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Wednesday
Dec272017

Franchise 101: NLRB Out With the New; and Too Little Too Late

  Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



DECEMBER 2017

 

Franchise Distribution Attorneys

David Gurnick Selected to Best Lawyers

Congratulations to David Gurnick, designated one of the Best Lawyers in Southern California 2018 in franchise law by Best Lawyers Magazine, distributed with the Los Angeles Times. Selection for the honors are based on a survey of other attorneys practicing franchise law in Southern California. This is the sixth consecutive year David appears on the list.
 

FRANCHISOR 101:NLRB: Out With the New

NLRB overturns joint employer ruling

On December 14, 2017, the National Labor Relations Board (Board) in Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017) expressly overruled the divisive joint-employer standard adopted by Browning-Ferris Industries, 362 NLRB No. 186 (2015).

The Browning-Ferris decision departed from decades of precedent by issuing a new joint-employer test, holding that two entities could be joint employers based on a reserved right to control terms and conditions of employment. The decision provided no concrete guidelines for businesses to evaluate whether their specific relationships would result in joint-employer status. Under the Browning-Ferris standard, a franchisor that had indirect or potential control over employees of its franchisees through typical brand controls found in franchise agreements could be considered a joint employer of those employees.

Franchisors were gravely concerned about ramifications of Browning-Ferris on the franchise business model.

In overruling Browning-Ferris, the Board reinstated the prior joint-employer standard. Going forward, the Board clarified that one entity would be deemed the joint employer of another entity's employees only if it exercised actual, direct control over "essential employment terms." Potential or reserved control alone is no longer enough. Moreover, that control must be exercised in a manner that is not "limited and routine."

While this decision is welcome news for franchisors, it does not eliminate the possibility that a franchisor will be found to be a joint employer with its franchisee and thus jointly liable for actions of the franchisee's employees.

Franchisors should remain careful when drafting documents that set controls over franchisees' employees, such as payroll practices, setting work schedules or disciplinary guidelines. After Hy-Brand, the mere fact that a franchisor reserves the right to exercise control over a franchisee's employees will no longer mean joint employment exists, but if that right to control is frequently exercised, there might still be a finding of joint employment.

Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017)

 

FRANCHISEE 101:Offer Too Little Too Late

Late Offer to Cure

A Florida federal district court found that a doughnut franchisee's failure to pay royalties and other fees constituted a material breach of contract justifying termination, even though the franchisee expressed a willingness to pay.

The franchisee had been in the Tim Hortons' system for a decade, and had operated this particular Tim Hortons franchise for over four years. On July 7, 2016, Tim Hortons sent the franchisee a breach notice for failure to pay monies owed. The notice provided that if amounts owed were not paid in full within five days of receipt of the notice, the franchise agreement would terminate on written confirmation.

The franchisee failed to pay by July 12, 2016 and Tim Hortons terminated the franchise agreement on July 13, 2016. That same day, the franchisee offered to pay the amount demanded in the breach notice and requested that Tim Hortons provide wire instructions to send payment. Tim Hortons rejected the offer and confirmed the franchise's termination.

Following a bench trial, the court upheld Tim Hortons' decision to terminate the franchisee for failure to pay monies owed. The franchisee argued that it was willing to pay the fees owed and asked Tim Hortons for wiring instructions.

The court found that an "offer to pay" was not the same as actual payment and in any event, the offer to pay came after the cure deadline. The court stated that, under Florida law, payment has not occurred until there is an actual "tender" of funds. A suggested willingness to send funds and a request for information on where to send was not equivalent to a tender of funds. The court concluded that the franchisee's offer to pay was not a cure of its breach and Tim Hortons had the right to terminate.

This decision serves as a warning for franchisees. Franchise agreements often have terms that favor the franchisor and these terms are likely enforceable. Franchisees should evaluate the costs and benefits before entering into a franchise relationship and recognize that the risks are different from ordinary business risks associated with business ownership.

Tim Hortons USA, Inc. v. Singh, 2017 WL 4837552 (S.D. Fla. Oct. 25, 2017)

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Thursday
Nov302017

Franchise 101: Injunction Bottleneck; and All in the Family

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



NOVEMBER 2017

 

Franchise Distribution Attorneys

Matthew J. Soroky in Franchise Law Committee e-Bulletin

”...the U.S. House of Representatives approved by a vote of 282 to 181 the Save Local Business Act, a bill that would amend the National Labor Relations Act and the Fair Labor Standards Act to limit joint employer liability." How could this bill affect franchisors? Read Matt's summary in the State Bar of California Business Law Section's Franchise Law Committee e-Bulletin: U.S. House of Representatives Passes Save Local Business Act

Katherine L. Wallman in Valley Lawyer

"Although the advantages of social media and the digital age are vast, the ever-changing cyber world raises ethical questions attorneys must address before reaping its benefits." For more, read Kate's MCLE article: Social Media and Common Ethical Problems

 

FRANCHISOR 101:
Injunction Bottleneck

A restaurant franchisor, World of Beer Franchising ("WOB"), recently lost an appeal to enforce a post-termination restriction against a franchisee launching a competing business. Both the trial and appellate court ruled against WOB.

WOB lost because it ignored the franchise agreement requirement to submit the dispute to mediation at the same time as it sought injunctive relief.

WOB and Evan Matz were parties to three franchise agreements to operate World of Beer restaurants. After mutual termination of the agreements, Matz reopened the former franchised locations as competing restaurants. WOB sought to enjoin Matz from using its marks, confidential information, and trade dress and from violating the post-termination non-compete covenant.

A federal district court denied WOB's request on the basis that the franchise agreements required the parties to first mediate their dispute. WOB appealed, arguing that the district court misinterpreted the agreements' dispute resolution provisions.

The dispute resolution clauses each said that a preliminary injunction may be sought, as long as the dispute was submitted for arbitration at the same time. But the agreements required nonbinding mediation before bringing arbitration. Another provision said that all disputes, except those concerning the marks, had to be arbitrated. Harmonizing these provisions, the district court ruled that the franchisor was required to submit its grievance with Matz to mediation and arbitration, at the same time as its motion for an injunction.

The Court of Appeals agreed that the provisions required the parties to mediate first, regardless of whether the dispute was arbitrable. The provisions could be reasonably read as requiring contemporaneous submission of the injunction request to both arbitration and mediation, followed by arbitration under the agreements' injunction clause, if mediation did not resolve the dispute.

The franchisor argued that the dispute was not subject to arbitration, and therefore was also exempt from mediation, because the claim concerned the marks. The courts disagreed, finding that the franchisor's claims extended beyond the marks. The franchisor alleged infringement, but also claimed violation of the non-compete covenant and use of confidential information and trade dress. The court was likewise unmoved by the franchisor's attempts to initiate mediation under the dispute resolution clauses.

WOB contended Matz ignored inquiries about whether he preferred mediating through the American Arbitration Association or a private mediator. The franchise agreement expressly required mediation under AAA Commercial Mediation Rules, which permitted the franchisor to submit the dispute to AAA mediation unilaterally, without Matz's cooperation.

Post-termination covenants are often the franchisor's last remnant of control over former franchisees. It is preferable for a franchise agreement's dispute resolution clause to provide a clear path to enforcing the post-termination covenants.

Read: World of Beer Franchising, Inc. v. MWB Development I, LLC

 

FRANCHISEE 101:
All in the Family

Some creativity can help in passing a former franchised business to the next generation, particularly if the franchisor has no part in the franchisee's succession plan.

A federal court in Nebraska preliminarily enjoined two former franchisees of The Maids International, a home-cleaning business, and also the franchisees' daughters and the competing home-cleaning company the daughters established, from continuing to violate post-termination non-compete and non-solicitation provisions of the franchise agreements.

One might think, as the defendants argued, that the daughters and their business could not be enjoined because they didn't sign the franchise agreements and were part of a separate business entity. According to the franchisees, their daughters' business - "Two Sisters" - had a new website, new uniforms, and new phone numbers. But under case law in some states, those acting in concert or privity with signatory franchisees may be bound by an injunction for actions that violate franchise agreements, even if they did not sign the agreements.

The court found several indicators that the former franchisees were in privity with their daughters' home-cleaning business.

The new business operated from the same locations as the former franchise locations. It offered the same services. It kept the franchisor's logo. It used the same email address. It used two of the same vehicles. And one of the former franchisees was listed as the registrant for the website of his daughters' business.

Most tellingly, in the court's view, was that the franchisee's "retirement letter" to customers made clear that the daughters were "ready to take over," that "most everything will remain the same," and that the daughters would continue the franchisees' business, using the same employees (their daughters), cleaning schedule, cleaning products and insurance. The court added that the defendants failed to comply with other post-termination obligations, such as the return of all confidential and marketing material and stopping use of customer lists, proprietary methods and trade secrets.

Family successors to a formerly franchised business should clearly understand what the franchisor has the power to enforce against them, and franchisees should factor the non-compete provisions of a franchise agreement into their succession plans.

Read: The Maids Int'l, Inc. v. Maids on Call, LLC

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Thursday
Nov022017

Franchise 101: Arbitr-"all"; and 31 Flavors of Fees (or just one)

  

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



OCTOBER 2017

 

Franchise Distribution Attorneys

40th Annual ABA Forum on Franchising

 

Our Franchise & Distribution Practice Group, including three California Bar Certified Specialists (Barry Kurtz, Tal Grinblat and David Gurnick), three associates (Samuel C. Wolf, Matthew J. Soroky and Katherine L. Wallman), and four paralegals (Caitlyn Dillon, Marianne Toghia, Kelly D'Angelo and Peggy Karavanich [not depicted below]) attended the American Bar Association's Forum on Franchising in California's Palm Desert. This three day conference consists of educational programs and networking events designed to keep legal professionals up to date on the latest transaction and litigation concerns affecting both franchisor and franchisee clients.

David Gurnick in Corporate Counsel

When Uber acquired Otto, the autonomous vehicle program headed up by former Google engineer Anthony Levandowski, eyebrows were raised and a lawsuit was filed. Now, more questions come to the fore, this time regarding due diligence by Uber's chief legal officer. Read David Gurnick's quotes on this topic in:


Should Uber’s Salle Yoo Have Taken Earlier Look at Critical Due Diligence Report?

FRANCHISOR 101: Arbitr-“all”

 Conflicting Arbitration Clauses
A federal court in New Jersey granted a franchisor's motion to compel arbitration of disputes involving seven frozen yogurt franchises, even though the claims were subject to different arbitration provisions in different agreements, providing for different arbitral organizations and procedures.

An insolvent franchisee sought to liquidate assets. Each franchise agreement included arbitration and mediation clauses. The franchisee brought a claim against its franchisor for fraud, breach of contract, unjust enrichment and violation of the New Jersey franchise law. The franchisee argued the court should not compel arbitration because the various agreements' arbitration provisions had different language, were in conflict, and did not specify a uniform method of arbitration.

Two franchise agreements provided for arbitration according to rules of the American Arbitration Association. The other agreements called for arbitration with any reputable arbitration services, specifically noting CPR and JAMS.

The court found the various clauses did not require separate arbitrations. The court concluded that while the provisions differed on rules governing arbitration, the differences were minor and did not preclude compelling arbitration. The court also found that the parties could comply with all the provisions by, for example, retaining as arbitrator a neutral, former judge who was willing to proceed according to American Arbitration Association rules.

While speed, cost, and privacy may no longer be persuasive grounds to support inclusion of arbitration provisions in franchise agreements, arbitration often provides control over the location of the dispute, lowers the damages that can be recovered by franchisees, and limits the number of parties to the action. Franchisors often have a tactical advantage if the franchise agreement contains an arbitration provision, particularly in disputes against multi-unit franchisees that own units spread across different jurisdictions.

The nature and extent of these characteristics of arbitration usually advance the business and legal interests of the franchisor.

See Mitnick v. Yogurtland Franchising, Inc., 2017 WL 3503324 (D.N.J. Aug. 16, 2017).

FRANCHISEE 101:
Thirty-one Flavors of Fees (Or Just One)

Baskin-Robbins charges a dairy supplier a so-called "commercial factor" fee for the right to make and sell Baskin-Robbins proprietary ice cream to franchisees. The supplier's pricing to franchisees includes an amount equal to this fee. In Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, LLC, a franchisee association asked a federal court to rule this price component was an unauthorized fee. But the court ruled for Baskin-Robbins, holding that the charge to franchisees was permissible.

The court found that Baskin-Robbins franchisees pay a "price" for products they buy, not a "fee." Relying on dictionary definitions of "fee" and "price," and noting that Baskin-Robbins franchisees pay a single amount to the supplier for products, the court found that while the commercial factor was a fee the franchisor charged its supplier for the privilege of selling ice cream under Baskin-Robbins's name, the supplier simply charged franchisees for the products and that was not a fee.

The court also considered whether Baskin's franchise agreement prohibited the supplier from charging a pass-through cost to franchisees. The court found that the relevant provisions in the franchise agreement required franchisees to buy products from Baskin-Robbins' designated supplier, at the supplier's price. The court noted that pass-through costs and charges along the supply chain are standard industry practice. The court added that even if it found ambiguity in the franchise agreement, the parties' course of dealing showed that a supplier passing along its cost to franchisees was not prohibited. The franchisees paid for many years without objection and Baskin-Robbins disclosure document noted that the franchisor received revenue from franchisees' purchases of products from designated suppliers.

Some franchisors are creative in finding ways to collect monies from franchisees beyond straight royalties and advertising fees. Prospective franchisees should carefully review the disclosure document, talk with other franchisees and learn about practices in their system, to be informed about each source of revenue, and both direct and indirect charges, their franchisor imposes.

Read: Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, LLC

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Thursday
Sep282017

Franchise 101: A Clean Sweep; and Upgrading Your Metal 

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



SEPTEMBER 2017

 

Franchise Distribution Attorneys

Franchise Convention

Will you be attending Franchise Expo West at the Los Angeles Convention Center in early November? We'll be there, and we'll be happy to meet with you. Use one of the email addresses above to contact one of our attorneys directly, or send a message to our Franchise Practice Group mailbox. Someone will be in touch regarding potential meeting times.

State Bar Appointment

David Gurnick joins Barry Kurtz on the State Bar of California's Franchise and Distribution Law Advisory Commission. Members of the Commission serve a three year term, and are tasked with reviewing application packages of California attorneys who sat for and passed the Franchise and Distribution Certified Specialist exam, and providing recommendations to the California Board of Legal Specialization as to awarding the credential. Currently there are less than 60 Certified Specialists in Franchise and Distribution Law in the state of California, three of whom include our own Barry Kurtz, Tal Grinblat, and David Gurnick.

 

FRANCHISOR 101: A Clean Sweep

Jan-Pro Joint Employer Litigation 

A federal court recently held that under California law, cleaning services franchisor Jan-Pro Franchising International (Jan-Pro) was not the employer of its unit franchisees. The franchisee plaintiffs failed to show that Jan-Pro exercised sufficient control over day-to-day employment activities or reserved the right to exercise such control.

Jan-Pro operates a three-tier franchising structure. Jan-Pro grants the right to use its trademark "Jan-Pro" to a regional master franchisee for a specific geographic area. The master franchisee is responsible to sell Jan-Pro franchises in that area. The master franchisee sells unit franchises, giving franchisees the right to service accounts provided by the master franchisee. Each unit franchise operates pursuant to a franchise agreement. Franchise agreements are between the master franchisee and unit franchisee, but Jan-Pro is not a party.

The unit franchisees sued Jan-Pro seeking minimum wage and overtime premiums, claiming they were improperly classified as independent contractors when they were really Jan-Pro's employees. The court evaluated the claims under California's three alternative definitions of an employer/employee relationship: (i) exercise of control over wages, hours, or working conditions; (ii) to suffer or permit to work; or (iii) to engage, thereby creating a common law employment relationship. A common-law employment relationship requires evidence of the right to control day-to-day activities.

The unit franchisees argued that Jan-Pro met the first and third definitions because Jan-Pro's contracts with its master franchisees gave it the absolute right to control policies and procedures of any master franchisee as well as any unit franchisee. The court disagreed. It found the right to control policies and procedures were set forth only in Jan-Pro's contracts with its master franchisees, not in contracts with unit franchisees. The court determined that unit franchisees' franchise agreements with master franchisees did not set out any rights for Jan-Pro or otherwise indicate that Jan-Pro would be a third-party beneficiary. The court concluded that the unit franchise agreements did not create rights between Jan-Pro and the unit franchisees.

Next, the court rejected the unit franchisees' argument that Jan-Pro had authority to stop them from working under the second definition of an employer/employee relationship. The court stated that Jan-Pro's agreements with regional master franchisees purported to confer that authority, but the unit franchisees' agreements with master franchisees did not extend Jan-Pro's authority to the unit franchisees.

Finally, the court rejected an ostensible agency theory raised by the unit franchisees because they failed to offer evidence that they believed the master franchisees were agents of Jan-Pro.

The court's analysis focused on features that are unique to subfranchise systems, specifically the lack of a direct contractual relationship between the franchisor and unit franchisees. A franchisor considering a subfranchise system should pay particular attention to the contractual rights it can enforce directly against unit franchisees. If a franchisor determines that it wants to have some direct contractual rights then it should be careful not to exert direct or indirect control over a unit franchisee's employment conditions in a way that would make it a joint employer.

Read: Roman v. Jan-Pro Franchising International, Inc., N.D. Cal.

FRANCHISEE 101: Upgrade Your Metal

Metal Supermarket Software Litigation

A federal court in New York denied a franchisee's motion for preliminary injunction that would have prevented its franchisor Metal Supermarkets Franchising America (MSFA) from installing technology upgrades in its stores.

MSFA is the franchisor of a metal parts business. JDS Group (JDS), a Washington corporation, owned two MSFA franchises. For ten years as an MSFA franchisee, JDS used a software system called "Metal Magic" that MSFA supplied. In 2012, MSFA determined that Metal Magic was outdated and below an appropriate measure of MSFA's standards. It developed a new software system, called "MetalTech," which took three years to develop and cost over $1 million. MSFA began installing MetalTech at franchisee locations. But JDS continued to use the Metal Magic system and refused to switch its stores to MetalTech, claiming it was unreliable and did not perform as required. JDS sued MSFA for violation of the Washington State Franchise Investment Protection Act (FIPA) and for breach of the implied covenant of good faith and fair dealing, and asked the court for a preliminary injunction to prevent MSFA from installing MetalTech in its stores.

JDS claimed MetalTech was unreliable and inefficient and submitted declarations of six MSFA franchisees, all alleging that they had serious problems using MetalTech that hurt their business operations. The court found that express terms of the franchise agreements permitted MSFA to develop or designate computer software programs and required JDS to use them. The court noted that federal courts have repeatedly held that it is permissible for a franchisor to require franchisees to use its proprietary computer systems. The court found no evidence of bad faith by MSFA and concluded it was unlikely that JDS would be successful on the merits of its FIPA claim.

The court also held that JDS failed to show it was likely to suffer irreparable harm if MetalTech were installed in its stores. MSFA showed that 78 out of 86 stores were using MetalTech and on average those stores saw sales increases after the conversion. The court found that any impediment imposed by MetalTech was not so great as to impair JDS's ability to continue operating its business. Accordingly, the court found an injunction was not warranted and denied JDS's motion.

An important aspect of operating a franchise that may be overlooked by potential franchisees is the possibility of changing or upgrading technology at the franchisor's request. Franchisors typically reserve the right to require franchisees to upgrade computer and technology systems. Prospective franchisees should understand before they enter into a franchise agreement that technology upgrades are likely to occur during the life of their franchised business.

More Info: JDS Group Ltd. v. Metal Supermarkets Franchising, W.D.N.Y.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Tuesday
Aug292017

Franchise 101: Selective Enforcement; and Squeezed at the Pump

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com


 

AUGUST 2017

 

Franchise Distribution Attorneys

David Gurnick in Corporate Counsel

When Uber acquired Otto, the self-driving automobile tech company fronted by former Waymo executives, Google filed a lawsuit alleging misappropriation of trade secrets, among other claims. Corporate Counsel magazine interviewed David Gurnick for his take.

Read more: Was Uber’s Deal With Otto Out of the Ordinary?

Welcome Katherine L. Wallman!

We are very pleased to announce the arrival of our newest associate, Kate Wallman. Ms. Wallman earned her law degree from the Catholic University of America, Columbus School of Law, where she graduated cum laude. She's worked as a franchise attorney for various firms in Washington D.C. and most recently served as in-house senior counsel at DineEquity, parent company of Applebees and IHOP.

Learn more about: Katherine L. Wallman

FRANCHISOR 101:
Selective Enforcement of Franchise Agreement Provisions

 

A franchisor's ability to set renewal terms can bind franchisees to terms in a later franchise agreement before the renewal agreement even exists. In a recent case, a franchisor could enforce a hypothetical non-compete restriction in a renewal agreement, even though it waived the restriction in the currently-effective franchise agreement.

James Robinson, a veterinary hospital franchisee, also ran other veterinary clinics not affiliated with the franchise. The franchise agreement's non-compete provision would have prohibited operating the independent locations. But the franchisor chose not to enforce it. On expiration of the franchise agreement, the franchisor notified the franchisee of its intent to enforce the covenant in the renewal agreement.

The franchisee refused to divest the independent locations. No renewal agreement was signed. The franchisee sued for breach of the franchise agreement, covenant of good faith and fair dealing, and interference with economic relations - all based on the absence of any renewal.

A federal district court dismissed the complaint, and the Ninth Circuit affirmed. The courts said plain language of the franchise agreement's renewal provision allowed the franchisor to condition renewal on compliance with a different non-compete provision than the current agreement.

One may ask - how could a franchisee be bound by a future non-compete provision, in a future agreement, when the covenant in the present contract was not enforced? The courts were satisfied that the existing agreement's renewal provision explicitly said the renewal agreement would be "substantially similar to the then-current form of the franchise agreement." The Ninth Circuit ruled, based on this clause, that the renewal agreement would have a similar non-compete provision.

The courts ruled that the franchisor's waiver of the non-compete provision in the franchise agreement did not extend to the renewal agreement, nor was there a promise to never enforce a non-compete provision in the future. Dismissal of the interference claim was upheld because conduct between business competitors is proper if it is to further the defendant's own business interests. The franchisee alleged only that the franchisor's act of not renewing him was "done to make a profit," which was not wrongful.

See: Robinson v. Charter Practices International

FRANCHISEE 101:
Squeezed at the Pump

Most dealership and franchise agreements require the franchisor's prior written consent to the transfer of a business from one franchisee to another. The new franchisee is often required to sign the franchisor's then-current agreement as a condition to getting the franchisor's consent to the transfer.

Can a franchisor unreasonably withhold consent, or can an incoming franchisee or dealer be coerced to sign up with a franchisor? A California appellate court has said no and upheld a lower court's ruling that a petroleum products distributor and franchisor of "76" brand gas stations unreasonably tried to coerce a purchaser to sign a new franchise agreement. The franchisor was found to have breached the seller's franchise agreement, which excused further performance by the seller and purchaser.

The seller asked several times for the franchisor's consent and for the original branded reseller agreement. But the franchisor never obliged or responded to the purchaser's transfer application, short of telling the seller they were "working on it."

After nearly a month with no response, escrow closed without an assignment of the original reseller agreement. The seller continued to buy gasoline for the purchaser, who paid the seller for the gasoline shipments until the franchisor stopped delivering gasoline.

The franchisor then told the parties it was considering other potential purchasers and never took the purchaser's application seriously. The franchisor refused to make further gasoline deliveries to the station unless the purchaser signed a 64-page franchise agreement on the spot. The franchisor refused the purchaser's request for time to review the agreement, and rejected its offer to pay in advance for gasoline deliveries made before finalizing the agreement. The franchisor threatened to sue the purchaser and put it out of business unless it signed "then and there."

The trial court came down hard on the franchisor, finding the franchisor was unreasonable in failing to respond to the seller's request to assign the original agreement and in its actions and threat toward the purchaser. The appellate court agreed, affirming that the franchisor breached the original reseller agreement because it gave no notice to the seller or purchaser before placing a hold on the purchaser's gasoline orders. The purchaser also received an attorneys' fees award based on the agreement, even though it never entered into any contract with the franchisor.

While franchisors often reserve the right to impose conditions on assignment of a franchise, a franchisor cannot unreasonably withhold consent to impede a transfer.

See: Westco Petroleum Distributors v. Huntington Beach Industrial

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

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