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Tuesday
Jun242014

Pumped Up and Suing in Seattle

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

June 2014

 

Top Ranked Law Firms 2014

Lewitt Hackman was named one of the Top Ranked Law Firms in California by Martindale-Hubbell for the third, consecutive year. The rankings are based on the size of the firm and the percentage of attorneys who have earned an AV Preeminent rating by Martindale-Hubbell. Lewitt Hackman well exceeds the selection criteria.

 

Franchise Distribution Lawyers*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Barry Kurtz quoted by the Los Angeles Times

Franchisees allege 7-Eleven targets the more profitable stores, accuses the owners of skimming from the till, and then pressures them to give up their businesses so the franchisor can offer them to new investors. How common is "churning" in the franchise industry?

Click Franchisees Allege Hardball Tactics, Store Seizures by 7-Eleven, to read the article.

 

Barry Kurtz and Bryan H. Clements in
The Practical Lawyer

"Prior to 1919 and the passage of the 18th Amendment, brewers and producers of alcoholic beverages sold their products directly to retailers, which led to anti-competitive business practices and unscrupulous marketing..."

Continue reading: The Yin and Yang of Beer Distribution Law and Franchising.

 

FRANCHISOR 101: 
IFA Files Lawsuit Against Seattle

On June 11, 2014, the International Franchise Association (IFA), a Washington, D.C.-based trade group, and five franchisees sued in U.S. District Court in Seattle to block Seattle's recently enacted increase of the minimum wage in the city to $15 per-hour.

The law requires large businesses, defined as those with more than 500 employees, to raise the minimum wage they pay employees to $15-an-hour over three years. Small businesses have seven years to phase in the wage increase. Under the law, a franchisee with five employees or more is considered a large employer and must begin raising its wage base next April if the franchise system has more than 500 employees nationwide.

Minimum Wage Hike Litigation

On the other hand, an independent, non-franchise company with 499 employees or less will be considered a small employer and will have additional time to comply with the law. IFA wants an injunction to prevent the new law from taking effect on April 1, 2015. The complaint alleges the law illegally discriminates against franchisees, improperly treating them not as small, locally-owned businesses, but as large, national companies, because they operate in a franchise network; and claims the law violates the Equal Protection Clause of the U.S. Constitution and the Washington State Constitution by arbitrarily discriminating against small businesses simply because they are franchises. IFA also launched SeattleFranchiseFairness.com, a website to encourage business owners to amend or overturn the law.

Read the article: Trade Group, Franchisees Sue to Block Seattle Minimum Wage Hike.  

 

FRANCHISEE 101:
Unsigned Franchise Agreement Binds Franchisee's Shareholder

A Texas Appeals Court recently held in Pritchett v. Gold's Gym Franchising, LLC that a Texas forum-selection clause in a Franchise Agreement was incorporated by reference into a personal guaranty agreement and was binding on a franchisee's out-of-state shareholder who did not sign the Franchise Agreement.

Gold's Gym and its franchisee, Bodies in Balance, entered into a Franchise Agreement in 2008. Each of Bodies in Balance's three shareholders signed a Guaranty, agreeing to be "personally bound by each and every provision in the Franchise Agreement."

The Franchise Agreement contained a "Consent to Jurisdiction" provision saying Bodies in Balance and its shareholders agreed the courts in Dallas County had exclusive jurisdiction over all disputes. The Guaranty did not have a "Consent to Jurisdiction" provision. Pritchett, a 50 percent shareholder, argued that, despite the Consent to Jurisdiction provision in the Franchise Agreement, he could not be forced to litigate claims in Texas because he had not signed the Franchise Agreement.

The court ruled that to uphold terms incorporated by reference in an agreement, "it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms." Since the Guaranty said "Guarantors do hereby agree to be personally bound by...each and every provision in the [2008 Franchise] Agreement...," the Court concluded that the parties to the Guaranty intended the entire Franchise Agreement, including its forum-selection clause, to be part of the Guaranty.

According to the Court, if Pritchett signed the guaranty, he was subject to the forum-selection clause in the Franchise Agreement and waived any jurisdictional objection to being sued in Dallas County.

Prospective franchisees should be cautious about, and fully understand the effects of, incorporation by reference clauses in their Franchisee Agreements.

Read the court opinion: Tim Pritchett, Appellant, v. Gold's Gym Franchising, LLC, Appellee.

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 2014. All Rights Reserved.

 

Thursday
May222014

When is Unreasonable, Reasonable?

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

May 2014

 

47th Annual International Franchise Association Legal Symposium

David Gurnick, along with representatives from Brinker International (known for the Chili's and Macaroni Grill brands) and Restaurant Services Inc. (national cooperative of Burger King franchisees) were invited to speak at the IFA's Annual Legal Symposium in Chicago, discussing aspects of the cooperative business model. Barry Kurtz and Tal Grinblat also attended. Tal served as roundtable facilitator on manufacturing issues facing franchise companies.

 

Franchise Distribution Lawyers*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Barry Kurtz & Bryan H. Clements in Fresno County Bar Association's Bar Bulletin

"Many unsuspecting businesses that have licensed their trade marks and marketing plans to others without providing the required disclosures or registering as a franchise have been found to be in violation of federal and state law." Click Is Franchising the Right Model for Your Client's Business? for further information.

 

Tal Grinblat & David Gurnick in American Bar Association's  Franchise Law Journal

"Implicit in the franchise relationship is that the franchisor owns intellectual property, which others cannot use without the franchisor's permission. But this fundamental premise is not entirely correct." Continue reading: OPIP: When Is It Lawful to Use Other People's Intellectual Property in Franchising?

 

FRANCHISOR 101:
When is Unreasonable, Reasonable?

Crown Imports, LLC (Crown) imports Corona beer from Mexico. In 2008, two of Crown's Southern California distributors, Classic and HBC, agreed that Classic would buy HBC's Crown distributorship. Crown denied approval of the transfer citing Classic's poor performance.

In 2008 and 2009, Classic won top-distributorship awards, and in 2010, Classic again sought Crown's approval to buy HBC's distributorship. But Crown again refused consent, and HBC sold its distributorship to Anheuser-Busch.

Classic sued Crown for interference, claiming that Crown had a secret plan to prevent Classic from acquiring HBC's distributorship. On appeal, the California Court of Appeal disagreed with Classic and with a lower court, and held that no genuine issues of fact existed as to whether Crown unlawfully withheld consent to the Classic/HBC transfer.

A plaintiff claiming interference must prove, among other things, that the defendant intentionally or negligently committed an independently wrongful act to disrupt an existing business relationship, which did disrupt the relationship.

Beer LawClassic argued Crown unreasonably withheld consent to its purchase of HBC's distribution rights in violation of California Business and Professions Code Section 25000.9, which, Classic claimed, amounted to an independently wrongful act. Section 25000.9 says that "Any beer manufacturer who unreasonably withholds consent [to a distributor transfer] shall be liable to the [distributor]."

In rejecting Classic's arguments, the court held that since Section 25000.9 provides a remedy for disappointed sellers, not buyers, Crown's denial, even if it was unreasonable and violated Section 25000.9, was not an independently wrongful act. Moreover, the court opined, Section 25000.9 can be read to "permit a beer manufacturer to unreasonably deny approval [of] a transfer."

It ruled that "as long as a seller receives adequate compensation either from a successor purchaser or the manufacturer itself, there is no violation of the statute." The court further ruled that good policy reasons exist to let beer manufacturers unreasonably deny consent to transfers, provided they make the disappointed distributors whole.

Under California law, beer distributors may not sell beer without first entering into written distribution agreements with manufacturers and filing the agreements with state. So, the court explained, if a manufacturer could not withhold consent, it would be forced to enter a new contract with the transferee distributor, even if it did not wish to do business with the new distributor.

Notwithstanding the court's reasoning and outcome in this case, California brewers should still keep in mind the risk that unreasonably denying consent to a distributor transfer may violate California law. Discretion remains a better part of valor.

Read the appellate court opinion: Crown Imports, LLC v. Superior Court and Classic Distributing & Beverage Group. 

 

FRANCHISEE 101:
Item 19 Misdirection Ultimately Discovered by Franchisee

Franchisors that make Item 19 financial performance representations (FPRs) must disclose all material facts and not knowingly conceal any facts necessary to make their disclosures true under the circumstances in which they are presented. Abbo v. Wireless Toyz L.L.C. provides hope for franchisees whose franchisors do not disclose all relevant facts in their FPRs.

Franchise LitigationIn August 2004, Wireless Phones, L.L.C. (WP) entered into a franchise agreement with Michigan franchisor Wireless Toyz Franchise, L.L.C. (Toyz) for a Wireless Toyz franchise to be located in Colorado. Wireless Toyz franchisees earn commissions by selling cellular equipment and 3rd party cellular contracts to customers. The commissions are reduced by Hits (customer discounts offered by cellular providers) and Charge Backs (recoupments due to early termination of customer contracts).

Before buying the franchise, WP was given Toyz's disclosure document, which contained an FPR that made no mention of Hits and only cautioned that commissions could be subject to Charge Backs, but included no data to indicate the financial impact Charge Backs would have on a franchisee profits. WP apparently recognized the discrepancies, raised the issue and received verbal assurances from Toyz's owner that the average Hit would not exceed $50 and Charge Backs would average 5% to 7% percent of annual commissions.

After WP's store failed in 2009, WP brought suit, asserting, among other claims, that Toyz violated Michigan's Franchise Investment Law (MFIL) and committed the tort of fraudulent concealment by knowingly concealing facts regarding Hits and Chargebacks.

A claim for fraudulent concealment arises from suppression of the truth with intent to defraud. The trial judge ruled that the evidence did not support a claim of fraudulent concealment, and WP appealed.

The appellate court overturned the trial court and ruled Toyz was liable for fraudulent concealment. The court held that the MFIL required Toyz to refrain from making material misrepresentations or omitting pertinent information from any disclosures relating to the sale of the franchise. The court found Toyz's FPR "omitted [material] information concerning average Hits and Chargebacks" that was necessary to make the FPRs not misleading and Toyz suppressed the truth by falsely giving WP verbal assurances that the impact of Hits and Chargebacks would be minimal.

Potential franchisees should carefully review their franchisor's FPRs to ensure that all pertinent financial information is fully presented and make further inquiry when they believe that is not the case.

Read the court opinion re: Abbo v.Wireless Toyz Franchise.

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 2014. All Rights Reserved.

 

Tuesday
Apr222014

False Financial Representation Slams Franchisor

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

April 2014

 

Craft Brewers Conference 2014

 

Barry Kurtz and Bryan H. Clements were invited to speak at the annual Craft Brewers Conference and BrewExpo America, the largest brewer's trade show in the country. The three day event was held in Denver. Lewitt Hackman represents craft brewers in distribution and related transactions. Barry and Bryan's presentation focused on the federal three-tier system of beer distribution law, and its similarities and contrasts with franchise and distribution law.

 

*Certified Specialist in Franchise & Distribution Law as designated by the State Bar of California Board of Legal Specialization

David Gurnick in Valley Lawyer Re Non-Compete Clauses

 

Generally, California Courts will not enforce a restrictive covenant. But there are several circumstances in which such covenants can be enforced. Read, Enforcement of Non-Compete Clauses in California by David Gurnick for details.

 

FRANCHISOR 101:
False Financial Representation Slams Franchisor

 

In Rogers Hospitality, LLC v. Choice Hotels International, Inc., a panel of arbitrators found that the franchisor of Choice Hotels violated Minnesota franchise laws by making false financial performance representations to its franchisee.

Hotel FranchiseThe franchisee proved that in a 2008 investor conference, the franchisor's Director endorsed financial projections for a potential Sleep-Inn and Suites Hotel in Minnesota. The projections were adopted into a pro-forma that identified average daily rates the hotel could expect.

At the conference, Choice Hotels' Director claimed the pro forma numbers were "attainable, conservative, and/or spot-on." The statements were made outside Item 19 of the Franchise Disclosure Document. Therefore they were unlawful.

The arbitration panel also found the information was false because only 2.3% of Choice's Sleep-Inn and Suite hotels achieved such performance, and Choice's Director failed to disclose this low percentage. The arbitrators concluded that some of the franchisee's representatives at the conference relied on the statements in electing to purchase the franchise. Accordingly, the panel ruled against Choice Hotels and in favor of the franchisee.

For franchisors, the Choice Hotels case is a reminder of the importance not to give financial performance information to franchisees or endorse pro formas prepared by franchisees, if not included in the Franchise Disclosure Document, Item 19.

This case should also remind franchisees to tread carefully when given earnings information outside Item 19. The information may be inaccurate, false or misleading.

 

FRANCHISEE 101:
Terminated Franchisee Can Pursue Fraudulent Disclosure Claims

 

In Solanki v. 7-Eleven, Inc., a U. S. District Court in New York ruled that a terminated 7-Eleven franchisee who decided to purchase a third location before receiving the Franchise Disclosure Document (FDD) could proceed with claims that 7-Eleven made false presale revenue and earnings claims in violation of the New York Franchise Sales Act.

The franchisee owned two 7-Elevens and contacted the franchisor to buy a third. At that time, he received the New York version of the 7-Eleven FDD, which contained unaudited financial statements showing averages of actual sales, earnings, and other financial performance of franchised 7-Eleven stores.

7-11 Franchise LitigationIn a deposition, the franchisee testified he decided to buy the third store before receiving the FDD. Later, he explained that he committed to the purchase only after seeing the FDD.

Prior to signing the franchise agreement, he provided a business plan to 7-Eleven for approval. When he was approved, he was told the projections in his business plan were consistent and in line with 7-Eleven's estimates.

However, 7-Eleven never provided its revenue projections for the store he purchased. In the first year of operation, the store never achieved the sales projected in the business plan. Later he was unable to make payroll. At the franchisee's request, 7-Eleven terminated the Agreement.

The franchisee brought an action claiming 7-Eleven's representation that the revenue projections in his business plan "were consistent with and in line with 7-Eleven's estimates" violated New York's Franchise Sales Act because:

 

  • 7-Eleven's revenue estimates and their basis were not in the FDD, as required by the Franchise Sales Act, and

  • 7-Eleven's earnings estimates were false, misleading and lacked any reasonable basis.

 

Though the franchisee testified he decided to purchase a third franchise before receiving the FDD, the court rejected 7-Eleven's defense. The court explained that making up one's mind to buy a particular store and committing to go through with the purchase based on information received from 7-Eleven were two different actions. The court also held that any disclaimers reviewed, acknowledged, or agreed to by the franchisee in the franchise agreement could not bar his claims.

For franchisees the 7-Eleven case shows that claims for damages and fraud against franchisors can be won, even though it is not clear how much a franchisee relied on an FDD when deciding to purchase the franchise and even though a franchise agreement contains customary disclaimers.

For more information regarding this case, click Jimmy Solanki v. 7-Eleven, 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 2014. All Rights Reserved.
Thursday
Mar202014

Franchisee Not Bound by Arbitration Provision

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

March 2014

 

Tal Grinblat Selected to 2014 Legal Eagles

 

Tal Grinblat was named a Franchise Times' 2014 Legal Eagle. Nominated by peers, Tal was then chosen for the distinction by the publication's editorial board. The list of 2014 Legal Eagles will be published in April.

 

*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Barry Kurtz, David Gurnick & Tal Grinblat Honored as 2014 Southern California Super Lawyers

 

Barry Kurtz, David Gurnick and Tal Grinblat have each been selected as a 2014 Super Lawyer in their specialty of Franchise & Distribution Law. This honor is bestowed by the Journal of Law and Politics, in conjunction with Los Angeles Magazine. The Super Lawyer designation is the result of peer evaluation. Nominations are received from thousands of lawyers throughout the state. According to the Journal of Law and Politics, this honor is reserved for the top five percent of the lawyers in each practice area.

 

David Gurnick in Los Angeles Lawyer Re Cooperatives

 

How are cooperatives organized and regulated? David Gurnick's article, Cooperative Conditions: California Law Allows for Flexible Application of the Operative Principles of Cooperatives takes an in-depth look at these enterprises. Click: Cooperative Conditions to read the full article.

 

 

FRANCHISOR 101:
Franchisee Not Bound by Arbitration Provision

 

 

In March 2013, Edison Subs, LLC, a Subway franchisee/transferee, filed a complaint in New Jersey against Subway and Aliya Patel (the original franchisee/transferor) and Subway's affiliate for breach of contract, fraud, violations of the New Jersey Consumer Fraud Act, negligent misrepresentation and violations of the covenant of good faith and fair dealing. Edison alleged that it entered into an oral franchise agreement with Subway that Patel induced Edison to accept through misrepresentations and omissions and that Subway and Patel breached the oral agreement by ejecting Edison from the premises after Edison had operated the Subway restaurant for two years.

The Subway Franchise Agreement required all claims to be arbitrated in Connecticut, so Subway brought an action to compel arbitration of Edison's claims. The U.S. District Court in Connecticut observed that it was undisputed that Edison did not sign, and denied ever receiving, a copy of the Franchise Agreement.

Subway argued that Edison could be bound by the terms of the Franchise Agreement under common law principles of contract and agency, including estoppel. Despite the fact that Edison never signed the Franchise Agreement, the court noted that a signatory may be able to compel a non-signatory to comply with certain terms of an agreement when the non-signatory directly benefits from the agreement.

To rely on this theory and enforce arbitration, Subway had to prove that Edison received notice of the Franchise Agreement and the arbitration provision and knowingly accepted the Franchise Agreement's benefits. The court found there was no evidence offered that Edison had notice of Subway's written Franchise Agreement or that Edison knowingly exploited the Franchise Agreement. Therefore the court denied Subway's plea for an injunction to compel arbitration.

Franchisors should maintain a signed and dated copy of each Franchise Agreement for each franchised business and a signed and dated FDD receipt that predates the Franchise Agreement and any payments made to the franchisor under the Franchise Agreement by at least 14 days. Click: Subway Franchise Arbitration Ruling to see the ruling.

 

FRANCHISEE 101:
Franchisor May Be Joint Employer Under Federal Law

 

Franchise AttorneyA U.S. District Court in New York found that the plaintiffs, current and former employees of a Domino's Pizza franchisee, sufficiently alleged multiple violations of federal and state labor laws against their franchisee-employer to add the franchisor, Domino's, as a "joint-employer" defendant under the federal Fair Labor Standards Act (FLSA) and New York labor laws and to survive a motion to dismiss their case.

The franchisee's employees alleged that Domino's:

(1) dictated compensation policies that were implemented in the franchisees' stores; required a system of tracking hours and wages; and required franchisees retain payroll records that were submitted to Domino's for review,

(2) created management and operations policies and practices that were implemented at the franchisees' stores by providing materials for use in training store managers and employees, posters with directions on how employees were to perform tasks, and monitored employee performance through required computer hardware and software,

(3) developed and implemented hiring systems for screening, interviewing, and assessing applicants for employment at all franchised stores, and

(4) had the right to inspect franchisees' stores to ensure compliance with the franchisor's policies, including those related to day-to-day conditions of the employees.

The court found that, taken together, these facts were enough to establish Domino's as a joint employer for the purpose of a motion to amend, notwithstanding the fact that other courts in the U.S. have generally concluded that franchisors are not employers within the meaning of the FLSA. Click: Domino's Challenges Joint Employer Liability for more information.

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 2014. All Rights Reserved.
Friday
Feb212014

Franchisor Successfully Fends Off Fraud Claims

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

February 2014

 

Kurtz Law Group Joins Lewitt Hackman Franchise Practice Group

 

On February 1, 2014, the Kurtz Law Group joined Lewitt Hackman. Known for their "Focus on Franchise Law," Barry Kurtz and his team have been one of the premier franchise law practices in California. Barry will chair the Franchise Practice Group, which now includes Barry, David Gurnick, Tal Grinblat, Candice Lee, Bryan Clements and two franchise law paralegals. Together, we have more than 85 years of experience representing franchisors, licensors, manufacturers, franchisees, licensees and distributors and are one of the largest, most experienced franchise law practice groups.

 

FRANCHISOR 101:
Franchisor Successfully Fends Off Fraud Claims

 

*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal SpecializationThere are circumstances when a fraud claim will not succeed against a franchisor. In Dunkin' Donuts Franchised Restaurants, LLC v. Claudia I, LLC, a franchisee alleged fraud by Dunkin' Donuts, but a US District Court in Pennsylvania rejected its hardest hitting claims.

Fast Food Franchises

A Dunkin' Donuts franchisee purchased a franchise and subleased a deteriorating store in Pennsylvania from Dunkin'. The franchisee's owners believed they were paying above-market rent, and the sublease also overstated the size of the premises, so they believed they were overpaying common area expenses. The donut store lost money, the franchisee asked Dunkin's consent to relocate, Dunkin' declined and the franchisee stopped paying rent. The franchisor terminated both the franchise agreement and sublease and obtained an injunction requiring the franchisee to leave the store. Then, after retaking possession of the store, Dunkin' moved the store to another location.

The franchisee claimed Dunkin misrepresented the store size and that it could renegotiate the sublease. The court ruled the franchisee could not prove fraud based on misrepresented square footage because the franchisee always suspected the stated square footage was wrong. Under the law, a person who believes a representation is false cannot claim to have relied on it and cannot prevail in a claim of fraud.

 The court also found that any statement by Dunkin' that the sublease could be renegotiated was also not actionable. A statement about what may happen in the future is not considered false, unless the speaker knowingly misstates his true state of mind. The court said renegotiation was a promise to do something in the future and noted that Dunkin' actually had offered the franchisee a new, more favorable sublease. Therefore any pre-agreement representations could not have been knowingly false.

The court ruled, however, that the franchisee might be able to show Dunkin breached an implied contractual duty to act in good faith and in a commercially reasonable manner since Dunkin' executives considered the store location to be bad, but had, nevertheless, sold the franchise and subleased the store to the franchisee and then, after taking back the store, relocated it itself, suggesting bad faith.

This case is a reminder to franchisors that appearances count. Here, refusing to consent to relocation, but then relocating a store after terminating the franchisee, gave the appearance of misconduct and was enough for the court to allow the franchisee's breach of contract claim to proceed. For franchisees, the case is a reminder that you cannot claim reliance and recover for fraud if you had doubts or were suspicious about what the franchisor told you, or if the claimed fraud was a franchisor's promise to do something in the future. To see the case, click Dunkin' Donuts v. Claudia I, LLC.

 

FRANCHISEE 101:
Brewer's Subsidiary Could Terminate Distributor

 

Craft Brew LawIn 2008, Heineken made an acquisition that included the Strongbow Hard Cider brand. Esber Beverage Company, founded in 1937, is one of the oldest, family-owned beverage wholesalers in Ohio, as well as the United States, and distributed Strongbow in Ohio. Until 2013, Strongbow was imported into the USA by an independent company, VHCC. In 2013 Heineken terminated VHCC and entered into an agreement with its own subsidiary, Heineken USA (HUSA), naming the subsidiary as its exclusive U.S. import agent for Strongbow Hard Cider.

Under Ohio law, when ownership of an alcoholic beverage brand changes, a new manufacturer is permitted to terminate any distributor without cause upon notice within 90 days of the acquisition, allowing the manufacturer to assemble its own team of distributors. The notice triggers a valuation of the franchise and the new manufacturer must compensate the terminated franchisee for the reduced value of the business that is related to the sale of the terminated brand, including the value of the assets used in selling the brand and the goodwill of the brand.

Heineken and HUSA terminated Esber and, after a trial court in Ohio ruled that only a new owner could terminate the franchise and that Heineken USA was not a new owner, Heineken appealed. In Heineken USA, Inc. v. Esber Beverage Co., the appellate court ruled that Heineken USA was a successor that could terminate the distributor.

The court found that following the 2008 acquisition, Strongbow was imported into the USA by VHCC and  VHCC supplied the Strongbow product to U.S. distributors, such as Esber. Heineken never owned any interest in VHCC. After Heineken terminated VHCC (and compensated VHCC as discussed above), Heineken no longer had an importer to supply Strongbow to U.S. distributors. It subsequently named HUSA as supplier of Strongbow, starting in January 2013. The appellate court ruled that VHCC had been the U.S. supplier of Strongbow, and VHCC, not Heineken, entered into contractual relationships with distributors, such as Esber. Once Heineken lawfully terminated its agreement with VHCC, Heineken acquired the right to decide who would import and supply Strongbow to distributors.

This decision indicates that in some states brewers may have additional flexibility to determine who will distribute their products domestically following an importer's acquisition of the brands. To see the case, click Heineken v. Esber.

 

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 2014. All Rights Reserved.
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