San Fernando Valley Los Angeles Attorneys
Navigation Two
Phone Number
Thursday
Apr262018

Franchise 101: Future Royalties & Beyond; and a Sweet Non-Compete

Franchise 101 News

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

April 2018

 

Tal Grinblat in Franchise Times

Congratulations to Tal Grinblat named a Legal Eagle by the Franchise Times for the fifth, consecutive year. In addition to this designation, Tal is also a State Bar of California Certified Specialist in Franchise & Distribution Law, and a member of the Executive Committee of the Business Law Section of the California Lawyers Association.

Read: 2018 Franchise Legal Eagles

Franchise Distribution Attorneys

FRANCHISOR 101:
Future Royalties and Beyond

A Florida federal court refused to dismiss a franchisor's claim for past due royalties and lost future profits.

The case concerned an Interim Healthcare staffing franchise in Arizona. The franchisor issued a default notice based on the franchisee's failure to pay agreed royalties. After the franchisee failed to cure the default, the franchisor terminated the franchise agreement and sued for almost $400,000 in past due royalties and more than $1,400,000 in lost future royalties.

The franchisee moved to dismiss the claim for future royalties, arguing that future amounts were speculative and that the franchisor's act of terminating the agreement-rather than the franchisee's breach - caused any alleged future royalty damages.

The court rejected this argument, noting that although Florida courts are "hesitant" to award future royalties, the franchisor properly pled its claim by alleging breach of the franchise agreement, lost profits as a proximate result of the breach, that losses were contemplated by the parties based on the agreement's ten-year term, and that the claimed losses were not speculative as they were based on average weekly fees and number of weeks remaining on the agreement. The court noted that future profits can be recovered in Florida by demonstrating the loss with "reasonable certainty by competent proof" and that the franchisor would be held to that standard at trial.

Lost future royalties may be difficult to recover, but a properly detailed pleading can get the claim to trial rather than being dismissed early in the case. Franchisors should work closely with franchise litigation attorneys to strengthen the pleading of such claims.

Interim Healthcare Inc. v. Health Care@home, LLC, S.D. Fla.

FRANCHISEE 101:
A Sweet Non-Compete

A Florida federal court held that the non-compete provision in a chocolate shop franchise agreement was enforceable against an ex-franchisee operating a competing chocolate store at the former franchised location.

The franchisee was terminated for refusing to install the new point of sale system, which was required by the franchise agreement. After termination, the former franchisee continued to operate in the same location.

The franchisor sued to enforce the non-compete provision in the franchise agreement. The non-compete prohibited the former franchisee from operating a competing business within 25 miles of its former location or other franchised locations for two years.

The former franchisee argued that the non-compete provision was unenforceable under Florida law, claiming the franchisor failed to prove a legitimate business interest justifying the provision. The court was not persuaded. It found the franchisor had legitimate business interests in protecting its goodwill in the region surrounding the location and in protecting its ability to sell new franchises. The court concluded that the franchisor's interest in re-entering the market and efforts to bolster the goodwill associated with the franchisor's brand in the area of the franchisee's former location were legitimate business interests for enforcing the non-compete provision.

A franchisee leaving a franchise system should evaluate its legal rights before deciding to operate a competing business. A non-compete provision may or may not be enforceable in the state where the franchisee plans to operate. Knowing the enforceability of non-compete provisions in the franchisee's jurisdiction before operating a competing business can save time, money and headache.

Peterbrooke Franchising of America, LLC v. Miami Chocolates, LLC, S.D. Fla.

Thursday
Mar292018

Franchise 101: Liability as Certain as Death & Taxes; and To First Refuse, or Not to Refuse

Franchise 101 News

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

March 2018

 

 

Franchise Distribution Attorneys

FRANCHISOR 101:
Liability as Certain as Death & Taxes

Structuring a franchise to reduce risk of joint employment and vicarious liability means limiting a franchisor's control over franchisees. This is a challenge in a professional services franchise, where the brand is intertwined with the franchisee's personnel and the end product.

A California federal court held that a franchisee's former customer sufficiently alleged claims that tax preparation franchisor Jackson Hewitt exercised sufficient control over processing of tax returns to be vicariously liable for fraudulent conduct of a franchisee's rogue employee. The franchisor must also face claims of making fraudulent statements about accuracy of its tax preparation services.

The customer claimed the franchisee manipulated his tax returns to get a larger refund, and kept part of the refund as fees, without the customer's knowledge. In a prior ruling, the Court found the franchisor's controls were typical of a franchise relationship, and that control over certain aspects of a franchisee's operations was insufficient to create vicarious liability. This time, the customer alleged that Jackson Hewitt controlled the instrumentality of the harm by hiring and training tax preparers, and reviewing, approving and submitting tax returns to the IRS through the franchisor's proprietary and mandatory computer system. The Court was persuaded by allegations that the franchisor's "Code of Conduct" referred to the reader as an "employee" of Jackson Hewitt (not of the specific franchisee), mandated background checks and training programs to prevent preparation of fraudulent returns, and set parameters for termination of franchisee employees for failure to comply with system requirements.

Jackson Hewitt was also alleged to have made fraudulent ads touting 100% accurate returns, comparison to mom and pop tax preparers, and the "Preparer's Pledge" to handle a customer's tax return like their own. The Court said the purpose of the ads was to engender trust in potential customers, so they would hire Jackson Hewitt and its franchisees to prepare their taxes.

A professional services franchisor should be cautious in preparing training materials and manuals to delineate no more supervision than needed over franchisee personnel, to protect the franchisor's brand and intellectual property while trying to reduce the risk of vicarious liability for acts of a franchisee's employees.

Read: Lomeli v. Jackson Hewitt, Inc.

 

FRANCHISEE 101:
To First Refuse, or Not to Refuse

A franchisee looking to transfer assets of a franchised business may be subject to the franchisor's right of first refusal, the franchisor's option to purchase the business, or both, depending on the language of a franchise or dealer agreement.

In a federal court in Pennsylvania, a franchisee of seven car dealerships prevailed against Audi of America, the franchisor of one of the dealerships. Audi claimed the franchisee breached Audi's dealership agreement and violated state dealer law when, subject to the franchisor's right of first refusal, the franchisee did not provide pricing and other terms to transfer an Audi dealership.

The dealership agreement and Pennsylvania dealer law granted Audi a right of first refusal if the franchisee attempted to sell its majority ownership interest in the Audi dealership. The franchisee found a buyer and entered into an asset purchase agreement which packaged all seven dealerships as an "auto multiplex" for $17 million. The agreement did not separately price the Audi dealership. Believing the franchisee was acting in bad faith in valuing the Audi dealership at $8 million, Audi sued to block the transaction. A court granted a preliminary injunction.

After Audi filed the lawsuit, the franchisee and buyer signed two addenda to the purchase agreement, seeking to remove the Audi dealership from the sale. The franchisee contended that Audi's right of first refusal ended because it was no longer selling the Audi dealership. The trial court sided with the franchisee, finding there was no breach of the dealership agreement because the second addendum removed the Audi dealership, and the terms of the dealership agreement permitted the franchisee to withdraw the proposed sale after Audi elected its purchase right.

The Court also rejected Audi's claim that the first refusal right ripened into an irrevocable option to buy the dealership. It was only a general right of first refusal, which Audi failed to exercise before the franchisee withdrew the Audi dealership.

While Audi claimed it was unable to exercise its right due lack of a good faith price breakdown, the dealer was free to withdraw the asset from the sale. Accordingly, the franchisor received the full benefit of its right of first refusal, and was not entitled to further rights after failing to accept the right of first refusal prior to the withdrawal.

Read: Audi of America, Inc. v. Bronsberg & Hughes Pontiac, Inc.

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 2018. All Rights Reserved.

Wednesday
Feb282018

Franchise 101: Finger Lickin' Restrictions; and Til Expiration Do Us Part

 

Franchise 101 News

Southern California Tier 3 Best Lawyers in Franchise Law 2018bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

FEBRUARY 2018

 

Franchise Distribution Attorneys

IFA 2018 Convention

Barry Kurtz, Tal Grinblat and Matthew J. Soroky all attended the 2018 International Franchise Association's annual convention in Phoenix earlier this month. The convention is geared to further expanding the franchise industry through educational and networking opportunities for legal and business professionals.

David Gurnick inValley Lawyer

David Gurnick reviewed "Legal Ethics and Social Media: A Practitioner's Handbook" for the San Fernando Valley Bar Association's Valley Lawyer Magazine. The tome addresses "the clash between the lawyer's quest for professionalism and the public's freedom of speech..." among other issues lawyers face when using social platforms. Read the review here: Legal Ethics and Social Media: A Practitioner’s Handbook

 

FRANCHISOR 101:
Finger Lickin’ Restrictions

Chicken Franchisee MarketingFranchise agreements give franchisors nearly absolute, unfettered discretion to control advertising of their brands. Franchisors need not regard prior course of dealings with franchisees. An Illinois federal court dismissed a franchisee's claim that KFC (known to many by its former name, Kentucky Fried Chicken) should not force the franchisee to stop advertising halal chicken at his franchised KFC locations simply because KFC in the past permitted, and assisted, in accommodating the franchisee's religious practice. The court found KFC's franchise agreement gave it express power to change advertising policies.

After opening his first franchise in 2002, the franchisee's local marketing campaign emphasized that his restaurant's chicken was halal-processed according to Islamic law. The strategy was so lucrative, the franchisee opened five more KFCs near mosques and Muslim communities.

For 14 years, KFC allowed the franchisee to market halal chicken. KFC allegedly helped the franchisee identify halal-certified processors and distributors. But then KFC revoked consent due to a new policy against franchisees making religious dietary claims. KFC became concerned about varying religious standards and compliance difficulties.

The plaintiff alleged that KFC's prohibition on advertising dietary claims contradicted KFC's earlier representations. But the court's decision rested on the franchise agreements. The court observed that "failure, forbearance, neglect or delay of any kind or extent on the part of KFC" in enforcing and exercising its rights would not "affect or diminish KFC's right to strictly enforce" the agreements. Given the franchisor's unambiguous contractual right to control franchisee advertising, and the agreements' integration clauses, the court would not consider evidence of KFC's previous actions. The court also dismissed the franchisee's promissory estoppel claim because Kentucky law, which governed, does not allow such claims when the parties have a contract.

The court dismissed KFC's counterclaim for attorney fees because the franchise agreement allowed KFC to recover attorney fees only for suits it initiated and won, rather than suits started by the franchisee. The court interpreted the attorney fee clause narrowly, and concluded that KFC did not start the action; rather the franchisee did in filing his original complaint.

When drafting fee shifting provisions in franchise agreements, franchisors should give serious thought to what kinds of disputes are likely to arise for which attorney fee recovery would be a benefit or hazard, before using boilerplate attorney fee clauses (whether narrow or broad). Specific wording of these provisions can impact their application in a dispute.

Lokhandwala v. KFC Corporation, 2018 WL 509959 (N.D.Ill., 2018)

FRANCHISEE 101:
Til Expiration Do Us Part

 Non-Signatory Operators Must Honor Franchise Agreements
Though an individual owner and operator of a formerly franchised Church's Chicken restaurant in Texas was not a signer of the franchise agreement, a district court ruled the individual was subject to the agreement's post-termination provisions. The ruling was based on assumption and equitable estoppel. The operator was enjoined from further use of the franchisor's trademarks or any confusingly similar marks; from breaching the agreement's non-competition provisions; and from taking actions violating the agreement's post-expiration obligations. The court found the franchisor was likely to succeed on the merits for breach of the franchise agreement and trademark infringement against the restaurant operator.

Shortly after a third-party franchisee entered into the franchise agreement, the franchisee sold the restaurant to the operator without notice to the franchisor. The operator performed under the agreement for the entire ten-year term as if he was an authorized franchisee. When the agreement expired, the operator re-branded the restaurant as a competing quick-service restaurant specializing in the sale of fried chicken using a logo, marks and other décor similar to those used at the former Church's Chicken restaurant. The franchisor demanded that the operator cease and desist and upon the operator's refusal, the franchisor filed suit.

Assumption and equitable estoppel applied to prevent the operator from having it both ways. After ten years of performing and enjoying the benefits of the agreement, he could not repudiate the post-expiration obligations in the same agreement. The court enjoined the operator's infringement and unlawful competition based on finding the operator's continued operation was causing the franchisor irreparable injury.

Non-signatory operators who operate under and benefit from a franchise agreement for a long period should understand they cannot avoid post-term obligations simply because they did not sign the agreement. The non-signatory faces risk of being subject to the same injunction order as would an ordinary franchisee who signed the contract with the franchisor.

Cajun Global LLC v. Swati Enterprises, Inc., N.D. Ga., 16,118

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 2018. All Rights Reserved.

Friday
Feb022018

Franchise 101: Copycat Restaurant Shutdown; and Out of Time, Out of Gas

Franchise 101 News

Best Law Firms Southern California Badge 2018bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



JANUARY 2018

 

Franchise Distribution Attorneys

2018 Southern California Super Lawyers

Congratulations to Barry Kurtz, Tal Grinblat and David Gurnick, all State Bar of California Certified Specialists in Franchise & Distribution law, and all named 2018 Franchise/Dealership Super Lawyers for Southern California. To be selected, Barry, Tal and David were first nominated by attorneys at other law firms, and then underwent a 12-point selection process based on peer recognition and professional achievement: Super Lawyers 2018

Barry Kurtz inSFV Business Journal

Barry Kurtz was quoted in an article regarding the expansion of franchises in the San Fernando Valley area of Los Angeles. His insights on the post-recession appeal of buying into franchise systems is available here: Franchise Companies Find Retail Room to Grow

David Gurnick in Valley Lawyer

"Under the principal formulation of unconscionability, two elements must be present: procedural and substantive unconscionability. But they need not be present in the same degree. . . ." Read David Gurnick's full article: Unconscionability in California: Contract Power Tool for the Powerless and Powerful

FRANCHISOR 101:
Copycat Restaurant Shutdown

A registered trademark is a valuable corporate asset and can be a significant part of a company's worth. A franchisor has an affirmative legal duty to police use of its mark by licensed franchisees and also third-party infringers. For instance, a federal court in Louisville permanently enjoined a competitor from using "La Bamba" in its name, holding that use by La Bamba Authentic Mexican Cuisine (LBAMC) was likely to cause confusion with the La Bamba Mexican restaurant chain operated by franchisor and restaurant owner La Bamba Licensing (LBL).

Both parties served casual, Mexican food. The court found the marks were similar enough that consumers could mistakenly think the restaurants were related.

LBL owns the registration of La Bamba for restaurant services, and operates eight La Bamba Mexican restaurants in Kentucky and the Midwest. LBAMC opened a casual, Mexican restaurant named "La Bamba" 65 miles from Louisville. LBL sued after LBAMC refused to comply with LBL's demands to cease and desist and change the name of its restaurant.

LBL argued and the court agreed that the La Bamba mark is distinctive, despite some ordinary language usage, because the phrase "La Bamba," a famous Mexican folk song, is unrelated to LBL's restaurant services. LBL provided evidence that its mark acquired distinctiveness for Mexican cuisine, based on its continuous use of the mark for nearly 30 years, particularly in Kentucky. LBAMC argued that the mark was weak due to un-policed third-party use. But LBAMC failed to point to evidence of similar marks, let alone the number, location, or types of goods and services offered by allegedly numerous undisclosed third-party users.

The court found a likelihood of confusion and permanently enjoined LBAMC from using the La Bamba name. In balancing hardship of an injunction, the court noted that LBAMC operated only a single restaurant, only since 2015, while LBL operated several restaurants in multiple states for an extended time period.

A franchisor that tolerates infringers will find its trademark asset has "eroded" and "shrunken" because the strength of its mark as a distinctive symbol is diminished by the presence of similar marks. Vigilance in policing marks helps build a stronger, reputable brand, avoid loss of trademark rights, and minimize the risk of an infringer operating with impunity.

La Bamba Licensing, LLC v. La Bamba Authentic Mexican Cuisine, Inc.

FRANCHISEE 101:
Out of Time, Out of Gas

A California federal judge held that breach of contract claims brought by franchisees of two ARCO-branded gas stations against their franchisor BP West Coast Products were untimely, and declined to adopt the franchisees' argument that equitable estoppel tolled the statute of limitations.

The franchisees operated two gas stations since 1998, one in San Ramon, California and one in Dublin, California. In 2007 a BP sales representative allegedly approached plaintiffs offering to brand the stations as ARCO gas stations. Prior to signing contracts to convert both sites to the ARCO brand and add mini Markets, a BP representative allegedly projected to plaintiffs $40,000 per month of profits for the San Ramon station.

After heavy losses, the franchisees closed the stations and sued. The franchisees claimed that BP breached the franchise agreements by refusing to allow them fuel pricing allowances and ability to use additional vendors for the on-premises mini-markets. Since the franchisees sued more than four years after closure of the stations their action was barred unless equitable estoppel could save the claims.

The franchisees argued equitable estoppel saved their claims based on a purported oral "Walkaway Agreement" in which BP representatives represented that they would not pursue any claims based on the franchise agreements.

The judge found the franchisees could not reasonably rely on the alleged Walkaway Agreement because the franchise agreements had bold disclaimers on their signature pages saying no BP representative could orally modify or amend the agreements. The fact that plaintiffs received BP's demand for $1.2 million for gasoline, unpaid loans and other payments under the franchise agreements approximately one month after the alleged Walkaway Agreement further suggested that plaintiffs' reliance was not reasonable. The judge noted it would have been unreasonable for the franchisees, sophisticated business people, to expect BP to relinquish its claim to those payments.

Equitable estoppel may defeat a statute of limitations defense when the defendant's promises, threats or representations induce a plaintiff to delay filing a lawsuit. But it is not always successful in overcoming the statute of limitations. This case is a harsh reminder that equitable estoppel may not save a time-barred claim even if based on settlement negotiations between the parties.

Power Quality & Electrical Systems, Inc. v. BP West Coast Products 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 2018. All Rights Reserved.

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.

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120