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Although Litigation Typically Slows Down During the Summer, This Year Both Franchisors and Franchisees Have Actively Initiated Litigation.

Although litigation typically slows down during the summer, this year both franchisors and franchisees have actively initiated litigation. 

Hotel franchisors have been particularly active:

In Days Inns Worldwide, Inc. v. Patel, the franchisor terminated its license agreement with Patel for failing four quality inspections in a row, failing to provide proof of insurance, and failing to pay fees due.  After termination, Patel continued to operate the hotel as a Days Inn.  Days Inn has sued in federal court in New Jersey for breach of contract and for trademark infringement, seeking injunctive relief, actual and treble damages, and fees.

Like Days Inn v. Patel, Knights Franchise Systems, Inc. v. Battle Creek Hari Ohm involves a dispute between the hotel franchisor and its franchisee over unpaid fees and the continued use of marks after termination, seeking  declaratory and injunctive relief, actual and punitive damages, and costs for trademark infringement and breach of contract.  Ramada seeks similar relief in Ramada Worldwide, Inc. v. The Hotel Company VII, LLC.  Aside from sharing subject matter, these three cases all involve a hold-over franchisee and seek injunctive relief under the Lanham Act for trademark infringement; but not one of the complaints spells out violations for trade dress infringement or unfair competition.  Why have one slice when you can have the whole pie?

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In a case brought by a franchisee, S-Jet Corp. v. The Quizno’s Holding Co. the franchisee claims it had had a contract to sell all of its 22 franchised Quizno’s locations, but that the franchisor failed to respond to its transfer request within the 30 days specified in the contract.  S-Jet has sued in federal court in Texas for breach of contract an, breach of good faith and fair dealing, seeking actual and consequential damages and costs.  The complaint is a bare-bones skeleton; there is nothing that tells us the franchisee’s story or that compels the conclusion that a wrong has been done.  Moreover, a number of potential causes of action – for tortious interference, promissory estoppel and violation of the Texas Deceptive Trade Practices Act – are not mentioned.  Finally, the damages claimed are for the full sale price of the business – ordinarily, damages recoverable on a sale of a business are limited to the profits the franchisee would have made on such a transaction.

In Gyllenhammer v. Jackson Hewitt, Inc., a Washington-based franchisee sued Jackson Hewitt after it failed to supply franchisees with access to Refund Anticipation Loans (RALs) to offer to clients for the 2010 tax year.  As RALs serve as an incentive to keep and gain clientele, Gyllenhammer alleged losses during this year’s tax season to competitors who has access to RALs.  Gyllenhammer sued in federal court for breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and under the Washington Franchise Investment Protection Act, seeking declaratory and injunctive relief, actual and punitive damages, and costs.   This case is one of a number brought by Jackson Hewitt franchisees arising from its failure to provide RALs to all franchisees in the 2010 tax season.

When it rains, it pours.  To date, Dunkin’ Donuts and Baskin-Robbins have been involved in 15 franchise-related lawsuits in federal court since the beginning of the year.  Here are the two newest:

In Dunkin’ Donuts v. NB Combo, NB Combo (a former franchisee) allegedly breached a settlement agreement by failing to sell its franchises to a third party during and by continuing to hold itself out as a Dunkin’ Donuts franchisee.  Dunkin’ sued in federal court in New Jersey for breach of contract, for trademark and trade dress infringement and unfair competition, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

Baskin-Robbins v. Crescent Enterprises, Inc. involved another franchise in the Dunkin’/Baskin-Robbins’ family to go under.  Baskin-Robbins terminated its agreement with Crescent after it failed to pay fees due.  Crescent continued to operate as a Baskin-Robbins outlet.  Baskin-Robbins sued in federal court in Florida for breach of contract, breach of personal guaranty, under the Lanham Act for trademark and trade dress infringement and unfair competition, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

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Franchisees continue to fight for their rights.

Sometimes franchisors or franchisees seek relief in a lawsuit that is different from damages or an injunction.   Instead, they seek to have a court declare their rights – this is a way of getting clarity on a proposed course of action before actually taking it.   Thus, for example, in CNH America, LLC v. Magic City Implement, Inc., a  franchisor of agricultural equipment asked the court to declare that a dealer’s repeated failures to meet quota constituted good cause for termination.  Conversely, in Tri-County Wholesale Distributors, Inc. v. The Wine Group, Inc., a beer distributor seeks to have the court declare that its’ supplier’s proposed consolidation plans are in violation of the Ohio alcoholic beverages law. 

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Franchisees can do more to get on a franchisor’s bad side than fail to pay royalties.

In Automotive Technologies, Inc. v. Mkaffi, LLC, Automotive, a franchisor of Wireless Zone, a wireless communication device store, sued its franchisee in federal court in Connecticut for breach of contract and guarantee after it engaged in subscriber fraud.  Subscriber fraud is the act of fraudulently activating accounts to avoid the payment for cell phone service. Automotive sought declaratory relief, monetary damages, and indemnification for Mkaffi’s actions against Verizon.

Other recent cases filed include:

            — Moran Industries, Inc. v. Pancham Enterprises, Inc., seeking injunctive relief and damages for operating as a franchisee after termination.

            — Little Caesar Enterprises, Inc. v. Hunter Hospitality, LLC, seeking similar relief.

Posted in Breach of Contract, Franchise Dealer Trends, New Franchise Cases, Termination & Non-Renewal | Leave a comment

Termination, specific enforcement, pricing issues, theft of system information and similar issues continue to fill the dockets of courts with franchise law cases.

Termination, specific enforcement, pricing issues, theft of system information and similar issues continue to fill the dockets of courts with franchise law cases.

Dunkin’ Donuts continues to sue its franchisees for issue arising from termination and failure to renew.  Five suits have been filed in the last few weeks alone.

            In Dunkin’ Donuts, LLC v. ABM Donuts, Inc., Dunkin’ terminated its franchise agreement after learning that ABM was operating a competing donut shop under a different name and using Dunkin’ inventory to stock the store.  Dunkin’ sued in federal court in Rhode Island for breach of contract, under the Lanham Act for trademark infringement, trade dress infringement, and unfair competition, seeking actual and punitive damages, declaratory and injunctive relief, and costs.

            In Dunkin’ Donuts, LLC v. Management MD, Inc., Dunkin’ sued its former franchisee in federal court in Florida for breaching the settlement agreement reached in a previous law suit.  Pursuit to the settlement agreement, Management MD was to obey all the provisions in their franchise agreement until its franchise locations could be sold.  Management MD continued to operate the locations but failed to pay royalties, other fees, and lease payments, and to comply with operational standards at its shops.  Dunkin’ sued for breach of contract for the settlement and franchise agreements, under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

            Dunkin’ Donuts, LLC v. Khan, Inc. involves another settlement agreement breach by a former franchisee.  In the original suit, Dunkin’ sued in federal court in Georgia to enforce the termination of Khan’s franchise agreements after Khan failed to timely remodel its shops.  Pursuant to the settlement agreement, Khan agreed to install certain required equipment at every location and to transfer ownership of one franchise location to a prospective franchisee by certain dates.  After failing to comply with the deadlines of the settlement agreement, Dunkin’ sued for breach of contract for the settlement and franchise agreements, under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, seeking, declaratory and injunctive relief, actual and punitive damages, and costs.

            In Dunkin’ Donuts, LLC v. Alsayed, Alsayed transferred his business ownership to a company in which he held 50% interest without Dunkin’s knowledge or consent, resulting in Dunkin’ terminating the franchise agreement.  After termination, Alsayed continued to operate the location as a Dunkin’ Donuts/Baskin Robbins store.  Dunkin’ sued in federal court in Ohio for breach of contract and under the Lanham Act for trademark infringement, trade dress infringement, and unfair competition, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

            Most recently, in Dunkin’ Donuts, LLC v. E.P.Donuts, Inc., Dunkin’ terminated its franchise agreement after discovering that E.P. failed to accurately report all sales to Dunkin’, the IRS, and the State of Rhode Island, maintained false books and filed false tax returns, and failed to pay all fees due.  E.P. refused to accept the termination and continued to operate the business as a Dunkin’ Donuts.  Dunkin’ sued in federal court in Rhode Island for breach of contract, and under the Lanham Act for trademark and trade dress infringement and unfair competition, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

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Going against the current trend to terminate franchises for defaults, some companies are seeking mandated performance under the contracts.

            In Goddard Systems, Inc. v. Toston, the franchisor of pre-schools sued its franchisee in federal court in Pennsylvania for breach of contract for failure to pay royalties and maintain a bank account for fee withdrawal.  Goddard seeks actual damages and declaratory relief mandating specific performance under the contract.

            In Toyota v. Bewley Imports, Inc., a Toyota dealer attempted to sell its dealership assets after Toyota invoked its right of first refusal because the proposed buyer failed to comply with requests for proper documentation and information.  Toyota then assigned its rights to purchase the dealership assets to another individual.  After Bewley refused to cooperate with the sale, Toyota filed suit in federal court in Tennesee claiming breach of contract and seeking declaratory and injunctive relief and specific performance for Bewley’s compliance with the right of first refusal.

            Lady of America v. Murphy involves a woman-specific aerobic and health service franchisor’s protection of its brand.  Lady of America discovered that Murphy had been copying, disclosing and misappropriating proprietary information, and modifying and copying advertisement materials without Lady’s approval or consent.  Lady of America sued in federal court in Florida claiming breach of contract, seeking actual and compensatory damages and costs.  Lady did not elect to terminate the agreement.

            In Management Recruiters v. Miller, a franchisor simply sued to collect unpaid royalty and advertisement fees.  Management sued in federal court in Ohio for breach of contract, seeking declaratory relief and damages.

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While American might be happy that the Double Cheese Burger is on Burger King’s dollar menu, Burger King franchisees are certainly not.

            A class action suit commenced in federal court in Florida a few weeks ago (Family Dining, Inc. v. Burger King Corp.) in regard to BK’s infliction of a price cap on two menu items.  Despite two franchisee-wide votes against a $1 limit on the burgers, BK imposed the rule.  Franchisees contend that it costs more than $1 to produce the menu items and, as a result, they are losing money in an effort to comply with this new regulation.  Franchisees sued for breach of contract and breach of implied covenant of good faith and fair dealing, seeking actual damages, declaratory relief, and costs.

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Chick-Fil-A is no chicken when it comes to upholding sexual harassment laws.

            In Chick-Fil-A, Inc. v. Horres, Chick-Fil-A terminated its franchise agreement with Horres after investigating complaints of Horres’ inappropriate and offensive physical interactions with many female employees.  Chick-Fil-A immediately took possession of the location and currently operates the restaurant as a company-operated store.  Horres initiated certain proceeding in Delaware, one of which he ultimately dismissed as his franchise agreement specifies Georgia as the litigation venue.  Chick-Fil-A filed suit in federal court in Georgia seeking declaratory judgment regarding the termination of the franchise agreement, Horres’ inability to establish damages or entitlement to damages, and Horres’ post-termination breaches of the franchise agreement, as well as costs.

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Struggles in in-home medical care franchise systems.

            In CK Franchising, Inc. v. Cooper, a franchisee of Comfort Keepers, an in-home, personal care service system, ceased to provide services through the franchise and worked directly with a third party to operate a competing care business, utilizing Comfort Keepers’ proprietary information and methods.  CK sued in federal court in North Carolina for breach of contract, violation of the North Carolina Unfair and Deceptive Trade Practices Act, tortious interferences with contract, tortious interference with prospective economic advantage, civil conspiracy, and unjust enrichment, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

            In Home Instead, Inc. v. Viduya, Home terminated its franchise agreement with Viduya after learning that Viduya violated the agreement by hiring illegal immigrants, failing to run criminal background checks on every employee, and maintaining false records.  Home sued in federal court in Nebraska for breach of contract, seeking declaratory and injunctive relief, damages, and prejudgment interest.

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Aggrieved franchisees sue franchisors.

            In Van Buren Lodging, LLC v. Wingate Inns Int., a hotel franchisee sued in federal court in South Dakota after discovering that the franchisor’s statements of potential earnings were entirely false.  Van Buren sued for violation of the South Dakota Franchise Act for providing earning projections outside of the UFOC, for breach of contract and the implied covenant of good faith and fair dealing, for unjust enrichment, and intentional and negligent misrepresentation, seeking rescission, actual damages, declaratory relief, and costs.

In Twin Cities Muffler v. Car-X, a franchisee sued its franchisor for dissatisfaction with its performance under the franchise agreement.  Twin Cities Muffler alleged that Car-X failed to enforce its own standards throughout the system, to develop and improve the Car-X concept, to make certain disclosures in its UFOC, and to provide meaningful supply and inventory purchasing assistance.  Twin Cities Muffler sued in federal court in Minnesota for breach of contract and implied covenant of good faith and fair dealing, violation of the Minnesota Franchise Act, and breach of fiduciary duty, seeking declaratory relief, rescission, damages, and costs.

In a case out of Puerto Rico, Agosto v. Sol Puerto Rico Limited involves a franchisor’s unilateral termination of a franchisee’s 20 year old gas station business.  Sol Puerto elected not to renew the agreement, citing termination of the lease Agosto took over when he purchased the business.  Agosto did not have a copy of the lease and Sol Puerto refused to provide him with one.  Through research, Agosto learned that he retained a purchase option for the property.  Sol Puerto’s actions led Agosto to sue in federal court in Puerto Rico under the Petroleum Marketing Practices Act for wrongful non-renewal and failure to assign an option to purchase, seeking actual and punitive damages, damages for emotional distress, and costs.

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Some franchisees are simply judgment-proof.

In Medicine Shoppe, Inc. v. Tura, a pharmacy franchisor sued to enforce an arbitration award against its franchisee.  Medicine Shoppe was awarded nearly $300,000 in damages and costs by the arbitrator for past due fees and Tura has failed to comply with the award.  Medicine Shoppe sued in federal court in Missouri seeking declaratory relief upholding and enforcing the arbitrator’s award and costs.

Posted in Breach of Contract, Franchise Dealer Trends, Fraud and Misrepresentation | Leave a comment

The Impact of The Economic Downturn Can Be Seen In The Turmoil That Some Franchise Systems Are Facing.

The impact of the economic downturn can be seen in the turmoil that some franchise systems are facing.  Lawsuits to enjoin post-termination covenants and use of the marks are in the upswing, as are disputes involving transfers.

Dunkin’ Donuts and Baskin-Robbins (affiliated sweet-treat stores) filed 4 complaints in the past few weeks against franchisees operating one or both of the franchise systems.  It seems America might not really be running on Dunkin’ after all.

In Dunkin’ Donuts v. Shiv Enterprises, Inc. and Dunkin’ Donuts v. Panzar Boston Post, LLC., Dunkin’ Donuts and Baskin-Robbins Franchising terminated both Defendant’s Dunkin’ Donuts/Baskin-Robbins franchises after each failed to pay their respective royalties and other fees due.  Despite the termination, both Defendants continued to operate their locations as Dunkin’ Donuts/Baskin-Robbins’ stores.  Dunkin’ sued both Defendants in federal court in New York for breach of contract, under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, and for breach of personal guarantee.  Dunkin’ seeks declaratory and injunctive relief, actual and punitive damages, and costs.

In similar case, Baskin-Robbins Franchising, LLC v. Allerton Delights, Inc., involves a franchisee who only operated Baskin-Robbins franchises.  Baskin-Robbins terminated after this franchisee failed to pay royalties, advertising and other fees, and repeatedly failed to cure the defaults.  The franchisee continued to operate the locations as Baskin-Robbins franchises.  As a result, Baskin-Robbins sued for breach of contract and under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

In the most recently filed action (Dunkin’ Donuts v. Tozanli Donuts, Inc.) the franchisor claims that a bad economy is not much of an excuse for the franchisee’s defaults.  Tozanli violated its franchise agreements for its Dunkin’ Donuts/Baskin-Robbins locations by failing to pay its employees overtime wage rates, avoiding the payment of federal and state payroll taxes, failing to accurately report sales, failing to pay all fees due under the Agreement, failing to keep accurate books, and employing individuals not authorized to work in the United States.  As a result, Dunkin’ terminated the Agreements, but Tozanli continued to operate the locations as Dunkin’ Donuts/Baskin-Robbins franchises.  Dunkin’ sued for breach of contract and under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

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Hotels are continuing to experience economic hardship, resulting in more franchise agreement breaches, terminations, and suits.

In Wyndham Hotels and Resorts, LLC v. Rhonda & Son’s, Inc., Rhonda & Son’s failed to make certain conversions on the hotel location, to file monthly franchise reports, and to pay fees due in violation of the Franchise Agreement.  Wyndham terminated the Agreement and Rhonda & Son’s continued to operate the location as a Wyndham Hotel.  Wyndham sued for breach of contract, under the Lanham Act for trademark infringement and unfair competition, and for breach of personal guarantee, seeking declaratory and injunctive relief, damages, and costs.

Country Inns & Suites by Carlson, Inc. v. Parkinson, Inc. involves another hotel licensee affected by the financial tides.  Country Inns & Suites terminated Parkinson’s hotel License Agreement after failure to pay fees due under the Agreement.  Parkinson continued to operate the hotel as a Country Inns & Suites location. Country Inns sued for breach of contract, under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement, seeking declaratory and injunctive relief, damages, and costs.

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Not-so-squeaky-clean behavior in the cleaning service community.

In JCommSolutions, Inc. v. Vintage Cleaning Corp.,  JComm filed suit against another franchisee and their franchisor, ServiceMaster, for ServiceMaster’s preferential treatment of Vintage Cleaning.  JComm alleged that Vintage Cleaning continually advertised within JComm’s territory, thus, taking its business.  For this, JComm sued Vintage for tortious interference with business expectancy, common law unfair competition, violation of Maryland’s Anti-Trust Act, and violation of the Lanham Act for unfair competition, seeking declaratory and injunctive relief, restitution, punitive damages, and costs.  JComm also alleged that ServiceMaster’s inaction on Vintage Cleaning’s territory intrusion showed preferential treatment for an older and more profitable franchisee.  As a result, JComm sued ServiceMaster for violation of the Maryland Anti-Trust Act, fraudulent inducement, and breach of contract, seeking declaratory relief to be released from its franchise agreement, injunctive relief, restitution, and costs.

The Cleaning Authority, Inc. v. Smith involves a franchisee’s simultaneous operation of a Cleaning Authority franchise and a competing cleaning business.  After discovering Smith operated the Commercial Green Clean Corp. from the same location and under the same phone number as her Cleaning Authority franchise, Cleaning Authority terminated her franchise agreement and sued for breach of contract, conversion of goodwill, tortious interference with business relations, tortious interference of contract, violation of Maryland Uniform Trade Secrets Act, civil conspiracy, and aiding and abetting, seeking declaratory and injunctive relief, damages, and costs.

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In these hard times, some franchisees are choosing abandonment over withholding fee payments. 

In Kahala Corp. v. William B. Holtzman et al., defendants unilaterally closed their respective Blimpie Subs and Salads locations in violation of their franchise agreements.  Kahala filed an action for breach of contract, seeking actual damages and costs.

In Precision Franchising, LLC v. Siciliano, Precision Franchising (owned by Precision Tune Auto Care, Inc.) sued the operators of two Precision Tune Auto Care locations for breach of contract after they prematurely closed and abandoned the locations in violation of their Agreements.  Precision seeks actual damages and costs.

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Across the board, franchisors seem reluctant to authorize the assignment or transfer of franchises.

Hot Stuff Foods, LLC v. Cody Ventures, LLC., involves a Hot Stuff franchisee’s unilateral sale of all 15 of her franchise locations without the prior consent of Hot Stuff Foods.  This breach led Hot Stuff Foods to terminate all 15 Franchise Agreements and to file suit for breach of contract and unjust enrichment, seeking declaratory relief, damages, and costs.

In Old Stage, Inc. v. Southside Oil, LLC, Old Stage sold one of its Southside-licensed gas stations to another company.  During the negotiations, Southside refused to agree to any assignment unless Old Stage and the new owner would enter into new contracts which were more onerous than the terms of the original contract.  When Old Stage refused to enter into new contracts, Southside began cutting off the supply of motor fuel to the location and eventually terminated the agreement.  Old Stage sued Southside for violation of the Petroleum Marketing Practices Act, breach of contract, and breach of the implied covenant of good faith and fair dealing, seeking injunctive relief, actual and punitive damages, and costs.

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With these trends coming to light, one has to wonder if the following two cases are warning flags of further litigation in the tax and eye care industries.

In JTH Tax, Inc. d/b/a Liberty Tax Service v. First Financial, Defendant breached its franchise agreement by filing an action against plaintiff in a state court other than the one specified for litigation in the agreement, conspiring with another former franchisee to operate a competing tax service in the franchise location, and by failing to pay fees due.  As a result, Liberty Tax sued for breach of contract, seeking actual damages, injunctive relief, and costs.

In Luxottica Retail North America, Inc. v. Cas-Man, Inc., Luxottica (owner of Pearle Vision) terminated Cas-Man’s two Pearle Vision franchises for failure to pay royalty, advertising, and merchandise fees in violation of the franchise agreements.  Cas-Man continuesd to operate both locations as Pearle Vision stores.  Luxottica sued for breach of contract, under the Lanham Act for trademark infringement and false designations of origin, under common law for trademark infringement and unfair competition, breach of guaranty, and unjust enrichment, seeking injunctive relief, damages, and costs.

Posted in Breach of Contract, Franchise Dealer Trends, Termination & Non-Renewal | Leave a comment

Franchisors and Franchisees Rush Federal Courts; Claims Range From Routine to Bizarre.

Franchisors and franchisees rush federal courts; claims range from routine to bizarre.

In the past two weeks, a rash of cases has been filed in federal court by both franchisors and franchisees.  Franchisors are typically seeking to enforce trademark infringement and to enforce non-competes.  Franchisees sued for a wide variety of remedies.  The details . . .

In Eggs ‘N Things International Holdings PTE. LTD v. ENT Holdings, LLC, the owner of a Hawaii-based breakfast restaurant entered into a very broad license agreement with a Japanese franchise mogul (Mr. Matsuda, owner of Egg ‘N Things International) giving his company the latitude to modify trademarks, establish protocols, and create and initiate advertising in order to expand the restaurant concept in Japan and, later, to create a franchise system.  After a personal disagreement between the parties, the owner began making demands never addressed in the license agreement (some outlandish enough to encompass the required use of a pancake mix ingredient which is illegal in Japan) and publically repudiated Eggs ‘N Things affiliation with the newly launched flagship restaurant in Japan.

Mr. Matsuda sues for breach of contract, violation of the HI Franchise Investment Law for unfair competition and deceptive trade practices, and for business defamation and commercial disparagement seeking injunctive relief, damages, and costs.

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In Little Caesar Enterprises, Inc.  v. Gregart Enterprises, Inc., LCE terminated a franchise agreement with GE after it repeatedly submitted fraudulent accounting and failed to pay fees.  GE continues to operate the former franchise location as a Little Caesar’s and, as a result, LCE filed suit under the Lanham Act for trademark infringement, unfair competition, and trade dress, and for breach of contract for said grievances.  LCE seeks injunctive relief, damages, and costs.

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Country Inn & Suites by Carlson v. Quincy Hotel, LLC is a case regarding the continued operation of a hotel by a former licensee after the termination of its License Agreement by Country Inn.

Country Inn sues for breach of contract for failure to pay fees and liquidated damages, and under the Lanham Act for trademark infringement, unfair competition, and trade dress infringement for the above offenses, seeking declaratory and injunctive relief, actual damages, liquidated damages, and costs.

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Ramada Worldwide, Inc. v. Fady & Fady Hospitality Management, LLC is a case about a licensor’s right to terminate a license agreement after its licensee failed multiple quality inspections and missed scheduled fee payments in violation of the agreement.

For such license abuses, Ramada sues for breach of contract, seeking fee reimbursement, liquidated damages, actual damages, and costs.

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Wyndham Hotels and Resorts, LLC v. Northstar Mt. Olive, LLC regards a franchisee’s hold-over of a former Wyndham Hotel location after the termination of its franchise agreement for failure to pay any royalty fees.

Wyndham sues for breach of contract and under the Lanham Act for trademark and trade dress infringement seeking declaratory relief, damages, and costs.

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Bonus of America, Inc. v. Patron Supply, Inc. is a case about a franchisee’s use of franchisor-provided training and facilities to operate a directly competing business in violation of the Franchise Agreement.

The franchisees agreed to operate a Bonus of America (BOA) cleaning and building maintenance franchise in certain MN and WI territories.  Three years into the Agreement, BOA learned that the franchisee was operating a competing business in secret from its BOA office in order to siphon employees and clients to expand its new business, Patron Supply (another cleaning and building maintenance provider).

BOA sues for breach of contract for the competition and unpaid fees, under the Lanham Act for trademark infringement and unfair competition, and for civil conspiracy, seeking declaratory and injunctive relief, actual and punitive damages, and costs.

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J.S. Foods General Partnership v. Burger King Corporation is a case regarding the alleged retaliatory action of a franchisor against its franchisee for participating in unrelated litigation as a member of a franchise association.

The primary owner of this Burger King franchise testified against BK as a member of the National Franchise Association in an unrelated action, and now alleges that, as a result of his participation in that litigation, BK has retaliated against his franchise by assessing an old and apparently forgotten termination fee.

JSF filed suit alleging a breach of contract and the violation of the California Franchise Investment Law for BKC’s seemingly retaliatory actions seeking declaratory and injunctive relief, estoppel, actual and punitive damages, and costs.

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Moran Industries, Inc. v. Vicki Clark and Cathy Willis is a case regarding the impact of the economy on franchise agreements.  After the Defendants failed to pay all the required fees and eventually ceased to operate their Mr. Transmission location due to poor revenues, Moran terminated the agreement and brought this suit for breach of contract.  The franchisor seeks damages and costs.

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Road Machinery & Supplies, Co. v. Link-Belt Construction Equipment Company is a case about the legality of a manufacturer’s arbitrary imposition of unprecedented market-share and inventory requirements on a distributor without good cause.

RMS and Link-Belt had distribution agreements since 1959, in which RMS agreed to sell Link-Belt’s cranes.  In February of this year, LB informed RMS that it was in breach of its agreement for failure to acquire proper inventory and to meet market-share requirements and that it would terminate their agreement if these problems were not addressed in an unreasonably short cure period.  Although these requirements were newly imposed and unrealistic in this economy, RMS made a good faith effort to comply, but LB has failed to formally state whether or not RMS is now in compliance. 

LB filed an action for declaratory judgment in Kentucky after receiving several notices from RMS’s attorney about the illegality of their impositions.  In response, RMS filed this action for the violation of the Minnesota Heavy and Utility Equipment Manufacturer and Dealers Act (HUEMDA) for LB’s lack of good cause and unrealistic cure requirements, as well as a breach of contract and the implied covenant of good faith and fair dealing, seeking declaratory and injunctive relief, damages, and costs.  RMS will also move to have LB’s Kentucky action dismissed for improper venue, or, in the alternative, to have it transferred to Minnesota and consolidated with this action.

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In Maaco Franchising, Inc. v. Napco Enterprises, LLC a franchisor seeks to enforce a covenant not to compete and to enjoin continued use of its marks by a former franchisee who is using the location as a competing collision repair and auto painting center.

When Napco failed to pay fees pursuant to its Franchise Agreement, Maaco terminated.  Napco immediately turned the location into a “Ramco Collision Truck and Auto Painting” while continuing to use some of the Maaco trademarks and signs.

Maaco sues for breach of contract and under the Lanham Act for trademark infringement and unfair competition seeking declaratory and injunctive relief, damages, and costs.

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In Howard Johnson International, Inc. v. Arshco, Inc., Howard Johnson sued its licensee, Arshco, after it relinquished control of its hotel to a third party in violation of its License Agreement.  This transfer of ownership terminated the Agreement, and Howard Johnson filed an action for breach of contract against Arscho and its Guaranty, Sajid Saeed, asking for outstanding fees, liquidated damages, actual damages, and costs resulting from the termination.

Posted in Franchise Dealer Trends, New Franchise Cases, Termination & Non-Renewal | Leave a comment

Be Careful of Absentee Ownership, says Franchise Lawyer.

I am often asked what the best franchises are for absentee owners.  Typically, these prospective investors are people with excess money or persons approaching retirement age that want to put their money into a business that will generate profits for them over the ensuing years.  Franchisors frequently tout their franchises as ideal for absentee owners.  But the fact is that for many reasons, I have rarely seen a start-up franchisee that was successful as an absentee owner.  Why?

The predominant, and perhaps only, reason is quite simply that a young business requires the focused attention of an owner who has his or her eyes on every aspect of the business.  Employees—good employees—view their duties as the performance of the tasks that constitute their jobs.  But a business if far more than that.  Inevitably, critical tasks fall through the job descriptions of employees and be left undone.

Most owners, however, have an inherent sense of what is important and a compulsion to check all details.  Most small businesses rise or fall on attention to detail.  The owner of a taco franchise once told me that his success depended on being in the store every day and making sure that the sauce for the tacos was made just right.

This is not to say that absentee ownership is not possible.  I know many franchisees who are absentee owners, but they are inevitably well established franchisees with highly developed management structures that are able to devote the kind of attention to detail that an on-site owner would give the business in any event.

Take heed if you are thinking about absentee ownership for a new franchise—the best course is to tend to the business yourself.

Posted in Buying a Franchise | Leave a comment

Franchise Lawyers Sue Over Undue Hardship and Wrongful Termination. Franchisors seek to terminate for cause.

In complaints that reflect the struggling economy, a KFC franchisee in Northern Ohio has sued KFC for demanding that it remodel and upgrade its outlet to comply with new standards in violation of the franchise agreement’s provision that the upgrade requirements would “not impose an undue economic burden.”  The complaint alleges that KFC cut off supplies to the franchisees resulting in a breach of contract.  The franchisee is demanding an injunction requiring the franchisor to continue supplying products.  Lima “D” Brothers v. KFC.

Meanwhile, in Arizona, a local distributor of fire trucks, ambulances and other first response vehicles has sued its manufacturer for wrongful termination under the motor vehicle laws of several states as well as for tortious interference and breach of contract.

The complaint alleges that the distributor was terminated without adequate notice and that while the termination notice was pending, the manufacturer informed customers that the distributor was no longer authorized to do business.  The franchisee is seeking injunctive relief in damages.  First In, Inc. v. Pierce Manufacturing.

Rooster’s Franchising Company has sued a Cleveland franchisee for failing to offer all authorized products, to provide monthly financial reports and to remit all royalties to the franchisor.  The complaint alleges that the franchise has been terminated and that the franchisee is violating the non-compete and trademark requirements.  Rooster’s Franchising Co., LLC v. R&R Roosters, Inc.

Similarly, in the Northern District of Alabama, Choice Hotels has sued one of its Rodeway Inn franchisees for trademark infringement after termination of the franchise for numerous defaults.  Choice Hotels International v. Saya Hospitality LLC.

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What Is A General Release and Why You Should Not Sign It?

Franchisees often find that they have been wronged by their franchisor, but are unable to pursue relief because they signed a general release of all claims against the franchisor.  Whenever you, as a franchisee, get a general release from your franchisor, you should check with a franchise lawyer to see if you should sign it.  This blog will answer a few basic questions about general releases.

What is a general release?  A general release is a contract where one side releases the other side of all claims that it may have.  Usually, a general release is effective to release all claims that that party has, whether they are known or unknown, and that exist as of the time the franchisee executes the release.  Typically, if the franchisor engages in wrongdoing after the release is signed, claims arising from that conduct are not covered.

Why are releases important?  A general release is important because it gives away, or gives up, any claims that the franchisee may have against the franchisor.  You would not write a check to the franchisor for nothing—therefore, you should not execute a general release for nothing.  Courts will usually enforce general releases unless there are extenuating circumstances.

When do franchisors ask for general releases?  Franchisors typically ask franchisees for general releases when there are changes in the franchise agreement, when the franchise is renewed, when it is transferred, and on any other number of occasions.  Especially if there is unrest in a franchise system, the franchisor may demand general releases from franchisees quite often.

How do I know that I am signing a general release?  Releases are frequently titled “Release” or “General Release.”  That word may be combined with other words, such as “Consent to Assignment and Release.”  At the same time, however, releases may be “buried” in the middle of other documents; some franchisors even include a paragraph that consists of a general release right in the middle of their franchise agreements.  You should make sure that a knowledgeable franchise lawyer reviews your documentation before you sign it and that you get complete advice.

What if I didn’t know I was signing a release?  If you did not know you were signing a release, or you feel that you were forced to sign it, then you should see a franchise lawyer to determine if you have grounds for striking the release or making it ineffective.  While a release is generally treated like other contracts by courts, and frequently will be upheld, only a knowledgeable franchise attorney can make a clear assessment as to your particular circumstances.

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Franchise Cases: Lifesuccess Publishing Hit For Fraud, Goddard Goes After “Inappropriate” Activities.

Franchisees of “Lifesuccess Publishing, LLC” have sued their franchisor and its owner in the Federal Court in Arizona for fraud, violation of the Florida Franchise Act, the Florida Unfair Trade Practices Act and similar statutes in North Carolina arising from the franchisor’s allegedly fraudulent sale of a publishing business franchise.  The complaint alleges that the franchisor made misrepresentations about its ability to provide training, conduct seminars, to pay commissions for books published, advertising and marketing assistance, operations manuals and the ability to timely and successfully publish books.  The franchise fee ranged from $100,000 to $250,000, and according to the complaint, Lifesuccess lacked the resources and capabilities to even publish books.

We suspect that when the time comes to respond, the defendant will move to dismiss for failure to plead fraud with particularity.  While the complaint is otherwise well done, it does not spell out in detail the “who, what when and where” of the misrepresentations allegedly made.

Goddard Systems, which franchises centers for pre-school early education programs, has sued Illinois franchisees for failure to pay royalties, including payment of a default judgment and, mysteriously, “for engaging in highly inappropriate activities on school property” that “were likely to affect the goodwill of the proprietary marks.”  The complaint alleges, in parentheses, that the inappropriate activities “will be fully explained to the court at the appropriate time.”  Interestingly, no termination has been alleged nor is the complaint seeking to enforce a termination.

An otherwise ordinary franchisor complaint against a franchisee for violation of a post-term non-compete contains an unusual allegation with respect to goodwill.  In The Cleaning Authority Inc. v. Harry Rutherford, brought in the Federal District Court for the District of Maryland, the franchisor complains that the franchisee quit its cleaning business and is continuing to service its clients under his own flag.

One of the counts is for “conversion of goodwill” and contains this interesting allegation:  “During the term of the franchise relationship, TCA [the franchisor] metaphysically transferred [to the franchisee] the right to use and develop goodwill for the term of the franchise relationship, but at the end of the relationship, all goodwill flowed back to TCA and TCA alone has the exclusive right to the goodwill.”  This is the first time in this lawyer’s experience that he has encountered a “metaphysical transfer” of anything in a franchise or lawsuit.  Since the complaint is verified as true and correct by one Allen Thrift, Senior Vice President of The Cleaning Authority, it will be interesting to see how Mr. Thrift testifies when questioned about this metaphysical transfer.

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Recent Franchise Law Cases Focus on Termination and Encroachment

Cases filed in the Federal Courts over the last two weeks involving franchisees and franchisors focus on termination and non-renewal.  Jersey Mike’s Franchise System, a submarine sandwich franchisor has sued Michael and Billie Snyder for trademark infringement and breach of a non-compete after terminating their franchise because the franchisee continued to operate under the same name and marks.

Moran Industries, the franchisor of Mr. Transmission, has sued a former franchisee in Chattanooga and his son for continuing to operate after termination.  The counts for trademark infringement have a twist—the franchisor alleges that the franchisee’s son is using the trademark through a Yahoo.com local advertising program and a website link in the business listing that included “Mr. Transmission.”

Electra Inc., an Arkansas distributor of electrical components sued its supplier, Thomas & Betts Corp., in state court in Arkansas for wrongful termination in violation of Arkansas’s franchise law.  Electra is seeking damages for loss of business expectancy, lost profits and consequential damages, plus repurchase of inventory.

A franchisee of United Imaging Partners, a chain of retail ultrasound screening locations, has sued its franchisor in Austin, Texas for encroachment by placing another franchisee in its territory.

In New York, a local yacht store sued its Italian supplier for breach of contract, including encroachment, allowing another dealership to engage in deceptive marketing and selling to the other dealer on more favorable terms.

Posted in Franchise Encroachment, New Franchise Cases | Leave a comment

Franchisees File Class Action Against Medicine Shoppe Claiming Fraud and Breach of Contract Arising from “System Changes.”

A far-flung group of Medicine Shoppe franchisees, from California, South Dakota, Pennsylvania, North Carolina and other states, have filed suit against their franchisor, Medicine Shoppe International; a company that it acquired, Medicap; and the parent company of both, Cardinal Health, a pharmaceutical distributor, alleging that the franchisor committed fraud and breach of contract in connection with its attempt to address deficiencies in its franchise system and to reshape the system in a new format.

According to the complaint, Medicine Shoppe’s model was no longer working, and it had been losing a substantial number of franchisees. It sought to remake its franchise system in a new, streamlined format that offered lower royalties and reduced services. As originally presented to the franchisees, the new system would go into effect only if 95 percent of the existing franchisees signed up for it. In fact, however, only about 54 percent signed up, but the franchisor went forward nonetheless. The result is that about half the franchisees are on the new system and half on the old, with neither group getting the benefits that they thought they would receive. Further, the complaint alleges that Cardinal engineered the program in order to boost its sales of pharmaceuticals to the franchisees.

The complaint alleges that the defendants falsely represented that they would adopt the new system only if 95 percent opted in. It alleges further that the franchisees who opted in were falsely induced into paying early termination fees on their old agreement whereas those who opted not to go in are now paying higher royalties and getting fewer services.

The complaint then alleges that the franchisor and Medicap had breached their franchise agreements and the implied covenant of good faith and fair dealing by failing to exercise their discretion in good faith by accepting the opt-ins when they were less than the required number. The complaint also seeks to certify the plaintiffs as class representatives.

Although the complaint is very well written, it does not contain allegations of violation of franchise laws, even though they would be implicated by a number of the states in which the Plaintiffs are resident. Additionally, the complaint does not allege negligent fraud or violation of unfair trade practice acts, which are powerful state laws that may incorporate, by reference, the Federal Trade Commission Rule, which requires truthfulness in offering franchises for sale. The importance of franchise and unfair trade practice laws is threefold: (1) it can be easier to allege and prove fraud under these laws than in ordinary circumstances; (2) under some unfair trade practice laws, multiple damages (e.g., double or triple damages) are available; and (3) attorneys’ fees may be awarded to a prevailing franchisee.

It’s always surprising to find lawyers not looking for a fee!

Posted in Breach of Contract, Franchise System Changes, Fraud and Misrepresentation, New Franchise Cases | Leave a comment

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