’s could
be held liable for the actions of its franchisee’s employee.
On October 10, 2012, the California Supreme Court accepted Domino’s for
application for further appellate review. 287 P.3d 68 (Cal. 2012). As a result, the
above-cited opinion has been de-published.
Terrelle Ford v. Palmden Rests., 2012 Cal. App. Unpub. LEXIS 5596 (Cal. App.
4th Dist. July 31, 2012), addresses both a franchisee’s and its franchisor’s potential
liability for a restaurant patron’s injuries. Here, Ford sued Palmden LLC (a Denny’s
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franchisee) and various Denny’s corporate entities, alleging that their negligence
contributed to injuries resulting from a brawl between well-known trouble-causing
customers at a Palm Springs Denny’s restaurant. The trial court granted summary
judgment in favor of Denny’s, but the appeals court reversed and held several issues
over for trial, noting that although Palmden was not an insurer of its patron’s safety, in
light of an earlier, similar brawl, it had a duty to do something to protect them. Id. at *2.
Specifically, the court relied upon the fact that the gang frequented the Denny’s during
late night hours and caused trouble for staff and customers, had caused a brawl one
month prior in which customers were hurt, and that Palmden had done nothing to
enhance security at the restaurant. Id. at *10-12. It was therefore foreseeable to
Palmden that a customer might become a victim of third party criminal conduct. Id. at
*30.
The appeals court also reversed summary judgment for Denny’s on the vicarious
liability claim. Without significant analysis, the court held that “While some Denny's
restaurants are franchisee-operated, others are corporate-operated; hence, we cannot
say it is common knowledge that all Denny's are necessarily franchises.” Id. at *38.
At issue in the class action Rivera v. Simpatico, Inc., 2012 U.S. Dist. LEXIS
67765 (E.D. Mo. May 15, 2012), was plaintiffs’ motion to remand the matter back to
state court following Simpatico’s removal to federal court pursuant to the Class Action
Fairness Act (“CAFA”), 28 U.S.C. § 1453. Simpatico sells cleaning franchises to master
franchisees, under the name Stratus Building Solutions. The master franchisees are
then able to sell franchises in an exclusive territory to unit franchisees, who perform
cleaning services to commercial accounts. The class action was brought on behalf of
all unit franchisees, who assert that the master franchisees did not perform as obligated
under the franchise agreements. The plaintiffs also alleged that Stratus exerted so
much control over the master franchisees that they were not independent businesses
but rather agents of Stratus. Plaintiffs sought declaratory judgment that Stratus was the
principal of the master franchisees for purposes of vicariously liability and were jointly
liable for any future claim against the master franchisees.
The key issue here was the amount in controversy, which plaintiffs contended did
not meet the $5 million requirement because they simply sought to clarify their legal
relationship with Simpatico, did not make any claim for breach of contract or request a
determination that the class members were employees of Stratus. Simpatico argued
that reclassification of over 3,000 individual, which necessarily followed “clarification,”
would result in costs exceeding $5 million. The court, however, held that the plaintiffs
were master of their complaint and while they might file future lawsuits based on the
resolution of the instant action, the damages arising from such speculative lawsuits
cannot be the basis to determine the amount in controversy. The court therefore
remanded the case to state court.
Anderson v. Domino’s Pizza, Inc., 2012 U.S. Dist. LEXIS 67847 (W.D. Wash.
May 15, 2012), addresses a putative class’s attempt to hold Domino’s vicariously liable
for numerous calls to the class in alleged violation of the Telephone Consumer
Protection Act, 47 U.S.C. § 227 et seq. and Revised Code of Washington, § 80.36.400
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(“WADAD”). Anderson alleged that the calls were made with a prerecorded message
identifying the sender as Domino’s Pizza and without the recipients’ prior consent. The
class sought to hold Domino’s liable because it allowed the telemarketing firm that
placed the calls to advertise at a national franchisee convention and the firm used
telephone numbers stored by a software system that Domino’s requires its franchisees
to use. Domino’s moved to dismiss the claims against it and the court agreed.
The court found that just because Domino’s compelled franchisees to use a
software system that the telemarketing firm relied upon does not compel the conclusion
that Domino’s was complicit in the allegedly illegal calling. Further, the mere fact that
Domino’s requires franchisees to participate in marketing campaigns does not mean
that any franchisee’s illegal use is imputed to a franchisor. As a result, the court
granted Domino’s motion for summary judgment, while denying the franchisee’s motion.
In Estate of Kriefall v. Sizzler U.S. Franchise, Inc., 2012 WI 70 (Wis. 2012), a
“sizzler” of a decision, the Wisconsin Supreme Court reviewed a decision regarding the
apportionment of damages sustained due to an E. Coli contamination at two franchised
restaurants. The underlying facts of the case were that from July – August 2000,
approximately 150 people became ill when eating E. coli-contaminated food at two
Sizzler Steak House franchisees in the greater Milwaukee area. Three people died due
to the contaminate. Victims of the contaminated meat brought claims against the meat
distributor Excel, Sizzler USA and the franchisees. Prior to trial, plaintiffs settled with
defendants on an overall number such that at trial, the primary issue was how to
apportion liability between them. The jury found Excel 80% liable, the franchisees 20%
liable and Sizzler USA not liable. The jury ultimately found Excel 80% liable, the
franchisees 20% liable and Sizzler USA not liable. As a result, the trial court held that:
(1) “Sizzler [was] entitled to recover consequential damages for Excel’s breach of
implied warranties in the parties’ meat contract, notwithstanding limiting language in the
Continuing Guaranty”; (2) Sizzler [was] entitled to indemnity from Excel for the entire
Sizzler $1.5 million advance partial payment to the Kriefall family …because the
payment was not voluntary and the jury found Sizzler [ ] zero percent liable for the E.
coli contamination”; and, (3) “notwithstanding the jury’s determination that Sizzler was
zero percent responsible for the E. coli-contaminated food that caused the illnesses of
so many people, Sizzler may not recover attorney fees [ ] because the exception to
American Rule does not apply here.” Id. at * 41.
The first issue the supreme court considered was whether a limitation of
damages provision in an Excel-Sizzler USA Continuing Guaranty should prevent Sizzler
USA from recovering damages for Excel’s breach of the implied warranties of
merchantability and fitness. The court affirmed the lower court’s decision that the
language used in the parties’ Continuing Guaranty effectually barred Sizzler USA’s
recovery of incidental and consequential damages for breach of the Guaranty’s
warranties, but did not extend to the relevant “Boxed Beef contract.” Therefore, Sizzler
USA could recover damages for Excel’s breach of the same. Second, the court
discussed the fact that the jury found Sizzler USA zero percent liable for the E. coli
contamination. Given that, Sizzler USA was entitled to complete indemnity from Excel
for its $1.5 million advance to the Kriefall family because that payment was not
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voluntary and Sizzler USA was not liable. Lastly, the court found that Sizzler USA did
not properly state a claim for attorney fees because it did not demonstrate that Excel
engaged in wrongful conduct relevant to Sizzler USA. Notwithstanding the jury’s
apportionment of fault, Sizzler USA was not an “unrelated, third party,” therefore it was
responsible for its own fees.
H.
UNFAIR BUSINESS PRACTICES AND LITTLE FTC ACTS
Oliver Stores v. JCB, Inc., 2012 U.S. Dist. LEXIS 144348 (D. Me. Oct. 5, 2012),
involved a dispute between a manufacturer of heavy machinery, JCB, and a distributor
of the machinery, The Oliver Stores. JCB terminated the relationship on June 21, 2011.
In response to the termination, The Oliver Stores filed suit alleging violation of the Maine
Franchise Act, the Maine Unfair Trade Practices Act, and breach of contract. JCB
moved to dismiss or stay and compel arbitration. The court referred the breach of
contract claim to arbitration, but retained jurisdiction over the statutory claims. JCB then
moved for judgment on the pleadings on the Maine Unfair Trade Practices Act claim
arguing that a commercial franchisee may not bring a claim under the private remedies
provision in Section 213 of the Act.
In 1993, the Maine legislature had made changes to the Maine Franchise Act,
adding in the penalty section that a violation of the Maine Franchise Act constitutes an
unfair trade practice under the Maine Unfair Trade Practices Act. The Oliver Stores
contended that this signaled the legislature’s intent to provide with franchisees with a
private remedy under the Unfair Trade Practices Act. JCB countered that remedies
under the Unfair Trade Practices Act are only available to persons who purchase or
lease goods, services or property primarily for personal, family, or household purposes,
neither of which applied to The Oliver Stores.
Looking at the statutory history of the Franchise Act, the court found no
suggestion that it was meant to alter the clear limitation in the Unfair Trade Practices
Act to claims relating to goods purchased for personal, family, or household purposes.
Because the legislature is presumed to know the existing law, and because the
legislature then must have known of the limitation in the Unfair Trade Practices Act and
made no attempt to change it to accommodate actions by commercial franchisees, the
court found that the Unfair Trade Practices Act by its plain terms applies only to
consumers, and not commercial parties like The Oliver Stores.
The Oliver Stores also argued that even if there was no private right of action
under the Unfair Trade Practices Act, dismissal was not appropriate because it had also
requested a declaration that JCB had violated the Unfair Trade Practices Act. The court
disagreed. Because under both state and federal law, a court will only undertake to
declare rights of the parties where some relief would be provided as a result, the
declaration sought by The Oliver Stores would be meaningless. Thus the court granted
the motion for judgment on the pleadings.
Burda v. Wendy’s Int’l, Inc., 2012 U.S. Dist. LEXIS 145447 (S.D. Ohio Oct. 9,
2012), deals with cross motions for summary judgment filed by a franchisor and a
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franchisee in an action by Burda, a Wendy’s franchisee, for breach of contract and antitrust violations relating to the cancellation of 13 virtually identical franchise agreements.
In 1996, Burda signed franchise agreements for five Wendy’s restaurants. A sixth
was added in 1997. In 2000, Wendy’s began its Franchise Real Estate Development
Program (“FRED”) which encouraged franchisees to buy additional franchises by
assisting in building the new restaurants. Wendy’s would identify areas that could
absorb an additional restaurant and offer the new restaurant to existing franchisees in
the market. If the existing franchisee chose not to open the new restaurant, Wendy’s
would open the restaurant itself or offer the location to other franchisees, potentially
eroding the existing franchisees’ profits. Through this program, Burda opened 7
additional restaurants under the FRED Program. Around this same time, Wendy’s
began to require franchisees to purchase food and supplies from one distributor as part
of its attempt to optimize its distribution network. Wendy’s had no economic interest in
the appointed distributor.
After years of success, Burda began to have financial problems, and was
delinquent in paying Wendy’s royalties and advertising fees. By 2006, all of Burda’s
franchises were having financial problems, leading to a special financial arrangement
under which it was able to make interest only payment on past due royalties. In
exchange for the special financing, Burda signed a general release of all claims that
could have been asserted up to the date the release was signed, including any antitrust
and contract claims.
In 2007, Wendy’s sent several default notices to Burda. Burda then hired a
business restructuring expert who found that the business was completely insolvent.
Wendy’s subsequently terminated all of Burda’s franchises, citing repeated defaults,
failure to pay creditors, and financial insolvency.
Burda sued Wendy’s in March 2008 alleging breach of contract and antitrust
claims based on its switch to a different bun supplier in 1997, alleged under pressure
from Wendy’s. The parties filed cross motions for summary judgment. On the contract
claims, Burda alleged that it did not receive 30 days’ notice of termination as required by
the contract and that the contract was therefore prematurely terminated. The court
found that Wendy’s had the right to immediately terminate because the contract
expressly allowed immediate termination if the plaintiff committed the same default
within a six month period, which plaintiff did in relation to the failure to pay the royalty
and advertising fees. The court further found Wendy’s could terminate without notice
because of plaintiff’s insolvency.
On the remaining claims which related to the switch in bun suppliers, the court
found that Burda released those claims in 2006. The court found no proof of duress or
fraud, and thus, the release was enforceable. The court therefore granted Wendy’s
motion and dismissed all claims.
Stocco v. Gemological Inst. of Am., 2013 U.S. Dist. LEXIS 1603 (S.D. Cal.
Jan. 3, 2013), involved franchisor Gemological Institute of America (“GIA”)’s motion to
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dismiss franchisee Frederick and Kathleen Stocco’s (“the Stoccos”) claims of (1) breach
of contract; (2) fraud in the inducement; (3) failure to provide franchise offering circular
in violation of California franchise law; and (4) unfair business practices in violation of
California’s Unfair Competition Law.
GIA is a company providing gem-grading services. As employees of GIA, the
Stoccos relocated to Italy to establish GIA’s first European location. In exchange for
GIA’s agreement to open a GIA school and gem grading location, the Florence
Chamber of Commerce agreed to provide GIA with substantial financial support. Two
years later, GIA offered the Stoccos the opportunity to enter into a franchise agreement,
which the Stoccos accepted. Several years later, GIA notified the Stoccos that it would
no longer permit the creation of a GIA gem grading location, causing Florence to
withdraw its financial support.
The Stoccos’ breach of contract claim alleged that GIA breached an agreement
with Florence to open a GIA school/gem grading location, which was contained in the
GIA Italy’s articles of incorporation. The articles of incorporation were signed by
Frederick Stocco on behalf of GIA and representatives of the Florence Chamber of
Commerce and University of Florence several years before the Stoccos became GIA
franchisees. The court concluded that the Stoccos had no rights under the articles of
incorporation, as Frederick Stocco signed only on behalf of GIA and there were no facts
to suggest that they were third-party beneficiaries or direct beneficiaries. Accordingly,
the court dismissed this claim.
The Stoccos’ fraud in the inducement claim alleged that they reasonably relied
on GIA’s false representations that it would open a gem grading location when they
entered into the franchise agreement. However, the court noted the franchise
agreement expressly prohibited the Stoccos from opening such a location, and
therefore concluded that it was unreasonable for the Stoccos to have relied on any oral
representation to the contrary. Accordingly, the court dismissed this claim.
The Stoccos also alleged that GIA willfully failed to provide them with the
franchise offering circular in violation of Cal. Corp. Code § 31119. The court concluded
this claim was barred by the statute of limitations.
The Stoccos’ unfair business practices claim alleged that GIA had engaged in
unfair business practices by offering scholarships to students at some GIA locations, but
not at the Stoccos’, and by withdrawing its support for a gem grading location after
persuading the Stoccos to enter into a franchise agreement. The court concluded that
California’s Unfair Competition Law did not apply because of all of the challenged
actions took place in Italy. Accordingly, the court dismissed this claim.
In AdvoCare Int’l, L.P. v. Ford, 2013 Tex. App. LEXIS 1162 (Tex. Ct. App. Feb.
5, 2013), several distributors sued manufacturer AdvoCare under the Texas Deceptive
Trade Practices Act after they were terminated. The distributors also brought claims for
breach of contract, unjust enrichment, common law fraud, and promissory estoppel.
The jury found AdvoCare did not breach the agreements, but did act in a false,
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misleading, or deceptive way that the distributors relied upon to their detriment, causing
damages, and that the agreements were unconscionable in that they took advantage of
the lack of knowledge, ability, experience and capacity of the distributors. The jury
awarded damages and attorney fees to each distributor based solely on Texas’s “little
FTC act.”
AdvoCare appealed, arguing that the distributors were not entitled to damages
under the little FTC act because they were not consumers. In order to be a consumer
under the Texas little FTC act the person must have sought or acquired goods or
services by purchase or lease and the goods or services purchased must form the basis
of the complaint.
The court of appeals reversed, reasoning that the distributors’ claimed damages
were not based on the purchase of goods or services, but rather on the value of each
distributorship as of the date the agreements were terminated. Neither the termination
nor any lost value was tied to any defective service or product. Therefore, even if the
distributors could qualify as consumers under the act because of goods or services
acquired through the distributorship relationship, those goods and services did not form
the basis for the claims, and therefore they could not recover under the Texas little FTC
act for those claims.
Mr. Elec. Corp. v. Khalil, 2013 U.S. Dist. LEXIS 15723 (D. Kan. Feb. 6, 2013),
is a trademark infringement, unfair competition, and breach of contract action. Mr.
Electric alleged that after terminating Khalil’s franchise agreement, Khalil started a
different business called Alber Electronics, and that Alber Electronics continued to use
Mr. Electric’s marks without permission and engaged in unfair competition in violation of
the Lanham Act and Kansas common law. Khalil counterclaimed that Mr. Electric
breached the franchise agreement in violation of Kansas common law.
Khalil moved for summary judgment on the trademark and unfair competition
claims, arguing that he was not personally liable for the use of the marks and that any
action he took was only in his capacity as an employee of Alber Electronics. The court
reasoned that an officer or agent of a corporation who directs or actively participates in
a tortious act can be personally liable. The court found that Khalil’s sole argument, that
he was using the marks on behalf of his employer, was in contravention of the agreed
facts submitted in the pretrial order, and therefore could not be used to escape liability,
including that he could not use his position as an employee of a company he was an
owner of to get out of the trademark and unfair competition claims. The court also
found unpersuasive Khalil’s statement that he simply did not have time to re-label the
equipment or other assets. Because Khalil participated in and oversaw the acts of
infringement, he was personally liable for trademark infringement.
The court further found that there was a likelihood of confusion when a former
franchisee continues to use the franchisor’s marks, that there was evidence of intent to
infringe, that there was actual confusion, and that there was a similarity in services and
manner of marketing. These factors, plus the fact that Mr. Electric had been using and
enforcing the marks for 16 years led the court to grant the summary judgment motion in
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relation to the infringement claim and the unfair competition claim, which have nearly
identical elements.
Defendant moved for summary judgment on all of the plaintiff’s claims and
defendant’s counterclaims. In relation to the trademark and unfair competition claims,
the court entered judgment for the plaintiff, as discussed above. On plaintiff’s contract
claims, the court found there were issues of fact regarding defendant’s willingness to
perform under the contract, as well as a dispute over whether defendant breached the
agreement. The court denied the summary judgment motion on plaintiff’s contract
claims.
In relation to the summary judgment motion filed by defendant on his breach of
contract counterclaims, the court found that there were genuine issues of material fact.
In relation to the breach for failure to train, the court found that defendant had failed to
prove that he was willing to perform and that he failed to prove that a multi-day event
was a seminar, not training. In relation to the breach for failure to provide on-going
support and sales analysis, the court found plaintiff had properly provided evidence of
its efforts to assist defendant. In relation to the breach for failure to maintain
confidentiality, the defendant cited to the fact that plaintiff showed Khalil’s financial
information to its auditor, another franchisee, supply houses, and Home Depot without
defendant’s consent. The court found that the agreement specifically allowed plaintiff to
show the information to other franchisors, and granted summary judgment for plaintiff in
relation to that part of the claim. In relation to the other parties, plaintiff set forth
sufficient facts to controvert defendant’s claim, so the court denied summary judgment.
Carroll v. Farooqi, 2013 U.S. Dist. LEXIS 22329 (N.D. Tex. Feb. 19, 2013),
involves an unsuccessful sale of a Salad Bowl franchise by Carroll to Farooqi. Carroll
was chairman, CEO, president, and CFO of Salad Bowl. In 2009, Farooqi began
negotiating with Carroll to obtain a Salad Bowl franchise. As part of the negotiations,
Farooqi signed a 30-day option to purchase and paid a $25,000 franchise fee that would
ultimately be applied to the total purchase price. During the 30-day window, Farooqi
was to obtain financing for the purchase of the franchise. He was unable to do so, and
demanded the $25,000 back. Carroll did not return the money.
Farooqi eventually filed suit for fraudulent inducement, fraud, and violations of
the Texas Deceptive Trade Practices Act (“DTPA”). Carroll filed for bankruptcy and the
claims were transferred to the bankruptcy court. The court found that Farooqi proved
his claims against Carroll for fraudulent inducement and violations of the DTPA and
awarded him actual and exemplary damages in the amount of $88,500 which, because
founded in fraud, were not dischargeable in the bankruptcy.
Carroll appealed, claiming the bankruptcy court improperly exercised jurisdiction,
that the bankruptcy court erred in finding the complaint met the standards of Fed. R.Civ.
P. 9, and that the bankruptcy court erred in its application of the DTPA. The court found
that the bankruptcy court properly exercised jurisdiction because it simply made a final
determination of the dischargeability of a creditor’s claim against a debtor, which
requires the liquidation of the state law claim. The court also found that the complaint
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met the standards of Fed. R.Civ. P. 9 because it set forth the representations allegedly
made, as well as what damages were claimed. Third, the court upheld the
determination of liability under the DTPA. The court found that Farooqi was a consumer
under the DTPA and that the franchise purchase was a good or service under Texas
law. Although the inducements were to make Farooqi sign the option agreement, the
ultimate goal was to purchase a franchise. Because Texas law looked at a plaintiff’s
central objective in determining if the plaintiff was a consumer, and the principle desire
was to purchase a franchise, it is that proposed transaction that is at issue. The court
therefore upheld the bankruptcy court’s determination that Farooqi was a consumer
under the DTPA.
merchandise.
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People v. JTH Tax, Inc., 151 Cal. Rptr. 3d 728 (Cal. Dist. Ct. App. 2013),
involved a complaint filed by the Attorney General of California against defendant
Liberty Tax alleging that defendant’s print and televising advertising relating to tax
preparation and loan services violated the California unfair competition and false
advertising laws.
Liberty Tax has more than 2,000 franchised and company-owned stores
throughout the United States, including 195 franchised stores in California. Liberty Tax
offers tax preparation services, efiling, refund anticipation loans (“RAL”) and electronic
refund checks (“ERC”). The complaint alleged that there were misleading or deceptive
statements in print and television advertising by Liberty and its franchisees regarding
Liberty’s RAL’s and ERC’s and inadequate disclosures to customers in Liberty’s RAL
and ERC applications. After a bench trial, the judge found for the plaintiff and assessed
approximately $1.6 million in civil penalties in addition to restitution and permanent
injunctions. Liberty Tax appealed.
One issue on appeal was whether the trial court erred in finding Liberty liable
under agency theory for its California franchisees’ misleading advertising. Liberty
argued that the franchisor-franchisee relationship required a higher level of control than
that considered by the court, and that Liberty was not liable under agency theory
because it acted only to protect its trademark and goodwill, and it should be excepted
from liability because it was ignorant of the illegal advertising, did everything it could to
stop it, and refused to accept its benefits. The court rejected all of Liberty’s arguments.
The court disagreed that the agency theory did not apply to franchisor-franchisee
relationships. Liberty, citing out-of-state authority, argued that agency theory didn’t
apply because the franchisor-franchisee relationship is fundamentally different than the
typical employer-employee relationship and that vicarious liability is a bad fit in the
modern franchise context. The court noted that Liberty could not overcome the general
rule in California where a franchise agreement gives the franchisor the right of complete
or substantial control over the franchisee, an agency relationship exists and that
determining whether substantial control over the franchisee exists is a question of fact.
The court affirmed the trial court’s finding of substantial evidence that Liberty had
enough control of the franchisees to be found vicariously liable.
In its second decision, the court addressed the franchisor’s Rule 12 motion. The
court began by denying the motion with respect to the Florida Deceptive and Unfair
Trade Practices Act Claim (“FDUPTA”). The court held that plaintiff fulfilled his pleading
requirements for this cause of action by alleging: (1) that InkMart deceptively and
unfairly omitted failed and defunct franchisors from its Franchise Disclosure Document
(“FDD”) and that it failed to properly disclose in the FDD the details of the master
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franchise and areas development rights being granted under the Agreement [deceptive
act or unfair practice], (2) that he would not have purchased the franchise had he known
this information [causation], and (3) that he purchased the franchise for $200,000 and
was forced to shut down its regional office and layoff its sales force [damages]. The
court did dismiss, however, the fraud, negligent misrepresentation and Florida
Franchise Act claims based on the lack of reasonable reliance. Under Florida law,
reliance is unreasonable as a matter of law where the alleged misrepresentations
contradict the express terms of the ensuing written agreement. As the franchise
agreement had a provision stating, “Franchisee acknowledges and Franchisor expressly
disclaims any understandings, agreements, inducements, course(s) of dealing,
representations (financial or otherwise), promises, options, rights of first refusal,
guarantees, warranties (express or implied) or otherwise (whether oral or written) which
are not fully expressed in this Agreement” the court held there could be no reasonable
reliance. Additionally, Beaver acknowledged that he had not been promised assistance
or services other than those represented in the Agreement. Thus, the court found he
could not have reasonably relied on the alleged fraudulent and negligent
misrepresentations.
motion to dismiss. Id. at ** 9-12.
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The issue is Brooks Place Props., LLC v. DiMaria, 2012 Mass. Super. LEXIS
203 (Mass. Super. June 18, 2012), was whether Century 21 was vicariously liable for
the actions of its franchisee and franchisee’s independent contractors. Brooks Place
Properties (“BPP”) was a private lender who provided loans to home buyers. It sought
to hold Century 21, franchisee Heritage Realty Associates, Inc. (“Heritage”) and Arthur
Vekos, a Heritage real estate agent, liable for misrepresenting the value of four homes
for which BPP provided mortgages. Specifically, BPP alleged that Vekos asked BPP to
provide loans to the buyers of the four properties and represented that he was a “very
experienced Century 21 real estate agent,” he was “very familiar” with the properties he
was selling, and the properties were “well valued.” Id. at * 3-4. BPP believed, based on
Century 21’s national advertising campaigns, that Century 21 had a reputation for
honesty, reliability, and fair dealing. Assuming that, because Vekos represented himself
as a Century 21 agent, he shared those same characteristics, BPP credited Vekos’s
representations regarding the value of the properties and provided loans to the four
home buyers. Subsequently, BPP discovered that the properties were worth a fraction
of their purchase price and their titles were subject to defects, encumbrances, and liens.
When all four home buyers defaulted on their loans BPP sued and sought to hold
Century 21 vicariously liable.
In granting summary judgment dismissing the claim against Century 21, the court
explained that, “[t]o prove vicarious liability, the plaintiff must first establish a masterservant relationship, either through an employer-employee or principal-agent
relationship, at the time of injury.” Id. at *7-8 (citation omitted). “In the franchise
context, a master-servant relationship may be established when the franchisor has the
right to control the franchisee’s day-to-day operations or the instrumentality that caused
the harm.” Id. at *8 (citation omitted). However, “[i]n the absence of actual agency,
vicarious liability may still be imposed when there is apparent agency,” which “occurs
when the principal’s conduct causes a third party to believe that a particular person is
the principal’s agent.” Id. at *9. Applying these principals to the facts of the case, the
court concluded that there was no agency relationship between Century 21 and Vekos
and therefore Century 21 could not be held liable for Vekos’s actions. In doing so, the
court emphasized the fact that Century 21 played no role in Vekos’s hiring or
supervision. In fact, the franchise agreement between Century 21 and Heritage
expressly forbade Century 21 from hiring, firing, or controlling any of the details of the
work performed by Heritage’s salespeople. Id. at *8. The court also took special note
of the fact that Century 21 had no control over how real estate listings were obtained
and sold. Id. at *2-3, 8. The court also concluded that Century 21 had done nothing to
create an apparent agency between itself and Vekos. The fact the BPP could not
describe the contents of any specific Century 21 advertisements was particularly
relevant to this finding. Also important was the fact that, while Vekos had a Century 21
e-mail address, BPP never received e-mail from that address.
BPP also brought a claim for unfair and deceptive business practices against
Century 21premised on the allegation that Century 21 misled the public into believing
that Century 21 agents were directly affiliated with Century 21, trustworthy, and reliable.
The court also granted Century 21’s motion for summary judgment on this claim on the
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grounds that BPP was unable to point to any specific statements by Century 21 that
were either unfair or deceptive.
In Smoothie King Franchises, Inc. v. Southside Smoothie & Nutrition Ctr.,
Inc., 2012 U.S. Dist. LEXIS 67620 (E.D. La. May 14, 2012), Smoothie King (the
franchisor) filed a lawsuit alleging that its former franchisee violated a non-competition
covenant by operating several smoothie shops in the same location as the former
franchises and failed to pay all royalties owed under the franchise agreements. In
response, the former franchisor asserted several affirmative defenses, including that the
franchise agreements were unenforceable, relying on Kaiser Steel Corp. v. Mullin, 455
U.S. 72 (1982). Specifically, the former franchisee alleged that the agreements required
Smoothie King’s franchisees to engage in false and deceptive advertising in violation of
the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) by selling their
products as “real whole fruit” smoothies, when they had other added ingredients. The
former franchisee moved for summary judgment on, among other things, this defense.
In Kaiser Steel, the Supreme Court allowed a defendant to assert an illegality of
contract defense in response to a breach of contract claim based on the
unenforceability of the contractual provision at issue under certain federal law. Based
on this illegality, the Supreme Court “held that the defendant was not foreclosed from
raising the provision’s illegality as a defense to plaintiff’s contract claim.” Id. at *10.
Here, the court found that the provisions Smoothie King sought to enforce – the noncompetition clause and royalty provision – were “not inherently unlawful.” Id. “Neither
the Lanham Act, the FTC Act, nor the FDUTPA directly prohibits a franchisee from
voluntarily agreeing to pay its franchisor royalty fees, or from agreeing to refrain from
competing with its former franchisor for a certain period of time within a limited
geographic bounds. The same is true for the mandatory advertising provisions.” As the
contractual provisions at issue could be enforced, “without commanding unlawful
conduct,” the court denied summary judgment seeking to dismiss the claim.
The former franchisee also asserted that each of the franchisee agreements at
issue were null and unenforceable under Article 2030 of the Louisiana Civil Code
because “they were designed to implement a widespread system of unconscionable
consumer fraud.” Id. at 14. The court found that the former franchisee failed to meet its
burden with this affirmative defense as well. Generally, “an obligation cannot exist
without a lawful cause.” Id. Under Article 2030, “‘[a] contract is absolutely null when it
violates a rule of public order, as when the object of a contract is illicit or immoral.’” Id.
However, the court stated that the “law presumes that individuals do not intentionally
enter into agreements to violate the law.” Id. The court found that the former franchisee
failed to offer any evidence that the franchise agreements were entered into “to
circumvent or violate the law.” Id. at *16. Rather, the evidence established that the
parties entered into the agreements “to establish a mutually beneficial franchise
relationship for anticipated commercial gain.” Accordingly, the court denied summary
judgment on this defense as well.
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I.
RICO
WW, LLC v. The Coffee Beanery, Ltd., 2012 U.S. Dist. LEXIS 121347 (D. Md.
Aug. 27, 2012), involves a tortured procedural history and the potential effect of not
disclosing a conviction required to be disclosed in an FDD. Plaintiffs, former Coffee
Beanery franchisees, initially filed this action in 2005 based on alleged fraudulent
statements and misrepresentations that they relied upon in deciding to purchase their
franchise. The District of Maryland closed the matter after the parties proceeded to
arbitrate their claims in Michigan pursuant to the franchise agreement. While Coffee
Beanery won the arbitration and confirmation of the award from the Eastern District of
Michigan, the Sixth Circuit reversed and vacated the award based on the arbitrator’s
“manifest disregard of the law” by disregarding Coffee Beanery’s failure to disclose in its
FDD that one of its principals had been convicted of grand larceny as a college student
for picking up construction cones. The plaintiffs then returned to Maryland and asked
that their case be reopened. When the court refused they successfully appealed to the
Fourth Circuit which reversed. Having reopened their case, plaintiffs filed amended
complaints containing RICO claims based on Coffee Beanery’s alleged fraud in the
FDD. Defendants then moved to dismiss.
Before addressing the RICO claims, the court first took up many of the individual
defendants’ “supplemental” motion to dismiss for lack of personal jurisdiction.
Defendants filed this motion sixteen days after filing their original motion to dismiss and
the court was unimpressed. After reviewing the requirement that Rule 12 motions must
include all possible bases for relief, the court denied the motion as untimely and held
just short of imposing sanctions on defendants for filing it. Next, the court turned to the
RICO claims. After detailing the standards to state a RICO claim, the court turned to
the nub of the issue: whether the claims and additional facts in the second amended
complaint related back to the original complaint such that they were timely. “When
applied in the context of amendments to complaints seeking to add RICO claims to
actions previously limited to claims of fraud, courts have consistently found that the
amendments would relate back under Rule 15.” Id. at 26. Here, because the RICO
claims were fundamentally based upon the same fraud alleged in the original complaint,
the court refused to dismiss the newly pled RICO claims.
In February 2013, the U.S. District Court for the District of Colorado issued a
whole batch of decisions addressing Quizno’s attempts to have franchisee claims of
fraud and various Colorado statutory and common law claims heard in federal court.
Those decisions include: Ranjer Foods LC v. QFA Royalties LLC, 2013 U.S. Dist.
LEXIS 18132 (D. Colo. Feb. 8, 2013), Viadeli, Inc. v. QFA Royalties LLC, 2013 U.S.
Dist. LEXIS 18689 (D. Colo. Feb. 11, 2013), PT Sak, LLC v. QFA Royalties LLC, 2013
U.S. Dist. LEXIS 18688 (D. Colo. Feb. 11, 2013); Marpa LLC v. QFA Royalties LLC,
2013 U.S. Dist. LEXIS 18691 (D. Colo. Feb. 12, 2013); MB Light House, Inc. v. QFA
Royalties LLC, 2013 U.S. Dist. LEXIS 20129 (D. Colo. Feb. 13, 2013); MMXII, Inc. v.
QFA Royalties LLC, 2013 U.S. Dist. LEXIS 20869 (D. Colo. Feb. 15, 2013); and
Avengers Inc. v. QFA Royalties LLC, 2013 U.S. Dist. LEXIS 23097 (D. Colo. Feb. 20,
2013).
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In each of those cases, the plaintiffs brought claims against QFA Royalties, the
Quizno’s franchisor, under the Colorado Organized Crime Control Act (“COCCA”), the
Colorado Consumer Protection Act, Colorado’s Civil Theft Act and breach of contract,
unjust enrichment, conspiracy, and negligent misrepresentation. QFA alleged that the
complaint raised two federal questions – whether defendants had complied with a
franchise rule promulgated by the Federal Trade Commission (“FTC”) and whether
defendants violated federal laws prohibiting fraud and racketeering.
The court first addressed QFA’s argument that the plaintiffs’ claims turned on an
analysis of whether its uniform offering circular was deceptive based on regulations
setting disclosure and other requirements relevant to franchises. The court rejected this
basis for federal jurisdiction, concluding that the absence of a private right of action to
enforce the Federal Trade Commission Act or its implementing regulations is evidence
that Congress did not intend for the franchise rule to serve as the basis for federal
jurisdiction in a private lawsuit.
The court next addressed QFA’s argument that plaintiffs’ claims under the
COCCA raised federal questions because plaintiffs alleged violations of various federal
laws as the requisite predicate acts. The court rejected this argument, noting that it had
held in other cases that asserting a violation of federal law as an element of a COCCA
claim does not support federal question jurisdiction. Further, none of the COCCA
claims relied exclusively on federal law for the predicate acts, so a court might resolve
those claims without addressing federal law at all. Accordingly, any federal questions
implicated in plaintiffs’ claims were too speculative and limited to support federal
jurisdiction.
At issue in St. Louis Motorsports, LLC v. Ferrari N. Am., Inc., 2012 U.S. Dist.
LEXIS 68307 (E.D. Mo. May 16, 2012), was plaintiff’s contention that Ferrari North
American (“FNA”) promised to grant it a Ferrari dealership in exchange for meeting
certain conditions but failed to do so. Having allegedly satisfied the conditions
precedent for the dealership, St. Louis Motorsports sued for civil conspiracy, violation of
the Missouri Motor Vehicle Franchise Practices Act, alleges it performed its obligations
but FNA refused to grant a dealership and claimed seven causes of action, including
civil conspiracy and violation of the Missouri Motor Vehicle Franchise Practices Act,
promissory estoppel, inducement, unjust enrichment, breach of oral contract and
negligent misrepresentation. FNA moved to dismiss the complaint in its entirety.
While the court dismissed the claims for civil conspiracy and violation of the
Missouri Motor Vehicle Franchise Practices Act, it let the remaining claims proceed.
With respect to the civil conspiracy claim, the court held that there can be no civil
conspiracy between a corporation and its agents, such that FNA could not have
conspired with itself as alleged. Likewise, the Vehicle Franchise Act claimed failed
because St. Louis Motorsports was not a franchisee and therefore lacked standing
under the Act. Contrary to St. Louis Motorsports’ argument, the Act simply did not
recognize “de facto” dealers.
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Faith Enters. Group v. Avis Budget Group, Inc., 2012 U.S. Dist. LEXIS 56181
(N.D. Ga. Apr. 19, 2012), involves a defendant franchisor’s motion to dismiss several
claims, including a RICO claim, asserted by an independent third-party operator, not a
franchisee. Of particular interest is the court’s finding that a franchise system cannot
constitute an “enterprise” under 18 U.S.C. § 1962(c). Defendant franchisor, Avis
Budget Group, Inc. and several of its subsidiaries (collectively, “Avis”) have three types
of locations: company-owned-and-operated facilities, third-party-operated facilities and
franchised facilities. Plaintiff Faith Enterprises Group (“Faith”) was an independent
third-party operator who had executed an independent operator agreement to
exclusively rent Avis vehicles and maintain a staff to service, repair and store such
vehicles. Avis agreed to furnish Faith with the vehicles to be rented on Avis’s behalf
which Avis, “in its sole discretion deems to be sufficient in quantity and class, from
[Faith's] location.”
Plaintiff Faith brought a lawsuit alleging that Avis falsely stated on its computer
reservation system that Faith was "sold out" of vehicles and that this misrepresentation
cost Faith commissions that it would have otherwise earned. Faith further alleged that
Avis was unjustly enriched by customer coupons that Faith accepted. Accordingly,
Faith asserted claims for RICO violations, breach of fiduciary duty, breach of the implied
covenant of good faith and fair dealing, and unjust enrichment and Avis moved to
dismiss.
Avis’s argument against the RICO claim had four alternative bases: that there
was an alternative explanation for its conduct, that Faith did not plead sufficient facts to
show proximate causation, that Faith did not plead its RICO claim with sufficient
particularity, and that Faith did not allege an “enterprise” under RICO. The court
granted the motion based on the fourth argument, holding that a RICO claim requires a
defendant to employ or associate with an “enterprise” distinct from itself to conduct a
pattern of racketeering activity. In this case, the complaint alleged that the Avis System
– meaning the defendant, its franchisees and independent operators – constituted the
“enterprise.” The court disagreed, noting that, because the independent operators and
franchisees were not conspirators in Avis’s alleged fraud, but were victims of that fraud,
the complaint did not sufficiently allege that Avis combined with an “enterprise” under 18
U.S.C. § 1962(c). Therefore, the court dismissed the RICO claim.
The court did not dismiss the plaintiff’s breach of fiduciary duty claim. Although
the independent operator agreement named Faith as an independent contractor, the
agreement nevertheless gave rise to a principal-agent, and therefore a fiduciary,
relationship. The court did dismiss Faith’s good faith and fair dealing claim that Avis
failed to provide sufficient rental cars because the independent operator agreement
granted Avis the discretion to determine how many and what kind of cars Faith should
have had. Finally, the court dismissed Faith’s unjust enrichment claim that Avis was
unjustly enriched by requiring Faith to accept coupons for free rentals because the
independent operator agreement expressly allowed for discounts and a claim for unjust
enrichment cannot stand in the face of an express contract.
J.
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170
Dodge v. Dollarstore, Inc., 2012 Cal. App. LEXIS 3976 (Cal. Ct. App. May 25,
2012), involves an appeal of the judgment of the Superior Court of Orange County,
awarding damages in the amount of $620,000 to Plaintiffs relating to loans to the
Defendants that were never repaid. Mr. Dodge and the other individual Plaintiffs made
loans to Dollarstore, Inc. pursuant to Loan and Security Agreements. The Agreements
limited their remedies upon default to recovering Dollarstore stock.
The Defendants appealed the trial court’s finding that the Loan and Security
Agreements were unconscionable and also argued that the trial court erred in finding
that the individual defendants were the alter egos of the corporate Defendants, “which
operated as a single unit.” As the evidence showed that the Defendants neither repaid
the loans nor issued Dollarstore shares to Plaintiffs, the court held that regardless of
whether the limitation of remedies was unconscionable, the Defendants were still liable
to Plaintiffs for the awarded damages.
The court also confirmed the trial court’s holding that defendant Rakesh Mehta,
founder of the Dollarstore, was the alter ego of the Dollarstore’s various corporate
entities, but reversed the trial court’s determination that Reeta Mehta (his wife) was the
alter ego of any of them. Mr. Mehta was found to share a unity of interest with the
corporate Defendants, which in turn disregarded corporate formalities that would
indicate true separation. The court held that piercing the corporate veil in this case was
equitable. but was careful to note that “there is no litmus test to determine when the
corporate veil will be pierced; rather the result will depend on the circumstances of each
particular case.”
Six Continents Hotels, Inc. v. CPJFK, LLC, 2012 WL 4057503 (E.D.N.Y. Sept.
11, 2012), addresses a franchisor’s ability to pursue individual guarantors for damages
when the franchise entity files for bankruptcy. Here, Holiday Hospitality Franchising,
Inc. (“HHFI”) terminated a Crowne Plaza franchisee’s franchise when it failed to make
timely royalty payments and cure its defaults. HHFI then filed suit claiming the
franchisee refused to cease using the Crowne Plaza name and trademark after
termination. When the franchise entity, CPJFK, LLC filed bankruptcy, HHFI
successfully pursued its claims against the individual guarantors. The court entered
summary judgment in HHFI’s favor and referred the matter to a magistrate to determine
the precise damages due. The magistrate ultimately determined that HHFI was entitled
to $326,719.73 in unpaid royalties; $1,973,689.37 in liquidated damages; $703,931.39
in prejudgment interest; and $114,658.17 in attorneys’ fees and costs.
Bonanza Rest. Co. v. Wink, 2012 Del. Super. LEXIS 167 (Del. Super. April 17,
2012), addresses the scope of a guarantee given by a former franchisee in connection
with its sale of four restaurants. Wink, the former franchisee, agreed to personally
guarantee all monies due from the new franchisee under its franchise agreements for a
period of one year. When the new franchisee closed the restaurants within less than a
year, Bonanza brought suit against Wink under the guarantees for its lost future
royalties totaling $1,319,899.83.
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In ruling on cross-motions for summary judgment, the court first addressed and
held that future lost revenues were recoverable here. Citing a 2012 article in the
Franchise Law Journal, Douglas R. Hafer & Logan W. Simmons, Lost Future Royalties:
Lessons from Recent Decisions, 31 Franchise L.J. 150 (2012), the court recognized that
a franchisor may recover lost future royalties when a franchisee terminates the
relationship. The court next addressed and rejected Wink’s argument that Bonanza
waived any right to future royalties by prohibiting consequential damages in the
franchise agreement. Applying Texas law, the court held that loss of future royalties
was inherent to breaching the franchise agreements and therefore not “consequential.”
Finally, and luckily for Wink, the court analyzed the specific language of the guarantee.
Based on the one year limitation, the court rejected Bonanza’s claim for future lost
royalties against Wink. In doing so, it also rejected Bonanza’s argument that Wink’s
unlimited guarantee of the new franchisee’s post-termination obligations produced a
different result. The post-termination obligations, the court held, made no mention of
future lost royalties and royalty payments, by their nature, end when a franchise closes.
Accordingly, it granted Wink’s motion for summary judgment.
Smoot v. B&J Restoration Servs., Inc., 2012 Okla. Civ. App. LEXIS 40 (Okla.
Ct. App. May 16, 2012), addresses to what extent franchise owners can be personally
liable for alleged contractual breaches in connection with the sale of their franchise to a
new owner. Here, the Hoppers sold their ServPro franchise to the Smoots and the
Smoots claimed breach of the purchase and sale and non-competition contracts.
Addressing the purchase and sale breach first, the court held that although the Hoppers
did not specify they were signing the agreement in their representative capacities, the
related documents, when taken as a whole, established their representative capacities.
They could not, therefore, be personally liable for an alleged breach of that contract.
The Hoppers could, however, be personally liable for breaching the noncompetition agreement. That agreement specifically extended its obligations to each
officer, director, shareholder and owner of the company. Despite this holding, the court
determined that the trial judge erred with respect to the jury instructions regarding the
measure of damages the plaintiffs could receive for breach of the covenants.
Accordingly, the court remanded the case on this issue and instructed the trial court to
determine whether the liquidated damages clause in the restrictive covenant is
enforceable prior to charging the jury with instructions regarding the proper method for
calculating damages.
K.
DEFENSES
1.
Limitations
Progressive Foods, LLC .v Dunkin’ Donuts, Inc., 2012 U.S. App. LEXIS
16815 (6th Cir. Aug. 9, 2012), involves the enforceability of contractual limitation periods
and whether allegations of fact in pleadings constitute judicial admissions. Progressive
Foods, an area developer, brought suit against Dunkin’ Donuts for various claims
associated with Dunkin’s alleged failure to develop and equip three locations and
placing holds on further development. In its Complaint, filed on October 3, 2007,
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Progressive Foods alleged that it had “timely notified the Defendants of all the issues
and problems and their claims against Defendants on or about August 3, 2005.” It then
repeated this allegation in seven different places in an amended complaint and did not
seek to further amend its complaint when Dunkin’ relied on the allegations on multiple
occasions. Unfortunately for Progressive Foods, its developer agreement with Dunkin’
contained a two year limitations provision.
Reversing the district court, the Sixth Circuit quickly dismissed Progressive
Foods’ claims based on its admission that they were untimely.
In order to qualify as judicial admissions statements must be deliberate,
clear and unambiguous, [citation omitted] but they do not need to be true.
Indeed, a judicial admission trumps evidence. [citation omitted]
Id. at *5. Interestingly, the court’s lack of any discussion of whether the contractual
limitations period was enforceable strongly suggestion that in the Sixth Circuit, two year
contractual limitations periods are per se reasonable and enforceable.
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rescission.
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Kim v. SUK Inc., 2013 U.S. Dist. LEXIS 24703 (S.D.N.Y. Feb. 22, 2013),
involved a motion to dismiss claims under the New York Franchise Sales Act as
untimely and ERISA claims as untimely and failing to state a claim. Kim worked as a
driver for Suk, which owned a car service company. In 2004 Suk forced Kim to sign the
signature page of an unknown document with threats of termination. In 2010, Kim
learned that document was a franchise agreement. Kim did not receive the full
franchise agreement until he was terminated and never received or reviewed a
franchise prospectus or financial disclosure document.
In 2010, Kim was fired for violation of a dress code and a mishandling of client
payments, but Kim alleged these were a pretext, and he was actually fired for his efforts
to organize labor over working conditions. Kim further alleged he suffered physical
violence in response to his organizing activities. Kim filed a complaint on March 2,
2012.
Defendants filed a motion to dismiss Kim’s New York Franchise Sales Act claims
as untimely and his ERISA claims as failing to state a claim and untimely.
In relation to the Franchise Sales Act claims, there is a three year statute of
limitations from the date of violation. Kim contends that the three years did not start
running until 2010 because he did not receive the franchise documents until he was
fired, and therefore was unaware of the violation until that time. This argument is
contradicted by case law that states there is no discovery rule for fraud based claims.
In attempting to figure out when the statute of limitations did start, the court noted that
the statute of limitations does not always begin to run on the date the agreement was
executed. Rather, it is the time of the violative transaction, which would be the time of
the sale of the franchise for claims under § 683 and when the agreement was signed for
claims under § 687 of the Act. Plaintiffs did not allege that any part of the transaction
occurred within three years of the filing of the complaint, meaning the claims were time
barred.
For the ERISA claim, defendants argued that Kim failed to state a claim because
he did not state which ERISA section formed the basis of his claim. The court found
that Kim need not establish which specific ERISA section he was claiming a violation of
as long as he made allegations consistent with an ERISA claim. The court therefore
found dismissal to be improper at this stage. The court also found the claim was timely
because Kim became an employee when he did not renew the franchise in 2007, a
classification that was in effect when he was terminated in 2010. Kim’s claim arises
from the discrimination he faced over his organizing activities. The complaint fails to
state when exactly when this occurred in 2010, but because the plaintiff filed his
complaint in March 2012, the odds are that his alleged pretextual firing in 2010 forms a
timely basis for his ERISA claim. The court therefore ordered plaintiff to amend the
complaint to add the date of termination.
In Creative Playthings Franchising Corp. v. Reiser, 463 Mass. 758, 978
N.E.2d 765 (2012), the Supreme Judicial Court of Massachusetts accepted and decided
a certified question from the District Court for the District of Massachusetts: in a
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franchise agreement governed by Massachusetts law, is a limitations period in a
franchise agreement shortening the time within which claims must be brought valid and
enforceable? The court answered this narrow question yes, but did not address
whether the franchise agreement’s creation of a statute of repose – which appeared to
violate Massachusetts’ discovery rule – was enforceable.
Creative Playthings, Ltd. (“Creative”) is a Massachusetts corporations that
designs, manufactures, and markets residential outdoor wooden swing sets and related
products. The defendant, James A. Reiser, Jr. (“Reiser”), entered into a franchise
agreement with Creative to operate a Creative Playthings franchise in Florida. The
franchise agreement included a Massachusetts choice-of-law provision and required
any action arising out of the franchise agreement to be brought no later than 18 months
after the date of the act giving rise to the claim.
In July 2009, Creative terminated its agreement with Reiser alleging that he was
in default for purchasing equipment from non-approved suppliers and failing to pay
trademark usage fees required under the franchise agreement. In September 2009,
Creative sued for breach of contract and trademark infringement. Reiser
counterclaimed for breach of the implied covenant of good faith and fair dealing,
fraudulent inducement, and violations of Florida’s unfair and deceptive trade practices.
Creative moved for summary judgment on Reiser’s counterclaims, asserting that
they were time barred under the limitations provision in the franchise agreement. The
District Court of Massachusetts noted that the Massachusetts state courts had yet to
decide whether contractually shortened statues of limitations in a franchise agreement
were enforceable and certified the question to the highest court in Massachusetts.
The Massachusetts court noted that the legislature has accepted the premise of
contractually shortened limitation periods in some circumstances, but not all. For
example, Massachusetts statute explicitly prohibits any contractual alteration to the fouryear limitation period for actions relating to motor vehicle dealership agreements. See
G.L. c. 93B, § 16(a). There was no specific statute applicable here, however, so the
limitation was valid unless it violated public policy. The court left it to the legislature to
determine whether restrictions on the content of franchise agreements were necessary
as a matter of public policy. Moreover, the court recognized that its ruling was
consistent with the dominant view under federal law that contractual limitation periods
shorter than the statute of limitations were permissible provided they are reasonable.
Reiser additionally maintained that under Massachusetts’ discovery rule,
contractually shortened time periods were not valid and enforceable if the limitations
period ends before the injured party “could or should” have discovered the facts
resulting in the harm. The franchisee agreement created a maximum 18 month limit
regardless whether the act or omission could have been discovered with reasonable
diligence. The court noted that this language in the agreement appeared to create a
statute of repose which would be per se invalid and unenforceable under
Massachusetts law. The court, however, did not reach the question because the
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certified question was narrowly defined and did not inquire about the discovery rule
issue.
motion to dismiss. Id. at ** 9-12
2.
Waivers
At issue on a motion for summary judgment in Ace Hardware Corp. v. Landen
Hardware, LLC, 2012 WL 2827180 (N.D. Ill. June 27, 2012), was whether franchisees
and individual guarantors could escape their contractual disclaimers and non-reliance
clauses to argue that Ace was responsible for their commercial failure. Despite signing
various agreements that contained disclaimers and non-reliance clauses upon any Ace
expertise in site selection or business operation, defendants sought to argue that Ace
was equitably estopped from enforcing the contracts because it “held itself out as an
expert on how to site and run Ace franchises.” Id. at *7. Defendants further sought to
argue that they could not verify the information Ace did provide because it “was only
available from Ace and thus was not independently verifiable.” Id. Ace argued in
response that “defendants knowingly assumed the risk associated with opening new
stores,” and denied that it either “told defendants how site scores were calculated or . . .
provided inaccurate information.” Id. The court granted Ace’s motion.
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The court determined that, because the defendants assumed “complete
responsibility for the success or failure of their stores” in the signed documents, it could
not “redline clear contractual language from the parties’ contracts simply because, with
the wisdom of 20/20 hindsight, the defendants believe that they got a poor bargain.” Id.
at *10. Because the disclaimers and non-reliance clauses contained in the agreements
were “clear and unequivocal,” “defendants cannot have reasonably relied on Ace’s
alleged statements,” and defendants’ equitable estoppel claim failed. Id. at *12.
This reasoning also applied to the guarantees. The individuals alternatively
argued that the guarantees were invalid “based on inequitable circumstances because
the bargaining positions of Ace and the defendants were wildly divergent.” Id.
However, the guarantees specifically disclaimed a fiduciary relationship, negating any
allegations of a quasi-fiduciary relationship. Moreover, Ace’s superior knowledge
concerning Ace franchises did “not create a fact question as to the parties’ bargaining
power,” particularly when defendants agreed they would assume all risks and
acknowledged that Ace made no guarantees concerning franchise performance. Id.
Finally, the court found that the exculpatory clauses were clear and unambiguous and
thus rejected the individuals’ public policy argument.
3.
Releases
Fullington v. Equilon Enterprises, 210 Cal. App. 4th 667, 148 Cal. Rptr. 3d 434
14379022.3
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2003).
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179
overpayment.
4.
Preclusion
Fullington v. Equilon Enterprises, 210 Cal. App. 4th 667, 148 Cal. Rptr. 3d 434
2003).
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180
overpayment.
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General Motors, LLC v. Bill Kelley, Inc., 2012 U.S. Dist. LEXIS 156129 (N.D.
W. Va. Oct. 31, 2012), involved a dispute arising out of GM’s bankruptcy. As part of the
bankruptcy, GM reviewed dealer performance to identify poorly performing dealers that
would not become part of GM’s new revamped network. The non-retained dealers were
offered wind-down agreements providing monetary payments and setting the
termination date as October 31, 2012. Bill Kelley was chosen to be a non-retained
dealer. It signed the wind-down agreement rather than litigate its rejection rights.
Bill Kelley then took advantage of the federal law allowing dealers to seek
reinstatement through binding arbitration. GM settled the arbitration claim by allowing
Bill Kelley to continue as a dealer for a designated period of time. As part of the
settlement, the dealer dismissed with prejudice and forever waived all of its rights in
connection with the claims in arbitration, and agreed that the agreement resolved all
claims and assertions that could ever be made as a result of the Arbitration, legislation,
dealer agreements, wind-down agreements, or any supplemental agreement.
As part of the settlement agreement, Bill Kelley also agreed to achieve a certain
retail sales performance and specified the remedies available to GMif the dealer failed
to meet the performance standards. Finally, the agreement stated that if defendant
instituted any proceeding or otherwise asserted any claim covered by the release, such
a breach would entitled GM to an immediate and permanent injunction precluding
defendant from contesting GM’s application for injunctive relief.
Bill Kelley failed to achieve the required retail sales performance, and GM gave
notice that it was exercising its option to purchase the dealer’s assets. Bill Kelley
refused to comply, and GM sued. Bill Kelley moved to dismiss or for summary
judgment. GM filed a cross motion for summary judgment on all claims and sought
preliminary and permanent injunctive relief.
In order to avoid its obligations under the settlement agreement, Bill Kelley
argued that GM’s actions violated West Virginia Code §§ 17A-6A-4 (conditions for
cancellation or nonrenewal of dealer agreements) and -7 (notice requirements) and that
the agreement was null and void under West Virginia Code § 17A-6A-18 because of
these violations. The court rejected Bill Kelley’s arguments. It reasoned that the West
Virginia statute deals with unilateral or coercive action on the part of the manufacturer.
Bill Kelley entered into the settlement agreement of its own free will. GM’s enforcement
of the contract that the parties had voluntarily entered into constituted neither coercion
or unilateral action. The court also found that Bill Kelley was estopped from attacking
the validity of the settlement agreement because it induced GM to enter the agreement,
enjoyed its benefits for two years, and avoided potentially losing the arbitration. Thus,
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the court found that GM would suffer irreparable harm without an injunction, denied Bill
Kelley’s motion for summary judgment and granted GM’s cross motion. Kelley moved
to stay the court’s order pending appeal in General Motors, LLC v. Bill Kelley, Inc., 2012
U.S. Dist. LEXIS 169621 (N.D. W. Va. Nov. 29, 2012). Analyzing the necessary factors
for a stay, the court found no irreparable injury for Kelly, noting that GM was simply
exercising what was bargained for under the contract.
Legg v. Bou-Matic, LLC, 2013 U.S. Dist. LEXIS 2827 (W.D. Wis. Jan. 7, 2013),
was a suit brought by three dairy farm equipment dealers against a manufacturer for
breach of contract. The exact relationship between the plaintiffs and the manufacturer
was disputed (and the court never made an explicit finding that a franchise existed), but
the parties agreed that the plaintiffs were, in some form, dealers of the manufacturer’s
products. The dealers alleged that the manufacturer breached the parties’ dealership
agreements by failing to pay rebates and incentives owed to the dealers, by failing to
repurchase inventory following termination of the agreements, and by locating a
competing dealer in the plaintiffs’ exclusive dealing area.
The manufacturer had previously terminated the dealers’ agreements because
they had begun to fail and accumulated large debts to the manufacturer. The
manufacturer then brought, and won, a lawsuit in state court for the unpaid debts that
the dealers owed, resulting in over $1 million in judgments against the dealers. After
losing in state court, the dealers brought this federal action for breach of contract. The
manufacturer moved for summary judgment on the dealers’ claims, arguing that claim
preclusion and the compulsory counterclaim rule barred their claims.
On claim preclusion, the parties agreed that the parties in the prior and present
suits were the same and that the prior suit resulted in a final judgment on the merits. At
issue was whether a third requirement for claim preclusion was met – identity of the
causes of action in the two suits. The dealers argued that there was no identity
because the claims in the two suits were different – the manufacturer’s claims for
unpaid debts in the first suit, and the dealers’ various breach of contract claims in the
second. The court disagreed, stating that Wisconsin follows the transactional approach
to determining whether there is an identity of claims, and finding that the claims in the
present suit were part of the same transaction as the claims in the first. It did not matter
that the legal theories advanced or damages sought were different, what mattered was
that the claims arose out of the dealer agreements, a common set of facts, and the
same overall transaction between the parties. The court concluded that there was an
identity of claims, and therefore (along with the other two undisputed factors) claim
preclusion applied.
The dealers also argued that even if claim preclusion applied, application of the
doctrine would be inconsistent with Wisconsin’s permissive counterclaim rule that a
defendant should be given its day in court to assert its claims when it sees fit. The court
disagreed, finding that the compulsory counterclaim rule operates as an exception to
the permissive rule in Wisconsin and bars a subsequent action by a party who was a
defendant in a first suit if a favorable judgment in the second action would nullify the
judgment or impair the rights established in the first action. Here, the parties’ dispute
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was essentially over the amount of money the dealers owed the manufacturer under the
dealer agreements. The manufacturer claimed that the dealers owed unpaid debts, and
the dealers claimed that the reason they were unable to pay their bills was because of
the manufacturer’s actions. The court determined that the dealers already had their
chance to try to offset the amount of money it owed during the state-court litigation, and
the matters the dealers were trying to assert in this federal action could have been
asserted in the prior state-court action. The court concluded that the compulsory
counterclaim rule applied and the dealers should not get a “do-over” after making the
mistake of not asserting those issues in the first action. Accordingly, the manufacturer
was granted summary judgment.
5.
Unconscionability
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184
Act.
Ace’s network consists of 4000 independent Ace retailers operating by 3000
an Ace Brand Agreement and paid a $5000 fee. These agreements did not contain an
provision by fraud.
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185
L.
REAL ESTATE
MSKP Oak Grove, LLC v. Venuto, 2012 U.S. Dist. LEXIS 86172 (D.N.J. June
20, 2012), illustrates how failing to tie up a seemingly insignificant loose end when a
franchise system ultimately fails can result in a substantial litigation headache.
Defendant Hollywood Tanning Systems, Inc. (“HTS”) was a New Jersey corporation that
operated tanning salons and sold franchises and tanning equipment to independent
tanning salons. HTS leased a commercial retail space in a Florida shopping center from
the plaintiff’s predecessor in interest. In 2004, HTS sublet the space to one of its
franchisees, but remained liable on the lease in the event of the franchisee’s default.
Then, in 2007, HTS entered into an asset purchase agreement, under which Tan
Holdings acquired almost all of HTS’s assets in exchange for approximately $40 million
and a 25% ownership interest. HTS apparently remained liable on the Florida lease
despite the asset sale to Tan Holdings. After the Tan Holdings transaction closed, HTS
used some of the $40 million to settle its then-outstanding debts. HTS then distributed
the remaining $16 million to its shareholders, retaining only the 25% ownership interest
in Tan Holdings. In 2008, the plaintiff notified HTS that the franchisee had defaulted on
the lease; the plaintiff sued HTS and the franchisee in Florida state court and won a
judgment against HTS for over $400,000, which was never paid. In the meantime, Tan
Holdings failed and turned its assets over to its creditors in 2009. Id. at *3–7.
The plaintiff filed the original complaint in this action at the end of 2010, naming
as defendants only HTS’s shareholders. After the complaint was dismissed without
prejudice, the plaintiff amended the complaint to add HTS as a defendant. The
amended complaint asserted four claims under the New Jersey Uniform Fraudulent
Transfer Act, as well as a claim for improper distribution of corporate assets and a claim
of unjust enrichment. The defendants again filed a motion to dismiss for failure to state
a claim. Although the court dismissed one of the NJUFTA claims, the improper
distribution claim, and the unjust enrichment claim, it held that the plaintiff has alleged
sufficient facts to support its three remaining NJUFTA claims, even under the higher
Iqbal and Rule 9(b) pleading standards. Id. at *7–11.
As to the intentional fraud claim, the defendants argued that the plaintiff had
failed to allege that HTS distributed the $16 million with the intent to defraud. The
NJUFTA lists 11 factors for the court to consider in determining whether the plaintiff has
sufficiently alleged the “badges of fraud.” Here, the court determined that the plaintiff
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had plausibly alleged four of the 11 factors. Specifically, the plaintiff had alleged that the
transfer was to “insiders,” that the transfer was substantially all of HTS’s assets, that
HTS received no consideration for the transfer, and that HTS became insolvent shortly
after the transfer. The court concluded that the confluence of these four factors was
sufficient to state a claim for intentional fraud. The question whether the $16 million
represented substantially all of HTS’s assets was a major point of contention. The
defendants argued that the 25% ownership interest in Tan Holdings, which HTS
retained, was worth quite a lot. But the fact that Tan Holdings failed within a year
supported the plaintiff’s contention that this ownership interest had minimal real value.
Id. at *11–20.
The minimal value of HTS’s interest in Tan Holdings was central to the plaintiff’s
constructive fraud claim as well. The defendants argued that the plaintiff had failed to
allege that HTS’s remaining assets were “unreasonably small” in relation to its
continuing liabilities. But even after discounting HTS’s contingent liabilities (such as the
plaintiff’s lease) based on how unlikely they were to materialize, the court still found that
the plaintiff had adequately alleged that the illiquid 25% ownership interest in Tan
Holdings was not sufficient to meet the foreseeable claims against HTS. Id. at *20–24.
The court also allowed the plaintiff to proceed on its third NJUFTA claim, which
required the plaintiff to allege that its claim arose before the transfer, that HTS did not
receive adequate consideration for the transfer, and that HTS became insolvent as a
result of the transfer. Again, the defendants argued that HTS did not become insolvent
as a result of the transfer because it retained a 25% ownership interest in Tan Holdings.
But the court held that the plaintiff had adequately alleged the reasonable inference that
had HTS not distributed the $16 million to its shareholders in 2007, it would not have
become in insolvent in 2008. Id. at *24–27.
The court did, however, grant the defendants’ motion to dismiss on the three
remaining claims. The fourth NJUFTA claim failed because HTS was not insolvent at
the time of the transfer, as required by the statute. The improper distribution claim failed
because the plaintiff failed to allege that HTS had dissolved or was undergoing
dissolution at the time of the transfer. And lastly, the unjust enrichment claim failed
because the plaintiff did not allege a contractual relationship between itself and the
shareholder defendants. Id. at *27–35.
Midas Int’l Corp. v. Chesley, 2012 U.S. Dist. LEXIS 87922 (N.D. Ill. June 26,
2012), involves interesting issues about how far a franchisor may go in effecting “selfhelp” for franchisee actions it perceives to be detrimental to the system. Here, when
Midas learned that one of its New York franchisees, Chesley, was about to sell four of
its ten locations to a competitor, Midas terminated all ten franchises, changed the locks
at two of them, and filed suit against Chesley, seeking injunctive relief and damages.
Chesley asserted counterclaims for bad faith termination in violation of the New York
Real Property and Proceedings Law (“RPAPL”), which awards treble damages to those
ejected from real property “in a forcible or unlawful manner.” Chesley based its RPAPL
claim on Midas changing the locks without notice or warning. Midas then moved to
dismiss the counterclaims.
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In support of its motion Midas argued that (1) Chesley’s breach of contract based
on bad faith was barred because it fell within an arbitration clause in the franchise
agreements that required any dispute over Midas’s “right to terminate” be submitted to
arbitration, and (2) Midas’s actions in changing the locks were neither “forcible” nor
“unlawful” because Chesley’s abandonment of those properties gave Midas the
contractual right to terminate the leases. Applying New York law, the court stayed
Chesley’s bad faith claim based on the franchise agreement’s arbitration requirement,
but allowed the RPAPL claim to proceed. Regarding the bad faith claim, the court
rejected Chesley’s argument that its bad faith claim fell outside the scope of the
arbitration clause in the franchise agreement because, as the court noted, Chesley’s
allegations directly challenged whether Midas had “just or proper cause” to terminate
the agreements. Further, the court rejected Chesley’s argument that the franchise
agreements were unconscionable contracts of adhesion, finding that (1) the dispute
resolution procedure set forth in the agreement was not substantively unfair, and (2)
Chesley’s allegation that the parties had “unequal bargaining power” was insufficient
because Chesley did not claim that Midas had employed “high pressure tactics” or
deceptive contract language.
Regarding the RPAPL claim, the court found that although Midas’s actions in
changing the locks did not appear to be “forcible,” Chesley adequately alleged
“unlawful” conduct and created a question of fact regarding whether the franchisee had
abandoned the properties when Midas changed the locks, which the court could not
determine on a motion to dismiss.
V.
DISPUTE RESOLUTION
A.
LITIGATION
1.
Jurisdiction
Plaintiffs Jordan and Jennifer Dontos brought their action, Dontos v.
Vendomation NZ Ltd., 2012 U.S. Dist. LEXIS (N.D. Tex. Aug. 27, 2012), against a
variety of corporate and individual defendants following the collapse of their vending
machine franchisor. Plaintiffs originally filed in state court and obtained a $6,000,000
judgment against two corporate defendants. When the defendants went bankrupt,
plaintiffs initiated this suit for a variety of fraud-related claims.
After filing the Fourth Amended Complaint, the court took up the defendants’
motion to dismiss for lack of personal jurisdiction. In a detailed analysis of each of
plaintiffs’ claims, the court found no basis to exercise personal jurisdiction over any
defendant. Specifically, the court first held that there was no “conspiracy” basis for
jurisdiction that relies upon the actions of alleged co-conspirators to establish
jurisdiction over the other conspirators. Next, the court rejected plaintiffs’ agency
argument. Finding the complaint contained nothing beyond conclusory allegations of an
agency relationship between non-party individuals and the named defendants and that
the individuals’ alleged contacts were in and of themselves insufficient, the court
dismissed all claims because it lacked personal jurisdiction over the plaintiffs.
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KFC Corp. v. Texas Petroplex, Inc., 2012 U.S. Dist. LEXIS 144342 (W.D. Ky.
Oct. 5, 2012), concerned a motion to dismiss for lack of personal jurisdiction filed by a
franchisee and its personal guarantors. In 2002, plaintiff KFC Corporation (“KFC”), a
Delaware corporation with a principal place of business in Kentucky, entered into two
franchise agreements with defendant Texas Petroplex (“Petroplex”). Petroplex is a
Texas corporation with shareholder owners Mohammad and Naim Tatari (collectively,
“the Tataris”). The Tataris signed personal guarantees in conjunction with KFC granting
Petroplex the franchise agreements. In August 2011, KFC terminated both franchise
agreements alleging that Petroplex had breached and sued Petroplex and the Tataris in
Kentucky for failing to abide by contractual post-termination provisions. Petroplex and
the Tataris moved to dismiss the action for lack of personal jurisdiction and improper
venue.
The court applied the Burger King analysis to determine if the court had personal
jurisdiction over any of the defendants. See Burger King v. Rudzewicz, 471 U.S. 462
(1985). The court analyzed both Petroplex’s and the individual defendants’ contacts
with Kentucky. It found that Petroplex had sought out a relationship with a Kentucky
corporation, negotiated two twenty year contracts with a Kentucky corporation, which
required oversight of Petroplex’s activities by the Kentucky corporation, and allowed
itself to be governed by standards developed in Kentucky. Petroplex also signed
agreements providing that Kentucky law would apply, and that all notices and other
communications would go to Kentucky. Moreover, the contracts were formed in
Kentucky as Petroplex signed the agreements, and then sent them to Kentucky for
KFC’s signature. As such, the court found that Petroplex met the purposeful availment
factor of the Burger King test. The court further found the lawsuit arose out of
Petroplex’s contacts with Kentucky as the trademark issues arose from the franchise
agreement, which was formed in Kentucky.
However, the court found that it lacked personal jurisdiction over the individual
defendants. The only agreements signed by the individual defendants were the
guarantees which do not state that they were made in Kentucky, and which were not
formed in Kentucky because they were only signed by the individual guarantors in
Texas. Even taking into account that the guarantees induced KFC to enter into a longterm contract with Petroplex, this was not enough to constitute minimum contacts to
support the exercise of jurisdiction. Additionally, the signing of the franchise application
did not provide the court with personal jurisdiction over the individual for the same
reason the signing of the guarantees did not.
KFC’s partial victory was a pyrrhic one, however, since the court then transferred
the action to the Northern District of Texas because it was in the interest of justice to
have all claims, against both Petroplex and the individual defendants, tried in one
action.
Corporation and its subsidiary, Bergstrom Fiat, against the Chrysler Group. Bergstrom
Fiat claimed that Chrysler failed to timely provide inventory or to support the Fiat brand
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with adequate marketing, alleging unconscionable and arbitrary conduct in violation of
the Wisconsin Motor Vehicle Dealer Law and asserting breach of contract and good
faith and fair dealing claims. Bergstrom Corporation alleged that Chrysler had provided
oral assurances that Bergstrom Corporation would have a right of first refusal for any
new Fiat dealerships that might be opened in Wisconsin. A year after opening,
Law.
estoppel claims.
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improper venue.
because all of the relevant events occurred in another jurisdiction. Further, Holiday
Inn’s advertising in the District of Columbia was insufficient to establish personal
jurisdiction because the advertisements were for the company generally, not the
Georgia franchisee specifically, and because the advertisements were unrelated to the
plaintiff’s injury because the plaintiff did not choose to stay at the Georgia franchisee as
a result of the advertisements (rather, her employer made the reservation).
Accordingly, defendants did not have substantial or continuous contacts with the District
of Columbia.
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The court reasoned that it only had jurisdiction if Palermo’s well plead complaint
or shield.
In February 2013, the U.S. District Court for the District of Colorado issued a
whole batch of decisions addressing Quizno’s attempts to have franchisee claims of
fraud and various Colorado statutory and common law claims heard in federal court.
Those decisions include: Ranjer Foods LC v. QFA Royalties LLC, 2013 U.S. Dist.
LEXIS 18132 (D. Colo. Feb. 8, 2013), Viadeli, Inc. v. QFA Royalties LLC, 2013 U.S.
Dist. LEXIS 18689 (D. Colo. Feb. 11, 2013), PT Sak, LLC v. QFA Royalties LLC, 2013
U.S. Dist. LEXIS 18688 (D. Colo. Feb. 11, 2013); Marpa LLC v. QFA Royalties LLC,
2013 U.S. Dist. LEXIS 18691 (D. Colo. Feb. 12, 2013); MB Light House, Inc. v. QFA
Royalties LLC, 2013 U.S. Dist. LEXIS 20129 (D. Colo. Feb. 13, 2013); MMXII, Inc. v.
QFA Royalties LLC, 2013 U.S. Dist. LEXIS 20869 (D. Colo. Feb. 15, 2013); and
Avengers Inc. v. QFA Royalties LLC, 2013 U.S. Dist. LEXIS 23097 (D. Colo. Feb. 20,
2013).
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In each of those cases, the plaintiffs brought claims against QFA Royalties, the
Quizno’s franchisor, under the Colorado Organized Crime Control Act (“COCCA”), the
Colorado Consumer Protection Act, Colorado’s Civil Theft Act and breach of contract,
unjust enrichment, conspiracy, and negligent misrepresentation. QFA alleged that the
complaint raised two federal questions – whether defendants had complied with a
franchise rule promulgated by the Federal Trade Commission (“FTC”) and whether
defendants violated federal laws prohibiting fraud and racketeering.
The court first addressed QFA’s argument that the plaintiffs’ claims turned on an
analysis of whether its uniform offering circular was deceptive based on regulations
setting disclosure and other requirements relevant to franchises. The court rejected this
basis for federal jurisdiction, concluding that the absence of a private right of action to
enforce the Federal Trade Commission Act or its implementing regulations is evidence
that Congress did not intend for the franchise rule to serve as the basis for federal
jurisdiction in a private lawsuit.
The court next addressed QFA’s argument that plaintiffs’ claims under the
COCCA raised federal questions because plaintiffs alleged violations of various federal
laws as the requisite predicate acts. The court rejected this argument, noting that it had
held in other cases that asserting a violation of federal law as an element of a COCCA
claim does not support federal question jurisdiction. Further, none of the COCCA
claims relied exclusively on federal law for the predicate acts, so a court might resolve
those claims without addressing federal law at all. Accordingly, any federal questions
implicated in plaintiffs’ claims were too speculative and limited to support federal
jurisdiction.
Cummings v. Jai Ambe, Inc., 2013 U.S. Dist. LEXIS 20211 (S.D.N.Y. Feb. 13,
2013), involved a negligence action by a hotel patron injured by a fall (“Cummings”)
against the owners/operators of a Days Inn Hotel franchise (“Jai Ambe”) in Missouri. Jai
Ambe filed a motion to dismiss for lack of personal jurisdiction, or alternatively to
transfer venue from New York to Missouri. The plaintiff resided in New York and her
Days Inn reservation was booked for her by her employer in New York.
The court rejected Cummings’ argument that jurisdiction was appropriate
because Jai Ambe derived a commercial benefit from Cummings based on their
affiliation with the Days Inn brand. The court noted that Jai Ambe did not maintain
offices, bank accounts, or property in New York, nor do they employ any individuals in
New York. Although the Days Inn Hotel was advertised on the general Days Inn
website pursuant to Days Inn licensing agreement, Jai Ambe did not maintain, control,
own, operate, or service that website or any other website.
The court also rejected Cummings’ argument that jurisdiction was appropriate
under New York’s long-arm statute because she located, made, and confirmed her
reservation at the Days Inn Hotel over the internet while home in New York. The court
held that this was insufficient to confer jurisdiction because all of Cummings’ injuries
arose from alleged negligence in Missouri.
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Finally, the court rejected Cummings’ argument that jurisdiction was appropriate
based on their affiliation with the Days Inn franchisor. Although the franchisor
transacted business in New York, the actions of the franchisor could not establish
personal jurisdiction over a franchisee.
Because Jai Ambe and Cummings both agreed that venue would be proper in
Missouri, the court granted Jai Ambe’s motion to transfer venue to Missouri.
At issue in A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 870 F. Supp.
2d 415 (D. Md. 2012), was the District of Maryland’s reconsideration of its earlier
decision that it had personal jurisdiction over franchisor Maoz Vegetarian USA, Inc.
(“Maoz”) that was incorporated in Delaware and had its principal place of business in
New York. Despite its earlier decision, the court reversed itself and held that it lacked
personal jurisdiction over Maoz.
After careful reviewing Maryland’s long-arm statute and the constitutional bases
for personal jurisdiction, the court concluded Maoz did not “purposeful[ly] avail[ itself] of
Maryland law . . . .” Id. at 422. In reaching its decision, the court rejected the
franchisee’s argument that pre-franchise sale communications between Maoz and the
franchisee’s Washington D.C. attorney should be treated as being directed to the
franchisee in Maryland. Due to the fact that Maoz was unaware the franchisee was a
Maryland resident, “communications to [its] counsel cannot be seen as culminating in
‘purposeful activity’ within Maryland.” Id. at 422. The court also noted that the
franchisee could not create personal jurisdiction through its own actions, such as listing
its owner’s home address as the principal place of business in the franchise agreement.
Id. at 423. Given the potential statute of limitations concerns implicated by dismissal,
the court opted to transfer the matter to the U.S. District Court for the District of
Columbia where the parties had stipulated that personal jurisdiction over Maoz would be
proper.
but rather, agents of Stratus. Plaintiffs sought declaratory judgment that Stratus was
the principal of the master franchisees for purposes of vicariously liability and were
jointly liable for any future claim against the master franchisees.
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that reclassification of over 3,000, which necessarily followed “clarification,” would result
in costs exceeding $5 million. The court, however, held that the plaintiffs were master
of their complaint and while they might file future lawsuits based on the resolution of the
instant action, the damages arising from such speculative lawsuits cannot be the basis
to determine the amount in controversy. The court therefore remanded the case to
state court.
At issue in Camac v. Dontos, 2012 Tex. App. LEXIS 2977 (Tex. App. Apr. 17,
2012), was whether the Texas court could exercise personal jurisdiction over a
California-based employee of a vending machine franchisor in the franchisee’s action
alleging fraud, breach of franchise agreement, and tortious interference with contractual
and business relationships, among other violations of state and federal trade and
franchise laws. The trial court denied the employee’s special appearance because it
found that it had specific jurisdiction over the employee. The Texas appellate court
affirmed the trial court’s finding.
The appellate court found that the franchisees satisfied their burden of pleading
sufficient allegations to bring the employee within the purview of the Texas long-arm
statute. The franchisees stated that the employee made material false representations,
misrepresentations, omissions and encouraged them to enter into the franchise
agreement. The court held these statements were substantially connected to the
employee’s Texas contacts and that the employee purposefully availed himself of the
privilege of conducting activities in Texas when he met with the franchisees there on
several occasions and communicated with them via e-mail and telephone to and from
Texas throughout the franchise transaction. The court also found that traditional notions
of fair play and substantial justice were not offended by the exercise of personal
jurisdiction over the employee and that the employee did not meet his burden of
negating all bases of personal jurisdiction alleged by the franchisees.
May 23, 2012), involved an alleged breach of a franchise agreement. Plaintiff Precision
Franchising, LLC claimed that franchisee Gatej breached the terms of a franchise
agreement (the “Agreement”) between the parties by failing to spend $55,000 in
required advertising under the Agreement and by prematurely ceasing operations of his
franchise and transferring its assets to a third party in violation of the Agreement.
Precision Franchising alleged that it suffered more than $86,000 in lost profits as a
result of this premature cessation. Gatej answered the complaint and then moved to
dismiss for lack of subject matter jurisdiction and failure to state a claim. The court
treated the motion as a motion for judgment on the pleadings.
Gatej first argued that the complaint failed to demonstrate that the amount in
controversy exceeded the jurisdictional minimum of $75,000 and thus lacked subject
matter jurisdiction. The district court denied the motion because Gatej failed to
demonstrate that it was legally certain that Precision Franchising would not recover the
$55,000 in past advertising expenditures or that it was legally impossible to recover
$86,000 in lost future profits based on the terms of the Agreement.
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Gatej also argued that Precision Franchising was not the proper plaintiff in the
case and thus the complaint failed to state a claim. Gatej asserted that Precision Tune,
Inc. was the party to the Agreement and any assignment to Precision Franchising was
invalid because the Agreement was a non-assignable personal services contract. The
court denied the motion because (i) the only prohibition of assignment in the Agreement
was the assignment by franchisee without franchisor’s approval and thus assignment by
the franchisor was permitted; (ii) even if the Agreement was a personal services
agreement, a partnership or corporate entity can assign contracts to a successor entity
if the successor is substantially the same as the original entity; and (iii) Gatej expressly
renewed the Agreement with Precision Franchising.
2.
Venue and Forum Selection Clauses
Midas Int'l Corp v. Chesley, 2012 U.S. Dist. LEXIS 54770 (N.D. Ill. Apr. 19,
2012), addresses a motion to transfer venue from the plaintiff franchisor’s home district
to the defendant former franchisee’s home district. Midas filed suit for breach of
contract and Lanham Act violation after terminating Chesley’s 10 franchises in New
York and Chesley’s refusal to discontinue using Midas’ trademarks, honor the noncompetition covenant and assign leases. Chelsey filed a motion transfer venue to the
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United States District Court for the Western District of New York in accordance with 28
U.S.C. § 1404(a). Interestingly, the franchise agreements did not appear to contain
forum selection clauses.
The court explained that transfer is permissible under § 1404(a) if: (1) “venue is
proper in both the transferor and the transferee court; (2) transfer is for the convenience
of the parties and witnesses; and (3) the transfer is in the interests of justice.” As the
proponent of transfer, Chesley bore the burden of establishing these factors. Under the
first element, the court found that venue was proper in both the Western District of New
York and in the Northern District of Illinois because Chesley resided in New York and
Midas suffered injury in Illinois.
Under the second element, the court found that the transfer would not serve the
convenience of the parties or promote the interests of justice. The court considered both
private and public interests, including “(1) the plaintiff’s choice of forum; (2) the situs of
the material events; (3) the relative ease of access to sources of proof; [] (4) the
convenience to the witnesses and parties[;] . . . “[(5)] the congestions of the respective
court dockets[; (6)] prospects for a speedy trail[; (7)] the respective desirability of
resolving controversies in each locale[; and (8)] the court’s familiarity with the applicable
law.” Id. at *7-8 (citation omitted). The court found that although Chesley claimed that
Midas was better situated to litigate the case in another forum, Chesley failed to offer
any evidence that they could not afford to litigate in Illinois and the party arguing for
transfer due to financial difficulties must “show that transfer (or lack thereof) would be
unduly burdensome to his or her finances.” Id. On the public side, the court found that
the evidence showed that the median time from filing disposition of a civil case in the
Northern District of Illinois was 6.6 months, compared to 9.2 months in the Western
District of New York, while the median time from filing to trial was 28.4 months in the
Northern District of Illinois, and 55.7 months in the Western District of New York. While
the court did note that the franchise agreements contained a New York choice of law, as
there were also several federal law claims and “federal district courts in different forums
are presumed equally capable and experienced with respect matters of federal law,” it
discounted this fact. Id. at 15-16. Thus, the court denied Chesley’s motion to transfer.
Allow Wheels, Inc. v. Wheel Repair Solutions, Int’l., Inc., 2012 U.S. Dist.
LEXIS 118600 (S.D. Fla. Aug. 21, 2012), involves enforcement of a forum selection
clause and the evidence necessary to do so. Plaintiff franchisee filed suit it its home
district of Florida alleging that defendant franchisor promised a certain exclusive territory
and then broke that promise by awarding other franchises within the territory.
Franchisor moved to dismiss for improper venue based on the franchise agreement’s
forum selection clause designating Georgia as the situs for all litigation. The only
problem was that franchisor could not locate a copy of the signed agreement and
franchisee alleged that it never actually signed an agreement.
Despite the absence of a signed agreement, the court nonetheless enforced the
forum selection clause. It did so based on an affidavit franchisor submitted from its
executive vice president for franchise sales averring that plaintiff executed the
agreement, that he had seen it in franchisor’s files, but that he was now unable to find it.
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Id. at *5. When the franchisee failed to produce any evidence to the contrary, and
instead relied solely on its allegations in the complaint, the court dismissed the action.
“Plaintiff cannot simply rely upon the unsworn allegations of the complaint. For this
reason, the Court concludes that Plaintiff has not met its burden of raising a factual
issue with respect to the execution of a franchise agreement containing a forum
selection clause mandating disputes be resolved in Georgia.” Id. at *8.
Valvoline Instant Oil Change Franchising, Inc. v. RFG Oil, Inc., 2012 U.S.
Dist. LEXIS 118571 (E.D. Ky. Aug. 22, 2013), involved what can only be described as a
convoluted fact pattern involving multiple versions of franchise agreements, settlement
agreements and alleged franchise agreements. In the end, however, it ultimately
stands for the proposition that contractual forum selection clauses are likely not to be
honored if doing so means requiring a quadriplegic to travel half way across the country.
At issue was whether the owner of RFG Oil, a former (or as it alleged, current) Valvoline
franchisee, could be required to litigate claims in Kentucky rather than its home district
in California. In granting RFG’s motion to transfer venue, the court assumed that
certain contractual forum selection clauses were enforceable. Id. at *13 (“A plaintiff’s
choice of forum and the existence of a forum selection clause are ordinarily strong
factors in an analysis of a motion to transfer venue. However, neither factor is
controlling.”). Despite the weight normally accorded such provisions, the court
nonetheless credited RFG’s owner’s affidavit that litigating in Kentucky would be a
severe inconvenience to him given his physical limitations and substantially affect his
ability to defend against the claims. Citing to multiple opinions that “have considered
motions to transfer venue for the convenience of a paraplegic or quadriplegic,” the
parties’ relative financial conditions and number of witnesses that RFP identified, the
court held that the factors ultimately weighed in favor of transferring the case.
Interestingly, the court concluded its decision by recognizing that certain waiver
language in the agreements could be interpreted to prevent any consideration of a
transfer motion by defendant. Id. at 33-34. Not to be deterred, “the Court states that it
would sua sponte transfer the case to California under 28 U.S.C. § 1404(a).” Id.
Thomas v. Automotive Techs., Inc., 2012 U.S. Dist. LEXIS 122666 (E.D. Mo.
Aug. 29, 2012), makes clear that, at least in Missouri, forum selection clauses in
franchise agreements will be enforced absent extraordinary circumstances.
Approximately 15 months after signing a franchise agreement containing a Connecticut
forum selection clause, Thomas brought suit in Missouri state court. Automotive
Technologies first removed the case to federal court and then moved to dismiss
pursuant to Rule 12(b)(3) or (6).
After first recognizing the split in circuit authority over whether to address the
motion under 12(b)(3) or (6), the court decided to proceed under 12(b)(3) and apply
federal law. Id. at *3-4. It then quickly disposed of Thomas’ arguments against
enforcement. The court first rejected Thomas’ reliance on The Bremen’s suggestion
that bargaining power could invalidate a forum selection clause based on subsequent
case law, especially Carnival Cruise Lines. The court next rejected Thomas’ citation of
a Western District of Missouri case not addressing a franchise agreement or breach of
contract claims. Id. at *7 (discussing Cook v. Double R Performance, Inc., 2011 U.S.
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Dist. LEXIS 52015 (W.D. Mo. 2011)). “Forum selection clauses form a vital part of
franchise agreements, in that a franchisor could conceivably be subject to suit around
the country were it not for the enforceability of such clauses.” Id. at 8. Thus, despite
the claimed unequal bargaining power between the parties, the court dismissed the
action without prejudice based on the forum selection clause.
Motorscope, Inc. v. Precision Tune, Inc., 2012 U.S. Dist. LEXIS 143735 (D.
Minn. Oct. 4, 2012), involved a motion to dismiss, stay, or in the alternative to transfer
venue, filed by Precision, a franchisor, in a lawsuit filed by its franchisee, Motorscope, in
the face of claims of bad faith negotiations, the first-filed rule and allegations of
unauthorized transfer of a franchise. In 1978, Motorscope became an area developer
for Precision Franchising, a wholly owned subsidiary of defendant Precision Tune Auto
Care, Inc. In 2005, Motorscope assumed an existing franchise agreement to operate
one of Precision’s franchises.
In 2010, Motorscope requested approval to sell the franchise to a manager of
another Precision franchise. It signed a purchase contract with the manager allowing
him to manage the franchise but withholding the actual transfer contingent on approval.
Precision denied the transfer and, in 2012, sent Motorscope a notice of termination,
nonrenewal, and expiration, terminating Motorscope’s franchise agreements effective
six months later. The notice stated that the termination was due to the unauthorized
transfer of the franchise to the manager discussed above. The notice also stated that
the area agreement expired on its own terms in 1984.
The same day, Precision sent Motorscope an “Offer of Settlement and
Compromise,” giving Motorscope the opportunity to enter into new area and franchise
agreements under new terms that allowed Precision to terminate at will. The parties
entered into a standstill agreement while discussing settlement, but they were unable to
reach agreement. One minute after the standstill agreement expired, Motorscope filed
suit in Minnesota alleging that the termination was without cause in violation of the
Minnesota Franchise Act, breached the area and franchise agreements, and that the
conduct resulted in unjust enrichment. It sought injunctive and declaratory relief, or
alternatively, damages resulting from the termination.
One day after the first lawsuit was filed, Precision filed a second action in Virginia
seeking a declaration that the area agreement had expired, that good cause existed for
termination, and damages for Motorscope’s breach.
Precision, in the Minnesota action, moved to dismiss, stay or transfer the lawsuit
to Virginia under the first filed rule. Precision argued that Motorscope’s filing one minute
after the expiration of the standstill agreement was an attempt to preempt defendant’s
choice of forum and that the suit was purely defensive. The Minnesota court found no
compelling circumstances to deviate from the first filed rule because Motorscope did not
act in bad faith or abuse the standstill and Motorscope’s complaint was not purely
defensive since it was seeking an award of damages, and denied the motion to dismiss.
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The Minnesota court also denied the motion to transfer the action to Virginia
because Precision did not meet the burden of establishing a transfer was warranted or
that the balance of factors strongly favored Virginia. All of Motorscope’s witnesses lived
in Minnesota and the agreement has a large impact on Minnesota residents.
KFC Corp. v. Texas Petroplex, Inc., 2012 U.S. Dist. LEXIS 144342 (W.D. Ky.
Oct. 5, 2012), concerned a motion to dismiss for lack of personal jurisdiction filed by a
franchisee and its personal guarantors. In 2002, plaintiff KFC Corporation (“KFC”), a
Delaware corporation with a principal place of business in Kentucky, entered into two
franchise agreements with defendant Texas Petroplex (“Petroplex”). Petroplex is a
Texas corporation with shareholder owners Mohammad and Naim Tatari (collectively,
“the Tataris”). The Tataris signed personal guarantees in conjunction with KFC granting
Petroplex the franchise agreements. In August 2011, KFC terminated both franchise
agreements alleging that Petroplex had breached and sued Petroplex and the Tataris in
Kentucky for failing to abide by contractual post-termination provisions. Petroplex and
the Tataris moved to dismiss the action for lack of personal jurisdiction and improper
venue.
The court applied the Burger King analysis to determine if the court had personal
jurisdiction over any of the defendants. See Burger King v. Rudzewicz, 471 U.S. 462
(1985). The court analyzed both Petroplex’s and the individual defendants’ contacts
with Kentucky. It found that Petroplex had sought out a relationship with a Kentucky
corporation, negotiated two twenty year contracts with a Kentucky corporation, which
required oversight of Petroplex’s activities by the Kentucky corporation, and allowed
itself to be governed by standards developed in Kentucky. Petroplex also signed
agreements providing that Kentucky law would apply, and that all notices and other
communications would go to Kentucky. Moreover, the contracts were formed in
Kentucky as Petroplex signed the agreements, and then sent them to Kentucky for
KFC’s signature. As such, the court found that Petroplex met the purposeful availment
factor of the Burger King test. The court further found the lawsuit arose out of
Petroplex’s contacts with Kentucky as the trademark issues arose from the franchise
agreement, which was formed in Kentucky.
However, the court found that it lacked personal jurisdiction over the individual
defendants. The only agreements signed by the individual defendants were the
guarantees which do not state that they were made in Kentucky, and which were not
formed in Kentucky because they were only signed by the individual guarantors in
Texas. Even taking into account that the guarantees induced KFC to enter into a longterm contract with Petroplex, this was not enough to constitute minimum contacts to
support the exercise of jurisdiction. Additionally, the signing of the franchise application
did not provide the court with personal jurisdiction over the individual for the same
reason the signing of the guarantees did not.
KFC’s partial victory was a pyrrhic one, however, since the court then transferred
the action to the Northern District of Texas because it was in the interest of justice to
have all claims, against both Petroplex and the individual defendants, tried in one
action.
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Myers v. Jani-King of Phila., Inc., 2012 U.S. Dist. LEXIS 172782 (E.D. Pa. Dec.
5, 2012), involved a class action brought against a franchisor that offers franchised
commercial cleaning businesses. The class claimed generally that the franchise
agreements were actually illegal employment agreements and brought causes of action
for wage claims under two different Pennsylvania statutes, breach of contract, breach of
the duty of good faith and fair dealing and unjust enrichment. Pending before the court
were the defendants’ motion for partial dismissal and motion to transfer venue.
On the motion to dismiss, notwithstanding the existence of a choice of law
provision in the franchise agreement that required the application of Texas law, the
court began a conflicts of laws analysis to decide whether Pennsylvania or Texas law
would apply. The court determined that a full conflicts of laws analysis would not be
necessary because the results in both jurisdictions would be the same with respect to
the claims sought to be dismissed. Neither Texas nor Pennsylvania extends the duty of
good faith and fair dealing to franchise agreements (except in Pennsylvania, franchise
terminations must occur in good faith), and therefore the motion to dismiss that cause of
action was granted. The breach of contract cause of action survived the motion to
dismiss, and the other causes of action were not addressed.
On the motion to transfer venue, the franchisor’s primary argument was that a
forum selection clause in its franchise agreement necessitated the transfer. The
plaintiffs argued that the forum selection clause was unreasonable and invalid because
it was the product of undue influence and overwhelming bargaining power. The
plaintiffs argued that the form franchise agreement was offered on a “take it or leave it”
basis and that they were unsophisticated businesspeople who did not appreciate the
meaning of the forum selection clause buried in a multi-page form franchise agreement.
The court rejected all of the plaintiff arguments, finding that the fact that the
franchise agreement was a form agreement that was not negotiated did not make the
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forum selection clause unenforceable. The court stated that the plaintiffs had notice of
the provision and certainly had the opportunity to reject the franchise agreement if they
so choose. The court also rejected the plaintiffs’ arguments that the forum selection
clause was procedurally and substantively unconscionable. On procedural
unconscionability, the court pointed out that there were no allegations that the franchisor
employed high-pressure tactics or put pressure on the plaintiffs such that they had no
meaningful choice regarding acceptance of the agreement’s terms. On substantive
unconscionability, the court stated that the terms of the agreement certainly were not so
unreasonably favorable to the franchisor as to shock the conscience. In the absence of
fraud, undue influence, unconscionability or overwhelming bargaining power, the court
concluded that the forum selection clause was valid.
Nevertheless, despite the finding of a valid forum selection clause, the court went
on to analyze the factors that the Third Circuit considers in determining whether transfer
under 28 U.S.C. § 1404(a) is appropriate. The court found that most of these factors
weighed in favor of the plaintiffs, including that the claim arose in Pennsylvania, the
convenience of the parties militated in favor of Pennsylvania (in part, because the
Texas-based franchisor had a regional office in Pennsylvania), and the convenience of
the witnesses and location of documents favored Pennsylvania. The court also
determined that practical considerations would make trial easier in Pennsylvania,
Pennsylvania has an interest in and has more familiarity with enforcing its own laws,
and enforcing a Texas judgment would be problematic for the Pennsylvania plaintiffs.
Seemingly the only effect of the franchise agreement’s forum selection clause, which
the court had determined to be valid, was to make the Section 1404(a) factor of the
parties’ choice of forum “neutral.” Accordingly, for these reasons, the court denied the
franchisor’s motion to transfer venue.
improper venue.
because all of the relevant events occurred in another jurisdiction. Further, Holiday
Inn’s advertising in the District of Columbia was insufficient to establish personal
jurisdiction because the advertisements were for the company generally, not the
Georgia franchisee specifically, and because the advertisements were unrelated to the
plaintiff’s injury because the plaintiff did not choose to stay at the Georgia franchisee as
a result of the advertisements (rather, her employer made the reservation).
Accordingly, defendants did not have substantial or continuous contacts with the District
of Columbia.
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rescission.
Cummings v. Jai Ambe, Inc., 2013 U.S. Dist. LEXIS 20211 (S.D.N.Y. Feb. 13,
2013), involved a negligence action by a hotel patron injured by a fall (“Cummings”)
against the owners/operators of a Days Inn Hotel franchise (“Jai Ambe”) in Missouri. Jai
Ambe filed a motion to dismiss for lack of personal jurisdiction, or alternatively to
transfer venue from New York to Missouri. The plaintiff resided in New York and her
Days Inn reservation was booked for her by her employer in New York.
The court rejected Cummings’ argument that jurisdiction was appropriate
because Jai Ambe derived a commercial benefit from Cummings based on their
affiliation with the Days Inn brand. The court noted that Jai Ambe did not maintain
offices, bank accounts, or property in New York, nor do they employ any individuals in
New York. Although the Days Inn Hotel was advertised on the general Days Inn
website pursuant to Days Inn licensing agreement, Jai Ambe did not maintain, control,
own, operate, or service that website or any other website.
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The court also rejected Cummings’ argument that jurisdiction was appropriate
under New York’s long-arm statute because she located, made, and confirmed her
reservation at the Days Inn Hotel over the internet while home in New York. The court
held that this was insufficient to confer jurisdiction because all of Cummings’ injuries
arose from alleged negligence in Missouri.
Finally, the court rejected Cummings’ argument that jurisdiction was appropriate
based on their affiliation with the Days Inn franchisor. Although the franchisor
transacted business in New York, the actions of the franchisor could not establish
personal jurisdiction over a franchisee.
Because Jai Ambe and Cummings both agreed that venue would be proper in
Missouri, the court granted Jai Ambe’s motion to transfer venue to Missouri.
Goddard Sys. v. Overman, 2013 U.S. Dist. LEXIS 5468 (E.D. Pa. Jan. 14,
2013), involved Lisa Overman’s motion to dismiss for improper venue Goddard’s claims
that she usurped a business opportunity owned by Goddard and breached her
obligation not to use Goddard’s trade secrets for the benefit of anyone other than
Goddard.
Overman and Goddard entered into a franchise agreement under which
Overman would run a Goddard preschool. When Overman later decided to serve as
the educational director of the school, the parties executed an addendum to the
franchise agreement, releasing Overman as a franchisee because Goddard did not
allow educational directors to simultaneously serve as a franchisees. The addendum
contained a forum selection clause designating the county of Goddard’s Pennsylvania
headquarters as the place for resolution of any disputes.
While employed by Goddard as an educational director, Overman obtained
proprietary and trade secret demographic information from Goddard about the area of
another Goddard franchise under the auspices of an interest in running the second
franchise. Shortly after obtaining this information, Overman left her job with Goddard
and began plans to open her own preschool in the location of the second franchise.
The court explained that venue would be proper if an enforceable forum selection
clause applied to this action or if venue was appropriate under 28 U.S.C. § 1391(b).
The court first concluded that the forum selection clause in the addendum was
enforceable because the case would require inquiry into the effect of the addendum
(specifically, whether it released all of Overman’s confidentiality obligations). Further,
the forum selection clause applied to “any disputes” between Goddard and Overman
and was therefore broad enough to extend to this action.
The court also concluded that venue was proper under 28 U.S.C. § 1391(b)(2)
because a substantial part of the events giving rise to the claim occurred in the Eastern
District of Pennsylvania. Although Overman allegedly intended to use the
misappropriated trade secrets in Florida, she learned (and allegedly misappropriated)
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those secrets in Pennsylvania. Accordingly, the court denied Overman’s motion to
dismiss for improper venue.
Great Clips, Inc. v. Ross, 2013 U.S. Dist. LEXIS 12530 (D. Minn. Jan. 30,
2013), involved the applicability of a forum selection clause in a franchise agreement
and a motion to transfer venue. Plaintiff Great Clips, Inc. (“Great Clips”) is a national
franchisor of hair care salons. Great Clips and defendant Steven J. Ross (“Ross”)
entered into a series of eleven franchise agreements in Texas. Each franchise
agreement contained a forum selection clause stating that any proceeding arising out of
the franchise agreement must be venued exclusively and solely in federal or state court
in Hennepin County, Minnesota. Great Clips had numerous problems with Ross’ stores,
and decided to terminate the franchise agreement. Great Clips delivered to Ross a
Notice of Termination of All Franchise Agreements and gave Ross thirty days of
continued operation during which he could attempt to sell the salons. The same day,
Great Clips filed suit in the United States District Court for the District of Minnesota
seeking a declaratory judgment that Great Clips properly terminated the franchise
agreements.
Three days later, Great Clips and Ross entered into a settlement agreement
resulting in the dismissal of the federal lawsuit in Minnesota. Different versions of the
settlement agreement were sent back and forth between Ross and Great Clips’ chief
legal officer. Ross asked that a Texas forum selection clause be included in the
settlement agreement. Great Clips rejected that provision; no forum selection clause
was ultimately included in the settlement agreement.
The settlement agreement also contained a confidentiality/non-slander clause
requiring the parties to keep the terms of the agreement confidential. A few weeks after
the settlement was reached, a local Dallas newspaper ran a story about the initial
lawsuit in Minnesota. Ross alleged that Great Clips had provided the newspaper
information in violation of the confidentiality agreement and demanded monetary
compensation to avoid litigation. Great Clips filed suit in the District of Minnesota
seeking a declaratory judgment that it did not breach the terms of the settlement
agreement.
Ross moved to transfer the action on the basis that venue was not proper in
Minnesota. In the alternative, Ross argued that the case should be transferred to the
Northern District of Texas pursuant to 28 U.S.C. § 1404(a) for the convenience of the
parties and witnesses and for the interests of justice. The court denied Ross’ motion
keeping the case in Minnesota.
Great Clips argued that although the settlement agreement itself did not contain
a forum selection clause, the forum selection clauses in the eleven franchise
agreements applied. The court disagreed, and noted that the negotiation over, and
ultimate decision not to include a forum selection clause in the settlement agreement,
suggested an intent not to designate a specific forum. Nonetheless, the court found that
a substantial part of the events giving rise to the claim occurred in Minnesota so that
venue there was appropriate.
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The court additionally rejected Ross’ argument that the case should be
transferred to the Northern District of Texas. There was no dispute that the case could
have been brought in that district. Instead, Ross argued inter alia that he had been
recently diagnosed with a serious, life-threatening illness that required extensive
medical treatment that required him to remain in Texas and the case should be
transferred. The court disagreed, noting that significant deference is given to a
plaintiff’s choice of forum and that the court is not to transfer a case where it merely
shifts the inconvenience from one side to the other.
Although Wine & Canvas Dev. LLC v. Weisser, 2012 WL 3260234 (S.D. Ind.
Aug. 7, 2012), involves an interesting fact pattern of painting, enjoying cocktails,
childhood friendships and business relationships gone sour, its importance to the
franchise world is limited. At best, it is a reminder that franchisees seeking to escape
contractual venue and jurisdictional provisions must demonstrate that those specific
provisions, as opposed to the contract generally, resulted from fraud or other undue
influence. In addition, the case is an important reminder that franchisors must have
actually registered their trademarks to bring suit for alleged infringement. Beyond these
two lessons, however, the case offers little guidance on franchise-specific matters.
Plaintiffs in DNB Fitness, LLC v. Anytime Fitness, LLC, 2012 U.S. Dist. LEXIS
74287 (N.D. Ill. May 30, 2012), are a number of individual franchisees challenging
Anytime Fitness’s requirement that they enroll all of their existing and future members in
a website (Anytime Health) and pay a reoccurring charge for each member that joins
the website. Plaintiffs claim the requirement is a breach of contract and violation of the
Clayton Act. Anytime moved to dismiss the claims for failing to first mediate the dispute
and based on releases certain plaintiffs signed. Alternatively, Anytime moved to
transfer venue to the District of Minnesota based on the franchise agreements’ forum
selection clause.
The court first took up and rejected Anytime’s argument based on the mandatory
pre-suit mediation requirement. The court held that because plaintiffs were seeking to
permanently enjoin Anytime from charging the fee (but were not seeking to recover for
damages stemming from previous payments) and because one could construe this as
the franchisees’ needing to preserve their goodwill, the court held the requirement
inapplicable. The court did, however, dismiss a subset of plaintiffs who had released
Anytime from any and all claims in connection with transferring their franchises. As
Anytime’s alleged wrongful conduct began prior to the execution of these releases,
those plaintiffs were dismissed from the action.
The court also granted Anytime’s motion to transfer the case to Minnesota based
on the forum selection clause set forth in the franchisee agreements. The agreements
stated that any action would be filed in Minnesota, except if “we” seek injunctive relief,
“we” may bring the action in the county where the franchise is located. First, the court
held that this exception applied to both franchisor and franchisee because the term “we”
was used at times to reference both parties, not just Anytime, as Defendant argued.
However, because there were no remaining Cook County franchisees in the case, the
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Plaintiffs could not rely on the exception to the forum selection clause. Applying the
factors from §1404, the court granted Defendant’s motion to transfer venue.
At issue in Carney v. Sibbernsen, 2012 U.S. Dist. LEXIS 63321 (D. Mass. May
7, 2012), was whether the franchisor was entitled to transfer venue pursuant to the
franchise agreement’s forum selection clause despite entering into subsequent
agreements with the franchisee that contained no forum selection clause. Here, the
franchisor informed Carney, the sole officer, director and shareholder of the franchisee,
that it intended to terminate the franchise following deficiencies during a compliance
audit unless Carney entered into a settlement agreement. Carney agreed and the
parties executed a settlement agreement providing that the termination was suspended
during a sale period when the franchise was to be sold. Carney also executed a power
of attorney (“POA”), appointing the franchisor during the sale period. Neither the
settlement agreement nor the POA contained a forum selection clause, but the POA
contained a Massachusetts choice of law provision.
Pursuant to the franchise agreement, both parties had agreed that any action
“arising out of or relating to this Agreement (including the offer and sale of the
Franchise) shall be instituted and maintained only in a state or federal court of general
jurisdiction in Douglas County, Nebraska…” Id. at *2. Applying the “but for” causation
standard, the court held that the dispute over the settlement agreement and the POA
“arose out of” the franchise agreement. Id. at *6. Neither the settlement agreement nor
POA would have existed but for the existence of the franchise agreement. Accordingly,
the court found that justice and fairness dictated that the matter be resolved in the
District of Nebraska.
3.
Conflicts of Law and Choice of Law Clauses (also RICO)
Novus Franchising, Inc. v. Superior Entrance Sys., Inc., 2012 U.S. Dist.
LEXIS 115640 (W.D. Wis. Aug. 16, 2012), presents an interesting discussion
concerning the intersection of choice of law principles, state franchise laws and jury
waivers. Novus and Superior Entrance were parties to a franchise agreement
containing a jury waiver provision and a Minnesota choice of law. Notwithstanding the
general choice of Minnesota law, the contract specifically provided that “if you are not a
resident of Minnesota or [your franchise territory] does not include a portion of
Minnesota, then the Minnesota Franchises Act will not apply to this Agreement.”
Although Superior Entrance signed the franchise agreement, its owner utilized another
one of his entities, Superior Glass, to actually operate the franchise. As framed by the
court, “[d]efendants’ claimed right to proceed with a jury trial turns on two discrete
questions: (1) whether the jury waiver provision in the franchise agreement is
enforceable under Minnesota law . . .; and if so (2) whether the jury waiver provision
also applies to Superior Glass, a non-signatory to the franchise agreement. Id. at *4.
The court answered both questions in the affirmative.
The court began by applying Wisconsin choice of law rules to determine if the
Minnesota choice of law was enforceable. Recognizing that in Wisconsin, “parties to a
contract may choose the law of a particular jurisdiction to control their agreement unless
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applying that law would compromise an important public policy of the state whose law
would otherwise apply,” the court enforced the choice of Minnesota law. This triggered
the question of whether the jury waiver was enforceable under Minnesota law. While
recognizing that the Minnesota Franchise Act specifically prohibits enforcement of jury
waivers, the court relied on both the contractual prohibition on application of the
Minnesota Act and the fact that the Minnesota Act does not apply outside of Minnesota
to hold the jury waiver enforceable under Minnesota law generally. Finally, the court
enforced the jury waiver against non-signatory Superior Glass based on estoppel
principles as recognized in Minnesota. The court held that there are two situations in
which non-signatories can be bound by equitable estoppel: “first, when a signatory to
the written agreement relies on the terms of the written agreement in asserting its
claims against the nonsignatory; and second, when a signatory to the agreement raises
allegations of substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories.” Id. at *9 [citation omitted]. Here, the
court found that the facts satisfied both tests.
ITW Food Equipment Group LLC d/b/a Hobart v. Walker, 2012 U.S. Dist.
LEXIS 147746 (W.D. Mich. Oct. 15, 2012), deals with a dispute between Hobart, which
is in the business of manufacturing, installing, and maintaining equipment for food
service and food retail industries, and Walker, who was part of Hobart’s network of
entities that sold parts and provided installation, maintenance and repair service to
customers. Walker’s territory included several Michigan counties. The parties’ service
contractor agreement specifically stated Walker was an independent contractor, not a
franchisee. The contract also stated that it would be governed solely by Ohio law.
Hobart sued Walker alleging breach of contract, tortious interference, and
misappropriation of trade secrets. Walker counterclaimed, alleging that Hobart violated
the Michigan Franchise Investment Law by failing to repurchase Walker’s inventory after
the relationship ended. Hobart moved to dismiss the counterclaim claiming that
Michigan law did not apply. Reasoning that federal courts apply the conflict of law rules
of the state in which it sits, the court looked to Michigan’s conflict of law analysis. Under
Michigan conflict of law rules, a contractual choice of law provision governs unless the
chosen state has no relationship to the parties or transaction or if application of the
chosen law would be contrary to the fundamental policy of a state that has a materially
greater interest than the chosen state.
Walker did not dispute that Ohio had a substantial interest in the parties’
relationship, instead arguing that under the terms of the Michigan Franchise Investment
Law a party cannot contract away the statute’s protections. The court rejected this
argument because the statute specifically stated that while forum selection provisions
were void, it did not specifically state that Michigan law must govern the disputes. Thus,
the Michigan Franchise Investment Law did not prevent the application of contractual
choice of law provisions.
Walker also argued that application of Ohio law would be contrary to Michigan
public policy. The court pointed out that the relevant test is not whether it is counter to
Michigan’s public policy, but rather whether there is a substantial erosion of the quality
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of protection that the Michigan Franchise Investment Law would otherwise provide.
The erosion can be shown by significant differences in the application of the law of the
two states.
The court found that Walker failed to show there were significant differences
between the laws of Ohio and Michigan. The only difference alleged was that under
Michigan law, a contract provision is void if it permits a franchisor to refuse to renew a
franchise without six months’ notice without fairly compensating the franchisee through
the repurchase of inventory. Under Ohio law, a franchisor may decide the conditions
under which a franchise may be terminated or renewed. The fact that the two
provisions are different is not enough -- the difference must be repugnant to Michigan’s
public policy. Here, because Walker only pointed out one different between Michigan
and Ohio law, the Court concluded that Ohio law is not contrary to Michigan’s
fundamental policy, and therefore the choice of law provision was enforceable.
merchandise.
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Myers v. Jani-King of Phila., Inc., 2012 U.S. Dist. LEXIS 172782 (E.D. Pa. Dec.
5, 2012), involved a class action brought against a franchisor that offers franchised
commercial cleaning businesses. The class claimed generally that the franchise
agreements were actually illegal employment agreements and brought causes of action
for wage claims under two different Pennsylvania statutes, breach of contract, breach of
the duty of good faith and fair dealing and unjust enrichment. Pending before the court
were the defendants’ motion for partial dismissal and motion to transfer venue.
On the motion to dismiss, notwithstanding the existence of a choice of law
provision in the franchise agreement that required the application of Texas law, the
court began a conflicts of laws analysis to decide whether Pennsylvania or Texas law
would apply. The court determined that a full conflicts of laws analysis would not be
necessary because the results in both jurisdictions would be the same with respect to
the claims sought to be dismissed. Neither Texas nor Pennsylvania extends the duty of
good faith and fair dealing to franchise agreements (except in Pennsylvania, franchise
terminations must occur in good faith), and therefore the motion to dismiss that cause of
action was granted. The breach of contract cause of action survived the motion to
dismiss, and the other causes of action were not addressed.
On the motion to transfer venue, the franchisor’s primary argument was that a
forum selection clause in its franchise agreement necessitated the transfer. The
plaintiffs argued that the forum selection clause was unreasonable and invalid because
it was the product of undue influence and overwhelming bargaining power. The
plaintiffs argued that the form franchise agreement was offered on a “take it or leave it”
basis and that they were unsophisticated businesspeople who did not appreciate the
meaning of the forum selection clause buried in a multi-page form franchise agreement.
The court rejected all of the plaintiff arguments, finding that the fact that the
franchise agreement was a form agreement that was not negotiated did not make the
forum selection clause unenforceable. The court stated that the plaintiffs had notice of
the provision and certainly had the opportunity to reject the franchise agreement if they
so choose. The court also rejected the plaintiffs’ arguments that the forum selection
clause was procedurally and substantively unconscionable. On procedural
unconscionability, the court pointed out that there were no allegations that the franchisor
employed high-pressure tactics or put pressure on the plaintiffs such that they had no
meaningful choice regarding acceptance of the agreement’s terms. On substantive
unconscionability, the court stated that the terms of the agreement certainly were not so
unreasonably favorable to the franchisor as to shock the conscience. In the absence of
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fraud, undue influence, unconscionability or overwhelming bargaining power, the court
concluded that the forum selection clause was valid.
Nevertheless, despite the finding of a valid forum selection clause, the court went
on to analyze the factors that the Third Circuit considers in determining whether transfer
under 28 U.S.C. § 1404(a) is appropriate. The court found that most of these factors
weighed in favor of the plaintiffs, including that the claim arose in Pennsylvania, the
convenience of the parties militated in favor of Pennsylvania (in part, because the
Texas-based franchisor had a regional office in Pennsylvania), and the convenience of
the witnesses and location of documents favored Pennsylvania. The court also
determined that practical considerations would make trial easier in Pennsylvania,
Pennsylvania has an interest in and has more familiarity with enforcing its own laws,
and enforcing a Texas judgment would be problematic for the Pennsylvania plaintiffs.
Seemingly the only effect of the franchise agreement’s forum selection clause, which
the court had determined to be valid, was to make the Section 1404(a) factor of the
parties’ choice of forum “neutral.” Accordingly, for these reasons, the court denied the
franchisor’s motion to transfer venue.
Summa Humma Enters., LLC v. Fisher Eng’g, Dist., 2013 U.S. Dist. LEXIS
856 (D.N.H. Jan. 3, 2013), involved Fisher’s motion to dismiss various claims asserted
by Summa Humma Enterprises (“MB Tractor”) based on a forum-selection clause in an
agreement between the parties.
For four years, MB Tractor purchased snowplows and other equipment from
Fisher for resale. The parties’ business relationship was governed by two documents –
a “Purchase and Security Agreement” (the “P&S Agreement”) and the “Fisher
Engineering Terms of Sale” (the “Terms of Sale”). After Fisher terminated its
relationship with MB Tractor, MB Tractor sought a declaratory judgment that the P&S
Agreement should be reinstated and asserted claims under New Hampshire’s
Equipment Dealership Act, Consumer Protection Act, and Antitrust Act.
Fisher moved to dismiss, arguing that MB Tractor was contractually obligated to
litigate the claims in Maine because the Terms of Sale contained a mandatory forum
selection clause requiring litigation of “any dispute concerning any products or these
terms and conditions of sale” in Maine. However, the P&S Agreement contained a
permissive forum selection clause under which the parties merely consented to
jurisdiction in Maine, and also contained a clause providing that the P&S Agreement
controlled to the extent it conflicted with the Terms of Sale. Therefore, MB Tractor
argued that the permissive forum selection clause controlled and it was not required to
litigate in Maine.
The court concluded that the two forum selection clauses were not in direct
conflict and therefore claims falling within the scope of the Terms of Sale forum
selection clause had to be litigated in Maine. Further, the court concluded that the
parties had formed a single agreement for MB Tractor to purchase snowplows from
Fisher, subject to the terms and conditions in both agreements. Therefore, claims
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concerning the P&S Agreement fell within the Terms of Sale’s mandatory forum
selection clause.
Next, the court considered whether MB Tractor’s claims fell within the scope of
the mandatory forum selection clause. The court first concluded that MB Tractor’s
request for a declaratory judgment that the P&S Agreement should be reinstated
necessarily concerned the P&S Agreement and therefore had to be litigated in Maine.
Second, the court concluded that MB Tractor’s claims that Fisher violated the New
Hampshire Acts by terminating the P&S Agreement also concerned the P&S Agreement
and therefore had to be litigated in Maine.
Finally, the court rejected MB Tractor’s argument that the forum clause was
unenforceable because it contravened New Hampshire’s public policy as expressed in
its Equipment Dealership Act. The court found no evidence in the Act’s legislative
history to suggest an intent to ensure that claims between equipment dealers and
suppliers be litigated inside the state.
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rescission.
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4.
Class Actions
Reid v. Supershuttle Int’l, Inc., 2012 U.S. Dist. LEXIS 113117 (E.D.N.Y. Aug.
10, 2012), largely brings to an end the long-running dispute whether Supershuttle’s
franchisees are independent contractors or employees entitled to minimum wages and
overtime. Here, the court approved of the class action settlement that that consists
primarily of: (1) $100 for each former franchisee; (2) implementation of a “Franchise
Resale Program” that allows current franchisees to sell new ten-year franchises with
Supershuttle-provided financing; and (3) procedural safeguards concerning franchise
termination. Although no class member formally objected to the settlement, 38% optedout, including some of the named plaintiffs. While acknowledging this as a high
percentage, the court nonetheless approved the settlement based largely on the fact
that plaintiffs had significant substantive hurdles. Specifically, the Motor Carrier
Exemption appeared likely to negate franchisees’ claim for overtime and franchisees’
gross wages appeared sufficient to avoid minimum wage law violations. Accordingly,
the court approved the settlement and attorney’s fees totaling $394,500. It remains to
be seen, however, how the 38% that opted-out will fare in their individual actions.
In what only can be called an “interesting” fact pattern, Villano v. TD Bank, 2012
U.S. Dist. LEXIS 123013 (D.N.J. Aug. 29, 2012), involves a suit by a Matco Tools
franchisee on his own behalf and on behalf of a putative class against both a bank for
providing him a loan to purchase a franchise and his franchisor for providing the bank a
three year projection to justify issuance of the loan. Interestingly, Villano brought suit
despite not only paying off the loan, but paying it off early.
In 2004, Villano purchased a Matco franchise based in large part on his father’s
success as a franchisee. To fund his purchase, Matco suggested Villano apply for an
SBA loan from TD Bank. In support of his application, Matco provided TD Bank with:
(1) Villano’s business cash flow estimate and initial capital requirements; (2) a sources
and uses of funds analysis; and (3) a three-year annual income projection. It is this final
piece of information upon which suit was based. As Matco does not provide financial
performance representations, Villano did not see it and was unaware that Matco
provided it to TD Bank. Villano ultimately secured the loan with his father as guarantor,
purchased the franchise and went into business. Alas, things did not go well and two
years later Villano’s father paid of the loan despite it not then being due. Villano then
continued as a Matco franchisee for four additional years, then closed his business and
filed suit.
While the fact pattern raises a host of interesting possibilities, including class
action waivers, financial performance representations and others, the one the court
focused on was whether the suit was subject to mandatory arbitration. Villano argued
that it was not, despite the broad arbitration requirement, because the contract was
unconscionable due to his not being able to negotiate its terms. Id. at *10. After
reviewing recent case law on this topic and class action waivers in arbitration, the court
flatly rejected this claim. Id. at *12 (“If neither individual claims nor class arbitration
waivers are unconscionable in the context of consumer adhesion contracts, when there
is a clear disparity of bargaining power and when only small monetary amounts are at
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issue, then I am at a loss as to how the contract here could be unconscionable when
this was an arm’s length negotiation to begin a business relationship and where
Plaintiffs took ten days to review the contract.”). The court then compelled plaintiffs to
arbitrate their claims against Matco and its parent. Interestingly, however, the court
refused to compel plaintiffs to arbitrate their claims against TD Bank as it was not a
party to the arbitration agreement. Nonetheless, the court stayed the claims against TD
Bank because they were largely duplicative of those against Matco.
Agne v. Papa John’s Int’l, 2012 U.S. Dist. LEXIS 162088 (W.D. Wash. Nov. 9,
2012), involved a putative class action against several Papa John’s pizza franchisees,
Papa John’s, and OnTime4U, a marketing company. The named plaintiff alleged that
several franchisees retained OnTime4U to send text message advertising to their
customers, with the encouragement of Papa John’s, without obtaining customer consent
in violation of the Telephone Consumer Protection Act (“TCPA”). The named plaintiff
moved for class certification. In response, the defendants argued that plaintiff lacked
standing to pursue her claims and had not met the requirements for class certification in
Federal Rule of Civil Procedure 23.
The court first evaluated defendants’ standing arguments. The defendants
argued that plaintiff’s injury was only fairly traceable to a few Papa John’s franchisees
and as a result, the plaintiff lacked prudential standing to represent class members with
potential claims against other franchisees. The court rejected this argument because
the plaintiff had not included franchisees other than the one that allegedly caused her
injury and franchisees that intermingled their operations with the franchisee that caused
her injury. The court also rejected defendants’ argument that plaintiffs’ injury was not
fairly traceable to the Papa John’s, noting that Papa John’s had produced documents
that indicated that it did play a role in the franchisee-level decisions to hire OnTime4U.
The court rejected defendants’ argument that many of the class members would not
have been injured by the specific franchisees named as defendants because all class
members would have at least been injured by one of the defendants, OnTime4U.
Finally, the court concluded that the plaintiff had statutory standing under the TCPA
even though her cell phone plan was registered under her husband’s name because
she was the authorized and sole user of the phone that received the messages.
Next the court analyzed whether the class could be certified under Rule 23. The
court found the ascertainability requirement satisfied because the defendants had
already produced documents reflecting many of the individuals that received the text
messages. The court found the numerosity requirement satisfied because there are
hundreds or thousands of potential class members. The court found the commonality
requirement satisfied because there were multiple common questions, including
whether Papa John’s controlled, participated in, or authorized OnTime4U’s marketing
and whether Papa John’s is vicariously liable for the acts of its franchisees. The court
also found the adequacy of representation requirement satisfied because there was no
reason the plaintiff could not fairly and adequately represent the class members’
interests. Finally, the court found that common issues predominated over individual
issues and that a class action was superior to individual litigation because the small
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individual damages involved. As such, the court granted the plaintiff’s motion for class
certification.
McPeak v. S-L Dist. Co., Inc., 2012 U.S. Dist. LEXIS 179893 (D.N.J. Dec. 19,
2012), involved a class-action complaint for alleged violations of New Jersey’s franchise
law on account of unilateral termination of contracts by the purported franchisor, a
distribution company. The defendant distribution company had entered into a distributor
agreement with the plaintiff and other members of the potential class, which agreement
granted the exclusive right to sell and distribute certain products within defined
territories. The agreements specifically stated that they were not franchise agreements
and that use of the defendant’s name, trademarks or trade names was prohibited.
After the plaintiff had apparently created a successful business in his
distributorship, the defendant (for reasons unstated in the opinion) terminated the
agreement. The plaintiff filed suit, asserting a claim on behalf of himself and a
purported class of similar situated individuals, and alleging that the defendant violated
New Jersey franchise law by the terminations. The plaintiff thereafter sold his
distributorship back to the defendant. The defendant moved to dismiss the class-action
complaint for lack of standing and for failing to allege the existence of a franchise.
As to the standing issue, the defendant argued that the plaintiff had no standing
because he had no injury in fact since selling the distributorship back to the defendant.
The court disagreed, finding that the plaintiff had standing to pursue monetary relief for
the difference in value of the distributorship as a going concern and the price the
defendant paid to purchase it back from the plaintiff. The court did find that injunctive
relief as to the distributor agreement was no longer available to the plaintiff since he had
sold his distributorship.
However, the court concluded that the plaintiff failed to successfully plead that he
held a “franchise” within the meaning of the New Jersey statutes, and the court
dismissed the action. The court first pointed out that the franchise statutes were
enacted to protect franchisees from unreasonable termination by franchisors who enjoy
superior bargaining power, and that the New Jersey franchise statutes were recently
amended in 2010 to extend its protections to wholesale distribution franchisees. In
order to enjoy the protections of the statutes, however, a plaintiff must hold a franchise
as defined by the statutes. Under New Jersey law, a franchise is a written agreement
under which a person grants to another a license to use a trade name, trademark or
service mark, and in which there is a community of interest in the marketing and sale of
goods or services.
The court determined that there was no franchise in this case because the
plaintiff failed to plead facts showing that the defendant granted a license for use of the
defendant’s trademarks and trade name; the court did not reach the community of
interest requirement. The court remarked that the “hallmark” of the franchise
relationship is the use of the franchisor’s trade name so as to create a belief among the
public that there is a connection between the franchisor and franchisee by which the
franchisor vouches for the activity of the franchisee. In this case, the defendant’s
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allowance of the plaintiff to use the defendant’s insignia or name on a limited basis did
not confer a license to use, particularly when the distributorship agreement expressly
prohibited the use of the defendant’s name or trademarks. The complaint was devoid of
any facts showing that a license to use the defendant’s name or trademarks existed,
and the plaintiff’s conclusory allegations that he was a “franchisee” did not make it so.
In Jackson Hewitt, Inc. v. Barnes Enters., 2012 U.S. Dist. LEXIS 63784 (D.N.J.
May 7, 2012), the plaintiff franchisor entered into three franchise agreements with
Ronald Clark to operate Jackson Hewitt tax preparation businesses in Wyoming. Clark
personally guaranteed each of the agreements. Jackson Hewitt later terminated the
franchise agreements and commenced the instant action. Clark failed to respond to the
complaint, as well as to a court order requiring him to file an answer. As a result, a
default judgment entered. Jackson Hewitt then filed a motion seeking damages based
on past due fees owed by Clark and for an award of attorneys’ fees, as well as an
injunction to enforce the post-termination provisions of the franchise agreements.
Ultimately, the Court found that the default judgment was warranted. In addition, there
was no dispute regarding the amount of past fees or attorneys’ fees owes, which the
Court awarded.
With respect to the injunction, the Court found that Jackson Hewitt met its burden
of establishing that an injunction was appropriate. However, Clark objected to the
portion of the injunction that prevented him from operating a competing business until
two years after the Court’s Order, arguing that it was an unjustified extension of the noncompetition clause already contained in the franchise agreements. The Court agreed
for two reasons. First, the Court agreed that inclusion of this provision in the injunction
was an unwarranted extension of the two year non-compete clause in the franchise
agreements. Second, the Court found that there were no facts alleged to support that
Clark was operating a competing venture.
but rather, agents of Stratus. Plaintiffs sought declaratory judgment that Stratus was
the principal of the master franchisees for purposes of vicariously liability and were
jointly liable for any future claim against the master franchisees.
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that reclassification of over 3,000, which necessarily followed “clarification,” would result
in costs exceeding $5 million. The court, however, held that the plaintiffs were master
of their complaint and while they might file future lawsuits based on the resolution of the
instant action, the damages arising from such speculative lawsuits cannot be the basis
to determine the amount in controversy. The court therefore remanded the case to
state court.
selection clause.
Rodriguez v. It’s Just Lunch Intl., 2012 U.S. Dist. LEXIS 51687 (S.D.N.Y. Apr.
6, 2012), involves a putative class action filed against It’s Just Lunch International, It’s
Just Lunch, Inc., Harry and Sally, Inc., Riverside Company, Loren Schlachet and seven
It’s Just Lunch International franchises. At issue before the court were (1) plaintiffs’
motion for partial summary judgment on their claims under New York’s General
Business Law (“”GBL”) and unjust enrichment cause of action; and (2) defendants’
motion for partial summary judgment regarding the plaintiff’s claims under New York’s
GBL, unjust enrichment and fraudulent inducement causes of action. With respect to
the lead plaintiff GBL’s claim, the magistrate judge found that it was time barred and
recommended that the court grant defendants’ request for summary judgment on this
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claim. With respect to plaintiff’s unjust enrichment claim, the magistrate judge
recommended that the court grant the defendant’s motion for summary judgment
because plaintiff’s claims were time barred, the parties had entered into written
contracts and the plaintiff’s written contract did not contain the offending terms. Finally,
the magistrate judge recommended that the court deny the defendants’ motion for
summary judgment on plaintiff’s fraudulent inducement cause of action because there
were disputed issues of material fact regarding whether representations made by the
defendants to prospective clients were false and were conveyed to induce prospective
clients to purchase the defendants’ social referral services.
5.
Evidentiary Matters
Transbay Auto Serv., Inc. v. Chevron U.S.A., Inc., 2013 U.S. Dist. LEXIS
17504 (N.D. Cal. Feb. 7, 2013), involved a franchisor (“Chevron”)’s motions for
judgment notwithstanding the verdict and for a new trial following a jury’s decision that it
had violated the Petroleum Marketing Practices Act (“PMPA”) by failing to make a bona
fide offer to sell its interest in the franchisee (“Transbay”)’s gas station to Transbay after
electing to terminate the franchise for business reasons, as required under the PMPA.
Chevron argued that there was insufficient evidence to support the jury’s
conclusion that its offer was not bona fide. Specifically, Chevron challenged the
adequacy of Transbay’s expert appraisals of the gas station’s value. Although both
parties’ experts agreed that the highest and best use of the property was for something
other than a gas station, Transbay’s experts did not provide a valuation for the property
if it were used for something other than a gas station. Transbay’s experts contended
that a San Francisco conversion ordinance was a significant impediment to conversion
of the property to another use, and had accordingly included the costs and uncertainty
associated with this ordinance in valuing the gas station. The court held that a
reasonable jury could conclude that the ordinance lowered the value of the gas station
based on this expert testimony. The court also concluded that there was sufficient
evidence from which a reasonable jury could conclude that Chevron’s proposed
purchase price was too high, noting testimony about Chevron’s extensive efforts to
market the gas station to another buyer. The offers Chevron received supported the
jury’s conclusion that Chevron’s proposed price was too high. Accordingly, the court
denied Chevron’s motion for judgment notwithstanding the verdict.
Chevron also argued that it was entitled to a new trial because of two allegedly
erroneous evidentiary rulings. First, Chevron argued that the court should have
excluded Transbay’s experts because their conclusions were based on an
unreasonable limitation imposed by Transbay to only value the gas station based on its
use as a gas station. The court rejected this argument, holding that any limitations
placed on the experts’ appraisals went to the weight rather than admissibility of the
evidence. Second, Chevron argued that the court should have admitted an appraisal
used by the franchisee to obtain financing to purchase the gas station as an admission.
The court rejected this argument, emphasizing that the franchisee’s owner testified that
he had never even read the contents of the appraisal. Accordingly, the court denied
Chevron’s motion for a new trial.
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In Beaver v. Ink Mart, LLC, 2012 U.S. Dist. LEXIS 125050 and 2012 U.S. Dist.
LEXIS 125051 (S.D. Fla. Sept. 4, 2012), the court addressed in separate decisions the
franchisor’s motion to dismiss under Rule 12 and the franchisee’s belated attempt to
arbitrate, rather than litigate its claims. In a convoluted procedural history, Beaver
brought suit against its franchisor and certain individual defendants for clams sounding
in contract and tort under the laws of Florida, Connecticut, Maine and the United States.
Thereafter followed a series of defaults, dismissals and the beginning of discovery.
Beaver eventually filed an amended complaint and the remaining defendants moved to
dismiss. While Beaver opposed the motion to dismiss, it also moved to compel
arbitration of its own claims pursuant to the franchise agreement’s arbitration
requirement.
In its second decision, the court addressed the franchisor’s Rule 12 motion. The
court began by denying the motion with respect to the Florida Deceptive and Unfair
Trade Practices Act Claim (“FDUPTA”). The court held that plaintiff fulfilled his pleading
requirements for this cause of action by alleging: (1) that InkMart deceptively and
unfairly omitted failed and defunct franchisors from its Franchise Disclosure Document
(“FDD”) and that it failed to properly disclose in the FDD the details of the master
franchise and areas development rights being granted under the Agreement [deceptive
act or unfair practice], (2) that he would not have purchased the franchise had he known
this information [causation], and (3) that he purchased the franchise for $200,000 and
was forced to shut down its regional office and layoff its sales force [damages]. The
court did dismiss, however, the fraud, negligent misrepresentation and Florida
Franchise Act claims based on the lack of reasonable reliance. Under Florida law,
reliance is unreasonable as a matter of law where the alleged misrepresentations
contradict the express terms of the ensuing written agreement. As the franchise
agreement had a provision stating, “Franchisee acknowledges and Franchisor expressly
disclaims any understandings, agreements, inducements, course(s) of dealing,
representations (financial or otherwise), promises, options, rights of first refusal,
guarantees, warranties (express or implied) or otherwise (whether oral or written) which
are not fully expressed in this Agreement” the court held there could be no reasonable
reliance. Additionally, Beaver acknowledged that he had not been promised assistance
or services other than those represented in the Agreement. Thus, the court found he
could not have reasonably relied on the alleged fraudulent and negligent
misrepresentations.
Century 21 Real Estate, LLC v. All Prof’l Realty, Inc., 2012 U.S. Dist. LEXIS
78837 (E.D. Cal. June 6, 2012), addresses a former franchisee’s ability to obtain
discovery from a current non-party franchisee. Here Century 21 filed suit against its
former franchisee, All Professional, alleging that it continued to use Century 21’s marks
after termination of its franchise. For reasons that are unclear, All Professional chose
not to file counterclaims, but instead filed a separate action alleging that Century 21
breached the franchise agreement by, among other things, failing to enforce its Policies
and Procedures Manual and permitting other franchisees to recruit All Professional's
productive agents. The cases were consolidated and All Professional served a
subpoena on Century 21 Select, one of the franchises it alleged stole agents.
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Specifically, All Professional sought commission split agreements between those agents
and Century 21 Select.
Though the court noted that Century 21 could object to the third party subpoena
if it had a personal right or privilege in the documents sought or if its personal interest
was jeopardized by the discovery sought, the court focused on the relevance of the
information sought to the case in declining to quash the subpoena. All Professional also
sought an order to show cause why non-party Century 21 Select should not be held in
contempt for failing to comply with a subpoena seeking communications and documents
between Century 21 Select and Century 21. Century 21 Select argued that the
subpoena was overbroad in that it sought irrelevant information about other franchises.
The court disagreed, stating that all of the subpoena’s categories were relevant or may
lead to the discovery of admissible evidence. The court granted the order to show
cause in part and ordered Century 21 Select to produce documents in response to the
subpoena.
Plaintiffs in Allegra Network LLC v. Bagnall, 2012 U.S. Dist. LEXIS 48918 (E.D.
Mich. Apr. 6, 2012), filed a Motion to Reopen Case and for an Order to Show Cause
alleging that the defendants failed to comply with a stipulated order for injunction
requiring them to transfer a telephone number used in connection with their former
franchise. The stipulated order arose out of defendants’ violation of a non-competition
covenant. The court found that the defendants were in violation of their stipulated
injunction, held them in contempt and imposed sanctions
6.
Discovery Matters
hearings.
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profits.
Campero USA Corp. v. ADS Foodservice, LLC, 2012 U.S. Dist. LEXIS 184497
(S.D. Fla. Dec. 13, 2012), involved a discovery dispute in a matter between a restaurant
franchisor and its former franchisee. The former franchisee had closed its restaurant in
alleged violation of the franchise agreement and opened a competing restaurant at the
same location. The franchisor brought breach of contract and trademark claims against
the former franchisee.
At issue was the franchisor’s withholding about approximately 20 emails from
production on the basis of attorney-client privilege. After several unproductive meetand-confers, and several admonitions from the court that the franchisor had the burden
to establish the applicability of the privilege, the franchisor changed its course and
claimed instead that the documents did not need to be produced because they were
non-responsive. The former franchisee moved to compel production. At the hearing on
the motion, the former franchisee argued that it should not have to rely merely on the
franchisor’s representations, orally and from its privilege log, that the contested emails
involving its outside general counsel were for legal advice rather than business advice.
Aside from the conclusory descriptions in its privilege log, the franchisor did not have
“proof” that the emails were regarding legal advice, and instead asked the court to
review the documents in camera. The court declined, granted the former franchisee’s
motion because of the franchisor’s failure of proof, and ordered production of the
emails.
The former franchisor moved for reconsideration, putting forth an affidavit from its
outside counsel that the emails in question were indeed regarding legal, rather than
business, advice. The court denied the motion for reconsideration. The court
acknowledged that some or even all of the contested emails may have indeed satisfied
all the elements of the attorney-client privilege, but since the franchisor did not heed the
multiple warnings from the court and did not put forth sufficient factual support that the
privilege applied, the court held that the order for production of the emails must stand.
White v. 14051 Manchester, Inc., 2012 U.S. Dist. LEXIS 178621 (E.D. Mo. Dec.
18, 2012), dealt with a defendant sports bar franchisor’s motion to modify a class
certification order. The court had previously granted conditional class certification to all
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current and former hourly-wage employees of any of the defendant’s sports bars who
shared in a tip pool during the previous three years. As part of that order, the court
required the defendant to provide to the plaintiffs the names and contact information for
any employees that could be potential plaintiffs.
The defendant objected to providing the names and contact information of
employees at its franchised locations which were not parties to the lawsuit. Apparently,
the defendant operated both franchised and non-franchised sports bars, and the
defendant agreed to provide the required contract information for employees at the nonfranchised locations. As to the franchised locations, however, the defendant argued
that it could not be compelled to produce information from these franchisees who were
third parties to the litigation. The court agreed, finding that the only permissible way to
secure this information is directly from the franchisees pursuant to the court’s subpoena
power.
defendants.
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Hughes Indus. Sales, LLC v. Diamond Mfg. Co., 2012 U.S. Dist. LEXIS
165072 (M.D. Pa. Nov. 19, 2012), involved a discovery dispute over the production of
documents. Because the court was writing only for that limited purpose, a full recitation
of the facts and issues in the case were not discussed.
Plaintiff Hughes Indus. Sales, LLC (“Hughes”) and defendant Diamond Mfg. Co.’s
(“Diamond”) entered into an Agency Sales Agreement where plaintiff earned
commissions for procuring customers who entered into orders with defendant. The
Agreement was terminated, although whether or not the termination was proper was at
issue. Hughes filed a motion to compel discovery based on Diamond’s failure to
provide documents after termination. Hughes argued that it was entitled to all of
Diamond’s sales and commission information from not only post termination, but also to
the present. Diamond argued that no documents needed to be produced posttermination. Hughes argued that statutory law and the Restatement of Agency allowed
it to recover commissions in which it was the “procuring cause” of the ultimate
transaction.
The court disagreed on Hughes’ interpretation of the law, instead holding that the
payment of commissions on termination of a contract between a sales representative
and a principal were governed by the terms of the contract. Interpreting the contract,
the court found that Hughes could discover information for only 90 days from the date of
notice of termination.
In Garbinski v. Nationwide Mut. Ins. Co., 2012 U.S. Dist. LEXIS 102706 (D.
Conn. Jul. 24, 2012), also reported under 2012 U.S. Dist. LEXIS 102707 in Section
IV.D, the court granted Nationwide’s motion to strike and for sanctions. Nationwide
moved to strike approximately 38 exhibits plaintiff submitted in opposition to
Nationwide’s summary judgment motion for not having earlier produced such
documents. The court found no justification for plaintiff’s significant delay in producing
the documents despite being granted numerous discovery extensions. The court found
that considering the documents would be “enormously prejudicial to Nationwide” since
they were not produced until long after the close of discovery and plaintiff only offered
“far-fetched” excuses for his production delay.
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7.
Standing
Cold Stone Creamery, Inc. v. Nutty Buddies, 2012 U.S. Dist. LEXIS 142955
(D. Ariz. Oct. 3, 2012). The Cold Stone Creamery franchisee association filed a
complaint in the Florida state court alleging Cold Stone failed to provide information on
certain monies it received from third parties designated for the benefit of the individual
franchisees, who were members of the association. Cold Stone moved to stay the state
court action and filed a petition in federal court to compel arbitration of the individual
franchisees’ claims as provided in the franchise agreements. The state court stayed the
action pending a decision on whether the individual franchisees must submit to
arbitration. Nutty Buddies, one of the individual franchisee defendants in the federal
court action, moved to dismiss the petition to compel arbitration. Nutty Buddies argued
that the first-filed rule required dismissal, that the franchisee association had standing to
assert the claims of its members in the state court lawsuit and it had no obligation to
arbitrate its claims against Cold Stone, and that the court should order consolidated
arbitration if it did not grant the motion to dismiss.
The court only addressed the motion to dismiss the petition to compel arbitration,
not the request to compel arbitration or the request to order consolidated arbitration.
The Court rejected Nutty Buddies argument entirely. It found the fact that the
association has no contractual obligation to arbitrate irrelevant because Cold Stone
sought to compel the individual franchisees to arbitrate, not the association. It rejected
the first-to-file argument because the two disputes did not concern the same parties.
Accordingly, the court denied Nutty Buddies’ motion to dismiss the petition to arbitrate.
WMW, Inc. v. Am. Honda Motor Co., Inc., 291 Ga. 683, 733 S.E.2d 269 (2012),
involved a dispute concerning Honda’s proposed addition of a new dealership. WMW
operated a Honda dealership under an agreement which authorized WMW to sell and
service vehicles at its main location and operate a separate service only location.
Honda informed WMW that it intended to open another Honda dealership within eight
miles of its service only location, but more than 8 miles from WMW’s main location.
WMW sued, claiming the new dealership was within WMW’s relevant market
area. The lower court found that WMW had no standing to sue under the Georgia
Motor Vehicle Franchises Practices Act (the “Act”). The court of appeals upheld the
lower court’s decision and WMW sought review by the state supreme court. After the
Court of Appeals’ decision, but before a decision by the supreme court, Honda decided
it no longer was going to open a second service center in the relevant area, and moved
to dismiss the appeal as moot. Because Honda may attempt in the future to open a
second dealership in the relevant area, the court decided to review the lower court
decision, even though the specific controversy at issue was moot.
On the merits, the supreme court upheld the decision that WMW had no standing
to sue. The court reasoned that under the Act, a relevant market area is only calculated
from where motor vehicle sales take place, not from service centers because a dealer is
protected under the Act only if it is in the business of selling automobiles. Because the
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proposed new location was not within the relevant market area of WMW’s sales facility,
it had no standing.
Meade v. Kiddie Academy Domestic Franchising, et al., 2012 U.S. App.
LEXIS 21283 (3d Cir. Oct. 15, 2012), involved an appeal of a district court decision
dismissing Mark Meade’s complaint against Kiddie Academy Domestic Franchising, a
franchisor of child care learning centers, for lack of standing.
Meade established the Dasoda Corporation and was Dasoda’s president and
principal shareholder. When Dasoda’s franchise was unsuccessful, Meade filed suit
against Kiddie Academy and several of its employees, claiming that they had made
various fraudulent misrepresentations to induce him to sign the franchise agreement,
including overstating financial performance data and understating operating costs.
Meade also claimed that the defendants breached the franchise agreement by failing to
assist in finding a location for the franchise and failing to assist with teacher instruction,
classroom set up, training, and licensing requirements. Finally, Meade alleged multiple
statutory violations, including consumer rights laws, federal racketeering violations,
bank fraud, and others.
The court concluded that the appeal did not present a substantial question and
therefore summarily affirmed the district court’s dismissal. Because Meade’s claims all
involved injuries to Dasoda stemming from the franchise agreement between Dasoda
and Kiddie Academy, and because Meade did not allege that the defendants took any
actions against him in his individual capacity, the court concluded that he did not have
standing to sue for injuries sustained by Dasoda.
In Wingate Inns Int’l, Inc. v. Cypress Ctr. Hotels, LLC, 2012 U.S. Dist. LEXIS
179345 (D.N.J. Dec. 19, 2012), a hotel franchisor moved for judgment on the pleadings
as to a counterclaim raised by a guarantor of a loan that was provided to the franchisee
pursuant to the franchise agreement. After the franchisee relinquished control of the
franchised lodging facility, the franchisor brought suit against the franchisee and several
guarantors of the loan, alleging that they had failed to pay amounts due under the loan.
The franchisee failed to answer, and default judgment was entered against it.
One guarantor could not be served with the complaint, and another had filed for
bankruptcy. A third guarantor answered the complaint and filed a counterclaim for
breach of contract, proceeding pro se and alleging that the franchisor breached the
franchise agreement by providing misleading information as to the hotel development
and renovation for which the loan would be used. The franchisor moved for judgment
on the pleadings as to this counterclaim, arguing that the guarantor did not have
standing to assert breach of contract claims that belonged to the franchisee and that the
counterclaim was insufficiently pled.
As to the standing argument, the franchisor argued that the guarantor did not
have standing to bring the counterclaim because that claim could only belong to the
obligor (the franchisee) and because the guarantor was neither a party nor a third-party
beneficiary to the franchise agreement. The court recognized an exception to the rule
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of standing for guarantors and obligors where a plaintiff has sued both the guarantor
and obligor of a note as co-defendants. In such a situation, the guarantor has standing
to bring the claims that ordinarily belong to the obligor. Accordingly, the court
determined that the guarantor did have standing to bring the breach of contract
counterclaim against the franchisor. The court pointed out that, by application of this
exception, it did not have to reach the issue of whether the guarantor was either a party
to the franchise agreement or a third-party beneficiary.
However, having found that the guarantor had standing, the court then
determined that the guarantor did not plead sufficient facts to state a claim. The facts
pled did not allow an inference that the franchisor might be liable for the alleged conduct
and failed to raise his breach of contract counterclaim above a speculative level. In
particular, the guarantor failed to plead which agreement and which provision of that
agreement was alleged to have been breached by the franchisor. Accordingly, the
guarantor’s counterclaim was dismissed without prejudice on that basis.
Trescone v. Lotsadough, Inc., 2012 Mich. App. LEXIS 1648 (Mich. Ct. App.
Aug. 21, 2012) (unpublished), analyzes whether, under Michigan law, a franchise seller
qualifies as a third-party beneficiary of the financing agreement between the franchise
buyer and the buyer’s bank. Trescone agreed to sell his pizza franchise to Lotsadough.
Lotsadough, in turn, entered into a commercial financing agreement with Comerica
Bank to facilitate the transaction. But at the closing, Comerica refused to fund
Lotsadough’s loan to purchase the franchise. Trescone sued, asserting a breach-ofcontract claim against Comerica on the theory that he was a third-party beneficiary of
the financing agreement. The trial court granted Comerica’s motion for summary
disposition and denied Trescone leave to amend the complaint to add a tortiousinterference claim against Comerica. Id. at *1–2.
On appeal the court reviewed Michigan’s statutory and case law on third-party
beneficiaries. The court explained that a person is a third-party beneficiary of a contract
only when the promisor has undertaken a promise to give, or to do, or to refrain from
doing something directly to or for that person. In other words, the person must be an
intended, rather than an incidental, beneficiary of the contract. The court will look to the
contract itself and use an objective standard to determine whether the plaintiff qualifies
as a third-party beneficiary. Id. at *2–5. Trescone argued that Comerica was aware of
his role as seller in the transaction for which Lotsadough sought financing and that the
closing statement for the sale of the franchise indicated that he would be receiving a
disbursement in excess of the loan amount. Id. at *5–6. But the court rejected
Trescone’s argument, affirming the trial court’s ruling that he was merely an incidental
beneficiary of the financing agreement. The court noted that there was nothing atypical
about the financing agreement and that nothing in the agreement set forth any direct
promise to act or refrain from acting for Trescone’s benefit. Id. at *6–7.
Additionally, the court found that the trial court had not abused its discretion in
denying Trescone leave to amend the complaint to assert a tortious-interference claim
against Comerica. Although leave to amend is generally freely granted, it need not be if
the amendment would be futile or otherwise unjustified. The court found that Trescone’s
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proposed amended complaint was futile because he failed to allege an essential
element of tortious interference—that Comerica committed a wrongful act. The court
explained that there is nothing inherently wrongful about Comerica’s refusal to fund a
commercial loan premised on an assertion of a failure of a condition precedent to that
obligation. Id. at *10–14. Alternatively, a proposed amendment is futile if it merely
restates allegations already made. Here, the factual allegations underlying the proposed
new claim were the same as those alleged in the initial complaint—that Comerica
wrongfully refused to fund the loan, which made Lotsadough unable to complete its
purchase of Trescone’s pizza franchise. The court accordingly affirmed the trial court’s
order. Id. at *14–16.
8.
Necessary Party
In The Business Store, Inc. v. Mail Boxes Etc., 2012 WL 3962235 (D.N.J.
Sept. 7, 2012), the court addresses whether to permit the franchisor to join the plaintiff
franchisee’s guarantors as third-party defendants. The crux of the issue appears to be
that Mail Boxes Etc. filed its motion 11 days after the court-imposed deadline for filing
motions to join additional parties. Reviewing the parties’ respective filings and noting
that the franchisee’s only real argument in opposition was that the motion was untimely,
the court granted leave to join the individual guarantors as third-party defendants.
9.
Default Judgment
In Curves Int’l, Inc. v. Negron, 2012 U.S. Dist. LEXIS 142055 (E.D.N.Y. Aug.
31, 2012), Curves brought suit to enforce its non-competition agreement against a
franchisee that chose not to renew and began operating a competing business. Suit
was originally brought against two individual guarantors and their corporation, but one of
the individuals and the corporation was subsequently dismissed. Following entry of a
default against the remaining individual for not responding to the lawsuit, the court took
up Curves’ request for a permanent injunction enforcing the non-compete and for
attorney’s fees. Despite accepting the allegations of the Complaint as true, the court
nonetheless recommended against issuance of the permanent injunction. Applying
Texas law, the court held that enforcement of the non-compete requires, among other
things, a wrongful act. Here, the Complaint contained no allegation that the remaining
individual actually engaged in the operation of the competing business such that no
injunction should issue. “Injunctive relief is improper where the party seeking the
injunction has a mere fear or apprehension of the possibility of injury.” Despite this, the
court did recommend that attorney’s fees be awarded in accordance with the loser pays
provision in the franchise agreement, but awarded only $15,000 instead of the $25,747
requested.
Howard Johnson Int’l, Inc. v. Kim, 2012 U.S. Dist. LEXIS 178026 (D.N.J. Dec.
17, 2012), involved a breach of franchise agreement claim brought by the franchisor,
alleging that the former franchisee had unilaterally and prematurely breached the
franchise agreement. The franchisor sought liquidated damages under the franchise
agreement, repayment of certain recurring fees that it incurred, and recovery of
attorneys’ fees and costs.
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The former franchisee answered the complaint and counterclaimed, but then,
over the course of the next several months, failed to respond to court orders, inquiries
by the court or communications from counsel for the franchisor. Specifically, the former
franchisee failed to respond to notices attempting to set pre-trial conferences, failed to
respond to numerous letters sent by the franchisor’s counsel, failed to appear for a
scheduling conference and failed to respond to discovery requests. The franchisor
thereafter moved to strike the answer and enter default judgment, seeking a damages
award of approximately $200,000.
The magistrate judge determined that default judgment was within the court’s
available sanction authority pursuant to Federal Rules of Civil Procedure 37 and 16, but
proceeded through the Third Circuit’s six-factor test for determining whether a sanction
of default deprives the sanctioned party of the right to litigate. The court determined
that five of the six factors weighed in favor of granting the default, and the sixth factor
(the merit of the claim or defense of the sanctioned party) was neutral. In particular, the
pro se former franchisee was personally responsible for its failure to participate, the
prejudice to the franchisor was clear as it expended time and money for eight months
with no material advancement of the litigation, the history of dilatoriness was severe, the
former franchisee’s conduct appeared to be willful and without sufficient excuse, and
nothing less than an extreme sanction would be effective. The magistrate pointed out
that the drastic sanction of default should be reserved for extreme cases but
nevertheless recommended granting the motion for default and determined that the
damages sought were sums certain that did not require further hearing. The district
court judge adopted that recommendation a few weeks later in Howard Johnson Int’l,
Inc. v. Kim, 2013 U.S. Dist. LEXIS 770 (D. N.J. Jan. 3, 2013), awarding the franchisor
approximately $200,000.
Convenience Franchise Group, LLC v. Obed, 2012 U.S. Dist. LEXIS 25577
(S.D. Ohio Feb. 25, 2013), involved a claim by the Convenience Franchise Group
against defendants for providing gas and convenience store services using its
trademarks without permission. CFG moved for default judgment after defendants
failed to answer the complaint. The court denied the motion, finding that the default was
not willful, would not prejudice plaintiff, and the defense for not answering was
meritorious where defendants had agreed to settlement terms and taken steps to
execute the terms before the answer was due.
PSP Franchising, LLC v. Dubois, 2013 U.S. Dist. LEXIS 28048 (E.D. Mich.
Feb. 28, 2013), involved a claim by PSP Franchising against defendants for trademark
infringement and breach of contract. After defendants failed to respond to the
complaint, PSP filed a motion for default judgment, and the magistrate judge
recommended that the court grant the motion to the extent it sought a permanent
injunction, but that it order an evidentiary hearing regarding the amount of damages.
The court affirmed the magistrate’s recommendation regarding the permanent injunction
but disagreed that an evidentiary hearing was necessary because it found sufficient
evidence in the record to establish the amount of royalties and value of merchandise
owed, and it entered judgment for PSP accordingly.
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In Baymont Franchise Sys. v. Raj, 2013 U.S. Dist. LEXIS 8588 (D.N.J. Jan. 22,
2013), plaintiffs sought a judgment against defendants for monies owed pursuant to a
breach of a franchise agreement. Defendants defaulted on its obligations to pay plaintiff
certain royalties as required in the franchise agreements. Plaintiffs sued and
defendants did not file any opposition. There was no dispute that the franchise
agreement was valid, that the defendant failed to meets its obligations, and that plaintiff
sustained damages. The court granted plaintiff’s requested monetary relief.
At issue in Choice Hotels Int’l, Inc. v. Kusum Vali, Inc., 2012 U.S. Dist. LEXIS
62211 (S.D. Cal. May 3, 2012), was whether there was good cause to set aside entries
of default against defendants. Following Choice Hotels’ termination of the defendants’
franchise for failure to pay royalties, it sued for damages, federal and state trademark
infringement, false designation of origin and violation of the California Unfair
Competition Law based on defendants’ post-termination use of the ECONO LODGE
family of marks. When defendants failed to respond, defaults were entered against
them. When Choice Hotels moved for default judgments, defendants finally responded
and moved to set aside the defaults.
The court found that defendants had demonstrated good cause to set aside the
default because it did not find defendants’ conduct to be culpable. Although the
individual defendant acted negligently by failing to pick up his mail regularly, there was
no evidence that defendants knew about the lawsuit and acted in bad faith by
deliberately failing to answer the complaint. While the court rejected plaintiff’s
arguments that it would be prejudiced by a risk that defendants’ assets would be lost or
transferred to another entity or by the potential loss of evidence and witnesses due to
the passage of time, the court agreed that Choice suffered prejudice as a result of
having to incur attorney’s fees in connection with bringing the motion for default
judgment. Accordingly, the court ordered that the entries of default against defendants
would be set aside upon their payment of Choice’s reasonable attorney’s fees for
bringing the motion for default judgment. The court further found that the defendants
had alleged sufficient facts to support a potentially meritorious defense to set aside the
default with respect to the amount of damages. Finally, the court concluded that the
defendants had waived any argument of improper service because they admitted being
“subserved” with the summons and complaint at a hotel owned by the individual
defendant. Id. at 11-13.
10.
Relief from Final Judgment
Hayes v. Jani-King Franchising, Inc., 2012 U.S. Dist. LEXIS 182690 (S.D.
Miss. Dec. 28, 2012), was a post-settlement, post-judgment attempt by the defendant
franchisor to seek reconsideration of a summary judgment motion that it lost nearly
eighteen months prior. In June 2011, the court denied the franchisor’s motion for
summary judgment on the plaintiff’s claims for negligence and negligent supervision
against the franchisor on a respondeat superior theory. The court determined there was
a genuine issue of material fact on the question of whether the franchisor and a former
co-defendant (apparently an employee of one of the defendant’s franchisees) had
themselves created an employer-employee relationship.
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The parties thereafter entered into settlement negotiations, which proved
successful and resulted in a settlement and order for dismissal. Realizing at this point
that the summary judgment decision against it on the respondeat superior theory may
have negative consequences beyond just this case, the franchisor objected to the order
of dismissal and objected to the settlement, arguing that it should first have the
opportunity to request reconsideration of the summary judgment decision.
The franchisor filed both a motion for reconsideration and a motion to vacate the
summary judgment decision. In the motions, the franchisor presented alternative
arguments, not raised at summary judgment, why it should not be held liable. The
plaintiff opposed the motions, pointing out the defendant was merely trying to take a
second bite at the summary-judgment apple, having lost the first time.
The court agreed with the plaintiff. The defendant’s motion for reconsideration
did not demonstrate either a manifest error of law or fact or present newly discovered
evidence. Nor could the defendant satisfy the more stringent requirements of a motion
to vacate an order. Instead, the defendant used the motions to attempt to raise
defenses based on facts that were available at the time of the summary judgment
motion. Accordingly, the court denied the defendant’s motions for reconsideration of
and to vacate the summary judgment decision.
In Curves Int’l, Inc. v. Cleveland, 2013 U.S. Dist. LEXIS 6909 (N.D.N.Y. Jan.
17, 2013), the issue was whether the plaintiff had pled sufficient facts for the court to
conclude that a defaulting defendant was liable on plaintiff’s claims.
Plaintiff Curves International, Inc. (“Curves”) sued defendant Nancy Cleveland
(“Cleveland”) for abandoning a franchise, in violation of the franchise agreement. After
Cleveland did not answer the complaint and Curves received an entry of default, Curves
moved for default judgment against Cleveland. The only factual allegation in the
complaint was that Curves had sent Cleveland correspondence acknowledging the
termination of her interests and rights under the franchise agreement as a result of
certain violations.
The court said this factual allegation was insufficient to enable the court to
determine whether Cleveland was liable. Although a non-answering party admits all
allegations in a complaint as true, it is the court’s obligation to determine whether
unchallenged facts constitute a legitimate cause of action since a party in default does
not admit conclusions of law. The factual allegations in the complaint were insufficient
to enable the court to conclude whether Curves had a legal basis to send the letter it
did, or whether Cleveland had in fact abandoned or otherwise violated the franchise
agreement.
The court denied Curves’ motion for default judgment, but without prejudice, to
allow Curves an additional opportunity to make a proper motion.
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B.
ARBITRATION
1.
Agreements to Arbitrate/Enforceability
In what only can be called an “interesting” fact pattern, Villano v. TD Bank, 2012
U.S. Dist. LEXIS 123013 (D.N.J. Aug. 29, 2012), involves a suit by a Matco Tools
franchisee on his own behalf and on behalf of a putative class against both a bank for
providing him a loan to purchase a franchise and his franchisor for providing the bank a
three year projection to justify issuance of the loan. Interestingly, Villano brought suit
despite not only paying off the loan, but paying it off early.
In 2004, Villano purchased a Matco franchise based in large part on his father’s
success as a franchisee. To fund his purchase, Matco suggested Villano apply for an
SBA loan from TD Bank. In support of his application, Matco provided TD Bank with:
(1) Villano’s business cash flow estimate and initial capital requirements; (2) a sources
and uses of funds analysis; and (3) a three-year annual income projection. It is this final
piece of information upon which suit was based. As Matco does not provide financial
performance representations, Villano did not see it and was unaware that Matco
provided it to TD Bank. Villano ultimately secured the loan with his father as guarantor,
purchased the franchise and went into business. Alas, things did not go well and two
years later Villano’s father paid of the loan despite it not then being due. Villano then
continued as a Matco franchisee for four additional years, then closed his business and
filed suit.
While the fact pattern raises a host of interesting possibilities, including class
action waivers, financial performance representations and others, the one the court
focused on was whether the suit was subject to mandatory arbitration. Villano argued
that it was not, despite the broad arbitration requirement, because the contract was
unconscionable due to his not being able to negotiate its terms. Id. at *10. After
reviewing recent case law on this topic and class action waivers in arbitration, the court
flatly rejected this claim. Id. at *12 (“If neither individual claims nor class arbitration
waivers are unconscionable in the context of consumer adhesion contracts, when there
is a clear disparity of bargaining power and when only small monetary amounts are at
issue, then I am at a loss as to how the contract here could be unconscionable when
this was an arm’s length negotiation to begin a business relationship and where
Plaintiffs took ten days to review the contract.”). The court then compelled plaintiffs to
arbitrate their claims against Matco and its parent. Interestingly, however, the court
refused to compel plaintiffs to arbitrate their claims against TD Bank as it was not a
party to the arbitration agreement. Nonetheless, the court stayed the claims against TD
Bank because they were largely duplicative of those against Matco.
Cold Stone Creamery, Inc. v. Nutty Buddies, 2012 U.S. Dist. LEXIS 142955
(D. Ariz. Oct. 3, 2012). The Cold Stone Creamery franchisee association filed a
complaint in the Florida state court alleging Cold Stone failed to provide information on
certain monies it received from third parties designated for the benefit of the individual
franchisees, who were members of the association. Cold Stone moved to stay the state
court action and filed a petition in federal court to compel arbitration of the individual
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franchisees’ claims as provided in the franchise agreements. The state court stayed the
action pending a decision on whether the individual franchisees must submit to
arbitration. Nutty Buddies, one of the individual franchisee defendants in the federal
court action, moved to dismiss the petition to compel arbitration. Nutty Buddies argued
that the first-filed rule required dismissal, that the franchisee association had standing to
assert the claims of its members in the state court lawsuit and it had no obligation to
arbitrate its claims against Cold Stone, and that the court should order consolidated
arbitration if it did not grant the motion to dismiss.
The court only addressed the motion to dismiss the petition to compel arbitration,
not the request to compel arbitration or the request to order consolidated arbitration.
The Court rejected Nutty Buddies argument entirely. It found the fact that the
association has no contractual obligation to arbitrate irrelevant because Cold Stone
sought to compel the individual franchisees to arbitrate, not the association. It rejected
the first-to-file argument because the two disputes did not concern the same parties.
Accordingly, the court denied Nutty Buddies’ motion to dismiss the petition to arbitrate.
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Act.
provision by fraud.
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EA Indep. Franchisee Ass’n v. Edible Arrangements Int’l, Inc., 2012 U.S.
Dist. LEXIS 166082 (D. Conn. Nov. 21, 2012), involved enforcement of an arbitration
provision in a franchise agreement. Plaintiff EA Independent Franchisee Association
LLC (the “Association”) was a Michigan entity that represented more than 170
franchisees of defendant Edible Arrangements and its affiliates (collectively “Edible”).
The Association brought suit for declaratory judgment1 alleging that Edible had
breached franchise agreements, breached an implied covenant of good faith and fair
dealing, and violated the Connecticut Unfair Trade Practices Act. Edible filed a motion
to compel arbitration which the court granted.
In determining whether to compel arbitration, the court noted that it must consider
two issues: (1) whether the parties agreed to arbitrate; and (2) whether the scope of the
arbitration clause covers the asserted claims. The arbitration provision at issue
provided that the parties will arbitrate:
“all controversies, disputes or claims between [Edible] and
its affiliates, and their respective shareholders, officers,
directors, agents, and/or employees, and Franchisee . . .
arising out of or related to: (1) this [Franchise] Agreement or
any other agreement between them; (2) [Edible’s]
relationship with Franchisee; (3) the validity of this
[Franchise] Agreement or any other agreement between
them; or (4) any System Standard.”
1
The Association brought these claims in a single count for declaratory judgment and did not
specifically seek damages. Edible moved to dismiss, arguing that the franchisee
association lacked standing to bring claims on behalf of its members and that the
association’s complaint was a blatant attempt to circumvent the individual arbitration
clauses in each member’s franchisee agreement. In a previous decision, the court rejected
Edible’s argument and declined to dismiss the complaint. EA Independent Franchise
Association LLC v. Edible Arrangements Int’l, Inc., et al., 2011 U.S. Dist. LEXIS 78008 (D.
Conn. July 19, 2011).
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There was no dispute whether the parties agreed to arbitrate. Rather, the issue
was whether the arbitration provision covered the asserted claims, whether Edible’s
motion to compel arbitration was ripe, and whether Edible had waived its right to
arbitrate by previously seeking a dismissal of a non-party to the arbitration agreement
and thereby litigating the case waiving the right to arbitrate. The court found that the
arbitration provision covered the asserted claims, and Edible made clear that it intended
to enforce the arbitration agreement when it previously sought dismissal of the nonparty.
Awuah v. Coverall N. Am., Inc., 2012 U.S. App. LEXIS 26461 (1st Cir. Dec. 27,
2012), was the latest decision in a long-running litigation that generated several
opinions in the District of Massachusetts and the First Circuit Court of Appeals since
2008. More than one class of franchisees had brought suit against the franchisor of
commercial janitorial cleaning service businesses claims for breach of contract,
misrepresentation, unfair business practices, failure to pay due wages, and other
claims. The merits of these various claims was not discussed to any extent in this
opinion; at issue was whether one particular group of the plaintiffs was subject to the
arbitration provisions of the franchise agreements.
This group of plaintiffs had acquired their franchises not by executing franchise
agreements as other plaintiffs had, but by executing transfer and guaranty documents
(essentially, they bought their franchises from other franchisees). These transfer and
guaranty agreements, which were signed by the franchisor, the transferring franchisees,
and the transferees, did not themselves include arbitration clauses, but included
provisions stating that the transferees succeeded to all the rights and obligations of the
franchisee under the franchise agreement. Some of the plaintiffs who signed these
agreements never even saw copies of the franchise agreements they acquired.
The district court had previously certified a class consisting of all individuals who
owned a Coverall franchise and performed work for Coverall customers in
Massachusetts, who did not sign arbitration agreements. The plaintiffs moved to
expand that class by adding the plaintiffs who acquired their franchisees by the transfer
and guaranty agreements. The district court granted the motion, refusing to stay the
court proceedings pending arbitration and finding that these plaintiffs did not have to
submit to arbitration because they did not have adequate notice of the arbitration
clauses contained in the franchise agreements. The franchisor appealed.
The First Circuit reversed, finding that the district court erred in not enforcing the
arbitration clauses of the franchise agreements as to these plaintiffs, and ruling that
these plaintiffs’ claims should be stayed pending arbitration.
The appellate court, even though it found that the transfer and guaranty
agreements were not outright assignments of the franchise agreements, concluded that
the provisions in the transfer and guaranty agreements stating that the transferees were
succeeding to all the rights and obligations of the franchisees under the franchise
agreements were sufficient to incorporate by reference the arbitration clauses of the
franchise agreements. In addition, the appellate court disagreed with the plaintiffs’
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argument that it would be unconscionable to bind them to an arbitration provision in an
agreement that they never saw, which had persuaded the district court. Rather, the
court found that Massachusetts contract law was explicit that a party is bound by the
terms of an agreement regardless of whether he or she reads or understands them, and
that there is no special notice requirement for agreements containing arbitration
clauses. Moreover, the court pointed out that the Federal Arbitration Act provides that
arbitration agreements are valid and enforceable, and preempts state-law defenses
applicable to arbitration, and for that reason no notice requirements that might be
imposed by state law could render the arbitration provisions unenforceable in any event.
Shoney’s N. Am. LLC v. Vidrine Restaurants, Inc., Bus. Franchise Guide
(CCH) ¶ 14,990 (M.D. Tenn. Jan. 22, 2013), involved a suit brought by a restaurant
franchisor against several former franchisees for enforcement of a liquidated damages
provision in the franchise agreements. The former franchisees moved to stay that
action on account of a dispute resolution provision in the agreements. This provision
broadly required the parties to engage in direct negotiations and then mediation prior to
either party bringing a suit against the other arising out of the franchise agreement or
any business relationships or activities conducted as a result of the franchise
agreement. The provision further expressly provided that the parties agreed not to
commence any legal action until seven days after mediation concluded, and that if a
party failed to adhere to these requirements, the other party would be permitted to seek
abatement of any legal action initiated in violation of the dispute resolution provision.
The franchisor argued that the franchise agreements had been terminated, and
therefore the dispute resolution provisions did not survive termination. In response, the
former franchisees contended that they had a contractual right to have this litigation
stayed pending compliance with the dispute resolution procedures and that right
survived termination of the franchise agreements.
The court agreed with the former franchisees. Under the continuing obligations
section of the franchise agreements, the dispute resolution provisions by their very
nature must survive termination of the franchise agreements and remain in effect until
they are performed in full or until they expire by their terms. Accordingly, the court
stayed the franchisor’s lawsuit pending the parties’ compliance with the dispute
resolution requirements of the franchise agreement.
Cahill v. Alternative Wines, Inc., 2013 U.S. Dist. LEXIS 14588 (N.D. Iowa Feb.
4, 2013), deals with a dispute over the defendants’ sale of wine distribution rights to
plaintiffs. The plaintiffs claimed that the defendant company and its CEO breached the
purchase agreement and services agreement signed by the parties. Both agreements
contained an arbitration provision.
Defendants filed a motion to dismiss or stay the action pending arbitration.
Defendants argued that the Federal Arbitration Act (“FAA”) governed the dispute and
preempted Iowa Code § 537A.10(3)(a). Plaintiff argued that the arbitration agreements
were unenforceable under state law and that the FAA does not preempt the Iowa code
because the FAA only preempts state laws that burden arbitration agreements
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specifically. The Iowa code provision governing franchise agreements states that a
provision in a franchise agreement restricting jurisdiction to a forum outside the state is
void with respect to a claim otherwise enforceable under the section.
The court broke the inquiry into two parts: (1) does Iowa render the arbitration
provision unenforceable and (2) whether the claims fall into the arbitration provision.
In relation to the first inquiry, the court found the arbitration provision was valid.
The Iowa provision at issue did not apply to contracts generally, but rather only to
franchise agreements. Because it is not a generally applicable contract defense
comparable to fraud, duress or unconscionability, it violated the Supremacy Clause
because it directly conflicted with the FAA. As such, the Iowa provision was invalid, and
the arbitration provision was valid under the FAA.
In relation to the second inquiry, the court found that the claims fall within the
arbitration provision. The provision stated that it applied to any dispute or claim under
the agreement or its breach. The claims at issue, including breach of contract, violation
of Iowa franchise law, and fraud all directly implicate the agreements and clearly fall
within the scope of the code. The court found that even the claims against the
nonsignatory CEO were subject to arbitration because the CEO and his company were
close in relationship and because the claims at issue all rely on the two agreements
containing arbitration clauses. The court therefore dismissed the action.
King Cole Foods, Inc. v. SuperValu, Inc., 2013 U.S. App. LEXIS 2949 (8th Cir.
Feb. 13, 2013), involved a putative class action brought by grocery retailers against
certain grocery wholesalers. One group of the retailers had supply agreements and
arbitration agreements with one of the wholesalers, and another group of retailers had
supply agreements and arbitration agreements with the other wholesaler. The two
wholesalers at some point entered into a transaction whereby they exchanged certain
business assets, including some of their respective customers and the related retail
supply agreements, and agreed not to do business with or solicit any of the exchanged
customers for a certain time period. The retailers contended that this asset exchange
constituted an illegal conspiracy to inflate wholesale grocery prices and brought a class
action under Section 1 of the Sherman Act. Because each of the retailers had
arbitration agreements with their respective wholesaler, each retailer brought its claims
only against the wholesaler with whom it did not execute arbitration agreements.
The wholesalers nevertheless moved to dismiss the action, arguing that any
claims by the retailers were required to be arbitrated. They argued that either equitable
estoppel or the successor-in-interest doctrine allowed each non-signatory wholesaler to
enforce the arbitration agreement against the signatory retailers who brought claims
against that wholesaler. The district court agreed on the grounds of equitable estoppel,
finding that the antitrust claims were so intertwined with the wholesaler/retailer
relationship that it would be unfair to allow the retailers to avoid the arbitration
agreement. The court did not reach the wholesaler’s successor-in-interest argument.
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The Eight Circuit reversed, finding that equitable estoppel was not applicable. It
relied on a pair of cases where claims were brought relating to contracts that contained
arbitration provisions. In those cases, the claims brought by the plaintiffs were so
intertwined with the contract at issue in the litigation that equity required the arbitration
provision to be enforced against non-signatories. In contrast to those cases, the court
pointed out that the antitrust claims in this case were not closely related to the supply
and arbitration agreements and in fact exist separate and apart from the retailers’
supply and arbitration agreements. Therefore, the claims are not related closely
enough to the underlying agreements that equitable estoppel should apply. The court
remanded the action to the district court to consider the argument not previously
reached -- whether the successor-in-interest doctrine required enforcement of the
arbitration agreements against the retailers.
One judge dissented, contending that equitable estoppel should have applied.
The dissent pointed out that the cases the majority relied upon were contracts including
arbitration provisions, whereas the present case involved separate supply agreements
and separate, broad arbitration agreements. Therefore, the dissent contended that the
purported requirement of a close relationship between the claims and the underlying
contract for equitable estoppel to apply did not fit the facts of the present case. Here,
the arbitration agreements were entirely separate contracts, and they broadly required
arbitration of any claims relating to the retail/wholesale relationship, not just claims
arising out of the underlying supply agreements. Thus, the dissent would not have
permitted the retailers to avoid arbitration and would have held that equitable estoppel
should apply to enforce the arbitration agreements.
Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013), involved an
effort by a franchisor to enforce an arbitration clause in the parties’ franchise
agreement. The trial court found that the forum selection clause in the arbitration
clauses was unconscionable, and ordered the parties to arbitrate its claims in
Washington, not in Connecticut as provided in the agreement. The Washington
Supreme Court affirmed the decision.
Doctor’s Associates Inc. (“DAI”) is a Florida corporation which franchises Subway
sandwich shops across the country. Saleemi operated three Subway franchises in
Washington State. The franchise agreement provided that any disputes would be
arbitrated in Bridgeport, Connecticut, under Connecticut law. After a dispute arose
whether Saleemi was operating another store similar to Subway in violation of the
franchise agreement, a Washington State superior court judge found the choice of law
and forum selection clause unenforceable and entered an order compelling Washington
arbitration. DAI did not seek review of that decision immediately, and proceeded to
arbitration where Saleemi prevailed. DAI sought to vacate the trial court’s order
compelling arbitration in Washington.
DAI’s failure to seek immediate review of the decision compelling arbitration in
Washington was key to the court’s analysis. Although the court rejected Saleemi’s
argument that DAI’s failure to immediately appeal that decision resulted in wavier, the
court held that DAI must show it was prejudiced before reaching the merits of the
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decision to arbitrate in Washington. Because DAI could not demonstrate prejudice, the
court affirmed the arbitration decision. Accordingly, the court did not address DAI’s
argument that the United States Supreme Court’s decision in AT&T Mobility v.
Concepcion, 131 S. Ct. 1740, 563 U.S. ___ (2011), required enforcement of the
Connecticut arbitration requirement in the franchise agreement.
Mariposa Express, Inc. v. United Shipping Solutions, LLC, 2013 UT App. 28
(2013), involved a franchise’s motion to compel arbitration with a group of its
franchisees. The Utah Court of Appeals affirmed the district court’s order compelling
arbitration. It remanded the case, however, because the Utah Arbitration Act required
that when arbitration is ordered, the court should stay the underlying lawsuit rather than
dismiss it, which the district court had done.
The franchise (USS) operated a franchising system in which franchisees re-sold
the shipping services of DHL. The franchisees were required to pay USS for DHL’s
services and then USS would provide an aggregate payment to DHL. DHL breached its
resell agreement with the franchisees and, as a result, the franchisees stopped paying
USS for the DHL services still being utilized by its customers. USS terminated the
franchises. The franchisees sued and USS filed a counterclaim seeking payment for
the DHL services. USS and the franchisees reached a settlement where the
franchisees agreed to pay USS for the unpaid amounts owed to it for freight shipment.
Pursuant to the settlement, the parties agreed that if they disputed the amount due for
the freight shipment it would be resolved by an arbitrator. USS moved to compel
arbitration. The court of appeals held that the broad language of the arbitration
provision covering “any dispute” included the freight shipment cost and therefore
affirmed the district court’s order.
Kairy v. Supershuttle Int’l Inc., 2012 U.S. Dist. LEXIS 134945 (N.D. Cal. Sept.
20, 2012), addresses a franchisor’s attempt to stay litigation pending individual
arbitrations of franchisees’ claims that they are employees entitled to minimum wages
and overtime and not independent contractors. All of the plaintiffs signed franchise or
other agreements requiring arbitration and the vast majority of those agreements also
specifically called for individual arbitrations. Plaintiffs sought to avoid arbitration by
arguing that :(1) SuperShuttle waived its right to arbitrate by not raising the argument
when it initially moved to dismiss for lack of jurisdiction;(2) the statutory Fair Labor
claims fall outside of the arbitration clause covering “any controversy arising out of” the
agreement; (3) that class-wide arbitration prohibitions are unconscionable; and (4) nonsignatories can be compelled to arbitrate. The court rejected each of these arguments
and stayed further proceedings.
Addressing the waiver argument first, the court held that SuperShuttle had not
waived its right to arbitrate because raising the issue earlier would have been futile.
Here, the court recognized that prior to the Supreme Court’s ruling in ATT v.
Concepcion, 131 S. Ct. 1740 (2011), SuperShuttle had no right to enforce its
contractual requirement for individual arbitrations. In addition, plaintiffs could not rely
upon their court costs and legal expenses to demonstrate prejudice. Instead, a party
must show that the judicial process was used to garner information that could not have
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been gained in arbitration, that a party has unduly delayed and waited until the eve of
trial to seek arbitration, or that delays have resulted in the destruction or loss of
evidence and there was no evidence that happened here. Next, the court held that
plaintiffs’ statutory Fair Labor claims were subject to the broad arbitration clause
because fall under the arbitration clause based on Supreme Court precedent requiring
as much if the litigant can effectively vindicate his rights in arbitration absent
Congressional prohibition.
The court concluded its analysis by holding that the arbitration was not generally
unconscionable due to the FTC-required 14 day review period and that non-signatories
were required to arbitrate based on their claims being tied to active participation in the
rights and duties described by the franchise agreements. The court did, however find
that the fee splitting provision was unconscionable because plaintiffs would not be able
to afford individual arbitrations and therefore refused to enforce that provision.
Martin, Inc. v. The Henri Stern Watch Agency, Inc., 2012 U.S. Dist. LEXIS
58388 (D.N.J. Apr. 25, 2012), involves an authorized Patek Phillipe jewelry retailer that
challenged the termination of his distributorship as unconscionable and a violation of the
New Jersey Franchise Protection Act (“NJFPA”). Here, Martin was an authorized Patek
Phillipe retailer pursuant to an agreement with Patek. That agreement required Martin,
among other things, to purchase watches from Patek’s master U.S. distributor and
arbitrate all disputes with Patek in Switzerland. When Patek terminated the agreement,
Martin sued both it and the U.S. distributor who both moved to enforce the arbitration
agreement and dismiss.
The district court adopted the magistrate judge’s report and recommendation to
enforce the arbitration agreement and dismiss the litigation. First, the court held that
there was a valid agreement to arbitrate that applied to Martin’s claim and that the U.S.
distributor was a third-party beneficiary of that agreement. Second, the court
determined that a contractual provision requiring arbitration in a foreign country is not
per se unconscionable. Here that was true despite the fact that Swiss Law would be
applied in the arbitration and some of the arbitrators may not speak English. The court
found support for its holding in the fact that the parties’ original 1999 agreement
contained a similar arbitration clause, Martin had never before objected to it and
renewed the agreement as recently as 2009. The court also held that the fact that the
retailer was a small business and had little bargaining power compared to the distributor
was insufficient, without more, to prove unconscionability. Finally, the Court rejected
the retailer’s argument that the clause could not be enforced because of alleged
violations under the NJFPA, reasoning that the arbitration clause does not relieve a
party from NJFPA liability, but simply determines the forum for resolution.
In Ironson v. Ameriprise Fin. Servs., Inc., 2012 U.S. Dist. LEXIS 128393 (D.
Conn. Sept. 10, 2012), the court enforced a broad arbitration clause contained in the
franchise agreement. Here, the franchisee brought suit claiming the franchisor violated
the Connecticut Franchise Act (“CFA”) and the Connecticut Unfair Trade Practices Act
(“CUTPA”) following its termination of the franchise for repeatedly failing to complete a
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“written deliverable” for each of the franchisee’s customers holding a certain type of
account. Id. at *5-6. The franchisor moved to compel arbitration. Id.
The court first addressed the franchisee’s “claim[] that the arbitration clause in
the [f]ranchise [a]greement is invalid based on the existence of unequal bargaining
power between himself and [the franchisor] and because he was under economic
duress when the agreement was signed.” Id. at *7-8. Specifically, the franchisee
claimed that the franchise agreement was presented as a contract of adhesion, and he
“genuinely believed that if [he] did not immediately sign the [f]ranchise [a]greement . . .
[he] would be summarily stripped of everything that [he] had worked for and built up
over the course of the preceding fifteen years, and upon which [he] depended entirely
for income to support [his] family.” Id. at *10-11. “In order to demonstrate economic
duress under Connecticut law, the [p]laintiff must prove (1) a wrongful act or threat (2)
that left the victim no reasonable alternative, and (3) to which the victim in fact acceded,
and that (4) the resulting transaction was unfair to the victim . . . . ” Id. at *9 (internal
quotes and citations omitted). Here, the court found no duress because “under
Connecticut law, economic necessity cannot be the sole basis for a claim of economic
duress” and “the mere fact that continued employment was conditioned on acceptance
of an arbitration agreement is insufficient to establish economic duress.” Id. at *11. The
court further noted that the franchisee was an “educated businessperson” and that the
circumstances surrounding the presentation and execution of the franchise agreement
failed to establish duress. Id. at *11-12. Thus, the arbitration clause was valid. Id. at
*12.
The court then rejected the franchisee’s argument that the claims at issue were
not subject to the arbitration clause. The court determined that the arbitration clause
was broad, resulting in “a presumption of arbitrability,” such that “arbitration of even a
collateral matter will be ordered if the claim alleged implicates issues of contract
construction or the parties’ rights and obligations under it.” Id. at *12-14 (citing Louis
Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir.
2001)). The court held that there was insufficient evidence that the franchisee’s claims
were intended to be exempt from the arbitration clause, and that prior precedent
established that CFA and CUTPA claims were properly arbitrable. Accordingly, the
court compelled the franchisee to arbitrate his statutory claims. Id. at *15-18.
Senior Services of Palm Beach LLC v. ABCSP Inc., 2012 U.S. Dist. LEXIS
79038 (S.D. Fla. June 7, 2012), involves a franchisee seeking to avoid an arbitration
obligation in its franchise agreement. Not surprisingly, the franchisee was unsuccessful.
The franchisee filed suit for a declaratory judgment that the arbitration clauses were
unconscionable and in violation of Florida law, as well as various state law contract and
tort claims. In response, the franchisor filed a motion to dismiss the action and also
asked the court to compel Senior Services to arbitrate. The court dismissed the case
and entered an order compelling the parties to arbitrate the claims.
Referring to the Federal Arbitration Act and California law, the court noted that
the question of whether an arbitration clause is unconscionable is left for the arbitrator,
but even if it was a question before the court, the court would not find the clause
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unconscionable. While California law extended the defense of unconscionability to
franchise agreements, the clause was neither procedurally unconscionable (i.e.,
whether the clause was oppressive) or substantively unconscionable (i.e., whether the
clause was “overly harsh” or would produce “one-sided” results). Though Senior
Services claimed that it was in a weak bargaining position as a first time franchise
owner, the court focused on the fact that Senior Services was represented by
competent counsel during negotiations and rejected this argument.
In NIACCF, Inc. v. Cold Stone Creamery, Inc., 2012 U.S. Dist. LEXIS 70256
(S.D. Fla. May 21, 2012), the National Independent Association of Cold Stone
Creamery Franchisees, Inc. (“NIACCF”) sued Cold Stone Creamery, Inc. concerning
Cold Stone’s alleged failure to disclose certain payments it received from third-parties.”
Id. at *2. Cold Stone moved to stay the proceedings until the District of Arizona ruled on
Cold Stone’s motion to compel the NIACCF’s members to individually arbitrate the
claim. NIACCF argued in opposition that it, as opposed to its members, never agreed
to arbitrate with Cold Stone and that it has “associational standing” to pursue its claims.
Over NIACCF’s objection, the court granted Cold Stone’s motion to stay the
Florida proceedings. Citing the efficiency gained by waiting for the Arizona federal
court’s decision, the court rejected NIACCF’s standing argument. “NIACCF should not
be able to end-run the arbitration agreement to which all franchisees are individually
bound.” Id. at *6-*7.
selection clause.
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Meineke Car Care Ctrs., Inc. v. Martinez, 2012 U.S. Dist. LEXIS 55674
(W.D.N.C. Apr. 20, 2012), involves enforcement of an arbitration agreement and a noncompetition covenant. Here, Meineke filed to suit to: (1) compel arbitration of its
damages claim for unpaid royalties and advertising fees; and (2) preliminary enjoin
operation of a competing business pending arbitration pursuant to a non-competition
agreement. When the former franchisee failed to respond to the suit, the court awarded
Meineke a default judgment on both its claims.
In Hamden v. Total Car Franchising Corp., 2012 U.S. Dist. Lexis 71251 (W.D.
Va. May 22, 2012), the court refused to enforce an arbitration provision because it did
not apply to the franchisor. In this preliminary skirmish to the decision reported in the
non-competition section of this paper, the franchisor sought to compel arbitration of the
former franchisee’s declaratory judgment action seeking to hold a non-competition
covenant unenforceable. The franchise agreement provided a three-step dispute
resolution process: (1) direct negotiation; (2) mediation; and (3) arbitration. The
language concerning arbitration provided:
The parties will each choose one arbitrator. The two arbitrators will select
a third. The parties will determine the forum for arbitration. If, however, the
parties fail to establish a forum the standard rules of arbitration as set out
by the American Arbitration Association will apply.... The arbitration will be
binding and the decision of the arbitrators final.
The format of the arbitration process is this:
One or each disputant submits a demand for arbitration to us. We will
assist in the selection of arbitrators and serve as case administrator.
Once the arbitrators are appointed, they will control the proceedings and
all decisions will be final and binding and may be filed in a court of
competent jurisdiction.
Relying on a case from Louisiana interpreting the same agreement and the
language specifying that the franchisor would serve as “case administrator,” the court
held that it was not intended to apply to disputes with Total Car. Instead, Total Car was
meant to be a neutral. As a result, the court refused to compel arbitration of the dispute.
In Kubista v. Value Forward Network, LLC, 2012 U.S. Dist. LEXIS 101420
(D.S.D. Jul. 20, 2012), Kubista sued five defendants seeking declaratory and injunctive
relief that a Value Forward Network License Agreement which claimed not to be a
franchise or business opportunity was void. He also sought damages for alleged
violations of South Dakota Franchise law, South Dakota Business Opportunities Law,
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and common law claims. Defendants moved to compel arbitration of Kubista’s claims
and Kubista sought a preliminary injunction to stop arbitration. Ultimately, the court
granted defendants’ motion to compel and denied Kubista’s motion for a preliminary
injunction.
In coming to its decision, the court noted that the parties’ license agreement
contained a clear and broad arbitration clause applicable to “[a]ny dispute relating to the
interpretation or perform[ance]” of the same. The court held that through that arbitration
provision the parties agreed to arbitrate the disputes between them. The court also held
that Kubista’s argument that the License Agreement was void because “franchise or
business opportunity law prescribes it,” was an issue for resolution by the arbitrator and
did not absolve the parties’ agreement to arbitrate. Finally, the Court also found that
Kubista’s claims fell within the scope of the parties’ agreement to arbitrate because they
related to the performance or interpretation of the License Agreement. As a result, the
Court ordered Kubista to arbitrate his claims against defendants and denied Kubista’s
motion to enjoin arbitration proceedings.
2.
Scope of Arbitration Agreement Provisions
Act.
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provision by fraud.
Cahill v. Alternative Wines, Inc., 2013 U.S. Dist. LEXIS 14588 (N.D. Iowa Feb.
4, 2013), deals with a dispute over the defendants’ sale of wine distribution rights to
plaintiffs. The plaintiffs claimed that the defendant company and its CEO breached the
purchase agreement and services agreement signed by the parties. Both agreements
contained an arbitration provision.
Defendants filed a motion to dismiss or stay the action pending arbitration.
Defendants argued that the Federal Arbitration Act (“FAA”) governed the dispute and
preempted Iowa Code § 537A.10(3)(a). Plaintiff argued that the arbitration agreements
were unenforceable under state law and that the FAA does not preempt the Iowa code
because the FAA only preempts state laws that burden arbitration agreements
specifically. The Iowa code provision governing franchise agreements states that a
provision in a franchise agreement restricting jurisdiction to a forum outside the state is
void with respect to a claim otherwise enforceable under the section.
The court broke the inquiry into two parts: (1) does Iowa render the arbitration
provision unenforceable and (2) whether the claims fall into the arbitration provision.
In relation to the first inquiry, the court found the arbitration provision was valid.
The Iowa provision at issue did not apply to contracts generally, but rather only to
franchise agreements. Because it is not a generally applicable contract defense
comparable to fraud, duress or unconscionability, it violated the Supremacy Clause
because it directly conflicted with the FAA. As such, the Iowa provision was invalid, and
the arbitration provision was valid under the FAA.
In relation to the second inquiry, the court found that the claims fall within the
arbitration provision. The provision stated that it applied to any dispute or claim under
the agreement or its breach. The claims at issue, including breach of contract, violation
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of Iowa franchise law, and fraud all directly implicate the agreements and clearly fall
within the scope of the code. The court found that even the claims against the
nonsignatory CEO were subject to arbitration because the CEO and his company were
close in relationship and because the claims at issue all rely on the two agreements
containing arbitration clauses. The court therefore dismissed the action.
Crown Auto Dealerships v. Nissan N. Am., Inc., 2013 U.S. Dist. LEXIS 20875
(M.D. Fla. Feb. 15 2013), involves a motion to compel arbitration and to stay
proceedings or dismiss claims filed by franchisor Nissan in response to a complaint filed
by its franchisee Crown Auto. Crown Auto and Nissan had entered into an agreement
(the “DPA”) relating to the Nissan’s dealer facilities upgrade program that contained an
arbitration provision. Crown Auto brought a lawsuit against Nissan alleging violations of
Florida’s motor vehicle dealer law in connection with Nissan’s refusal to provide Crown
Auto with financial assistance under its environmental design initiative program. Nissan
moved for an order to compelling the dealer to arbitrate its four claims: (1) violation of
the Florida dealer law; (2) an injunction requiring Nissan to comply with its financial
obligations under the environmental design initiative program; (3) breach of contract;
and (4) promissory estoppel.
Nissan argued that each claim arose from and was based on the dealer’s
participation in the environmental design initiative program and Nissan’s alleged failure
to provide financial assistance governed by the DPA. Crown Auto countered that its
counts alleging a violation of the Florida dealer law and for an injunction did not arise
out of the DPA and were not arbitrable. The court found that the DPA’s arbitration
provision was very broad, with the language providing that any dispute between the
parties be submitted to arbitration. The court found that the statutory claims arose
during the period covered by the DPA. Additionally, the parties agreed to the broad
arbitration clause and could have agreed to limit its scope, but did not. The court
therefore granted the motion to compel arbitration and stay proceedings.
Mariposa Express, Inc. v. United Shipping Solutions, LLC, 2013 UT App. 28
(2013), involved a franchise’s motion to compel arbitration with a group of its
franchisees. The Utah Court of Appeals affirmed the district court’s order compelling
arbitration. It remanded the case, however, because the Utah Arbitration Act required
that when arbitration is ordered, the court should stay the underlying lawsuit rather than
dismiss it, which the district court had done.
The franchise (USS) operated a franchising system in which franchisees re-sold
the shipping services of DHL. The franchisees were required to pay USS for DHL’s
services and then USS would provide an aggregate payment to DHL. DHL breached its
resell agreement with the franchisees and, as a result, the franchisees stopped paying
USS for the DHL services still being utilized by its customers. USS terminated the
franchises. The franchisees sued and USS filed a counterclaim seeking payment for
the DHL services. USS and the franchisees reached a settlement where the
franchisees agreed to pay USS for the unpaid amounts owed to it for freight shipment.
Pursuant to the settlement, the parties agreed that if they disputed the amount due for
the freight shipment it would be resolved by an arbitrator. USS moved to compel
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arbitration. The court of appeals held that the broad language of the arbitration
provision covering “any dispute” included the freight shipment cost and therefore
affirmed the district court’s order.
Kairy v. Supershuttle Int’l Inc., 2012 U.S. Dist. LEXIS 134945 (N.D. Cal. Sept.
20, 2012), addresses a franchisor’s attempt to stay litigation pending individual
arbitrations of franchisees’ claims that they are employees entitled to minimum wages
and overtime and not independent contractors. All of the plaintiffs signed franchise or
other agreements requiring arbitration and the vast majority of those agreements also
specifically called for individual arbitrations. Plaintiffs sought to avoid arbitration by
arguing that :(1) SuperShuttle waived its right to arbitrate by not raising the argument
when it initially moved to dismiss for lack of jurisdiction;(2) the statutory Fair Labor
claims fall outside of the arbitration clause covering “any controversy arising out of” the
agreement; (3) that class-wide arbitration prohibitions are unconscionable; and (4) nonsignatories can be compelled to arbitrate. The court rejected each of these arguments
and stayed further proceedings.
Addressing the waiver argument first, the court held that SuperShuttle had not
waived its right to arbitrate because raising the issue earlier would have been futile.
Here, the court recognized that prior to the Supreme Court’s ruling in ATT v.
Concepcion, 131 S. Ct. 1740 (2011), SuperShuttle had no right to enforce its
contractual requirement for individual arbitrations. In addition, plaintiffs could not rely
upon their court costs and legal expenses to demonstrate prejudice. Instead, a party
must show that the judicial process was used to garner information that could not have
been gained in arbitration, that a party has unduly delayed and waited until the eve of
trial to seek arbitration, or that delays have resulted in the destruction or loss of
evidence and there was no evidence that happened here. Next, the court held that
plaintiffs’ statutory Fair Labor claims were subject to the broad arbitration clause
because fall under the arbitration clause based on Supreme Court precedent requiring
as much if the litigant can effectively vindicate his rights in arbitration absent
Congressional prohibition.
The court concluded its analysis by holding that the arbitration was not generally
unconscionable due to the FTC-required 14 day review period and that non-signatories
were required to arbitrate based on their claims being tied to active participation in the
rights and duties described by the franchise agreements. The court did, however find
that the fee splitting provision was unconscionable because plaintiffs would not be able
to afford individual arbitrations and therefore refused to enforce that provision.
Midas Int’l Corp. v. Chesley, 2012 U.S. Dist. LEXIS 87922 (N.D. Ill. June 26,
2012), involves interesting issues about how far a franchisor may go in effecting “selfhelp” for franchisee actions it perceives to be detrimental to the system. Here, when
Midas learned that one of its New York franchisees, Chesley, was about to sell four of
its ten locations to a competitor, Midas terminated all ten franchises, changed the locks
at two of them, and filed suit against Chesley, seeking injunctive relief and damages.
Chesley asserted counterclaims bad faith termination violation of the New York Real
Property and Proceedings Law (RPAPL), which awards treble damages to those
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ejected from real property “in a forcible or unlawful manner.” Chesley based its RPAPL
claim on Midas changing the locks without notice or warning. Midas then moved to
dismiss the counterclaims.
In support of its motion Midas argued that (1) Chesley’s breach of contract based
on bad faith was barred because it fell within an arbitration clause in the franchise
agreements that required any dispute over Midas’s “right to terminate” be submitted to
arbitration, and (2) Midas’s actions in changing the locks were neither “forcible” nor
“unlawful” because Chesley’s abandonment of those properties gave Midas the
contractual right to terminate the leases. Applying New York law, the court stayed
Chesley’s bad faith claim based on the franchise agreement’s arbitration requirement,
but allowed the RPAPL claim to proceed. Regarding the bad faith claim, the court
rejected Chesley’s argument that its bad faith claim fell outside the scope of the
arbitration clause in the franchise agreement because, as the court noted, Chesley’s
allegations directly challenged whether Midas had “just or proper cause” to terminate
the agreements. Further, the court rejected Chesley’s argument that the franchise
agreements were unconscionable contracts of adhesion, finding that (1) the dispute
resolution procedure set forth in the agreement was not substantively unfair, and (2)
Chesley’s allegation that the parties had “unequal bargaining power” was insufficient
because Chesley did not claim that Midas had employed “high pressure tactics” or
deceptive contract language.
Regarding the RPAPL claim, the court found that although Midas’s actions in
changing the locks did not appear to be “forcible,” Chesley adequately alleged
“unlawful” conduct and created a question of fact regarding whether the franchisee had
abandoned the properties when Midas changed the locks, which the court could not
determine on a motion to dismiss.
In another case that seems to defy common sense and Supreme Court
precedent, Medicine Shoppe Int’l, Inc. v. Edlucky, Inc., 2012 U.S. Dist. LEXIS 67133
(E.D. Mo. May 14, 2012), stands for the proposition that arbitrators, not courts, must
decide whether to enforce contractual class arbitration bans. In Medicine Shoppe a
class of franchisees filed an arbitration demand with the AAA. The franchisor promptly
filed suit under the Federal Arbitration Act to enjoin the proceeding and compel
individual arbitrations pursuant to the franchise agreement’s provision that “[w]e both
hereby agree that arbitration shall be conducted on an individual, not a class-wide,
basis.” Despite this seemingly clear language, the court dismissed the action and left it
to the arbitrator to decide whether to proceed with the class claim. Citing the franchise
agreement’s provision that “all controversies, disputes or claims . . . shall be heard by
one arbitrator in accordance the then current Commercial Arbitration Rules of the AAA,”
and the AAA’s rules’ provision that arbitrators determine their own authority, the court
held that the arbitrator must decide the issue.
3.
Arbitration Location Selection Clauses
Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013), involved an
effort by a franchisor to enforce an arbitration clause in the parties’ franchise
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agreement. The trial court found that the forum selection clause in the arbitration
clauses was unconscionable, and ordered the parties to arbitrate its claims in
Washington, not in Connecticut as provided in the agreement. The Washington
Supreme Court affirmed the decision.
Doctor’s Associates Inc. (“DAI”) is a Florida corporation which franchises Subway
sandwich shops across the country. Saleemi operated three Subway franchises in
Washington State. The franchise agreement provided that any disputes would be
arbitrated in Bridgeport, Connecticut, under Connecticut law. After a dispute arose
whether Saleemi was operating another store similar to Subway in violation of the
franchise agreement, a Washington State superior court judge found the choice of law
and forum selection clause unenforceable and entered an order compelling Washington
arbitration. DAI did not seek review of that decision immediately, and proceeded to
arbitration where Saleemi prevailed. DAI sought to vacate the trial court’s order
compelling arbitration in Washington.
DAI’s failure to seek immediate review of the decision compelling arbitration in
Washington was key to the court’s analysis. Although the court rejected Saleemi’s
argument that DAI’s failure to immediately appeal that decision resulted in wavier, the
court held that DAI must show it was prejudiced before reaching the merits of the
decision to arbitrate in Washington. Because DAI could not demonstrate prejudice, the
court affirmed the arbitration decision. Accordingly, the court did not address DAI’s
argument that the United States Supreme Court’s decision in AT&T Mobility v.
Concepcion, 131 S. Ct. 1740, 563 U.S. ___ (2011), required enforcement of the
Connecticut arbitration requirement in the franchise agreement.
Martin, Inc. v. The Henri Stern Watch Agency, Inc., 2012 U.S. Dist. LEXIS
58388 (D.N.J. Apr. 25, 2012), involves an authorized Patek Phillipe jewelry retailer that
challenged the termination of his distributorship as unconscionable and a violation of the
New Jersey Franchise Protection Act (“NJFPA”). Here, Martin was an authorized Patek
Phillipe retailer pursuant to an agreement with Patek. That agreement required Martin,
among other things, to purchase watches from Patek’s master U.S. distributor and
arbitrate all disputes with Patek in Switzerland. When Patek terminated the agreement,
Martin sued both it and the U.S. distributor who both moved to enforce the arbitration
agreement and dismiss.
The district court adopted the magistrate judge’s report and recommendation to
enforce the arbitration agreement and dismiss the litigation. First, the court held that
there was a valid agreement to arbitrate that applied to Martin’s claim and that the U.S.
distributor was a third-party beneficiary of that agreement. Second, the court
determined that a contractual provision requiring arbitration in a foreign country is not
per se unconscionable. Here that was true despite the fact that Swiss Law would be
applied in the arbitration and some of the arbitrators may not speak English. The court
found support for its holding in the fact that the parties’ original 1999 agreement
contained a similar arbitration clause, Martin had never before objected to it and
renewed the agreement as recently as 2009. The court also held that the fact that the
retailer was a small business and had little bargaining power compared to the distributor
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was insufficient, without more, to prove unconscionability. Finally, the Court rejected
the retailer’s argument that the clause could not be enforced because of alleged
violations under the NJFPA, reasoning that the arbitration clause does not relieve a
party from NJFPA liability, but simply determines the forum for resolution.
4.
Confirming and Challenging Arbitration Awards
The issue in Subway Int'l B.V. v. Bletas, 2012 U.S. Dist. LEXIS 46960 (D.
Conn. Apr. 2, 2012), was whether the court should confirm Subway International B.V.’s
(“Subway”) arbitration award pursuant to Section 9 of the Federal Arbitration Act
(“FAA”). Subway and Bletas were parties to a franchise agreement permitting Bletas to
operate a Subway restaurant in Greece. The franchise agreement contained a dispute
clause that read: “the parties will arbitrate any Dispute the parties do not settle under
the discussion procedures above . . . .” Id. at *2. ,Arbitrations were to be conducted in
accordance with the United Nations Commission on International Trade Regulations
and Law Arbitration Rules. When Bletas failed to pay royalty and advertising fees,
Subway filed a Demand for Arbitration and was ultimately awarded the outstanding
royalty and advertising fees, filing fees, and other expenses associated with the
arbitration.
In reviewing Subway’s request to confirm the arbitration award, the court
recognized that its function was “severely limited.” Id. at *5 (citation omitted). “[I]f a
ground from the arbitrator’s decision can be inferred from the facts of the case,” the
court should confirm the award. Id. at *6. Here, Bletas claimed that the court lacked
personal jurisdiction over her due to improper service of process and because Subway’s
counsel allegedly committed fraud and perjury by submitting a false certificate of
service. Having previously rejected these arguments in ruling on Bletas’ motion to
dismiss based on her voluntary participation in a court-sponsored settlement
conference; the court enforced the arbitration award.
Choice Hotels Int’l, Inc. v. Special Spaces, Inc., 2012 U.S. Dist. LEXIS 153005
(D. Md. Oct. 23, 2012), involved an application to confirm an arbitration award filed by
Choice Hotels International, Inc. Choice Hotels had entered into a franchise agreement
with Special Spaces and the individual defendants, under which defendants were to
construct and operate a hotel. The franchise agreement provided liquidated damages
for premature termination and contained a mandatory arbitration clause. After
defendants failed to complete construction of the hotel, Choice Hotels terminated the
agreement and filed a demand for arbitration. Defendants did not participate in the
arbitration and the arbitrator awarded Choice Hotels liquidated damages pursuant to the
franchise agreement.
Choice Hotels filed an application to confirm arbitration award and subsequently
sought summary judgment on its application. The court rejected defendants’ claim that
the arbitration award should be dismissed because of their non-participation, concluding
that the defendants’ non-participation in the arbitration was voluntary. The court also
rejected defendants’ undeveloped theory that Choice Hotels violated its duty of good
faith and fair dealing, finding no factual support for the allegation on the record.
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Accordingly, the court granted Choice Hotels’ motion for summary judgment and
confirmed the arbitration award entered against defendants.
SCSJ Enters. v. Hansen & Hansen Enters., 2012 Ga. App. LEXIS 934 (Ga. Ct.
App. Nov. 13, 2012), involved a franchisee’s appeal of a trial court’s confirmation of an
arbitration award in favor of the franchisor.
SCSJ Enterprises and Shandton Williams purchased two UPS Store franchises
from Hansen & Hansen Enterprises, Inc. and Juden Enterprises, Inc. (collectively
“Hansen”). In connection with the purchase, SCSJ executed two promissory notes, one
in favor of Hanson and the other in favor of Juden Enterprises. Williams served as a
personal guarantor for both. SCSJ subsequently filed a claim against Hansen,
asserting that Hansen had fraudulently misrepresented the value of the two stores.
Hansen filed a counterclaim for nonpayment of the two promissory notes. In
accordance with the sales agreement, the claims were submitted to arbitration. The
arbitrator found in favor of Hansen on SCSJ’s claims but dismissed Hansen’s
counterclaims as outside the scope of the parties’ arbitration agreement. Hansen filed
an application for confirmation of the arbitration award and SCSJ filed a motion to
vacate the award. The trial court granted SCSJ’s motion to vacate the award and
Hansen appealed.
The court of appeals held that the arbitrator had erred in failing to consider
Hansen’s counterclaim and instructed the trial court to remand the case to the arbitrator.
Following the court of appeals ruling, SCSJ filed a motion with the trial court to dismiss
the arbitration proceedings, citing its right under the arbitration agreement to terminate
arbitration if no final award is made within thirty days. The trial court denied this motion.
The arbitrator subsequently found in favor of Hansen on its counterclaim and concluded
that Williams was liable under his personal guaranties. After the trial court confirmed
this award, SCSJ appealed.
The court first considered SCSJ’s argument that it was entitled to terminate
arbitration proceedings, concluding that the arbitrator had rendered a final award within
30 days notwithstanding the fact that the arbitrator’s award was later vacated.
Accordingly, SCSJ was not entitled to terminate arbitration.
Next, the court considered SCSJ’s argument that the arbitrator exceeded his
authority in issuing an award against Williams, who was not a named party to the
arbitration agreement contained in the sales agreement between SCSJ and Hansen.
The court rejected this argument because Williams had signed two notes, both of which
expressly provided that they were made “subject to the terms and conditions of the
[sales agreement].” Accordingly, he was subject to the arbitration agreement.
The court also rejected SCSJ’s argument that the arbitration award did not
conform to the liquidated damages provision in the promissory notes, emphasizing that
this argument asked the court to reweigh evidence submitted to the arbitrator. The
court explained that it could not consider the sufficiency of evidence underlying an
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arbitrator’s award, but merely where the arbitrator overstepped his authority under the
arbitration agreement.
Finally, the court rejected SCSJ’s argument that the arbitrator manifestly
disregarded the law by rejecting SCSJ’s defense of failure of consideration and/or
recoupment, finding that the arbitrator’s award included a detailed discussion of the
relevant law.
In GMAC Real Estate, LLC v. Fialkiewicz, 2012 U.S. App. LEXIS 26480 (2d
Cir. Dec. 27, 2012), the Second Circuit affirmed a district court order confirming an
arbitration award against a franchisor. The arbitrator had determined that the franchisor
violated the Connecticut Business Opportunity Investment Act (“CBOIA”) (the opinion
did not specify precisely which provisions were violated or how).
The franchisor argued on appeal that the arbitration award should be vacated
because the arbitrator manifestly disregarded the law in making his determination. The
appellate court rejected the franchisor’s argument and affirmed the confirmation of the
award. The court pointed out that the manifest disregard standard requires a
demonstration that the arbitrator committed an egregious impropriety, intentionally
defied the law, or refused to apply the law. The franchisor could not meet that stringent
standard for vacating the award.
As noted above, the opinion did not specifically state the conduct of the
franchisor that was determined to be violative of the CBOIA. The franchisor’s
arguments on appeal for disregarding the arbitration award appeared to be aimed at
attempting to fit the franchisor’s franchise agreements within exceptions to the CBOIA
so that whatever provisions were found to have been violated would not be applicable in
the first instance. The franchisor contended that the arbitrator misapplied the law in two
respects – that the franchise agreement’s licensing of trademarks to the franchisee
made the franchise fall within an exception to the CBOIA, and that the franchise
agreements did not fall within the definition of “business opportunities” such that they
would be subject to the CBOIA. The court found that there was a colorable basis for the
arbitrator’s findings on both issues, and so it could not be said that the arbitrator’s
application of the law to the facts of the case was a manifest disregard of the law.
Budget Blinds Inc. v. LeClair, 2013 U.S. Dist. LEXIS 7463 (C.D. Cal. Jan. 16,
2013), involved Budget Blinds’ motion to vacate an arbitration award entered against it
in favor of its franchisee, Joshua LeClair.
Budget Blinds is a national window-covering business. In 2007, Budget Blinds
and LeClair entered into a franchise agreement, under which LeClair was assigned a
sales territory in the northeast area of Madison, Wisconsin. Budget Blinds demanded
arbitration of its claims that LeClair had (1) breached the franchise agreement by
making unauthorized sales outside of his territory and by running a competing business
(a blinds cleaning and repair business); and (2) misappropriated Budget Blinds’ trade
secrets. Budget Blinds also sought a declaratory judgment that it was entitled to
terminate the franchisee agreement and that LeClair was bound by the post-termination
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provisions of the agreement. Finally, Budget Blinds sought injunctive relief enjoining
LeClair from operating his allegedly competing business. LeClair filed a counter-claim
in the arbitration proceedings, alleging that Budget Blinds had constructively terminated
the franchise agreement under the Wisconsin Fair Dealership Law.
Budget Blinds challenged two aspects of the arbitrator’s decision – her
determination that Budget Blinds had constructively terminated the franchise agreement
and her award of damages to LeClair. With respect to the constructive termination
finding, the court explained that constructive termination occurs when the franchisor
“takes actions that amount to an effective end to the commercially meaningful aspects
of the dealer relationship, regardless of whether the formal contractual relationship
between the parties continues in force.” The court concluded that the evidence
submitted by LeClair supported the arbitrator’s finding of constructive termination. This
evidence included that Budget Blinds’ refusal to discuss its allegations with LeClair to
explore potential remedies, termination of LeClair’s access to the company internet
portal, disconnection of LeClair’s franchise website, and redirection of LeClair’s
telephone, internet, and other leads to other franchisees. The arbitrator appropriately
concluded that Budget Blinds violated the franchise agreement and Wisconsin law by
failing to investigate before filing for arbitration and by failing to comply with notice and
cure requirements.
With respect to the damages award, the court rejected Budget Blinds’ argument
that the arbitrator awarded LeClair speculative damages that he could not prove with
reasonable certainty. Although LeClair was not a damages expert, the arbitrator
appropriately determined that LeClair “had actual business experience under the
Agreement from which the calculations were determined,” which were supported by
data from his time as a franchisee on the price and cost of goods sold, monthly sales
reports from Budget Blinds’ accounting system with gross retail sales and costs, and his
own bank statements.
Wireless Toyz Franchise, L.L.C. v. Clear Choice Commun., Inc., 825 N.W.2d
580 (Mich. 2013), is the end of an interesting procedural history for an arbitration matter.
This case began with a lawsuit by the franchisor alleging breach of the franchise
agreement. The franchisee then asserted a counterclaim for fraudulent inducement
based on not disclosing that another franchise would open within two miles of the one
offered to the franchisee. The franchisor then moved to compel arbitration of the entire
dispute, the parties stipulated to do so and the court ordered arbitration. Based on
discovery obtained while in arbitration, the franchisor asserted a new claim alleging that
the franchisee fraudulently concealed its true owners. The arbitrator then issued an
award rescinding the franchise agreement based on both parties’ fraud. While the
franchisor was content with the award, the franchisee sought to vacate it based on the
franchisor’s fraud claims exceeding the arbitrator’s authority. Specifically, the
franchisee argued that because the franchisor’s fraud claim was not pending when the
court ordered arbitration, the arbitrator lacked authority to resolve it.
The trial court disagreed with the franchisee and confirmed the award pursuant to
Michigan law. The appeals court reversed the trial court in a 2-1 decision. The majority
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focused on the precise language of the order compelling arbitration while the dissent
focused on the scope of the arbitration agreement in the franchisee agreement and
different language in the order compelling arbitration. Specifically, the dissent focused
on the order allowing further discovery, requiring a “full and final resolution as to any
claims, counterclaims and defenses filed in the above action . . .”providing the
arbitration with all the powers of a circuit court judge. Ultimately, it was the dissent’s
arguments that carried the day as the Michigan Supreme Court later reversed in a short
decision adopting the reasoning of the dissent.
C.
REMEDIES
1.
Compensatory Damages
FECO, Ltd. v. Highway Equip. Co., Inc., Bus. Franchise Guide (CCH) ¶ 14,967
(Iowa Ct. App. Jan. 9, 2013), was the latest decision in a wrongful termination suit
brought by a farm implements dealer against a manufacturer. After the manufacturer
terminated the dealer and the dealer brought suit, the manufacturer admitted during the
litigation that it did not have good cause for the termination and that it did not provide
the statutorily required notice for the termination. At a bench trial, the trial court
concluded that the dealership was wrongfully terminated but that the Iowa statutes did
not permit recovery of money damages for terminations without good cause and without
proper notice. The former dealer appealed, and the appellate court reversed the
determination that damages were not available and remanded for a trial on the issue of
damages.
Key to the issue of damages was that the dealer began selling its own proprietary
line of farm equipment after its agreement with the manufacturer was terminated, and
was very successful. The dealer had begun development of this line while it was still
under contract with the manufacturer.
On remand, the issue of damages was essentially a battle of experts. The
dealer’s expert claimed that the dealer, had it not been terminated, would have sold all
the units of its own line that it actually did sell, plus a substantial number of the
manufacturer’s implements. The manufacturer’s expert concluded that, the dealer,
through the sales of its own line of equipment, fully mitigated any damages resulting
from the termination. The court was persuaded by the manufacturer’s expert, and
concluded that the dealer was not entitled to any damages because it was in no worse
position than it was before the termination, and if anything, it was better off. The dealer
moved for reconsideration (which was denied) and then again sought review by the
court of appeals.
In reviewing the damages determination, the appellate court was required to
uphold the ruling if it was supported by substantial evidence and unless it was clearly
erroneous. The appellate court refused to reverse. On each of the dealer’s several
arguments on appeal, the court seemed most persuaded by the fact that assessments
of the credibility of witnesses is the responsibility of the fact-finder. The appeals court
was not willing to disturb the trial court’s determination as to which expert should be
believed. The appellate court was also influenced by the general maxim that a party
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injured by a breach of contract should not be placed in a better position than he would
have been in had the contract been performed. The trial court’s ruling that no damages
should be awarded was therefore affirmed.
Finally, the dealer had also appealed the decision of the trial court not to award
attorneys’ fees, as permitted in actions successfully prosecuted by dealers under the
Iowa code. However, both the trial court and the appellate court agreed that the statute
at issue was most reasonably interpreted by permitting attorneys’ fees only when the
successful dealer receives an award of damages in the lawsuit. An award of attorneys’
fees under the Iowa statutes is entirely contingent upon an award of actual damages,
and therefore the fees claim in this case was properly denied.
In Baymont Franchise Sys. v. Raj, 2013 U.S. Dist. LEXIS 8588 (D.N.J. Jan. 22,
2013), plaintiffs sought a judgment against defendants for monies owed pursuant to a
breach of a franchise agreement. Defendants defaulted on its obligations to pay plaintiff
certain royalties as required in the franchise agreements. Plaintiffs sued and
defendants did not file any opposition. There was no dispute that the franchise
agreement was valid, that the defendant failed to meets its obligations, and that plaintiff
sustained damages. The court granted plaintiff’s requested monetary relief.
In this substantive decision in a matter also reported in Section V.A.5 in the
Update, Century 21 Real Estate LLC v. All Prof’l Realty, Inc., 2012 U.S. Dist. LEXIS
111744 (E.D. Cal. Aug. 8, 2012), addresses Century 21’s summary judgment motion on
its claims against a former franchisee for continued use of Century 21’s trademarks
after termination of the franchise. Id. at *2-3. In granting Century 21’s motion, the court
first addressed the franchise agreement’s choice of New Jersey law and enforced the
provision. Applying New Jersey law, the court granted summary judgment and entered
judgment in Century 21’s favor for $195,454.90 in actual damages for breach of contract
along with future lost profits of $575,001.57 and treble damages for trademark
infringement in the amount of $86,022.00. Id. at *2. The district court also permanently
enjoined from further unauthorized use of Century 21’s marks. Id. at *3.
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Century 21 Real Estate LLC v. N. State Props., LLC, 2012 U.S. Dist. LEXIS
82876 (E.D. Cal. June 14, 2012), came before the court on Century 21’s motion for
summary judgment on several issues including a breach of the franchise agreement
and claim for a permanent injunction prohibiting use of its trademarks and unfair
competition. Century 21 brought suit following its “for cause” early termination of the
franchise for failure to pay royalty fees. Century 21 argued, and the court agreed, that
Defendants breached the franchise agreements and that they “hold-over franchisees”
by continuing to use the trademarks subsequent to termination of the franchise. Such
continuing unauthorized use, the court held, created a likelihood of confusion in violation
of both sections 1114(1)(a) and 1125(a)(1)(A) of the Lanham Act. Accordingly, the
court granted summary judgment on the breach of contract claim and issued a
permanent injunction under the Lanham Act.
In 7-Eleven, Inc. v. Spear, 2012 U.S. Dist. LEXIS 66366 (N.D. Ill. May 11, 2012),
7-Eleven filed suit against pro se defendants Violet Spear and Vianna, Inc. regarding
termination of their franchise for failing to maintain the minimum net worth requirement.
Although 7-Eleven terminated the franchise agreement, Defendants continued to
operate the stored as an authorized 7-Eleven store. After filing the complaint, 7-Eleven
obtained a preliminary injunction requiring Defendants to immediately surrender
possession of the store premises and facilities and cease all use of the trademarks and
service marks. 7-Eleven then moved for summary judgment on its claims, to which
Defendants did not respond. With respect to the breach of contract claims, the Court
found in 7-Eleven’s favor, but did not issue a permanent injunction because 7-Eleven
did not put forth any evidence that damages would not suffice to remedy the harm to 7Eleven. The Court awarded approximately $116,000 in damages, which represented
Defendants’ net worth deficiency in the franchised location.
With respect to the Lanham Act and Deceptive Trade Practices claims, the Court
also ruled in 7-Eleven’s favor. As to damages, 7-Eleven sought approximately
$391,000 in damages based on the sales Defendants made and reported to 7-Eleven
after termination of the franchise agreement. While it was the Defendants’ burden to
bring forth any costs associated with these sales, the Court found that 7-Eleven did not
provide adequate evidence to support this damages figure. Specifically, the Court
noted that under Seventh Circuit law, “‘a plaintiff wishing to recover damages for a
violation of the Lanham Act must prove the defendant’s Lanham Act violation, that the
violation caused actual confusion among consumers of plaintiff’s product, and, as a
result, that plaintiff suffered actual injury, i.e., a loss of sales, profits, or present value
(good will)” Id. at *22 (quoting Web Printing Controls Co. v. Oxy-Dry Corp., 906 F.2d
1202, 1204-5 (7th Cir. 1990)). In support of its damages figure, 7-Eleven merely recited
this sales figure in one line of an affidavit. The Court found this to be insufficient if 7Eleven expected to obtain these damages on top of the damages already awarded in
the breach of contract claims. Rather, the Court stated that 7-Eleven “must provide the
Court with detailed affidavits or other evidence of damages sustained in the way of loss
of revenue, loss of goodwill, and damages to its goodwill and reputation as a result of
Defendants’ acts.” Id. at **22-23 (emphasis in original). As a result, the Court declined
to award any additional damages, but was willing to re-address that issue if 7-Eleven
put forth sufficient evidence to support such an award.
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claims.
2.
Lost Future Profits
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hearings.
profits.
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merchandise.
Budget Blinds Inc. v. LeClair, 2013 U.S. Dist. LEXIS 7463 (C.D. Cal. Jan. 16,
2013), involved Budget Blinds’ motion to vacate an arbitration award entered against it
in favor of its franchisee, Joshua LeClair.
Budget Blinds is a national window-covering business. In 2007, Budget Blinds
and LeClair entered into a franchise agreement, under which LeClair was assigned a
sales territory in the northeast area of Madison, Wisconsin. Budget Blinds demanded
arbitration of its claims that LeClair had (1) breached the franchise agreement by
making unauthorized sales outside of his territory and by running a competing business
(a blinds cleaning and repair business); and (2) misappropriated Budget Blinds’ trade
secrets. Budget Blinds also sought a declaratory judgment that it was entitled to
terminate the franchisee agreement and that LeClair was bound by the post-termination
provisions of the agreement. Finally, Budget Blinds sought injunctive relief enjoining
LeClair from operating his allegedly competing business. LeClair filed a counter-claim
in the arbitration proceedings, alleging that Budget Blinds had constructively terminated
the franchise agreement under the Wisconsin Fair Dealership Law.
Budget Blinds challenged two aspects of the arbitrator’s decision – her
determination that Budget Blinds had constructively terminated the franchise agreement
and her award of damages to LeClair. With respect to the constructive termination
finding, the court explained that constructive termination occurs when the franchisor
“takes actions that amount to an effective end to the commercially meaningful aspects
of the dealer relationship, regardless of whether the formal contractual relationship
between the parties continues in force.” The court concluded that the evidence
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submitted by LeClair supported the arbitrator’s finding of constructive termination. This
evidence included that Budget Blinds’ refusal to discuss its allegations with LeClair to
explore potential remedies, termination of LeClair’s access to the company internet
portal, disconnection of LeClair’s franchise website, and redirection of LeClair’s
telephone, internet, and other leads to other franchisees. The arbitrator appropriately
concluded that Budget Blinds violated the franchise agreement and Wisconsin law by
failing to investigate before filing for arbitration and by failing to comply with notice and
cure requirements.
With respect to the damages award, the court rejected Budget Blinds’ argument
that the arbitrator awarded LeClair speculative damages that he could not prove with
reasonable certainty. Although LeClair was not a damages expert, the arbitrator
appropriately determined that LeClair “had actual business experience under the
Agreement from which the calculations were determined,” which were supported by
data from his time as a franchisee on the price and cost of goods sold, monthly sales
reports from Budget Blinds’ accounting system with gross retail sales and costs, and his
own bank statements.
Fantastic Sams Salons Corp. v. Maxie Enterps., Inc., 2012 U.S. Dist. LEXIS
86136 (M.D. Ga. June 21, 2012), involves a claim for past due and future royalties
against two former franchisees who abandoned their franchises and “de-identified.”
Following a bench trial establishing liability, the franchisees disputed the amount of
damages awarded. The court reviewed the evidence presented at trial and found in
favor of Fantastic Sams, also finding that the award of damages—which included the
contractual royalty and advertising fee owed in arrears plus lost future fees reduced to
present value and attorney’s fees.
Bonanza Rest. Co. v. Wink, 2012 Del. Super. LEXIS 167 (Del. Super. April 17,
2012), addresses the scope of a guarantee given by a former franchisee in connection
with its sale of four restaurants. Wink, the former franchisee, agreed to personally
guarantee all monies due from the new franchisee under its franchise agreements for a
period of one year. When the new franchisee closed the restaurants within less than a
year, Bonanza brought suit against Wink under the guarantees for its lost future
royalties totaling $1,319,899.83.
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In ruling on cross-motions for summary judgment, the court first addressed and
held that future lost revenues were recoverable here. Citing a 2012 article in the
Franchise Law Journal, Douglas R. Hafer & Logan W. Simmons, Lost Future Royalties:
Lessons from Recent Decisions, 31 Franchise L.J. 150 (2012), the court recognized that
a franchisor may recover lost future royalties when a franchisee terminates the
relationship. The court next addressed and rejected Wink’s argument that Bonanza
waived any right to future royalties by prohibiting consequential damages in the
franchise agreement. Applying Texas law, the court held that loss of future royalties
was inherent to breaching the franchise agreements and therefore not “consequential.”
Finally, and luckily for Wink, the court analyzed the specific language of the guarantee.
Based on the one year limitation, the court rejected Bonanza’s claim for future lost
royalties again Wink. In doing so, it also rejected Bonanza’s argument that Wink’s
unlimited guarantee of the new franchisee’s post-termination obligations produced a
different result. The post-termination obligations, the court held, made no mention of
future lost royalties and royalty payments, by their nature, end when a franchise closes.
Accordingly, it granted Wink’s motion for summary judgment.
Luxottica Retail N. Am., Inc. v. Haffner Ents., Inc., 2012 U.S. Dist. LEXIS
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3.
Lanham Act Damages
In 7-Eleven, Inc. v. Spear, 2012 U.S. Dist. LEXIS 66366 (N.D. Ill. May 11, 2012),
7-Eleven filed suit against pro se defendants Violet Spear and Vianna, Inc. regarding
termination of their franchise for failing to maintain the minimum net worth requirement.
Although 7-Eleven terminated the franchise agreement, Defendants continued to
operate the stored as an authorized 7-Eleven store. After filing the complaint, 7-Eleven
obtained a preliminary injunction requiring Defendants to immediately surrender
possession of the store premises and facilities and cease all use of the trademarks and
service marks. 7-Eleven then moved for summary judgment on its claims, to which
Defendants did not respond. With respect to the breach of contract claims, the Court
found in 7-Eleven’s favor, but did not issue a permanent injunction because 7-Eleven
did not put forth any evidence that damages would not suffice to remedy the harm to 7Eleven. The Court awarded approximately $116,000 in damages, which represented
Defendants’ net worth deficiency in the franchised location.
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With respect to the Lanham Act and Deceptive Trade Practices claims, the Court
also ruled in 7-Eleven’s favor. As to damages, 7-Eleven sought approximately
$391,000 in damages based on the sales Defendants made and reported to 7-Eleven
after termination of the franchise agreement. While it was the Defendants’ burden to
bring forth any costs associated with these sales, the Court found that 7-Eleven did not
provide adequate evidence to support this damages figure. Specifically, the Court
noted that under Seventh Circuit law, “‘a plaintiff wishing to recover damages for a
violation of the Lanham Act must prove the defendant’s Lanham Act violation, that the
violation caused actual confusion among consumers of plaintiff’s product, and, as a
result, that plaintiff suffered actual injury, i.e., a loss of sales, profits, or present value
(good will)” Id. at *22 (quoting Web Printing Controls Co. v. Oxy-Dry Corp., 906 F.2d
1202, 1204-5 (7th Cir. 1990)). In support of its damages figure, 7-Eleven merely recited
this sales figure in one line of an affidavit. The Court found this to be insufficient if 7Eleven expected to obtain these damages on top of the damages already awarded in
the breach of contract claims. Rather, the Court stated that 7-Eleven “must provide the
Court with detailed affidavits or other evidence of damages sustained in the way of loss
of revenue, loss of goodwill, and damages to its goodwill and reputation as a result of
Defendants’ acts.” Id. at **22-23 (emphasis in original). As a result, the Court declined
to award any additional damages, but was willing to re-address that issue if 7-Eleven
put forth sufficient evidence to support such an award.
Luxottica Retail N. Am., Inc. v. Haffner Enters., Inc., 2012 U.S. Dist. LEXIS
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4.
Liquidated Damages
Wingate Inns Int’l, Inc. v. P.G.S., LLC, 2012 U.S. Dist. LEXIS 115745 (D.N.J.
Aug. 16, 2012), involves one of many claims this year by a franchisee that it was
fraudulently induced to purchase its franchise and therefore should not be liable to fully
repay a note and liquidated damages upon terminating its franchise. The key issue
here was the franchisee’s claim that he was promised damages would be limited to
$250,000 upon termination and that 30% of reservations would be provided by the
franchisor. In support of that claim the franchisee relied upon the testimony of its owner
and an internal Wingate email stating “Please cap damages at $250,000.”
Unfortunately for the franchisee, the court held this to be insufficient and granted
summary judgment to the franchisor.
First, the court rejected the franchisee’s claim of a promised cap of $250,000 in
damages. It did so based on the parole evidence rule and the franchise agreement’s
unambiguous limit of $250,000 in liquidated damages. “The alleged fraudulent
representation here concerned an express provision of the written agreement. The
language in the written contract is unambiguous that it only caps liquidated damages.”
Id. at *10. Next, the court easily disposed of the claim that Wingate promised to provide
30% of the franchisee’s reservations. Holding that promises concerning future events
not within the promisor’s absolute control are not actionable as fraud, the court
dismissed the claim and granted summary judgment in Wingate’s favor for past due
royalties, liquidated damages and an unpaid promissory note.
Howard Johnson Int’l, Inc. v. Kim, 2012 U.S. Dist. LEXIS 178026 (D. N.J. Dec.
17, 2012), involved a breach of franchise agreement claim brought by the franchisor,
alleging that the former franchisee had unilaterally and prematurely breached the
franchise agreement. The franchisor sought liquidated damages under the franchise
agreement, repayment of certain recurring fees that it incurred, and recovery of
attorneys’ fees and costs.
The former franchisee answered the complaint and counterclaimed, but then,
over the course of the next several months, failed to respond to court orders, inquiries
by the court or communications from counsel for the franchisor. Specifically, the former
franchisee failed to respond to notices attempting to set pre-trial conferences, failed to
respond to numerous letters sent by the franchisor’s counsel, failed to appear for a
scheduling conference and failed to respond to discovery requests. The franchisor
thereafter moved to strike the answer and enter default judgment, seeking a damages
award of approximately $200,000.
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The magistrate judge determined that default judgment was within the court’s
available sanction authority pursuant to Federal Rules of Civil Procedure 37 and 16, but
proceeded through the Third Circuit’s six-factor test for determining whether a sanction
of default deprives the sanctioned party of the right to litigate. The court determined
that five of the six factors weighed in favor of granting the default, and the sixth factor
(the merit of the claim or defense of the sanctioned party) was neutral. In particular, the
pro se former franchisee was personally responsible for its failure to participate, the
prejudice to the franchisor was clear as it expended time and money for eight months
with no material advancement of the litigation, the history of dilatoriness was severe the
former franchisee’s conduct appeared to be willful and without sufficient excuse, and
nothing less than an extreme sanction would be effective. The magistrate pointed out
that the drastic sanction of default should be reserved for extreme cases but
nevertheless recommended granting the motion for default and determined that the
damages sought were sums certain that did not require further hearing. The district
court judge adopted that recommendation a few weeks later in Howard Johnson Int’l,
Inc. v. Kim, 2013 U.S. Dist. LEXIS 770 (D. N.J. Jan. 3, 2013), awarding the franchisor
approximately $200,000.
5.
Injunctions
Stuller, Inc. v. Steak N Shake Enters., Inc., 695 F.3d 676 (7th Cir. 2012),
presents an interesting confluence of preliminary injunctive relief jurisprudence and
franchisors’ ability to enforce national pricing programs. At issue in Stuller was Steak N
Shake’s implementation of a new menu pricing policy throughout its system. Stuller, a
five unit franchisee operating since 1939, refused to implement the new policy because
it believed the new policy would significantly harm its business and that its franchise
agreement gave it the right to set prices. When Steak N Shake initially threatened
termination based on Stuller’s refusal to adopt the new policy, Stuller filed suit for a
declaratory judgment. Although Steak N Shake originally agreed not to pursue
termination while the suit was pending, it later changed its mind which prompted Stuller
to move for a preliminary injunction preventing termination.
The magistrate to whom the motion was referred for a report and
recommendation sided with Steak N Shake and found no likelihood of irreparable harm
because “Stuller could comply with the pricing policy during litigation without
dramatically hurting its business, and that if it refused to accept the pricing policy and
had its franchises terminated, this loss would be self-inflicted.” Id. at 678. The district
court disagreed, holding that termination of the franchises would constitute irreparable
harm and that such harm was not “self-inflicted.” Id. It then entered the preliminary
injunction and Steak N Shake took an interlocutory appeal to the Seventh Circuit.
The issue on appeal was whether Stuller’s refusal to adopt the new menu pricing
was a self-inflicted injury that could not constitute irreparable harm. While recognizing
that certain types of self-inflicted harm precluded a finding of irreparable harm, the
Seventh Circuit held that each claim of self-inflicted injury must be evaluated on a caseby-case basis and that Stuller’s harm was not truly self-inflicted. Crediting Stuller’s
evidence that adopting the new policy would “be a significant change to its business
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model and that it would negatively affect its revenues, possibly even to a considerable
extent,” the Seventh Circuit affirmed the district court’s issuance of the preliminary
injunction. Id. In addition to the harm to its revenues, the court also noted that “if Stuller
implemented Steak N Shake’s policy and subsequently prevailed on the merits of its
case, it would be difficult to reestablish its previous business model without a loss of
goodwill and reputation.” In an interesting final footnote, the court went out of its way to
mention that during the pendency of the appeal the district court had denied Steak N
Shake’s summary judgment motion and granted Stuller’s as further proof that the merits
here warranted issuance of the preliminary injunction.
Aamco Transmissions, Inc. v. Singh, 2012 U.S. Dist. LEXIS 141764 (E.D. Pa.
Oct. 1, 2012), involved a dispute over a non-compete provision in the parties’ franchise
agreement. Aamco originally filed a complaint alleging Singh was in violation of the
parties’ franchise agreement by underreporting sales in an attempt to avoid payment of
franchise fees calculated as a percentage of sales. During the course of the litigation,
automotive center at another address. The motion was based on the parties’ franchise
agreement that prohibited Singh from engaging in the transmission repair business
within a radius of ten miles of the former center or any other Aamco center for two years
after the termination of the franchise agreement.
The court found that as part of the franchise, Aamco disclosed to Singh
proprietary systems, information, and trade secrets, and that Singh was provided with
Aamco’s operating and training manuals, national customer lists, and specialized
software through Aamco’s extensive training class. Singh’s current operation of a
transmission and general repair business within ten miles of his former Aamco store
was a violation of his franchise agreement, especially as Singh was using his
knowledge of Aamco, its unique systems, and other confidential information in the
operation of his new business.
Analyzing the factors for a preliminary injunction, the court found Aamco was
very likely to succeed on the merits of its claim: The non-compete was not ambiguous,
and was reasonable in time and geographic scope under the Piercing Pagoda factors
(351 A.2d at 212). Additionally, the Court found Aamco suffered irreparable harm. If
Aamco was unable to enforce the covenant not to compete, the values of all its
franchises would be lowered because the inability could induce other franchisees to
violate their franchise agreements and use Aamco’s goodwill to establish a competing
business. Moreover, the harm to Singh did not outweigh the harm to Aamco, as Singh
could still operate a non transmission repair business and because Singh was aware of
any potential harm when he signed the franchise agreement and then proceeded to
open a competing business in violation of that agreement. Therefore, Singh’s hardship
was not “undue” as it was merely Singh living up to the terms of the agreement he
entered. Lastly, the public interest was served by ensuring contractual rights and
obligations of parties are upheld.
In Aamco Transmissions, Inc. v. Singh, 2012 U.S. Dist. LEXIS 163930 (E.D.
Pa. Nov. 16, 2012), the court addressed the motion for reconsideration of its order
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granting Aamco’s motion for a preliminary injunction. The complaint involved a dispute
over a non-compete provision in the parties’ franchise agreement. Aamco originally
filed a complaint alleging that defendant-Singh was in violation of the parties’ franchise
agreement by underreporting sales in an attempt to avoid payment of franchise fees
calculated as a percentage of sales. In exchange for Aamco releasing Singh from the
substantial debt he owed to Aamco, Singh sold the franchise to an Aamco affiliate and
the franchise agreement was terminated. During the course of subsequent litigation,
automotive center at another address within ten miles of an Aamco repair center. The
court granted the preliminary injunction.
In a motion for reconsideration, Singh argued that the court ignored its own
analysis in Aamco Transmissions, Inc. v. Dunlap, 2011 U.S. Dist. LEXIS 91130, 2011
WL 3586225 (E.D. Pa. Aug. 16, 2011), which found a non-compete clause that
prohibited the defendant from operating a transmission repair business within a radius
of ten miles of any Aamco was not reasonable, but a ten mile prohibition from the actual
site of the center at issue was reasonable. Because the non-compete clause here was
identical to the non-compete clause in Dunlap, Singh argued that the court erred.
The court disagreed with Singh’s argument and denied his motion for
reconsideration. First, the court noted that a district court opinion has no precedential
value when it is affirmed without a published opinion by the Court of Appeals. Second,
the court disagreed that Dunlap established under Pennsylvania law a rule that all noncompete covenants which prohibit a former franchisee from operating within a radius of
ten miles from any like business was per se unreasonable and not enforceable. Rather,
the court noted that several Pennsylvania cases held that a ten-mile geographic scope
in a non-compete clause was reasonable. Finding that Singh failed to demonstrate any
of the factors needed when seeking reconsideration, the court denied the motion and
affirmed the preliminary injunction.
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W.V. Oct. 31, 2012), involved a dispute arising out of GM’s bankruptcy. As part of the
to stay the court’s order pending appeal in GM, LLC v. Bill Kelley, Inc., 2012 U.S. Dist.
LEXIS 169621 (N.D. W.Va. Nov. 29, 2012). Analyzing the necessary factors for a stay,
the court found no irreparable injury for Kelly, noting that GM was simply exercising
what was bargained for under the contract.
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Allegra Network, LLC v. Cormack, 2012 U.S. Dist. LEXIS 181640 (E.D. Mich.
Nov. 2, 2012), involved a franchisor’s allegation that former franchisees were violating a
preliminary injunction prohibiting them from operating a competitive business within ten
miles of their prior franchise location contrary to the non-competition clause in their
franchise agreement. The magistrate judge noted that the former franchisees did not
deny that they were currently operating a print and copying business within ten miles of
their prior print/copying franchise location and therefore ordered them to appear before
a circuit court judge to show cause why they should not be adjudged in contempt of the
preliminary injunction.
Tutor Time Learning Ctrs., LLC v. KOG Indus., 2012 U.S. Dist. LEXIS 162124
(E.D.N.Y. Nov. 13, 2012), involved Tutor Time’s request for a preliminary injunction
terminating KOG Industries’ continued operation of two tutoring facilities as violations of
the non-compete clause contained in KOG Industries’ franchise agreement with Tutor
Time.
KOG Industries’ tutoring facilities were originally established as Tutor Time
franchises. After Tutor Time terminated the franchise agreement with KOG Industries,
KOG Industries continued operation of both tutoring facilities under a different name.
Tutor time subsequently sought a preliminary injunction enjoining KOG Industries from
any continued use of Tutor Time’s trademarks and other intellectual property. The
parties entered into a settlement agreement in which KOG Industries agreed to cease
use of Tutor Time’s proprietary computer system, trademarks, curriculum, educational
materials, and forms, to send a letter to all existing customers that the tutoring facilities
were no longer licensed Tutor Time centers, and to disconnect all phone numbers
previously associated with Tutor Time.
Despite the settlement agreement, Tutor Time also sought a preliminary
injunction enjoining KOG Industries from continued operation of the tutoring facilities,
alleging that continued operation would irreparably harm Tutor Time through (1) public
confusion; (2) loss of good will; and (3) injury to current franchisees.
First, the court concluded that the terms of the settlement agreement alleviated
any risk of public confusion, as the customers were notified that KOG Industries’
tutoring facilities were no longer affiliated with Tutor Time and the facilities would no
longer be using any Tutor Time intellectual property or materials.
Second, the court concluded that there was no risk of loss of good will because
Tutor Time’s only interest in former customers of KOG’s Tutor Time franchises related
to their potential subsequent enrollment at another Tutor Time location. There were no
Tutor Time locations within the same neighborhoods, no evidence to suggest that Tutor
Time had attempted to recruit Kog Industries’ former customers, and no evidence to
suggest that the former customers would have enrolled at another Tutor Time location if
solicited.
Third, the court concluded that there was no injury to current franchisees for the
same reasons – there was no evidence that KOG Industries’ former customers would
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have enrolled at other Tutor Time locations even if KOG Industries ceased operations of
its two tutoring facilities.
In denying Tutor Time’s motion for a preliminary injunction, the court also noted
the potential harm to the public interest in closing tutoring facilities and forcing families
to locate alternative services.
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Competition Law.
claim.
terminate a franchise agreement for good cause, and good cause is satisfied if the a
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JOC Inc. v. ExxonMobil Oil Corp., 2012 U.S. App. LEXIS 25870 (3d Cir. Dec.
18, 2012), was an appeal of a preliminary injunction barring Exxon from terminating a
gas station franchise.
The franchisee had leased its property from Exxon and was required to purchase
its gasoline from Exxon. After encountering financial difficulties, the franchisee filed suit
against Exxon for allegedly charging higher wholesale prices for gasoline than
competing stations were charged. Thereafter, the franchisee stopped paying rent, and
Exxon initiated termination proceedings. The franchisee moved for a preliminary
injunction to prevent Exxon from terminating the franchise, which the court primarily
granted (Exxon was enjoined from terminating on the basis of the current franchise
agreement breaches but could terminate if other sufficient grounds were to arise). Both
parties appealed the scope of the injunction.
While the appeal was pending, Exxon terminated the franchise on the basis of
new breaches of the franchisee agreement and evicted the former franchisee from the
property. Because the franchise no longer existed and the court was therefore
powerless to grant any effective relief to either party, the court dismissed the appeal as
moot.
Foulke Mgmt. Corp. v. Audi of Am., Inc., 2012 N.J. Super. Unpub. LEXIS 2763
(N.J. App. Div. Dec. 18, 2012), was part of a motor vehicle franchise termination
litigation. Over the course of a few years, the franchisee’s sales had suffered, and
eventually the franchisor sent a notice of termination, reciting as grounds the poor sales
performance, poor customer service satisfaction ratings, and an alleged change in
ownership without the franchisor’s prior approval. The franchisee filed a complaint
seeking to prevent the termination, alleging that the franchisor was not appropriately
allocating vehicles to the dealership.
As required by the New Jersey Franchise Practices Act, the termination was
stayed pending the resolution of the litigation. A further requirement of the New Jersey
Act is that the franchisee must be afforded all the rights and privileges of a franchisee
as if the notice of termination had not been given. Accordingly, the franchisee sought
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an injunction from the trial court that prevented termination of the franchise while the
litigation was pending and required the franchise to allocate a certain number of
vehicles each month to the franchisee. The trial court granted an injunction in both
respects, staying the termination and also requiring the franchisor to allocate the same
number of vehicles as the franchisor had “expected” the franchisee to sell during the
year (which amounted to over 100 more vehicles than had been allocated to that dealer
in the previous year). The court believed that such an allocation requirement was
necessary in order to grant all rights and privileges to the franchisee as the statutes
required.
The franchisor appealed this second portion of the injunction. Under the
franchise agreement and the franchisor’s long-standing allocation practices that were
applied nationwide, dealers earned allocation of additional vehicles according to how
quickly they were able to turn over their existing inventory. The franchisor argued that,
rather than requiring the franchisee to earn vehicles as it had in the past and as
required by the franchise agreement, the trial judge instead improperly rewrote the
parties’ agreement and required the franchisor to deliver a guaranteed number of
vehicles regardless of the franchisee’s sales.
The appellate court agreed. While it pointed out that the intent of the entire
Franchise Practices Act was to level the playing field between franchisees and
franchisors (who enjoy superior bargaining power), the court determined that the intent
of the automatic-stay provision of the termination statute was to preserve the status quo
while termination litigation between a franchisor and franchisee is pending. The trial
judge’s order actually upset the status quo and granted more rights and privileges to the
franchisee than the franchise agreement provided and which were afforded to other
franchised dealers across the country. Therefore, the trial court erred in essentially
rewriting the parties’ prior business relationship and giving the franchisee more rights
during the period of the stay than it had enjoyed under the terms of the franchise
agreement. The franchisor was simply required to allocate vehicles to the franchisee in
accordance with the long-standing allocation formula and practice, and the trial court
was directed to order as much on remand. On an alternative basis, the appellate court
also determined that the franchisee had not met its heavy burden of submitting clear
and convincing evidence that it should be entitled to the “affirmative” injunctive relief that
had been granted, as the trial judge did not even conduct a hearing to weigh the
controverted facts submitted by both parties.
Joseph v. Sasafrasnet, LLC, 2012 U.S. Dist. LEXIS 182442 (N.D. Ill. Dec. 28,
2012), addressed whether a gas station franchisee was entitled under the Petroleum
Marketing Practices Act to a preliminary injunction preventing the termination of his
franchise.
The plaintiff franchisee had entered into a franchise agreement to operate a BP
gas station in Chicago. The defendant franchisor contended that the franchisee had
been consistently problematic and in breach of his obligations under the franchise
agreement. The franchisor eventually sent a notice of termination to the franchise,
citing the franchisee’s failure to uphold the contract requirements as to non-sufficient
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funds (“NSF”) payments and as to achieving certain “secret shopper” scores for station
appearance and advertising. The franchisee brought suit before the termination
became effective and requested a preliminary injunction preventing the termination.
Importantly, a preliminary injunction sought under the Petroleum Marketing Practices
Act requires only a showing of a reasonable chance of success on the merits, and not
the more typical strong likelihood of success on the merits required by most federal and
state rules.
The district court initially determined that the franchisee’s NSF payments were a
per se reasonable basis for termination, and denied the franchisee’s request for
injunctive relief. The franchisee appealed to the Seventh Circuit, which reversed and
remanded to the district court for further determination on two exceptions of the
Petroleum Marketing Practices Act that would likely affect the franchisee’s ability to
succeed. In particular, the Act generally permitted termination based upon failures to
timely pay the franchisor, unless (1) the failures were beyond the franchisee’s
reasonable control or (2) the failures are merely technical and unimportant to the
franchise relationship.
As to the first exception, the court determined from consideration of the facts that
the NSF payments in question were not merely technical errors but were failures to pay
within the reasonable control of the franchisee. As to the second exception, the court
determined that the franchisee’s delinquent payments of over $50,000 in a single month
were neither technical failures nor unimportant to the franchise relationship. The court
was persuaded by the facts that the franchisee had a history of late payments because
of insufficient funds and that the amount of each NSF payment was substantial.
Accordingly, the court determined that the franchisee failed to meet its burden of
showing that there was a reasonable chance that the franchisor would not be able to
prove that the termination was permissible under the Petroleum Marketing Practices
Act, and the franchisee was therefore not entitled to a preliminary injunction preventing
the franchise termination. The court did not reach the issue of whether the franchisee’s
“secret shopper” scores were a sufficient additional basis for termination.
Live, Inc. v. Domino’s Pizza, LLC, 2013 N.C. App. LEXIS 84 (N.C. Ct. App.
Jan. 15, 2013), involved Domino’s interlocutory appeal of a preliminary injunction
prohibiting Domino’s from terminating Live’s pizza franchise.
Domino’s had previously delivered a notice of termination of Live’s franchise,
citing Live’s alleged default on various obligations regarding quality, cleanliness, and
food safety under the franchise agreement. The district court the granted Live’s request
for a preliminary injunction prohibiting the termination.
In response, Domino’s sought interlocutory review, claiming that the substantial
right at risk necessary to justify interlocutory review was its “ability to control its brand
and to enforce its contractual right to terminate a franchisee whose failure to comply
with Domino’s standards not only [did] irreparable harm to the franchise system’s
goodwill, but also pose[d] a health risk.”
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Because the preliminary injunction only affected a single franchise location in
Domino’s national network of pizza stores, because Live’s franchise continued to be
subject to Domino’s supervision and inspection, and because the preliminary injunction
merely resulted in a continuation of business operations, the court concluded that there
was no substantial right at risk or irreparable harm to Domino’s as a result of preserving
the status quo pending resolution on the merits. Accordingly, it dismissed the
interlocutory appeal.
In PSP Franchising LLC v. Dubois, 2013 U.S. Dist. LEXIS 28769 (E.D. Mich.
Feb. 4, 2013), the court granted a plaintiff’s motion for default judgment and motion for a
permanent injunction. The plaintiff is a franchisor of pet food and supply stores
operating under the Pet Supplies Plus (“PSP”) trademark. Franchisees use PSP’s
propriety systems, trademarks, sales materials, and other proprietary information.
Defendant Dubois entered into a franchise agreement with PSP under which he agreed
to operate a PSP store for five years. Dubois transferred the agreements to codefendant Pets of Wellington but agreed to remain personally liable to PSP for all
obligations under the franchise agreement.
Defendants defaulted under the franchise agreement by failing to pay PSP
required royalties and for merchandise delivered to the franchise. PSP sent a notice of
termination providing a thirty-day cure period. Defendants failed to cure so PSP
terminated the franchise. Defendants continued to operate the franchise using PSP
proprietary materials and marks. PSP then filed a complaint alleging, trademark
infringement, common law unfair competition, breach of contract, and accounting.
Defendants failed to appear. Plaintiffs filed a motion for a default judgment, a
permanent injunction, and attorney’s fees. The court found that an injunction was
proper given the defendants use of the plaintiffs’ proprietary marks and the fact that the
plaintiff demonstrated actual success on the merits in relation to the trademark claims.
Plaintiffs also showed they would suffer irreparable harm if defendants continued to use
the PSP marks because have plaintiffs no longer have control over defendants
operations. Given that defendants would not suffer harm, and that the injunction was in
the public interest, the court entered the permanent injunction and default judgment.
PC P.R. LLC v. El Smaili, 2013 U.S. Dist. LEXIS 28701 (D. P.R. Feb. 28, 2013),
petroleum products and for abandoning the service stations, and alleging that
defendants failed to comply with their post-termination obligations by retaining some
form of possession over the gas stations and by exhibiting Texaco marks at both
stations. The court found that because defendants had ceased operation at the gas
stations, but had not covered or removed the Texaco name and signs on the stations
per the agreement, this affected the value of the Texaco marks and accordingly granted
the motion for permanent injunctive relief, enjoining defendants from using and
displaying all Texaco marks at both gas stations immediately, and also granted the
motion to evict defendants from both stations. Finally, the court granted PCPR’s
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request for damages for loss of income, equipment damage, overdue payments for
gasoline and rent, and all attorneys’ fees and costs.
Stanley Steemer Int’l, Inc. v. Hurley, 2013 U.S. Dist. LEXIS 10631 (S.D. Ohio
Jan. 18, 2013), involved a motion for a temporary restraining order to enjoin and restrain
a franchisee in violation of a franchise agreement from using protected trademarks or
from holding itself out as a franchise.
Defendant Susan Hurley (“Hurley”) was a long-time franchise owner of a Stanley
Steemer carpet and upholstery cleaning business in Kentucky. On July 26, 2009,
Hurley and Stanley Steemer entered into a Franchise Agreement (the “Agreement”)
giving Hurley an exclusive license to operate a Stanley Steemer carpet business in
certain counties in Kentucky. The Agreement required Hurley to make certain royalty
payments and to spend not less than 10% of gross sales on advertising. An audit
performed in December of 2012 found that Hurley was under-reporting sales and not
meeting her 10% advertising requirements.
In January of 2013, Stanley Steemer learned that Hurley was operating another
carpet business under the name “Custom Clean.” Calls made to the Stanley Steemer
phone number were automatically forwarded to a number for Custom Clean. When
confronted about this, Hurley claimed she “liquidated” her Stanley Steemer carpet
cleaning business and sold and/or leased it to a third party. The Agreement required
that Stanley Steemer have a right of first refusal to purchase any Stanley Steemer
carpet cleaning machine and/or vehicles. Hurley’s new business continued to use the
Stanley Steemer vans, cleaning equipment, and phone number.
Stanley Steemer sued for breach of contract, trademark infringement, and unfair
competition. The court found that Stanley Steemer had a strong likelihood of success
on the merits of all of these claims and granted the motion for a temporary restraining
order.
At issue in Tantopia Franchising Co., LLC v. W. Coast Tans of Pa., LLC, 2013
U.S. Dist. LEXIS 8266 (E.D. Pa. Jan. 22, 2013), was whether a non-compete covenant
in a franchise agreement prohibited the franchisees from assisting or providing advice to
a third-party business offering a related product.
Plaintiff Tantopia Franchising Co., LLC (“Tantopia”) operates a retail indoor
tanning salon franchise system. Defendants Donald and Richard Weiss entered into a
Franchise Agreement with plaintiff to operate a tanning salon. The Agreement included
a non-compete agreement which prohibited the defendants from offering services the
same or similar to the tan salon within a specified area for a period of two years
following the end of the Agreement.
Defendant filed a form with the Pennsylvania Department of Revenue to go out of
business. They did not inform plaintiff of this fact or that its salon ceased operations.
Subsequently, the space previously occupied by the defendants was leased out by a
new tanning business (the “CTG Salon”). This new company was owned ninety percent
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by Donald Weiss’ wife, and the other 10% by Donald Weiss himself. Additionally,
another tanning salon (the “Southampton Salon”) was opened by a close acquaintance
of Donald Weiss. Both Donald and Richard assisted at this tanning salon, and provided
the necessary requirements to secure the loan for the business.
Plaintiff filed suit and sought a motion for preliminary injunction to prevent the
tanning salons from operating as they were in violation of the non-compete provision in
the franchise agreement. The court granted the motion. The court noted that it was
well-established law that a non-covenantor who benefits from the covenantor’s
relationship with a competing business must abide by the same restrictive covenant
agreed to by the covenantor. The court found that the other businesses had sham
owners and the businesses were really being run by Donald and Richard but through a
different name. Accordingly, the non-compete restriction applied and success on the
merits was likely.
Dunkin’ Donuts Franchising LLC v. Oza Bros., Inc., 2012 U.S. Dist. LEXIS
140595 (E.D. Mich. Sept. 28, 2012), is yet another reminder that franchisees who
purposefully underreport sales will lose their franchises and find no sympathy in court.
Here, Dunkin’ Donuts began investigating the franchisee after receiving a tip from a
former employee that it was not reporting sales made to auto dealers. Three former
managers testified that dealership checks were given to Rajan Oza, one of the owners,
and that they had never seen him ring the dealership checks into the register. In
addition, corporate records showed that bank deposits substantially exceeded corporate
sales. While the franchisee claimed that the discrepancy was due to “shareholder
loans,” there was no evidence that such shareholder loans were ever made. Dunkin’
terminated the franchise, filed suit for damages and sought preliminary injunctive relief
prohibiting continued use of its marks.
The franchisee failed to produce any evidence beyond conclusory statements to
dispute Dunkin’s argument that it intentionally underreported sales. The court held that
the evidence establishing the dealership checks were deposited monthly coupled with
evidence showing that the owners had sole control over the checks established that
there was intentional underreporting of sales. As such, there was no genuine issue of
material fact and Dunkin’ was entitled to terminate the franchise. The court also
discounted the franchisee’s argument that, absent fraud, Dunkin’ could not terminate
without first providing an opportunity to cure, finding that no opportunity to cure was
required where, as here, the franchisee underreported to both Dunkin’ and the IRS.
Accordingly, the court granted Dunkin’ summary judgment and issued a preliminary
injunction enjoining further use of Dunkin’s marks.
In Jackson Hewitt, Inc. v. Barnes Enters., 2012 U.S. Dist. LEXIS 63784 (D.N.J.
May 7, 2012), the plaintiff franchisor entered into three franchise agreements with
Ronald Clark, the defendant franchisee, to operate Jackson Hewitt tax preparation
business in Wyoming. Clark personally guaranteed each of the agreements. Jackson
Hewitt later terminated the franchise agreements and commenced the instant action.
Clark failed to respond to the complaint, as well as to a court order requiring him to file
an answer. As a result, a default judgment entered. Jackson Hewitt then filed a motion
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seeking damages based on past due fees owed by Clark and for an award of attorneys’
fees, as well as an injunction to enforce the post-termination provisions of the franchise
agreements. Ultimately, the Court found that the default judgment was warranted. In
addition, there was no dispute regarding the amount of past fees or attorneys’ fees
owes, which the Court awarded.
With respect to the injunction, the Court found that Jackson Hewitt met its burden
of establishing that an injunction was appropriate. However, Clark objected to the
portion of the injunction that prevented him from operating a competing business until
two years after the Court’s Order, arguing that it was an unjustified extension of the noncompetition clause already contained in the franchise agreements. The Court agreed
for two reasons. First, the Court agreed that inclusion of this provision in the injunction
was an unwarranted extension of the two year non-compete clause in the franchise
agreements. Second, the Court found that there were no facts alleged to support that
Clark was operating a competing venture. As a result, the Court issued a permanent
injunction consistent with this decision.
At issue in MarbleLife, Inc. v. Stone Res., Inc., 2012 U.S. Dist. LEXIS 68223
(E.D. Pa. May 16, 2012), was enforcement of the court’s previous order enjoining
former franchisee Stone Resources from violating its post-termination restrictive
covenant. MarbleLife previously obtained a preliminary injunction enforcing the
covenant while the parties arbitrated Stone Resource’s claim MarbleLife fraudulently
induced it to purchase a franchise by wrongfully claiming ownership of certain patents.
MarbleLife claimed that Stone Resources was nonetheless continuing to operate and
sought contempt.
The court found that MarbleLife had demonstrated “beyond clear and convincing
evidence” that Stone Resources had blatantly violated the Court’s injunction order by
failing to provide MarbleLife with a list of its existing customers, relinquishing to
MarbleLife all phone numbers, fax numbers and email addresses used, relinquishing to
MarbleLife all advertisements used and “most disturbing” refraining from competing with
MarbleLife in the stone restoration business. Here, MarbleLife clearly demonstrated
that Stone Resources was in fact acting under the guise of a lease agreement and with
a MarbleLife competitor in contravention of the court’s injunction order. Finally, the
court found that Stone Resources failed to meet its burden of demonstrating a good
faith effort to comply with the injunction order. Instead, the court held the testimony of
Stone Resource’s owner to be “largely incredible” to the extent that a business owner
would not know that giving opinions, performing estimates, and conducting site visits on
behalf of a competitor to MarbleLife qualified as assistance in violation of the injunction
order. Accordingly, the court granted MarbleLife’s motion for contempt against Stone
Resources and its owner.
Husain v. McDonald’s Corp., 205 Cal. App. 4th 860, 140 Cal. Rptr. 3d 370
(April 30, 2012), addresses McDonald’s attempt to secure preliminary injunctive relief
shutting down certain restaurants. At issue was language in an assignment agreement
between a buyer and seller of seven restaurants that provided “in consideration of
McDonald’s consent to this agreement and the issuance of a rewrite to assignee,
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assignor waives, releases, and disclaims any claim for a rewrite of the franchise for a
particular location.” After the buyer failed to complete certain agreed-upon renovations,
McDonalds stated that it would not renew the franchises for some of the restaurants.
The franchisee filed suit claiming the language entitled it to renewal and obtained a
preliminary injunction prohibiting termination. McDonald’s appealed.
McDonald’s primary argument was that its franchise agreements with restaurant
operators are, in essence, contracts for personal services and therefore are not subject,
as a matter of law, to the remedy of specific enforcement by either party in the event of
a breach. McDonald’s emphasized language in its franchise agreement to the effect
that the maintenance of a “close personal working relationship” with McDonald’s is “the
essence” of the franchise. The court fundamentally rejected this argument and instead
held that the license agreement required franchisees to comply with all business
policies, practices, and procedures imposed by McDonald’s, to serve only those food
and beverage products McDonald’s designates, to maintain the building, equipment,
and parking area in compliance with standards designated by McDonald’s and to
purchase fixtures, lighting and other equipment in accordance with McDonald’s
designated standards. The court went on to note that a “close personal working
relationship” does not automatically equate to personal services as defined by law.
Although plaintiffs provided services to McDonald’s customers, they were doing so in a
manner which was strictly controlled by McDonald’s in every way possible and that it
could hardly be said that no performance save that of plaintiffs’ would have met the
obligations of the contract period. Finally, the court rejected McDonald’s argument that
Burger Chef Systems, Inc. v. Burger Chef of Florida, Inc., 317 So. 2d 795 (Fla. Dist. Ct.
App. 1975), precluded the specific performance plaintiffs sought as a matter of law
because it addressed a permanent injunction, not an interim injunction and in any event
did not find Burger Chef and its progeny to be persuasive.
At issue in Outdoor Lighting Perspectives Franchising, Inc. v. Harder, 2012
NCBC LEXIS 28 (N.C. Super. Ct. May 14, 2012), was the franchisor’s motion for a
preliminary injunction enforcing its non-competition and confidential information
covenants. After reviewing the general rules for enforcing non-competition covenants in
North Carolina, reasonableness as to geographic scope and time, protection of a
qualified interest such as good will, trade secrets or confidential information and
appropriately limited to protect the qualified interest, the court quickly turned to the one
factor at issue here: whether a two year prohibition on “directly or indirectly” engaging in
a “Competitive Business” was overbroad.
The court began its analysis by recognizing the more lenient standard applied to
enforcing non-competition covenants in the sale of business context as opposed to the
employment context. Although the court noted that prohibiting “direct or indirect”
competition in the employment context was generally considered too broad, it did not
invalidate the covenant on that basis. Rather, the court held that prohibiting
involvement in a “Competitive Business” was too broad to enforce. Although the
franchise agreement did not define “Competitive Business”, the absence of a definition
tying it to the business the former franchisees actually performed doomed enforcement.
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[T]he language further restricts Defendants from any outdoor lighting
business and any business which competes with a business "similar to"
the Franchisee's business. This expansive language extends well beyond
activities that Defendants performed pursuant to the Agreement. It
likewise extends beyond the business [franchisor] itself conducts. The
language thus extends beyond [franchisor]'s legitimate business interests.
Despite refusing to enforce the non-competition covenant, the Court did grant a
preliminary injunction prohibiting the use of the franchisor’s proprietary and
competitively-sensitive information that the franchisee admitted to retaining and using
and requiring the franchisee to assign its former telephone numbers to the franchisor.
7.
Attorneys' Fees and Costs
In Chinavasagam v. Equilon Enters., LLC, 2012 U.S. App. LEXIS 23464 (9th
Cir. Oct. 19, 2012), the district court (1) granted summary judgment to Equilon on
Chinavasagam’s Petroleum Marketing Practices Act (“PMPA”) claim; (2) denied
Chinavasagam’s motion to dismiss Equilon’s state law claims; (3) granted summary
judgment to Equilon on its conversion claim; and (4) awarded attorney’s fees to Equilon.
Chinavasagam appealed.
The appellate court upheld the district court’s decision in its entirety. The court
found that the PMPA establishes minimum federal standards governing termination and
nonrenewal of petroleum franchises and enumerates the circumstances under which a
franchisor may terminate a franchise. Equilon properly terminated Chinavasagam’s
franchise when Chinavasagam’s franchise lost its underlying lease.
The court also held that the trial court properly denied the motion to dismiss the
state law claims. While the PMPA preempts all state law claims inconsistent with it, it
only applies to those state or local laws that govern the termination of petroleum
franchises. Equilon’s state law claims did not relate to PMPA regulation of the
termination or nonrenewal of petroleum franchise agreements
The court found that all of the elements for conversion existed, and the district
court properly granted summary judgment on that claim. Lastly, the 9th Circuit found
that the district court did not abuse its discretion in awarding attorney’s fees and costs to
Equilon because the contract contained an explicit fee provision.
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defendants.
FECO, Ltd. v. Highway Equip. Co., Inc., Bus. Franchise Guide (CCH) ¶ 14,967
(Iowa Ct. App. Jan. 9, 2013), was the latest decision in a wrongful termination suit
brought by a farm implements dealer against a manufacturer. After the manufacturer
terminated the dealer and the dealer brought suit, the manufacturer admitted during the
litigation that it did not have good cause for the termination and that it did not provide
the statutorily required notice for the termination. At a bench trial, the trial court
concluded that the dealership was wrongfully terminated but that the Iowa statutes did
not permit recovery of money damages for terminations without good cause and without
proper notice. The former dealer appealed, and the appellate court reversed the
determination that damages were not available and remanded for a trial on the issue of
damages.
Key to the issue of damages was that the dealer began selling its own proprietary
line of farm equipment after its agreement with the manufacturer was terminated, and
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was very successful. The dealer had begun development of this line while it was still
under contract with the manufacturer.
On remand, the issue of damages was essentially a battle of experts. The
dealer’s expert claimed that the dealer, had it not been terminated, would have sold all
the units of its own line that it actually did sell, plus a substantial number of the
manufacturer’s implements. The manufacturer’s expert concluded that, the dealer,
through the sales of its own line of equipment, fully mitigated any damages resulting
from the termination. The court was persuaded by the manufacturer’s expert, and
concluded that the dealer was not entitled to any damages because it was in no worse
position than it was before the termination, and if anything, it was better off. The dealer
moved for reconsideration (which was denied) and then again sought review by the
court of appeals.
In reviewing the damages determination, the appellate court was required to
uphold the ruling if it was supported by substantial evidence and unless it was clearly
erroneous. The appellate court refused to reverse. On each of the dealer’s several
arguments on appeal, the court seemed most persuaded by the fact that assessments
of the credibility of witnesses is the responsibility of the fact-finder. The appeals court
was not willing to disturb the trial court’s determination as to which expert should be
believed. The appellate court was also influenced by the general maxim that a party
injured by a breach of contract should not be placed in a better position than he would
have been in had the contract been performed. The trial court’s ruling that no damages
should be awarded was therefore affirmed.
Finally, the dealer had also appealed the decision of the trial court not to award
attorneys’ fees, as permitted in actions successfully prosecuted by dealers under the
Iowa code. However, both the trial court and the appellate court agreed that the statute
at issue was most reasonably interpreted by permitting attorneys’ fees only when the
successful dealer receives an award of damages in the lawsuit. An award of attorneys’
fees under the Iowa statutes is entirely contingent upon an award of actual damages,
and therefore the fees claim in this case was properly denied.
Alboyacian v. B.P. Prods. N. Am., Inc., 2012 U.S. Dist. LEXIS 125889 (D.N.J.
Sept. 5, 2012), addresses whether a franchisee who successfully brought an action for
injunctive relief against its franchisor to prevent a violation of the New Jersey
Franchises Practices Act (“NJFP”) was entitled to attorneys’ fees. The statute provides
that franchisees who are “successful” in bringing actions for violations of the Act shall be
entitled to attorney’s fees. The court held that being “successful” included successfully
obtaining injunctive relief before a violation occurs, reasoning that the NJFPA allows for
actions to prevent violations and awards of attorney’s fees for injunctive relief preventing
a violation squares with the requirement of New Jersey law that “remedial statutes must
be construed broadly to give effect to their legislative purpose.” Accordingly, the court
awarded attorney’s fees.
Dunkin' Donuts Franchised Rests., LLC v. Naman Enters., Inc., 2012 U.S.
Dist. LEXIS 74590 (W.D.N.C. May 29, 2012), addresses another failed attempt to
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escape contract liability by claiming fraudulent inducement and unequal bargaining
power. Here, franchisees operated two Dunkin' Donuts /Baskin-Robbins shops in North
Carolina. When the franchisee informed Dunkin’ Donuts that it could no longer pay rent,
royalties and advertising, Dunkin’ terminated the franchise in accordance with its terms
and then brought suit to collect damages and enforce the non-competition covenant.
Interestingly, the parties mutually resolved the preliminary injunction motion to enforce
the non-compete such that only the damages claim was left and for which Dunkin’
donuts moved for summary judgment. Finding it undisputed that the franchisee had
breached the franchise agreement and failed to pay the franchise fees, advertising fees,
and rent, the court granted Dunkin’ Donuts summary judgment and awarded damages,
including attorney’s fees and costs incurred in enforcing the franchise agreement. In
doing so the court rejected the franchisee’s arguments that it was misled as to the future
viability of the franchises and that Dunkin’ Donuts strong-armed it into entering into the
franchise.
claims.
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At issue in Choice Hotels Int’l, Inc. v. Kusum Vali, Inc., 2012 U.S. Dist. LEXIS
62211 (S.D. Cal. May 3, 2012), was whether there was good cause to set aside entries
of default against defendants. Following Choice Hotels’ termination of the defendants’
franchise for failure to pay royalties, it sued for damages, federal and state trademark
infringement, false designation of origin and violation of the California Unfair
Competition Law based on defendants’ post-termination use of the ECONO LODGE
family of marks. When defendants failed to respond, defaults were entered against
them. When Choice Hotels moved for default judgments, defendants finally responded
and moved to set aside the defaults.
The court found that defendants had demonstrated good cause to set aside the
default because it did not find defendants’ conduct to be culpable. Although the
individual defendant acted negligently by failing to pick up his mail regularly, there was
no evidence that defendants knew about the lawsuit and acted in bad faith by
deliberately failing to answer the complaint. While the court rejected plaintiff’s
arguments that it would be prejudiced by a risk that defendants’ assets would be lost or
transferred to another entity or by the potential loss of evidence and witnesses due to
the passage of time, the court agreed that Choice suffered prejudice as a result of
having to incur attorney’s fees in connection with bringing the motion for default
judgment. Accordingly, the court ordered that the entries of default against defendants
would be set aside upon their payment of Choice’s reasonable attorney’s fees for
bringing the motion for default judgment. The court further found that the defendants
had alleged sufficient facts to support a potentially meritorious defense to set aside the
default with respect to the amount of damages. Finally, the court concluded that the
defendants had waived any argument of improper service because they admitted being
“subserved” with the summons and complaint at a hotel owned by the individual
defendant. Id. at 11-13.
In Estate of Kriefall v. Sizzler U.S. Franchise, Inc., 2012 WI 70 (Wis. 2012), a
“sizzler” of a decision, the Wisconsin Supreme Court reviewed a decision regarding the
apportionment of damages sustained due to an E. Coli contamination at two franchised
restaurants. The underlying facts of the case were that from July – August 2000,
approximately 150 people became ill when eating E. coli-contaminated food at two
Sizzler Steak House franchisees in the greater Milwaukee area. Three people died due
to the contaminate. Victims of the contaminated meat brought claims against the meat
distributor Excel, Sizzler USA and the franchisees. Prior to trial, plaintiffs settled with
defendants on an overall number such that at trial, the primary issue was how to
apportion liability between them. The jury found Excel 80% liable, the franchisees 20%
liable and Sizzler USA not liable. The jury ultimately found Excel 80% liable, the
franchisees 20% liable and Sizzler USA not liable. As a result, the trial court held that:
(1) “Sizzler [was] entitled to recover consequential damages for Excel’s breach of
implied warranties in the parties’ meat contract, notwithstanding limiting language in the
Continuing Guaranty”; (2) Sizzler [was] entitled to indemnity from Excel for the entire
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Sizzler $1.5 million advance partial payment to the Kriefall family …because the
payment was not voluntary and the jury found Sizzler [ ] zero percent liable for the E.
coli contamination”; and, (3) “notwithstanding the jury’s determination that Sizzler was
zero percent responsible for the E. coli-contaminated food that caused the illnesses of
so many people, Sizzler may not recover attorney fees [ ] because the exception to
American Rule does not apply here.” Id. at * 41.
The first issue the supreme court considered was whether a limitation of
damages provision in an Excel-Sizzler USA Continuing Guaranty should prevent Sizzler
USA from recovering damages for Excel’s breach of the implied warranties of
merchantability and fitness. The court affirmed the lower court’s decision that the
language used in the parties’ Continuing Guaranty effectually barred Sizzler USA’s
recovery of incidental and consequential damages for breach of the Guaranty’s
warranties, but did not extend to the relevant “Boxed Beef contract.” Therefore, Sizzler
USA could recover damages for Excel’s breach of the same. Second, the court
discussed the fact that the jury found Sizzler USA zero percent liable for the E. coli
contamination. Given that, Sizzler USA was entitled to complete indemnity from Excel
for its $1.5 million advance to the Kriefall family because that payment was not
voluntary and Sizzler USA was not liable. Lastly, the court found that Sizzler USA did
not properly state a claim for attorney fees because it did not demonstrate that Excel
engaged in wrongful conduct relevant to Sizzler USA. Notwithstanding the jury’s
apportionment of fault, Sizzler USA was not an “unrelated, third party,” therefore it was
responsible for its own fees.
8.
Receiver
After an evidentiary hearing in United States Bank Nat'l Ass'n v. Nesbitt
Bellevue Prop. LLC, 866 F. Supp. 2d 247 (S.D.N.Y. 2012), the court granted plaintiff’s
motion to appoint a receiver for Defendants’ eight hotel properties licensed under the
Embassy Suites franchise (the “Hotels”) because of the Defendants' default on loans for
which the Hotels are collateral. Plaintiff U.S. Bank (“Plaintiff”) is the Trustee, pursuant
to a Pooling and Servicing Agreement of various loans, including loans made to the
Defendants. The defendants are limited liability companies which own and operate the
Hotels. The Hotels are managed by Windsor Capital Group, Inc. (“Windsor”), which
moved to intervene on the basis that the Court “should consider its interests in its
consideration of the injury to the parties opposing appointment.” The Court denied the
motion to intervene without prejudice as moot and agreed to consider the potential harm
to Windsor in its analysis.
Following the Hotels’ failure to obtain a satisfactory score on Quality Assurance
Evaluations, Windsor received letters from the licensor explaining that each of the
Hotels was in default of the license agreement. The letters explain that the Hotels must
cure the default and that if they do not do so, then the franchise licenses may be
terminated on September 1, 2012. The court noted it was undisputed that, if the Hotels
were to lose their licenses to operate under the Embassy Suites brand, that would
substantially diminish their value. However, the evidence presented showed that it
would cost over $4.4 million to make the improvements necessary for the Hotels to
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satisfactorily improve their Quality Assurance Evaluations before the next round of
evaluations, but it would cost much more to bring the Hotels into compliance with all
brand standards. Neither the defendants nor Windsor had the $4.4 million for
improvements. Additionally, the evidence presented showed that the defendants were
several million dollars in arrears on payments for the loans, property maintenance
reserves, tax and escrow accounts.
The defendants argued that if a receiver were appointed, the receiver would
likely hire a new management company to manage the Hotels, thus depriving the hotels
of Windsor's experience with these specific properties. However, the court rejected that
argument, finding that the proposed new manager had experience with distressed
properties and would be more effective than the current Windsor management.
Ultimately, the court held that the appointment of a receiver was necessary to
preserve the properties for the secured lender and to effectuate the foreclosure and
liquidation of the Hotels, which were spread over six states.
In California Bank & Trust v. Shilo Inn, 2012 U.S. Dist. LEXIS 72008 (D. Idaho
May 22, 2012), California Bank & Trust (“CBT”) sought appointment of a receiver to
protect its collateral securing a loan made to defendant. The agreement between CBT
and the defendants was governed by a promissory note and a deed of trust. The
defendants did not dispute that the loan was in default but they argued that the
circumstances of the case did not warrant the appointment of a receiver. Additionally,
the defendants argued that Shilo Inn’s franchise and management agreement do not
allow for the appointment of a receiver because the franchisor can revoke the franchise
agreement once the receiver is appointed. Therefore, the defendants argued that if the
court were to appoint a receiver, the receiver’s authority should be limited to collecting
rents and not include full managerial rights.
The court analyzed CBT’s motion under the seven factors outlined in the Ninth
Circuits decision in Canada Life v. LaPeter. 563 F.3d 837 (9th Cir. 2009). In reviewing
a motion to appoint a receiver, Canada Life requires courts to consider the following
factors: (1) the validity of the claim; (2) whether there is fraudulent conduct by the
defendant; (3) whether the property is in imminent danger of being lost, concealed,
injured, or diminished in value; (4) whether other legal remedies are inadequate; (5)
whether the harm to the plaintiff by denial of the motion outweigh injury to the party
opposing appointment; (6) the plaintiff’s probability of success in the underlying action;
and (7) whether the plaintiff’s interest are well served by receivership.
The court noted that even though the parties consented to the appointment of a
receiver under the deed of trust, it was still going to analyze the motion under the
Canada Life factors. The court found that all seven Canada Life factors weighed in
favor of appointing a receiver. Interestingly, in analyzing the second Canada Life factor,
the court was concerned about the defendants attempting to “[hide] behind the franchise
and managerial agreements” for Shilo Inn that existed at the time they signed the loan
documents with CBT. Id. at *17-*18. The court found that the defendants’ argument
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that the franchise agreement would preclude the receiver from taking proper managerial
control over Shilo Inn was suggestive of fraud.
VI.
ANTITRUST
SSS Enters., Inc. v. Nova Petroleum Suppliers, LLC, 2012 U.S. Dist. LEXIS
126225 (E.D. Va. Aug. 30, 2012), involved claims by eighteen corporate and other
entities that own and/or operate gas stations against distributors of Shell and Exxon
gasoline. The claims were based on alleged violations of various antitrust provisions
and the PMPA and the decision addresses defendants’ summary judgment motion to
dismiss many of them. The court began with plaintiffs’ Section 2 monopolization claim.
“To prevail on a Section 2 monopolization claim under the Sherman Act, a plaintiff must
prove the 1) possession of monopoly power in a well-defined relevant market; 2) willful
acquisition or maintenance of that power using exclusionary or predatory conduct; and
3) causal antitrust injury. Id. at *5-6. Here, because plaintiffs’ had presented no
evidence of: (1) actual monopoly power; (2) a dangerous possibility of obtaining
monopoly power; (3) willfully acquiring or maintaining monopoly power; (4) a specific
intent to destroy competition; or (5) antitrust injury, the court dismissed the
monopolization claim.
The court then addressed and dismissed plaintiffs’ Robinson-Patman Act claim.
“In order to make a prima facie case of price discrimination, a plaintiff must show that a
defendant made at least two contemporary sales of the same commodity, at different
prices, to different purchasers.” Id. at *11. Relying upon the fact that defendants’ do
not sell fuels to themselves and citing cases addressing similar situations, the court held
that there were no contemporaneous sales sufficient to support a Robinson-Patman
claim.
Next, the court took up one plaintiff’s wrongful termination claims under the
PMPA. It dismissed the claim because the franchisee failed to pay for approximately
$653,000 in gasoline which constituted an “event” under the PMPA justifying
termination. Another franchisee’s claim under Virginia law based on defendants
operating competing locations within 1.5 miles also failed. While acknowledging that
the defendant’s station was within 1.5 miles of the straight-line distance from plaintiff’s
station, the court held that the statute specified that distance must be measured “by the
most direct surface transportation route” and under this standard the stations were more
than 1.5 miles apart. Id. at *15-16 (citing Va. Code Ann. 59.1-21.16.2(A)). Finally, the
court dismissed plaintiffs’ claims against two individual defendants and for breach of
contract based on their failure to identify facts demonstrating the breach of any
contractual obligation or damages.
King Cole Foods, Inc. v. SuperValu, Inc., 2013 U.S. App. LEXIS 2949 (8th Cir.
Feb. 13, 2013), involved a putative class action brought by grocery retailers against
certain grocery wholesalers. One group of the retailers had supply agreements and
arbitration agreements with one of the wholesalers, and another group of retailers had
supply agreements and arbitration agreements with the other wholesaler. The two
wholesalers at some point entered into a transaction whereby they exchanged certain
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business assets, including some of their respective customers and the related retail
supply agreements, and agreed not to do business with or solicit any of the exchanged
customers for a certain time period. The retailers contended that this asset exchange
constituted an illegal conspiracy to inflate wholesale grocery prices and brought a class
action under Section 1 of the Sherman Act. Because each of the retailers had
arbitration agreements with their respective wholesaler, each retailer brought its claims
only against the wholesaler with whom it did not execute arbitration agreements.
The wholesalers nevertheless moved to dismiss the action, arguing that any
claims by the retailers were required to be arbitrated. They argued that either equitable
estoppel or the successor-in-interest doctrine allowed each non-signatory wholesaler to
enforce the arbitration agreement against the signatory retailers who brought claims
against that wholesaler. The district court agreed on the grounds of equitable estoppel,
finding that the antitrust claims were so intertwined with the wholesaler/retailer
relationship that it would be unfair to allow the retailers to avoid the arbitration
agreement. The court did not reach the wholesaler’s successor-in-interest argument.
The Eight Circuit reversed, finding that equitable estoppel was not applicable. It
relied on a pair of cases where claims were brought relating to contracts that contained
arbitration provisions. In those cases, the claims brought by the plaintiffs were so
intertwined with the contract at issue in the litigation that equity required the arbitration
provision to be enforced against non-signatories. In contrast to those cases, the court
pointed out that the antitrust claims in this case were not closely related to the supply
and arbitration agreements and in fact exist separate and apart from the retailers’
supply and arbitration agreements. Therefore, the claims are not related closely
enough to the underlying agreements that equitable estoppel should apply. The court
remanded the action to the district court to consider the argument not previously
reached -- whether the successor-in-interest doctrine required enforcement of the
arbitration agreements against the retailers.
One judge dissented, contending that equitable estoppel should have applied.
The dissent pointed out that the cases the majority relied upon were contracts including
arbitration provisions, whereas the present case involved separate supply agreements
and separate, broad arbitration agreements. Therefore, the dissent contended that the
purported requirement of a close relationship between the claims and the underlying
contract for equitable estoppel to apply did not fit the facts of the present case. Here,
the arbitration agreements were entirely separate contracts, and they broadly required
arbitration of any claims relating to the retail/wholesale relationship, not just claims
arising out of the underlying supply agreements. Thus, the dissent would not have
permitted the retailers to avoid arbitration and would have held that equitable estoppel
should apply to enforce the arbitration agreements.
Bel Canto Design, Ltd. v. MSS HiFi, Inc., 2012 WL 2376466 (S.D.N.Y. June
20, 2012), involved a dispute between a manufacturer of high-end audio equipment and
a former authorized dealer of its products. In essence, the complaint alleged that the
former dealer had continued to sell the manufacturer’s products even after the
manufacturer had terminated their dealership agreement. Although the controversy
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between the parties involved myriad claims and counterclaims and various different
types of relief had been requested, the decision discussed here considered only the
manufacturer’s motion to dismiss the former dealer’s counterclaims stemming from the
manufacturer’s efforts to prevent the unauthorized resales.
The court turned first to the counterclaimants’ allegation that the manufacturer
had violated Section 1 of the Sherman Act (15 U.S.C. § 1) and the analogous provisions
of New York’s Donnelly Act (GBL § 340) by forging a “de facto conspiracy with its
authorized distributors . . . by their refusal to do business with” the counterclaimants.
Id. at *5. The court concluded that the counterclaim did not adequately allege a
conspiracy between plaintiff and its authorized dealers, especially in light of Supreme
Court precedent which makes clear that “the allegation of competitor complaints
followed by a response, such as termination of a dealership, is not sufficient to establish
a conspiracy.” Id. at *7. While the court noted that this finding was sufficient to doom
the antitrust counterclaims, it further opined that the counterclaims did not establish an
“unreasonable restraint of trade” because a “vertical” agreement between a
manufacturer and its authorized dealers (if one were sufficiently alleged) is not per se
illegal, and because the counterclaims failed to allege that the plaintiff had caused an
actual adverse effect on competition as a whole in the relevant market, in violation of
the “rule of reason.” See id. at 9.
The court next considered the counterclaimants’ commercial
disparagement/defamation claims, which alleged that the manufacturer had disparaged
them by making false statements on eBay and in letters to its authorized dealers to the
effect that the counterclaimants had engaged in “illegal” behavior, including violating the
manufacturer’s intellectual property rights. See id. at *13. While the court expressed
skepticism regarding these claims given its earlier ruling that the manufacturer was
likely to succeed in proving that the counterclaimants did, in fact, violate its IP rights, the
court nonetheless held that counterclaimants had stated a claim for commercial
disparagement—though it cautioned that it would entertain a motion for Rule 11
sanctions if the counterclaimants pursued that claim unsuccessfully. The court ruled
similarly with respect to one counterclaim of tortious interference with prospective
economic advantage by allowing the claim to proceed but noting that this cause of
action would also collapse if it was later determined that the manufacturer’s allegedly
defamatory statements were in fact true, thereby eliminating the “wrongful means” that
might otherwise give rise to liability. As to the other counterclaim on that basis,
however, which alleged that the manufacturer had interfered with the counterclaimants’
secret deals with authorized distributors to obtain and resell the manufacturer’s products
by terminating those dealers, the court held that this was “a perfectly legal and proper
business decision to enforce the Dealership Agreement’s proscription of sales to
unauthorized resalers.” Id. at *15.
With respect to the counterclaims alleging false advertising in violation of the
Lanham Act and Section 350 of the New York General Business Law, the court held
that the counterclaimants did not adequately allege any misrepresentation concerning
warranties on products sold by unauthorized dealers, but allowed leave to amend that
claim to supply the requisite factual content. It also allowed the “apparently novel” claim
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that the manufacturer’s disclosure of its policy not to honor warranties in such situations
was itself a misleading statement because the New York General Business Law in fact
required the manufacturer to honor those warranties. Id. at *17. The court also
permitted the counterclaim under New York GBL § 349, to the extent that it was
intended to encompass the tortious interference or disparagement discussed above.
Finally, the court dismissed the two counterclaims based on the manufacturer’s
alleged breach of the Dealership Agreement. It rejected the claim that the manufacturer
had violated the Minnesota Franchise Act because the counterclaimants had failed to
allege a franchisee-franchisor relationship, and dismissed the claim for breach of the
duty of good faith and fair dealing “for several independently sufficient reasons.” Id. at
*18.
Mary Kay, Inc. v. Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21,
2012), is an interesting case about the status of Mary Kay “Independent Beauty
Consultants” and its higher-level “National Sales Directors.” Here, Dunlap, a National
Sales Director, asserted counterclaims under Texas’ Deceptive Trade PracticesConsumer Protection Act ("DTPA") and challenged her non-competition covenant under
the Sherman Act.
The key issue in analyzing the DTPA claim was whether Dunlap qualified as a
“consumer.” Dunlap argued that her status as a National Sales Director was equivalent
to being a franchisee which previous cases had recognized as having standing to
pursue DTPA claims. May Kay, not surprisingly, begged to differ. The court ultimately
rejected Dunlap’s claim because she did not pay a franchise fee and simply received
commission on her own sales and those below her. Specifically, Dunlap’s agreement
provided her with various “intangible rights and privileges,” but not with “the facilities,
equipment, or other necessary goods and services to operate a business as would a
common franchisee.” Id. *10-11. The court also rejected the Sherman Act claim on the
basis that her “allegations concerning the relevant product market fail[] to define [the]
proposed relevant market with reference to the rule of reasonable interchangeability and
cross-elasticity of demand.” In addition, “the allegations do not specify the precise
contours of the geographic market; instead, the relevant geographic market is described
as at least Texas, but could be much larger.” Accordingly, the court dismissed the two
counterclaims.
VII.
MISCELLANEOUS CASES
Gomez v. Jackson Hewitt, Inc., 427 Md. 128, 46 A.3d 443 (2012), addresses
whether a franchisor that facilitates a refund anticipation loan from a third party lender,
but receives no direct payment from the consumer, was subject to the Maryland Credit
Services Business Act (the “Act”). Here, a Jackson Hewitt franchisee prepared the
plaintiff’s federal tax return and obtained for her an extension of credit, in the form of a
refund anticipation loan (“RAL”) from a third-party bank. Id. at 133-134. RALs are high
interest loans offered primarily to low-income customers that are secured by the
customers’ anticipated income tax return. Id. at 134, n.4. RALs give the consumer
“marginally quicker access to the consumer’s own money,” but at interest rates that
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ranges from 40 to 900 percent. Id. Pursuant to its agreement with the lender, Jackson
Hewitt received a fixed annual fee for offering, processing and administering financial
products, including RALs. Id. at 134. However, the only direct payment from the
plaintiff consumer to the tax preparer was for the tax preparation service. Id. at 154-55.
For this reason, the Maryland Court of Appeals found that Jackson Hewitt was not a
“credit services business” under the Act and, likewise, the plaintiff was not a
“Consumer” under the Act. Id. at 155.
In addition to the Court’s plain reading of the statute, it engaged in an analysis of
the legislative history to confirm its holding. That review revealed that the Act was
intended to regulate credit repair agencies and, in particular, concerns regarding
predatory practices and misleading advertising within that industry. Id. at 160-62.
Moreover, even though the Maryland Commissioner of Financial Regulation of the
Department of Labor, Licensing & Regulation (the “Commissioner”) previously issued an
advisory opinion that the Act applied to tax preparation companies that facilitate RALs,
the Court found that subsequent legislation directed at RALs provided a “strong
indication” that the General Assembly did not share the Commissioner’s view. Id. at
177-78.
A.
ADMIRALTY LAW
In re Oil Spill by the Oil Rig “Deep Water Horizon in the Gulf of Mexico on
April 20, 2010, 2012 U.S. Dist. LEXIS 141546 (E.D. La. Oct. 1, 2012), deals with
economic claims by BP dealers against BP for losses based solely on consumers’
decisions not to purchase fuel or goods from BP fuel stations and convenience stores
following the Deep Water Horizon explosion and oil spill. The dealers attempted to
bring these claims under the Oil and Petroleum Act (OPA) and state law. BP filed a
motion to dismiss.
The court rejected the attempt to bring the claims under Subsection B of the
OPA, because the section cited required physical injury to the property owned or leased
by Plaintiffs. Because the “BP brand” is not tangible property, it is not susceptible to
physical injury and, therefore, the dealers do not have a valid claim under Subsection B
of the OPA.
Likewise, the court rejected the dealers’ attempt to bring these claims under state
law. The court found that the dealers were attempting to use state law to circumvent
the Robins Dry Dock rule, a substantive rule of admiralty that bars unintentional tort
claims for economic loss when they do not involve physical injury to a proprietary
interest. Because the claims dealt with an event that occurred under admiralty
jurisdiction (the nexus was the explosion at sea), the dealers cannot attempt to use
state law to bring their claims. As such, the court granted the motion to dismiss.
B.
BANKRUPTCY
Redmond v. Bank of N.Y. Mellon, 470 B.R. 594 (Bankr. D. Kan. 2012), is a
breach of contract case brought in the U.S. Bankruptcy Court for the District of Kansas,
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Debtors Brooke Corporation and its various entities alleged that Textron and BNY
breached a series of Sale and Servicing Agreements by failing to set aside or distribute
amounts due for Level III Collateral Preservation Agreement Fees (Level III CP fees) in
their capacity as initial Servicers.
In 1996, Brooke developed a lending program to facilitate the acquisition of
existing insurance agencies by its franchisees. To finance the loans, Brooke as the
franchisor entered into Collateral Preservation Agreements with lender Aleritas. The
Agreements included three levels of services. At issue in this case were the Level III
collateral preservation services. These loans were ultimately pooled into seven separate
securities and sold to investors, with defendant BNY serving as the initial Servicer of
three and defendant Textron serving as the initial Servicer of the remaining four.
Textron moved to dismiss all eleven counts for failure to state a claim on which
relief could be granted. The District Court granted the motion on the grounds that the
only contracts to which Textron was a party, the Sales and Servicing Agreements,
included no provision that would require Textron to set aside or distribute Level III CP
fees or to direct in Servicer’s Certificates that BNY make such payments. Of particular
note however, was the Court’s further statement that even if the Agreements had
included such provisions, the Plaintiffs would have been precluded from bringing the
breach of contract claims because the negating clauses in the contracts specifically
excluded them from third-party beneficiary status.
W.V. Oct. 31, 2012), involved a dispute arising out of GM’s bankruptcy. As part of the
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to stay the court’s order pending appeal in GM, LLC v. Bill Kelley, Inc., 2012 U.S. Dist.
LEXIS 169621 (N.D. W.Va. Nov. 29, 2012). Analyzing the necessary factors for a stay,
the court found no irreparable injury for Kelly, noting that GM was simply exercising
what was bargained for under the contract.
Mangione v. Butler, 2012 Bankr. LEXIS 5689 (Bankr. W.D.N.C. Dec. 10, 2012),
was an action to establish a debt and determine the non-dischargeability of that debt in
bankruptcy, but the determination of the debt turned primarily on franchise-registration
requirements under New York law. The plaintiff had purchased from the franchisor the
right to open and operate twelve franchise locations in the state of New York in the
business of small-business marketing and promotion. The franchisor and franchisee
entered into a series of franchise agreements, and the franchisee paid $714,000 for his
franchise rights. Within months of selling those franchise rights to the plaintiff, the
franchisor was insolvent and folded. The evidence at trial suggested that the franchisor
was essentially a fraudulent enterprise, dissipating the proceeds from franchise sales to
its officers and principals.
Realizing that he had been had, the franchisee corresponded with the New York
Attorney General, who informed the plaintiff that the franchisor was not registered and
authorized to sell franchises in the state of New York at the time the plaintiff bought his
franchises, and that the franchisor was required to escrow the full amount of franchise
fees paid until such time that the franchisor could provide a franchise prospectus to
potential buyers that had been approved through the New York registration process.
The Attorney General and the former franchisee separately notified the franchisor that
the failure to be registered at the date of execution of the franchise agreements
permitted the former franchisee to rescind the agreements and recover the franchisee
fees paid, which should have been escrowed, together with interest and costs. The
14379022.3
295
franchisor, not unexpectedly, failed to refund the amounts paid upon demand made by
the franchisee.
The bankruptcy court determined that New York law required franchisors selling
franchises within the state’s borders to be registered, and the failure of this franchisor to
be registered at the time it entered into the franchise agreements with the franchisee,
along with the failure to escrow the franchise fees paid as required by law, entitled the
franchisee to rescission of the franchisee agreements and a refund of the $714,000 of
franchisee fees, plus costs and attorneys’ fees. The court also determined that the
individual bankruptcy debtors were responsible under New York franchise law for the
unlawful sale of franchises by the corporate franchisor that the debtors owned and
operated, and that the amount owed to the franchisee was not dischargeable in
bankruptcy under various dischargeability exceptions for debts incurred in a fraudulent
manner.
Long John Silver’s, Inc. v. Nickleson, 2013 U.S. Dist. LEXIS 2010 (W.D. Ky.
Jan. 4, 2013), involved franchisors Long John Silver’s, Inc. and A&W Restaurants, Inc.’s
various claims against defendant Patrick Nickleson and three of his business entities
(“Nickleson”) in connection with a series of Nickleson’s failed restaurant franchises, for
breach of contract, trademark infringement and unfair competition. Nickleson
counterclaimed, asserting breach of contract, violation of the Minnesota Franchise Act,
and common law fraud. While the lawsuit was pending, the defendants assigned their
equitable and legal interests in this action to a third party, and then later filed for
Chapter 7 bankruptcy. The bankruptcy trustee requested that the court either (1)
transfer the case to the bankruptcy court; or (2) abstain from deciding the action
because the legal and equitable interests in this action were property of the bankruptcy
estate.
The court first concluded that transfer was inappropriate because the trustee had
failed to establish that transfer of venue would be in the interests of justice or would
promote the convenience of the parties. The court noted that transfer was unlikely to
have any material impact on the administration of the defendants’ bankruptcy cases
because defendants had unconditionally assigned their interests in this action to a third
party prior to their bankruptcy filings. Accordingly, any recovery in this case would not
be an asset of the bankruptcy estate. Further, the parties had already engaged in
extensive briefing regarding plaintiffs’ motion to dismiss defendants’ counterclaims. As
a result, transfer at this stage in the litigation would cause delay and waste judicial and
party resources. Transfer would also deprive plaintiffs of their choice of forum. The
court therefore denied the trustee’s request for transfer.
Next, the court concluded that it need not abstain from deciding the case under
28 U.S.C. § 1334(e), which vests exclusive jurisdiction of all bankruptcy estate property
in the bankruptcy court. Because defendants had assigned all of their interest in the
action to a third party prior to the bankruptcy filings, the counterclaims were not property
of the bankruptcy estate. The court therefore denied the trustee’s request that it abstain
from deciding the case.
14379022.3
296
Allegra Network, LLC v. Ruth (In re Ruth), 2013 Bankr. LEXIS 133 (Bankr.
E.D. Tex. Jan. 10, 2013), involved Allegra’

judicial update - International Franchise Association

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