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The discontinuance of the Mercury brand of automobile and litigated damages issues dominated franchise cases filed recently.

March 30, 2011

The discontinuance of the Mercury brand of automobile and litigated damages issues dominated franchise cases filed recently.

In two cases, Ramada Worldwide Inc. sued former franchisees in federal court in New Jersey for liquidated damages and damages for past due fees in connection with the premature termination of the franchise agreements.  In Country Inns and Suites by Carlson, Inc. v. Bandera Pointe Hospitality, LP the plaintiff franchisor sued the defendant franchisee in federal court in Minnesota on January 19, 2011for liquidated damages.  The franchisee failed to begin construction of the hotel that it was to operate.  This constituted a default under the license agreement and the franchisor terminated the license agreement with the franchisee.  Liquidated damages are contractually defined damages to be paid to a party upon the early termination of the contract by the other party.  Liquidated damages provisions are often enforceable, but not always.  Even when they are enforceable, however, a former franchisee may be in a position to negotiate over the amount of those damages or to negotiate them away completely if, for example, the former franchisee has claims against the franchisor.  A former franchisee, or a current franchisee planning to end its relationship with the franchisor prior to expiration of the franchise agreement, subject to a liquidated damages clause should seek advice from a franchise lawyer about its options.

Ford Motor Company’s decision to end the Mercury brand gave rise to at least two lawsuits.  In Frances Scott Key Lincoln/Mercury, Inc. v. Ford Motor Company, the Plaintiff car dealer filed a complaint in federal court in Maryland for violations of the Maryland Transportation Code, violations of the Automobile Dealers Day in Court Act, tortious interference with present and prospective economic advantage, promissory estoppel, and equitable estoppel, all based on Ford’s discontinuance of the Mercury brand.  Ford sent a notice of discontinuance of the Mercury brand to its Mercury dealers on June 2, 2010.  In the notice of discontinuance, Ford offered a Mercury “resignation benefits offer” to Plaintiff of $181,026.00.  The Plaintiff contends that this amount was woefully inadequate.  Under the Maryland Transportation Code, the Plaintiff argues that it is entitled to the fair value of its business as a going concern.  Plaintiff also claims that because Ford discontinued Mercury and terminated its dealership in violation of the Maryland Transportation Code, it is entitled to damages including the economic loss from the investment made in a new facility which can no longer be used, the present value of the past and future increase in rent expense for the new facility, and lost profits as well as other losses incurred.  The Plaintiff also alleges that Ford has failed to act in good faith towards the Mercury dealership in attempting to coerce the dealer to release all claims against Ford.  Furthermore, the Plaintiff claims that in February of 2010, Ford made statements that it was committed to growing its Mercury line and in reliance on these statements the Plaintiffs invested significantly in growing its Mercury dealership. 

In a separate suit, North Palm Motors, LLC v. Ford Motor Company, another dealer sued Ford for discontinuing the Mercury line, alleging violations of Florida statutes relating to the termination, cancellation, or non-renewal of a dealer’s franchise. Florida law requires that a manufacturer terminating a dealer’s franchise must pay the dealer an amount at least equal to the fair market value of the franchise.  The plaintiff alleges that Ford’s offer was significantly less than the fair market value of the franchise terminated.  The plaintiff seeks compensatory damages, treble damages, court costs, and attorneys’ fees.  This is another example of how the evolving American car market may impact automobile dealers around the country.  Automobile dealers should recognize that state statutes offer them significant protections and dealers facing termination should seek experienced franchise attorneys to review options.

Kahala Franchise Corp. v. Maizr is a fairly typical complaint filed in federal court in Wisconsin on January 13, 2011 filed by the franchisor against a former franchisee for breach of contract, trademark infringement, and unfair competition.  The franchisee failed to pay royalties and despite being given an opportunity to cure, was unable to cure its default.  The franchisor terminated the franchise agreement and while the parties attempted to negotiate to allow the franchise to continue to exist, an agreement could not be worked out.  The former franchisee has not complied with its post-termination obligations.  In particular, it has violated the franchise agreements’ covenant not to compete.  In fact, the former franchisee continues to display the franchisor’s trademarks, trade name, logos, and promotional materials at the same location that it operated as a franchisee.  The Plaintiff franchisor seeks damages for this breach of contract and violations of trademark statutes.  Franchisees that receive a notice of default may be in a position to negotiate a way out of being terminated in order to allow them to operate a competing business.  Therefore, it is important for franchisees to seek counsel immediately upon receiving a notice of default or before receiving a notice of default in order to understand its options and possibly prevent termination and having to comply with certain post-termination obligations.

In the tax preparation business, four cases have been filed in which the franchisor seeks to shut down the franchisee and, in some cases, obtain damages.  In JTH Tax, Inc. v. Noor, the Plaintiff franchisor filed the complaint in federal court in Virginia on January 12, 2011 against the franchisee for breach of contract, tortious interference, business conspiracy, and civil conspiracy.  The franchise agreement required the franchisee to comply with the operations manual and the operations manual required that the franchisee have employees sign an employment agreement.  The Defendant allegedly failed to have its employees sign the agreement and thereby violated the franchise agreement.  The franchise agreement had also been terminated and the franchisee violated a post-termination covenant not to compete by operating a competing tax preparation business. 

In JTH Tax, Inc. v. Boress, the franchisor sued the franchisee in federal court in Virginia on January 19, 2011 for breach of contract, trademark infringement, business conspiracy, and tortious interference.  The franchise agreement expired and the franchisee chose not to renew the agreement, but the franchisor claims that the former franchisee’s former general manager is now operating a new tax service in the same location in which the franchise had operated. In Jackson Hewitt Inc. v. JJS Financial, LLC, the plaintiff franchisor sued the franchisee in federal court in New Jersey on January 19, 2011 for trademark infringement, unfair competition, and breach of contract.  Jackson Hewitt had terminated the franchise for abandonment, and the franchisor alleges that the franchisee is now operating a competing tax business in the former franchise locations.  These competing tax businesses are being operated under Jackson Hewitt’s trademarks while others are being operated under the name JH Tax Service using signage that is confusingly similar to Jackson Hewitt’s signage. 

In another tax case, Jackson Hewitt, Inc. v. Chaney, the franchisor sued the franchisee in federal court in New Jersey on January 19, 2011 for breach of contract and unjust enrichment.  The franchisee entered into five (5) nearly identical franchise agreements for the operation of Jackson Hewitt tax preparation businesses in Georgia.  Chaney personally guaranteed her obligations under each of the franchise agreements.  The franchisor is suing Chaney for certain past due royalties, advertising fees, rents, remaining unbilled promissory note balances, and interest.  Also, following termination, the franchisee began operating competing tax businesses at several former Jackson Hewitt franchise locations in violation of the covenant not to compete. 

These were all situations in which the franchisee could potentially have avoided having to comply with its post-termination obligations by negotiating with the franchisor prior to being terminated.  Franchise counsel may have been able to help this franchisee negotiate its way out of having to comply with the franchise agreement’s post-termination obligations.

In Joseph v. Sasafrasnet LLC the plaintiff franchisee sued the franchisor in federal court in Illinois on January 19, 2011 for violations of the Petroleum Marketing Practices Act (the “PMPA”).  The PMPA permits termination of a franchise agreement only under certain circumstances.  The plaintiff contends that the franchisor’s alleged reasons for termination did not give it grounds to terminate the franchise relationship under the PMPA.  The PMPA, like many state statutes, prohibits the termination or nonrenewal of a franchisee unless certain circumstances exist.  Franchisees who face termination or fear the possibility of termination should discuss statutory and common law protections with franchise counsel to better understand their rights.

In Dunkin’ Donuts Franchised Restaurants LLC v. G1540 Corporation, the franchisors (both Dunkin’ Donuts and Baskin Robbins Franchised Shops LLC) sued a franchisee in federal court in Florida on January 24, 2011 for breach of contract, trademark infringement, trade dress infringement, and unfair competition.  The franchisor terminated the franchisee for intentionally underreporting sales and failing to maintain required books and records.  Despite termination, the franchisee has continued operating as a franchise.  Continuing to operate is dangerous for terminated franchisees because they open themselves up to treble damages under the Lanham Act.  Franchisees should not take any significant action that may violate the law without consulting with a respected franchise attorney, even if the agreement has already been terminated.

In The Wine Group, Inc. v. Esber Beverage Company, the franchisor sued the franchisee in federal court in Ohio on January 25, 2011 for declaratory relief that would allow it to terminate the franchise agreement with Esber.  The Wine Group (“TWG”) produces Franzia, America’s most popular selling wine.  In state court, TWG was enjoined from terminating Esber under the Ohio Alcohol Beverage Franchise Act for consolidating distributors, because the court held this was not just cause under the law.  TWG now, however, is attempting to terminate Esber because the pharmacy CVS in Esber’s territory stopped carrying TWG’s products due to Esber’s historical lack of service.  TWG is seeking a declaration from the court that termination for this reason is just cause under Ohio law.  This is an interesting issue and may help determine what “just cause” for termination is under Ohio law.

Posted in Breach of Contract, New Franchise Cases | Leave a comment

The Year 2010 Wound Up With A Potpourri of Cases Being Filed by Franchisors and Franchisees

February 17, 2011

The end of 2010 proved to be a strange time for franchisors and franchisees in court.  The cases filed were some of the strangest we’ve seen…         

In Servicios Azucareros de Venezuela, C.A. v. John Deere Thibodeaux, Inc., the plaintiff, a distributor of John Deere products, sued the manufacturer in federal court in Louisiana on December 1, 2010 for violations of Louisiana and Venezuela law.  The defendant allegedly cut the plaintiff’s commission in half; wrongfully terminated the distribution contract, and morally damaged the majority owner of the plaintiff.  This case illustrates the similarities and differences in Louisiana and Venezuela law.  For example, Louisiana law allows for the termination of a dealer only with cause, whereas in Venezuela, distributorship contracts without a specific term cannot be cancelled without the consent of both parties.

In Curves International, Inc. v. Weeden, the franchisor sued the franchisee in federal court in New York on December 1, 2010 to enforce a default judgment against the franchisee that had been entered in a Texas action.

In Aamco Transmissions, Inc. v. Lydia Ertle, the franchisor sued a former franchisee in federal court in Ohio on December 2, 2010 for claims including breach of contract, violation of a non-compete, and unfair competition.  In this case, the franchisees allegedly cheated customers and breached an agreement not to do so.  The complaint alleges that the former franchisee was continuing to operate a transmission repair business from the former Aamco location. 

Franchise systems depend on a degree of uniformity and building a reputation on which consumers can rely.  When a franchisee engages in bad behavior with respect to customers, the franchisor should seek to remedy the situation.  Not all franchisors, however, are willing to do so, thereby harming other franchisees in the system.  Franchisees that are in systems in which the franchisor refuses to police its franchisees appropriately are often in a difficult situation, as the value of their business declines due to another franchisee’s breach of contract and/or poor behavior.  There are few cases addressing whether a franchisee has a claim against a franchisor for failing to police others in the system, but whether that franchisee has a claim may largely depend on the wording in the franchise agreement.  If a franchisee finds itself in such a situation, it should contact a franchise attorney to review the agreement and determine if a possible claim against the franchisor exists.

A franchisee’s change of name from Dairy Queen to Dairy Delight, and change of menu item name from “Blizzard” to “Blitz” is the subject of a claim for trademark infringement and related claims.  Franchisees that open themselves up trademark infringement claims risk having to pay treble damages in court.  While it may seem like a good idea to violate a non-compete, it is important for former franchisees to discuss all of their available options with experienced counsel before violating a non-compete.

A more creative, but comically doomed, scheme was uncovered in Dunkin’ Donuts Franchised Restaurants LLC v. Kenmore Square Foods LLC, filed in federal court in Massachusetts on December 10, 2010.  Dunkin’ Donuts generally provides franchisees with around $2,000 per year to donate to local charities as a way to boost the franchise’s reputation in the community.  Here, the franchisees requested to be reimbursed for around $8,000 that two franchises donated to the Belmont Hill School.  As is generally required, the request for reimbursement included a letter of thanks/appreciation signed by the school’s Head of School, acting as a receipt.  The letter, however, had an unusual number of grammatical and typographical errors, and Dunkin’ Donuts looked into it by contacting the school.  Apparently, the franchise owners had used this money to pay for their son’s tuition and bookstore charges, not for charitable purposes.

Days Inn Worldwide, Inc. is providing a lot of work for its outside counsel.  In three very similar complaints filed on December 7, 2010 in federal court in New Jersey, Days Inn is seeking non-reported revenue fees, recurring fees, and liquidated damages or, in the alternative, actual damages.  Days Inn terminated the agreements at issue in these cases for various reasons, but two of them were terminated at least in part due to failed quality assurance inspections.  While quality assurance inspections are beneficial to and necessary for the franchising business model to properly function, franchisors sometimes abuse quality assurance inspection processes by seeking out minor and immaterial faults upon which it can base a notice of default.  Franchisees are in a tough position in this regard because franchise agreements generally do not provide any protections for this sort of behavior.  Franchisees may find their best option is to contact a franchise attorney to protect the franchisee’s interests on statutory or common law grounds.

In S & S Sports, Inc. v. Stingray Boat Company, on November 19, 2010, the plaintiff dealer S & S Sports, Inc. sued the defendant manufacturer in state court in Montana for a violation of Montana Code Annotated (“MCA”) 30-11-712, which requires a manufacturer to repurchase inventory if a dealership contract is canceled by the manufacturer, distributor, or retailer pursuant to MCA 30-11-702. 

In Little Caesar Enterprises, Inc. v. Brijenda, Inc., the franchisor sued the franchisee in federal court in Michigan on December 20, 2010 for breach of contract, trademark infringement, trade dress infringement, and unfair competition.  The defendant sought to renew its franchise agreement, but in order to renew, the franchisor required that it completely remodel the lobby, replace the front counter, and completely replace the building signage.  The franchisee failed to complete the remodel required for renewal.  Alternatively, the franchisor claims that the defendant violated the franchise agreement by failing to provide the franchisor with requested financial reports, and by violating the Fair and Accurate Credit Transaction Act in failing to use a cash register that truncated credit card numbers on receipts for customers.  Whether through non-renewal or termination, the franchisor claims that the franchisee is no longer operating under the franchise agreement and therefore, its continued use of the Little Caesar trademarks and trade dress constitutes trademark infringement, trade dress infringement, and unfair competition.  If a franchisee is concerned with the franchise renewal requirements, it should meet with a franchise attorney to discuss the possibility of negotiating with the franchisor or to discuss other options.

In Matsyasana, LLC v. Lululemon FC USA, Inc., a franchisee sued its franchisor in federal court in Colorado on December 22, 2010 for the franchisor’s wrongful attempts to re-acquire the franchisee’s profitable stores by issuing false notices of default; required the franchisee to prepay for inventory without a purchase order; and demanding to buy out the stores at a price below what had been set in the franchise agreement.

What would a blog post be without a Dunkin’ Donuts case?  In Dunkin’ Donuts Franchising LLC v. Coelho Family Donuts, Inc., the franchisor is seeking to close down the franchise for underreporting.

In American automaker news, in Rich Morton’s Glen Burnie Lincoln-Mercury, Inc. v. Ford Motor Company, a Mercury dealer has sued Ford for wrongfully discontinuing the Mercury line, in violation of Maryland’s Transportation Article statute that protects dealers from termination, cancellation, or non-renewal without good cause.  Ford discontinued the Mercury line for business reasons, which is not good cause under the statute (the statute provides good cause is the dealer’s failure to substantially comply with the manufacturer’s reasonable requirements).  The plaintiff seeks compensation for certain items and lost profits.

In Mato v. Window World, Inc., the franchisee sued the franchisor in federal court in Pennsylvania on December 30, 2010 for breach of contract and violation of the covenant of good faith and fair dealing.  The franchisee sought to renew its franchise, and while the franchisee failed to send written correspondence indicating its desire to do so within the time required by the franchise agreement, the franchisor apparently waived this requirement by sending a “Request to Renew License” form, which the franchisee completed and promptly returned.  Despite the franchisor’s acceptance of this form, it soon after indicated it would not renew the franchise agreement even though the franchisee was in full compliance with the agreement.  Franchisees should take care to comply with the renewal requirements of a franchise agreement to avoid such problems, but regardless, a franchisor that appears to waive certain obligations may, in fact, have so waived them. 

In Mash, LLC v. Salad Bowl Franchise Corporation, the franchisee sued the franchisor in state court in New Mexico on November 12, 2010 for breach of contract, unfair and unconscionable trade practices, fraud, conversion, and racketeering, among other claims.  The plaintiffs and the defendants initially settled a dispute related to misrepresentations, breach of contract, sexual harassment, and misappropriation of funds.  The defendants, however, failed to comply with the settlement agreement and continued to delay its implementation, forcing the defendants to file this claim in New Mexico state court.  The defendants then, however, became plaintiffs in federal court in Texas on January 6, 2011 seeking to compel arbitration of the franchisee’s claims.  Interestingly, however, Salad Bowl seeks to enforce the arbitration provision of the settlement agreement while also denying the settlement terms had been agreed to by the parties and it also seeks to enforce the arbitration provision of the franchise agreement.  Even when it looks like a matter has been settled or resolved, complications may arise in enforcing the terms of such a resolution, and experienced counsel can help a party achieve not only an agreed to resolution, but can also help a party enforce a settlement.

In Ramada Worldwide Inc. v. Tri Star Lodging , LLC, the franchisor Ramada sued a former franchisee in federal court in New Jersey on January 7, 2011 for liquidated damages and damages for past due fees.  Liquidated damages are contractually defined damages to be paid to a party upon the early termination of the contract by the other party.  Liquidated damages provisions are often enforceable, but not always.  Even when they are enforceable, however, a former franchisee may be in a position to negotiate over the amount of those damages or to negotiate them away completely if, for example, the former franchisee has potential claims against the franchisor.  A former franchisee, or a current franchisee planning to end its relationship with the franchisor prior to expiration of the franchise agreement, subject to a liquidated damages clause should seek franchise counsel to advise it about its options.

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

The Most Important Cases of 2010

January 6, 2011

Looking back, 2010 was a year of significant changes in franchise law, and surprising results in litigation.  In our view, here are the most important cases.

The Home of The Price Fixer. 

The courts gave a whopping 1-2 blow to franchisee price independence in two decisions in the case of National Franchisee Association v. Burger King Corp.  At issue was whether the burger franchisor could require franchisees to offer double cheeseburgers for a dollar—a price that the franchisees contended was below their cost.  In the first decision, the court held that as a matter of antitrust law and as a matter of contract, BKC had the power to dictate the price.  It left open the question of whether BKC had actually set that price in good faith.  A second decision in November closed that gap and found that the dollar double cheeseburger was a good faith exercise of BKC’s discretion to set prices.

While the decision certainly goes a long way toward confirming the Supreme Court’s rulings over the last decade with respect to a franchisor’s ability to set prices of franchisees, it is not a definitive death knell for all systems.  Plenty of franchise agreements have provisions allowing franchisees to set their own prices.

What to look for:  As franchisors roll out new agreements in light of these decisions, look for provisions allowing franchisors to set maximum and minimum prices that franchisees can charge.

 

Who Wants To Be A Millionaire? 

Quizno’s Corporation ended three years of litigation with a class of franchisees with a settlement worth between tens of millions of dollars and huge overhauls in the franchisor’s operations affecting pricing, disclosure, franchisee transfers, supplier requests and training.  The settlement even called for the franchisor to assist in creating an independent franchisee association.  The settlement disposed of the franchisees’ claims in three separate suits alleging fraud, RICO, unfair trade practice violations, breach of contract and of the implied covenant of good faith and fair dealing.  The settlement is remarkable because courts rarely find that franchisees can proceed as a class because of the differences between franchisees in one state and another.

What to look for:  More class actions.

 

Where’s The Termination? 

The Supreme Court ended the debate on whether a cause of action for constructive termination could exist under the Petroleum Marketing Practices Act in Mac’s Shell Service Inc. v. Shell Oil Products Co.  At the heart of the court’s decision was the fact that under the PMPA, a “franchise” is specifically defined, and, in this case, that definition was not met.  The decision, in our view, was badly reasoned and poorly written.  There is no question that franchisors push franchisees out of business without sending them a letter that announces they are being terminated.  No less a jurist that Richard Posner, a legendary Court of Appeals Judge in Chicago, observed only a few weeks after the Mac Shell decision that “without a doctrine of constructive termination, there would be . . . a big loophole in the Petroleum Marketing Practices Act.”

What to look for:  Already, commentators and pundits are saying that Mac Shell will be followed in other arenas, and undoubtedly there will be plenty of arguments that constructive termination should not exist.  But Mac Shell’s holding was limited to the PMPA, and there are plenty of reasons why its reasoning has no application elsewhere.

 

No, The Girl Scouts Do Not Quack Like A Duck. 

In an exhaustingly long opinion, the federal district court in Wisconsin ruled that, after all, the Girl Scouts of the United States were not subject to the Wisconsin Fair Dealership Law.  Last year, the court had held that the national organization could not reduce the size of a local Girl Scout Council without violating the Council’s rights under the WFDL.  While the court, in this more recent decision, had plenty to say about the Girl Scouts national organization, it ultimately held that it had a first amendment right to express its viewpoints and that the constraints of the dealership law interfered with the right of free association and expression.

What to look for:  Keep your eyes peeled for further signs of common sense in judicial opinions.

 

Looming Employment Law.

The world of franchise law got shaken up in a March decision by the federal court in Massachusetts dealing with franchisees of Coverall North America.  Describing a franchise relationship as a “marriage of convenience” and comparing it to a “modified Ponzi scheme” the court held that Massachusetts franchisees of that system were misclassified as independent contractors and that they were in fact employees of the franchisor under the Massachusetts Independent Contractor Statute.  Despite the court’s strong language, the holding was later vacated for most of the franchisee plaintiffs because they failed to prove damages.  In short, if the franchisee makes as much money as he otherwise would have as an employee, there is nothing to be gained in claiming employment.

What to look for:  Despite the pyrrhic nature of the victory, franchisors can count on franchisees in the cleaning business to be scrutinizing their relationships with franchisors.

 

Just Rewards?

Franchisor efforts to change the terms of franchise agreements got a severe drumming when the federal court in South Dakota held that Super 8 motels breached the franchise agreement by increasing fees for a loyalty program from 2 to 7 percent.  Super 8 had contracted with the franchisees for a rewards program under which the franchisees paid 2 percent, and the agreements stated that “there are no other royalties or fees.”  After Super 8 was later acquired by HFS, which then became Cendant Corporation.  Cendant launched a rewards program for all of its different franchise programs.  That program charged 7 percent.  The unhappy franchisee plaintiff brought a class action to recover the additional fees, and the court agreed.  It held that the agreement’s terms “clearly do not permit Super 8 to impose upon its franchisees an additional 5 percent on gross room sales.”  The court left open the amount of damages that the plaintiffs could recover.

What to look for:  Keep an eye out for franchisor efforts to change agreements when merging or being acquired.

 

Search For The Lost Future Profits.

Two cases decided this year went opposite directions on whether franchisors could recover lost future profits from franchisees.  In Medicine Shoppe International v. TLC Pharmacy, the federal court in St. Louis decided that the franchise agreement did not contemplate that upon termination a franchisee would pay future profits and held that the franchisor was not entitled to them.  In another case, however, Moran Industries Inc. v. Mr. Transmission of Chattanooga, Inc., the federal court in Tennessee held that a franchisor could possibly recover lost future profits and could proceed with its complaint.

What to look for:  Franchisors may likely begin including more liquidated damages clauses in their franchise agreements.

Posted in Franchise Dealer Trends, New Franchise Cases | Leave a comment

Court Puts Final Nail in the Coffin of Pricing: BKC is Free to Set Maximum Prices

December 7, 2010

In a decision that is the last chapter in the trial court for the Burger King franchisee association’s suit against Burger King for price fixing, the United States District Court in the Southern District of Florida entered an Order on November 19, 2010 dismissing the Franchisees’ claims, rejecting the franchisees’ arguments that Burger King could not dictate pricing.

At the heart of the franchisees’ complaint was the claim that Burger King had wrongfully required the franchisees to sell double cheeseburgers for no more than $1 as part of its value meal menu.  The franchisees complained that the double cheeseburger could not be offered for a dollar; they lost money on it.

In prior litigation, the courts had held that BKC had the right, as a matter of antitrust law, to dictate the price at which the double cheeseburger would be offered and that it had the right under the franchise agreement to do so.  What was left, and what the court disposed of on this motion, was the franchisees’ continuing claim that BKC had set the price for the double cheeseburger in bad faith.  The court thus approached the issue with essentially two questions:  What must a franchisee show in order to demonstrate bad faith by the franchisor?  Second, did the franchisees show that BKC had exercised its power in bad faith?

Before addressing these issues, the Court paused to make a critical observation on the plaintiffs’ complaint:  It noted that while the original complaint had suggested that the impact of the double cheeseburger was so severe that franchisees were threatened with bankruptcy, the new complaint only alleged that they would have losses on the single product at issue.  Further, they did not allege that the price on the double cheeseburger would have a substantial adverse affect on their overall business.  This change in the complaint essentially reframed the question:  Does “bad faith” depend on the extent to which a franchisor’s conduct hurts a franchisee?  Viewed another way, can a franchisor cause a franchisee to sustain some losses, but still be acting in good faith?

The contractual provision at issue required BKC to act “in the good faith exercise of its judgment.”  The court viewed “good faith” as being “the honest belief that the measure it is adopting will help the company meet competition and succeed in the marketplace.”  Interestingly, the court does not cite any authority for this definition of good faith and, in fact, it is at odds with the common law definition of good faith as conduct does not deprive the other party of the fruits of the contract.

The Burger King franchisees alleged four facts to show bad faith:  The price set by BKC caused franchisees to sell the product at a loss; BKC adopted the prices despite franchisee disapproval; BKC sent information to justify the decision that was allegedly inaccurate and deceptive; and BKC imposed the prices even though all data showed that the prices would cause franchisees to suffer losses.  The court concluded that even if those factual allegations were true, they did not state a claim of bad faith.

The court disposed of the four factual contentions by focusing on “the motive of BKC in exercising its discretion.”  The court defined motive in terms of whether the party was trying to evade its contractual duties and achieve some purpose contrary to the purpose of the contract and impermissible because “it is so harmful to the other party as to deprive it of its reasonable expectations.”

The court went on to say that there were two ways that a plaintiff could go about raising a claim of bad faith.  One would be to allege facts that specifically identify an improper ulterior motive, such as the franchisor’s desire to drive franchisees out of business and take over their companies.  Because there is usually a lack of direct evidence of dishonesty, a plaintiff typically has to allege that the defendant’s conduct is a pretext, and the plaintiff must show that “no reasonable person” could have thought that the steps taken by the defendant were a reasonable means of carrying out the contract’s defined purposes.  If no reasonable person would have exercised discretion in that manner, there is an inference that the defendant must have had an improper motive.  Here the court went back to the issue of the injury to the plaintiff and claimed that the magnitude of that injury is of central importance.  On the one hand, the court held that no inference of bad faith will arise simply because the franchisor’s decision has “some marginal economic impact on the plaintiff.”  On the other hand, there may be an inference of bad faith when the defendant exercises discretion in a way that effectively destroys whatever benefits the plaintiff could have reasonably expected.

Applying this standard, the court found that none of the facts alleging bad faith were sufficient to support the claim.  The court observed that even if the double cheeseburger was sold at a loss, “there is nothing inherently suspect about such a pricing strategy for a firm selling multiple products.”  It went on to say that loss leaders may sometimes increase sales on other higher margin products.  It found that there was nothing about the pricing decision that suggested that BKC was “doing anything other than seeking to promote the performance of its franchisees.”  What was fatal to the franchisee’s cause was the lack of allegation of serious injury.  The court then said that in order to raise a claim of bad faith, the plaintiffs had to “allege that the damage to their overall business was so severe as to deprive them of their reasonable expectations under the contract.  The basic question is whether the impact has been so injurious that the measure could not reasonably have been considered within the contemplation of the parties.”

In evaluating the specific claims of bad faith by the franchisees, the court observed, in passing, that BKC had the unambiguous right to exercise its discretion in setting prices.

On this basis, the court dismissed the complaint.

There are a number of ways in which the court’s decision was skewed, or just incorrect.

First, the court did not at all discuss a fundamental difference between franchisors and franchisees:  That the franchisor gets paid from the gross revenue of the franchisee regardless of whether the franchisee makes a profit.  Framed in this way, the pricing decision for the double cheeseburger could certainly result in driving volume, which would increase BKC’s royalties, but would do so at the expense of the franchisees.  The court’s analysis with respect to loss leaders thus omits a critical distinction:  The benefit inures wholly to the franchisor, not to the franchisee.  Second, the court’s reliance upon the degree of injury as determining the inference of bad faith is a slippery slope:  Just how much does the franchisee have to be injured before it can file a complaint in court to complain about it.  Does the franchisee have to be driven out of business before it can stop a franchisor’s practices that are injurious?  This is a troubling, and unanswered question.

Third, the court quite blithely asserted that the franchisor had the unambiguous right to set prices for the system.  But in fact, the record shows that Burger King had, in the past, followed a pattern of obtaining franchisee approval before implementing pricing changes.  In this case, it deviated from that practice and simply imposed the prices.

In an old case from the same Federal Court in the Southern District of Florida, a court found that there was in fact a violation of the covenant of good faith and fair dealing when a franchisor changed its procedures in reviewing franchisee performance such that the franchisee was put at a disadvantage.  The Burger King court did not cite this opinion, nor did it’s reasoning appear to take account of that approach.

The franchisees have stated that they intend to appeal.

Posted in Franchise Associations, Franchise System Changes, New Franchise Cases | Leave a comment

Franchisees Come Out Fighting on All Fronts

October 12, 2010

Just after Labor Day, franchisees around the country filed suits against their franchisors for fraud, breach of contract and wrongful termination.

 Refusal to Honor Right of Refusal

In Paul D. McKinnis v. Fitness Together Franchise Corporation, master franchisees sued their franchisor in federal district court in Colorado, alleging that Fitness Together had refused to honor a right of first refusal in bad faith.  The plaintiff also alleged that Fitness Together breached the contract and negligently misrepresented the terms of the contract regarding the number of franchises that could be opened in Washington D.C.  Finally, the plaintiff alleged that Fitness Together unlawfully and fraudulently sold the plaintiffs a master franchise territory in Georgia when, during the sale, it failed to provide McKinnis with a Franchise Disclosure Document.

When is a Termination a Termination?

In Royal Petro, Inc. v. SMO, Inc., Royal Petro filed a claim against SMO in Virginia state court on September 20, 2010 for claims related to discriminatory pricing and unfair rent charges in connection with Royal Petro’s gasoline stations.  The case was removed to federal court.  The plaintiff complains that SMO and one of its executives engaged in discriminatory and predatory practices under which they induced unsophisticated, foreign-born franchisees to pay significant franchise and other fees, and then ultimately drove them out of business.  Significantly, the plaintiff claims that it was constructively terminated—that is, the franchisor drove it out of business without actually serving a termination notice.  Under the recent Supreme Court case of Mac’s Shell Service Inc. v. Shell Oil Products Company LLC, constructive termination under the Petroleum Marketing Practices Act requires that the franchise relationship actually be terminated.  Royal Petro did not allege any violations of the PMPA; whether this was an effort to avoid the Mac’s Shell holding or mere inadvertence is not clear.

Constructive termination is a difficult issue.  As noted, a claim of constructive termination under the PMPA requires an actual end to a franchise relationship even though there are many strong arguments against this requirement.  In particular, franchisees should not have to wait until the end of the relationship to defend themselves from predatory practices by a franchisor.  Franchisees will often have other possible claims or defenses available to them before the end of the relationship.  If a franchisee is threatened by its franchisor, the franchisee should seek help from a knowledgeable franchise lawyer in order to better understand its possible legal claims, rights, and obligations.

Dunkin’s Continuing Termination Campaign

Dunkin’ Donuts has been busy.  In federal court in Florida, in Dunkin Donuts Franchising LLC v. Park Blvd. Donuts, Inc., Dunkin’ Donuts filed a complaint against a franchisee for claims including breach of contract, trademark infringement, and trade dress infringement as well as unfair competition.  Dunkin’ Donuts and Baskin Robbins together filed a similar claim against a franchisee in Dunkin Donuts Franchising LLC v. Oza Brothers Inc. in federal court in Michigan.

Collecting the Dues

In Precision Franchising LLC v. Calvin Poisson, the franchisor filed a claim against Poisson and others in federal district court in Virginia on October 1, 2010 for breach of contract.  Precision Franchising is the licensor of the Precision Tune Auto Care system.  The claim alleges breach of contract for the defendants’ failure to pay operating fees and advertising fees, and repayment of a promissory note.  This is a relatively straightforward claim brought against the licensee, but the defendants may have defenses or counterclaims against Precision Franchising.  It is important to go over one’s options with an experienced franchise lawyer in responding to a lawsuit.

Failure to Give an Opportunity to Cure

In Envision Foods Corp. v. Cosi, Inc., the plaintiff sued Cosi in federal court in Illinois for breach of contract.  In December of 2006, Envision Foods and the defendant entered into an Area Development Agreement (“ADA”).  In September of 2008, Cosi sent a notice of termination to Envision Foods purporting to terminate the ADA immediately upon receipt of the notice.  The plaintiff alleges that under the ADA, the defendant is prohibited from terminating the agreement without first providing written notice of default and an opportunity to cure.  Envision Foods claims that it was not provided with either.  This case illustrates that while a franchisor may have many contractual provisions allowing it to terminate an agreement, it must do so in a systematic way that does not run afoul of the contract or the law.  If a franchisee/dealer/distributor/developer feels termination was undertaken unlawfully, it must remember that it may have legal protections both within and outside of the agreement.

Appealing the Jury Verdict

In Warren Distributing Co. v. InBev USA, LLC and Anheuser-Busch, Inc., a case on appeal at the Third Circuit, Warren Distributing Company and others are suing InBev USA and Anheuser-Busch for violation of New Jersey’s Malt Alcoholic Beverages Practices Act, as well as for other contract and common law claims.  The plaintiffs allege that Anheuser-Busch failed to pay them the fair market value of their business with respect to the InBev brands prior to their terminations, as required by the Malt Alcoholic Beverages Practices Act.  The jury returned a verdict in the plaintiffs’ favor, finding that Anheuser-Busch underpaid the plaintiffs by $390,000.  The jury also returned a verdict in favor of Anheuser-Busch with respect to its counterclaim, holding that the plaintiffs were unjustly enriched by the profits they earned with respect to the post-termination sales of the InBev brands and awarded Anheuser-Busch $638,000.  The issues on appeal focus on whether the lower court wrongly gave Anheuser-Busch summary judgment on certain issues as well as certain evidentiary points.

In Tecnimed SRL v. Kidz-Med, Inc., Tecnimed sued Kidz-Med in federal court in New York on September 21, 2010 for claims including breach of contract, and trademark and trade dress infringement.  Tecnimed is the manufacturer of a non-contact thermometer.  Kidz-Med, Inc. had the exclusive right to distribute this non-contact thermometer.  The complaint alleges that the defendants are now marketing and selling a competing non-contact thermometer despite the distribution agreement which prohibits the defendants from marketing and selling a competing non-contact thermometer.  The plaintiff also alleges that the defendants are marketing their new product under a confusingly similar name with confusingly similar trade dress to the plaintiff’s product.  The complaint alleges specific instances of confusion among consumers and cites a review on Amazon.com as evidence of such confusion.  In trademark infringement cases, illustrations of actual consumer confusion are very important.  Termination of a distribution agreement with a manufacturer can often be complicated.  It is important to see a good franchise attorney prior to the termination.  It is also important to have counsel help a party navigate through the gradual end of a distribution agreement if it is going to continue in some capacity.

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

Franchisee Suits For Earnings Claims and Coat Racks . . .

September 14, 2010

In A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., a franchisee sued its franchisor as well as the franchisor’s vice president of marketing and the franchisor’s CEO for making unlawful earnings claims, misrepresenting startup costs, and failing to register the franchise in New York and Maryland.  The franchisee is seeking rescission and damages.  The plaintiff may face a hurdle with the three-year statute of limitations.   The plaintiff purchased the franchise on August 27, 2007, and the complaint was filed on August 25, 2010, and some of the conduct at issue occurred on August 23, 2007.   The case points up the importance of consulting a knowledgeable franchise lawyer, and filing a complaint on time. 

In a case brought in federal court in Florida, Leadrack, LLC v. Goin’ Postal Franchise Corporation, a franchisee contends that Goin’ Postal Franchise Corporation (GPFC), founder of Hut No. 8 retail clothing stores, violated Florida law and breached the franchise agreement in failing to deliver a point-of-sale system and in failing to supply conforming fixtures and doors for Leadrack’s store.  Leadrack seeks damages for amounts paid to the franchisor, investments, and lost profits.  It claims that GPFC was supposed to create fixtures for its franchisees.  Allegedly, GPFC installed changing rooms at the franchise location that do not provide any privacy for customers.  When a changing room fails to provide privacy to a customer trying on clothes, that is likely going to lead to problems, whether related to the franchise agreement or not.  The plaintiff characterizes GPFC as a business opportunity seller and asserts a claim under Florida’s Business Opportunity statute.  The plaintiff, however, does not explain what it is that makes GPFC a business opportunity seller.

In a suit brought by the franchisor in federal court in Minnesota, Sarpino’s USA, Inc. v. Minnesota Sarpino’s Inc., the franchisor is suing the franchisee for continuing to operate as a franchise and for not granting the franchisor the right to purchase the franchisee’s assets following termination of the franchise agreement for failure to pay royalties.  In operating the franchise using the franchisor’s name and trademarks following termination, the franchisee is allegedly violating the federal Lanham Act and both the Minnesota Deceptive Trade Practices Act and the Minnesota Unlawful Trade Practices Act.  Continuing to run a business as a franchise following the termination of the franchise agreement leaves the door open for a number of possible claims by the franchisor, including both statutory and common law claims.

In Rita’s Water Ice Franchise Company, LLC v. SA Smith Enterprises, LLC, a franchisor in the business of selling frozen desserts is suing a Georgia-based franchisee in federal court in Pennsylvania for ceasing operations seven years prior to the expiration of the franchise agreement and opening a competitive business at the same location.  The franchisor also alleges that the defendants are using Rita’s proprietary and confidential information in operating the new business.  Rita’s seeks an accounting and damages, including lost future profits, for breach of contract due to the unilateral cessation of operations, and due to alleged violations of the post-termination covenants. 

Sarpino’s USA, Inc. v. Minnesota Sarpino’s Inc. and Rita’s Water Ice Franchise Company, LLC v. SA Smith Enterprises, LLC are similar in the sense that a franchisor is suing a former franchise operator.  In Sarpino’s, the former franchisee is allegedly using the franchisor’s name and trademarks, whereas in Rita’s the franchisee is operating a separate, but competitive business and is allegedly using Rita’s proprietary and confidential information to do so.  In either case, former franchisees should have gotten advice of a franchise lawyer before jumping ship and seeking to continue operating.

In Sol Puerto Rico Limited v.  Marzan, the plaintiff is suing a former franchisee in Puerto Rico for allegedly failing to remove Shell trademarks and continuing to operate a service station that offers inspection and car wash services.  The plaintiff claims that defendant’s alleged use of the Shell trademarks without the plaintiff’s consent infringes the plaintiff’s trademark and constitutes unfair competition.  The plaintiff is also complaining of trade dress infringement because the defendant is allegedly using signs, exterior appearance, packaging containers, and other items on which the word “Shell” appears in the same lettering style and color scheme used by Sol franchisees.  The plaintiff is also seeking indemnification if the defendant acts or omits to act in any way that creates liability (e.g., leaks from underground petroleum storage tanks).  The plaintiff claims that the defendant has no right to remain in possession of Sol’s property (the service station) and thus, Sol is seeking to recover the property under Puerto Rico’s unlawful detainer statute.  Sol is also seeking damages for the defendant’s failure to meet his obligation to purchase petroleum products.

In a series of hotel cases, Days Inns Worldwide, Inc. v. MHS Hospitality Group, LLC; Days Inns Worldwide, Inc. v. Patel; and Red Roof Inns, Inc. v. AA Hospitality Northshore, LLC, the licensors/franchisors are suing to collect past due royalties and liquidated damages.  In the Days Inns Worldwide, Inc. cases, the defendants allegedly owe royalties but are not violating any covenant not to compete or any trademark laws.  In the Red Roof Inns, Inc. case, in addition to seeking past due royalties and liquidated damages, the plaintiff alleges that the defendant is using confidential and proprietary information in the operation of a new hotel franchise in the same location.  Rather than spell out a claim for trade dress infringement, however, Red Roof Inns, Inc. seeks specific performance of the franchise agreement which requires the former franchisee to cease using distinctive physical and structural features and furnishings indicative of a Red Roof Inn upon termination.

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

August 23, 2010

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.

July 20, 2010

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

June 22, 2010

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.

June 2, 2010

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

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