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.
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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.