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Friday
Jan292016

DOL on Joint Employer Liability; and CA Expands Franchisee Protections

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

January 2016

 

Franchise Lawyers

Barry Kurtz, David Gurnick & Tal Grinblat: Super Lawyers 2016

Three of our franchise law attorneys were selected as 2016 Super Lawyers, in the Franchise/Dealership category. Only 11 attorneys in all of Southern California were so named. Among them, Barry Kurtz, David Gurnick and Tal Grinblat have a combined 23 years of Super Lawyer recognitions. All three attorneys are also Certified Specialists in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization. 

Tal Grinblat Co-Authors Legislation

As Co-Chair of the Franchise Law Committee, Tal Grinblat wrote an Affirmative Legislative Proposal (ALP) to enable franchisors wishing to test California markets to exhibit at trade shows without first registering as franchises. The ALP was approved by the Trustees of the California Bar and will now be introduced as a bill in Sacramento by Assembly Judiciary Committee Member Brian Maienschein. Click: BLS-2016-01 for further information. 

San Fernando Valley Business Journal Quotes David Gurnick re PizzaRev

"It's important for a franchiser to develop critical mass in a particular market before expanding into neighboring regions..." Read: Chain Offers Slice for further details.

Barry Kurtz Presentation at Southwestern University

Barry Kurtz co-presented a seminar regarding business law at his alma mater, Southwestern University. The one hour presentation, "Transactional Law in Practice" was geared towards law students and graduates of the school. Mr. Kurtz is an active member of the Alumni Association Board of Directors, which co-sponsored the event.

David Gurnick Speaks at San Fernando Valley Bar Association

David Gurnick participated in the San Fernando Valley Bar's MCLE Marathon, giving a 90 minute presentation entitled "Online Negativity: How to Fight Back." The marathon is held each year, and provides an opportunity for area lawyers to earn continuing education credits.

FRANCHISOR 101:
Department of Labor Weighs in on Joint Employer Liability

 

Recently, some plaintiffs - employees of franchisees - have tried to hold franchisors responsible for unpaid overtime and other claimed violations by franchisees they work for. They use the theory that franchisors are their joint employer, along with the franchisee who hires, pays and directs them.

In the latest development of the changing standard for joint employer liability, the U.S. Department of Labor (DOL) issued an Administrator's Interpretation ("AI") stating the analysis the DOL plans to apply in these cases.

The AI first distinguishes "horizontal" and "vertical" joint employment. Horizontal is where an employee works at the same time for two separate but related or overlapping employers. Vertical means the work an employee does for one direct or "intermediary employer" also benefits another company, the "potential joint employer." The benefit exists because the direct or intermediary employer provides services benefitting another company that may include labor and some employer functions, like hiring and payroll. The DOL believes a franchise is vertical, in which the franchisee is an intermediary employer that makes the franchisor a potential joint employer. In the DOL's view, a franchisee provides a labor force that benefits the franchisor by getting the franchisor's product, whether foods or merchandise or services, to consumers.

The AI says that a vertical joint employment analysis "must be an economic realities analysis and cannot focus only on control." It provides seven factors to be considered in determining if an employee "is economically dependent on the potential joint employer." The factors suggesting economic dependence, and joint employment, are:

1. The employee's work is directed, controlled, or supervised by the potential joint employer.

2. The potential joint employer may hire, fire, or modify the employee's employment conditions.

3. The employee's work that benefits the potential joint employer is full-time, of long duration, or permanent.

4. The employee's work is repetitive or rote, requiring little skill or training.

5. The employee's work is an integral part of the potential joint employer's business.

6. The employee works on premises owned or controlled by the potential joint employer.

7. The potential joint employer performs administrative functions for the employee that would typically be performed by an employer, like handling payroll or providing transportation.

Some of these factors resemble the relationship between a franchisor and employees of its franchisees. But in a set of frequently asked questions accompanying the AI the DOL states that "the existence of a franchise relationship, in and of itself, does not create joint employment." Which franchise relationships do create joint employment will be developed in future guidance and decisions. 

Read: U.S. Department of Labor Administrator's Interpretation No. 2016-1

FRANCHISEE 101:
California Expands Protections for Franchisees

California Assembly Bill 525, passed into law in 2015 applies to franchise agreements entered into or renewed on or after January 1, 2016. It expands and provides new protections for franchisees. Franchisees subject to California now benefit from the following provisions:

1. A franchisor may not terminate a franchise agreement for minor infractions; but may terminate only if the franchisee failed to substantially comply with lawful requirements imposed on the franchisee by the franchise agreement. The franchisor must give notice and at least 60 days opportunity to cure the default.

Exceptions: in certain severe events, such as franchisee bankruptcy or abandonment of the franchise business, a franchisor may give notice of immediate termination without an opportunity to cure.

2. On termination or non-renewal of a franchise, the franchisor must buy from the franchisee all inventory, supplies, equipment, fixtures, and furnishing purchased or paid for by the franchisee under the terms of the franchise agreement. The franchisor must pay for the items at the price paid, minus depreciation, and must buy any items the franchisee purchased from the franchisor or its approved suppliers and sources.

Exceptions: The franchisor need not buy items that were personalized, or that the franchisee was not contractually required to purchase. The franchisor need not purchase anything in certain situations, such as where a) termination or non-renewal is mutually agreed with the franchisee, b) the franchisor allows the franchisee to remain in the principal place of the franchise business, or c) termination or non-renewal is due to the franchisor's "nondiscriminatory decision" to completely withdraw from all franchise activity in the relevant geographic market area where the franchise is located.

3. A franchisor may not prevent a franchisee from selling or transferring the franchise to someone else, so long as that party would qualify under the franchisor's then-existing standards for the approval of new or renewing franchisees.

Exceptions: A franchisor may refuse to consent to a transfer or sale if the franchisee and buyer, transferee, or assignee do not comply with the transfer conditions specified in the franchise agreement. Also, the franchisor may still have a contractual right of first refusal, allowing it to purchase the franchise itself before allowing it to be transferred or sold to an outside party.

With these new laws in effect, added onto already existing protections for franchisees in the context of termination and nonrenewal, California is among the nation's most franchisee-friendly states.

Source: California Assembly Bill 525

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 2016. All Rights Reserved.

Tuesday
Dec292015

10 Ways to Reduce Vicarious Liability Risks; and Paying Attention to Contractual Statutes of Limitation

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

Franchise Lawyers

December 2015

 

National Award: Best Law Firms 2016 (Franchise Law)

We were named one of U.S. News & World Report's 2016 Best Law Firms for franchise law. According to the publication, the selection is based on rigorous scrutiny of client and lawyer evaluations -- at least one attorney from the firm must be eligible for Best Lawyer ranking in a particular practice area within a specific region. David Gurnick has been selected to the Best Lawyers in franchise list for the past four, consecutive years: Franchise Law National Ranking

 

Barry Kurtz in Los Angeles Business Journal

"First time restaurant licensors sometimes struggle to help partner companies get off the ground. At the same time, they sometimes realize too late that their partners lack skills to run the business." For more information regarding Los Angeles's popular gourmet marketplace and cafe, Joan's on Third, read: Eateries Fed Up

 

Tal Grinblat, David Gurnick and Nicholas Kanter in Valley Lawyer

"Individuals and businesses are becoming increasingly vulnerable to electronically posted falsehoods, invasions of privacy, revenge and other negative content... There are several strategies and legal tools for victims and lawyers to fight back." Read Online Negativity: How to Fight Back, for details.

 

FRANCHISOR 101:
10 Ways Franchisors Can Reduce Vicarious Liability Risks

 

Franchise Vicarious Liability 

The U.S. Department of Labor says McDonald's is liable for actions of franchisees. In the last three months a California federal court said McDonald's could be liable for a franchisee's alleged failure to pay overtime and provide meal and rest breaks.

But another California federal court dismissed similar claims against the franchisor of ARBY's. In 2014 the California Supreme Court said Domino's Pizza was not liable for misconduct by a franchisee's manager. The decision was close, decided by a 4-3 vote. All of these cases concern franchisor liability for acts and omissions of franchisees.

There are several theories on which a franchisor may be liable for acts of omissions of a franchisee.

One is the claim that the franchisor has so much control over the franchisee as to be, in effect, a principal or employer, with the franchisee being an agent. Another is the claim that the franchisor let the franchisee appear to the public or to employees to be an agent or branch of the franchisor. A third theory, developed in recent years, is that the franchisor exercises control over the franchisee's employees, and is therefore their joint employer along with the franchisee they work for.

Here are ten steps franchisors can take to reduce the risk of being liable for actions of their franchisees:

1. Choose or change the franchise company's name to something different from the name of the franchise. If the franchise brand is "Apex Advisors" or "Bubble Balloon Parties" the franchisor could be AA Franchising, LLC or BBP, Inc., or another formulation. Many lawsuits simply use the name of the franchise as the Defendant. By using a different name, a franchisor will reduce the risk of being inadvertently named as a defendant.

2. Require each franchisee to use and inform others of its/their/his/her true name. Franchisee business cards, stationery, checks, signage, advertising, menus, service lists, memos, and other materials should state the true name of the person or company that operates the franchise. Require each franchisee to display a plaque, for example: "This Apex Advisors Franchise is independently owned and operated by Sarah and Johan Jones." Other ways are to present certificates of training, longevity (years of ownership) and awards that state the independent owner's name.

3. Require the franchisee to display a sign in the employee area, possibly on the doorway to the work and customer area, reminding employees who owns the franchise. For example: "This franchise is independently owned by Sarah and Johan Jones. We appreciate your service and want to remind you that you are employed by us, not Bubbles Balloons." The franchisee should state a similar message on communications to service providers, inventory suppliers, utilities, chambers of commerce and other trade associations.

4. Review the franchise agreement, operating manual and operating policies to remove controls or requirements that are not essential to goodwill of the brand. For example, restricting the activities of franchisees' employees when they are not at work; specifying the color scheme of the employees-only area, or designating suppliers for a franchisee's holiday party are matters that do not protect the brand, and should be removed from the operating manual.

5. Remind franchisees in writing of all operational aspects of the business in which they are the decision-maker. Examples include site selection (franchisor does not select site but only consents to site selected by franchisee), lease negotiation, where and how to advertise, recruiting personnel, deciding who to hire, setting compensation, conducting reviews and giving raises, setting and scheduling hours, choosing which publications to advertise in, choosing which charities to support, setting prices, managing inventory, whether to extend credit; how much credit to extend; and declining to do business with some customers.

Store and location decor is an area where franchisors may consider allowing franchisees more flexibility. A McDonald's or other franchise can still be recognizable as part of the chain, even if the franchisee has wider discretion to customize or individualize many aspects of layout and decor.

6. State in the franchise agreement that the franchisee is responsible for safety of customers, workers and vendors who are at the premises and require the franchisee to be attentive to these matters.

7. Make sure the franchise agreement has indemnity language requiring the franchisee to indemnify the franchisor for any claims arising from the franchised business including employment claims by the franchisee's employees against the franchisor.

8. The franchisee should be required to purchase liability insurance and name the franchisor and franchisor's management and personnel as additional insureds under the franchisee's insurance.

The franchisor should require the franchisee to annually provide a copy of the full policy, so in the event of a claim the franchisor can tender it directly to the insurer. In addition, the franchisee should be required to purchase employment practices liability insurance with a co-defendant endorsement in favor of the franchisor.

9. In the franchise agreement require the franchisee to cooperate in the defense of any vicarious liability claim.

10. Franchisor personnel should not give directions or instructions to employees of the franchisee. For example, in an inspection visit of a franchisee's location, franchisor personnel should call the franchisee's attention to any deficiencies, but should not presume to instruct an employee of the franchisee to make any changes. The employees work for the franchisee, not for the franchisor. Employees should not come to view the franchisor as their supervisor.

In the Arby's and McDonald's cases mentioned above, Arby's was found not liable because Arby's did not make decisions about hours, breaks, or hiring and firing of the franchisee's employees. In the McDonald's case, the court found McDonald's might be liable, because the franchisees' employees said they believed McDonald's was their employer, partly because they wore McDonald's uniforms, served McDonald's food in McDonald's packaging, received paystubs and orientation materials marked with McDonald's name and logo, and applied for their jobs through McDonald's website.

The above are some steps a franchisor can take to reduce the risk of being sued and of being liable for acts and omissions of a franchisee. This article does not list every possible step that can be taken, but provides a good place to start.

 

FRANCHISEE 101:
Pay Attention to Contractual Statutes of Limitation

Many franchise agreements include a contractual limitation period or time limit when parties can bring a claim for relief. Though the franchise agreement is often written by and for the franchisor, these limitations can help or hurt either party.

Recently a court in Ohio ruled that a contractual time limit for claims, barred an action by the franchisor. The franchisor, Buffalo Wings and Rings, sent a notice to its franchisee in early 2011 describing claims. More than one year later, the franchisor filed a lawsuit.

At the franchisee's request the court dismissed the action, ruling that the franchisor's claim was barred by the one year limitation period stated in the franchise agreement. The Buffalo Wings and Rings case is a reminder to franchisors and franchisees, to be thoughtful of both statutory and contractual time limits for bringing claims, and is a reminder that a statutory or contractual time limit may be a successful defense to a claim by the other side. 

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 2015. All Rights Reserved.

 

Tuesday
Oct272015

Catch-all Disclaimers No Substitute for Untrained Salespeople; and "Two Wrongs Don't Make a Right"

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

October 2015

 

38th Annual Forum on Franchising

Barry Kurtz, David Gurnick, Tal Grinblat, Gabe Wintner and Sam Wolf all attended the American Bar Association's 38th Annual Forum on Franchising in New Orleans. The three day event provides an opportunity for attorneys from around the world to discuss industry-wide legal concerns. David Gurnick spoke on the potential legal risks and opportunities of using intellectual property created by others.

 

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

FRANCHISOR 101:
Catch-all Disclaimers No Substitute for Untrained Salespeople

 

 

How strong are "non-reliance disclaimers" or "integration" or "merger" provisions in franchise agreements at protecting a franchisor when it really matters? Only so much, a New York court recently decided.

For protection, franchisors often include "non-reliance disclaimers" in franchise agreements. By signing, the franchisee states they did not rely on any promise or representation which, though not in the printed Franchise Disclosure Document (FDD), was communicated in some way by the franchisor's staff. "Rather," the franchisee says, "I understand that only what is actually printed in the FDD is true."

To cover the other side of the issue and try to prevent any possibility of being bound by such promises, franchisors include an "integration" or "merger" clause in the franchise agreement. By signing, the franchisee agrees that only the terms printed in the agreement and its attachments - and nothing communicated outside of those documents - will actually bind the parties.

Two franchisees claimed they were induced to join the Engel & Voelkers real estate brokerage franchise by fraudulent statements made orally by E & V's representatives. E & V tried to have the claims dismissed based on non-reliance, integration and merger clauses in the franchise agreements. But the court refused to dismiss the claims and held that the anti-fraud provision in the New York Franchise Sales Act (NYFSA) prevented dismissal of claims just because such clauses were in the agreements.

The franchisees also claimed damage by not receiving FDDs before their first meetings with E & V's representatives. E & V moved to dismiss these claims as well, arguing that the franchisees could not suffer damage from failure to receive the disclosure at that early point because, ultimately, they received FDDs and were fully informed before they signed franchise agreements. Again the court disagreed, reasoning that the very existence of the NYFSA requirement implies that some harm could come to a franchisee just by beginning to speak with company representatives before having an FDD in hand.

Franchisors cannot depend fully on non-reliance provisions, merger clauses, or a "better late than never" approach to disclosure. A preferable approach is to have salespeople and company representatives trained in the rules and apply disciplined sales procedures.

To read the full opinion, click: EV Scarsdale Corp. v. Engel & Voelkers North East LLC, N.Y. Sup. Ct., para. 15,561

 

FRANCHISEE 101:
"Two Wrongs Don't Make a Right"

At one time or another, many people have occasion to be renters who feel mistreated by a landlord. This may be due to delays in repairs, responses, or just turning on the heat. A typical reaction is the temptation to retaliate by withholding rent. However, someone who watches court TV (or knows someone who does) knows that no matter how much one is in the right, failing to send the rent check is a wrong approach and often makes things worse.

In Dunkin' Donuts Franchising LLC v. Claudia III, LLC, a Pennsylvania court proved this when owners of a Dunkin' Donuts franchise did not complete a required renovation of their franchise location, and then stopped paying fees altogether. Due to their defaults, the franchisor terminated the franchise. But the owners continued operating as a Dunkin' Donuts store, claiming the original default - failure to complete renovation on time - was at least partly the franchisor's fault, because the franchisee owners had submitted a remodel plan that Dunkin' Donuts took an unusually long time to approve.

Nevertheless, the court found for the franchisor, issuing an injunction against the franchisee, prohibiting the owners from ever operating a store that used or infringed upon Dunkin's trademarks. The court noted that even if the franchisee could win its claim that the franchisor was at fault, that would not prevent the franchisor from terminating the franchise. The court held that a franchisee's remedy for wrongful termination is a claim for money damages, not continued unauthorized use of the franchisor's trademarks. The court noted that the franchisee never disputed its default nor questioned Dunkin's ownership of the trademarks, and therefore decided there was no choice but to rule against the franchisee.

Franchisees may have valid claims against their franchisor. But, to continue operating the franchise, a franchisee must stay in compliance with the franchise agreement - even if the franchisor does not. Failure to maintain this contractual moral high ground will give a franchisor the right to terminate.

To read the full opinion, click here: Dunkin' Donuts Franchising LLC v. Claudia III, LLC, DC Pa., para. 15,584

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 2015. All Rights Reserved.

 

Wednesday
Sep302015

Franchise Systems Can Fight Online Negativity; Bankruptcy Discharges Franchise Law Claims

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

September 2015

 

ABA Forum: David Gurnick Presenting

David Gurnick will co-present: Finders, Keepers, Losers, Weepers: Opportunities, Risks & Considerations in Using Intellectual Property Created by Others, at the ABA's 38th Annual Forum on Franchising, held in New Orleans October 13-17th. Finders, Keepers is scheduled for 10:15 a.m. on Thursday, 10/15, and 11:15 a.m. on Friday, 10/16. 

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

FRANCHISOR 101:
Franchise Systems Can Fight Online Negativity


 

One of today's challenges faced by franchisors and franchise systems is negative remarks posted online by a customer, ex-employee, or even a dissatisfied franchisee. Negative comments appear in sites created specifically to criticize; on social media like Facebook or Tweets, blogs, personal sites and review sites like Yelp. These posts can reach unlimited numbers of people and hurt a brand's reputation.

Posts, positive or negative, may have First Amendment protection. Website hosts have immunity under the federal Communications Decency Act, for content posted by others on their sites. But companies are learning of ways to fight back. Here are some choices from which franchisors can assemble a strategy against negative online comments.

Proactive Efforts: A proactive way to reduce negative comments is using care to provide quality products, good customer experience and treating franchisees and employees well. Satisfied people are less likely to complain. Dissatisfied people - more likely. As a timely example, consider Volkswagen. Apparently, dishonesty was built into VW's products, and the company's misguided intent to fool the public is generating massive online negative comments that will be around for years to come. Honesty and good product quality would have avoided most of that negativity.

Terms and Conditions: Another proactive step is to have terms with customers, suppliers, franchisees and others, limiting posting of negative online comments

Seek Removal: A franchisor could consider contacting and asking the poster to remove or modify their statement. This course is especially useful if the negative comment is due to a misunderstanding or unique circumstance that is not likely to recur. An explanation to a franchisee, a franchisee's customer or ex-employee could address their concern. Sometimes an apology or other consideration may be needed. Some improper posts can be removed according to a site's terms of use. Many sites have terms for objecting and asking that posts be removed. For a particularly egregious or unlawful posting, a franchisor may find it useful to go beyond the site's stated procedure, and contact their management or attorney to request that the content be removed.

Post a Polite Response: Many sites provide the opportunity to post a reply. A respectful, even-tempered response explaining the circumstance, expressing regret for a poster's experience, and if appropriate noting what corrective action was or will be taken, can partially mitigate some ill effects of a negative online comment.

Cease and Desist Demand: Where justified, such as for comments that are false, exaggerated, or defamatory, a franchisor may choose to have counsel send the poster a strong demand to cease, desist and remove the posting. If the poster has made a threat, or disclosed secret information, civil or criminal implications may arise. Sometimes, people who post comments want this kind of attention, prompting concern that a cease and desist demand will not dissuade their conduct, but will generate more undesired comments.

Prudent Inaction: Because responses to negative online comments may generate more comments and undesired attention, another rational strategy - in the right circumstances - is to take no action. For example, a comment on an active Facebook or other page, whether negative or positive, if not responded to, may receive less attention and be pushed down by later posts on other subjects.

Get Other Posts: Similar to the above is to enlist other customers, friends and associates to post their own truthful, favorable comments. This method provides positive messages and sometimes causes negative reviews to be pushed down, where they get less and eventually no attention.

Digital Millennium Copyright Act Take Down Notice: Where a post includes content that infringes a copyright, federal law has a procedure for notifying and requiring the website to remove that content.

Seek Government Help: In some circumstances it is useful to ask for help from the government. The FTC, Attorney General and elected representatives are possible sources of assistance. For example, when a person posting negative or false comments is really a competitor, or ex-employee now working for a competitor, such agencies and officials may be willing to help.

Litigation: Due to expense, litigation is rarely anyone's first choice. But when someone breaks the law and won't stop, our system provides courts as forums for seeking relief. Courts can help identify anonymous perpetrators and award money damages for defamation, disparagement, false advertising and sometimes injunctive relief.

Sign-Up: It is distasteful but sometimes balancing cost and effect, a practical solution is to sign up with sites where this is known to result in removing or lowering the prominence of negative comments.

Many tools and strategies exist for responding and fighting back. It is not necessary to just accept the injury, harm to reputation and loss of business that come with being a target of negative comments on the internet.

 

FRANCHISEE 101:
Bankruptcy Discharges Franchise Law Claims

A recent Bankruptcy Appellate Panel decision is a reminder of both a benefit of bankruptcy, in appropriate circumstances, and the need to respect the bankruptcy discharge a party obtains in the process.

Mr. Lee was developing a sushi restaurant concept called Little Madfish. Mr. Im and his wife invested $200,000 and obtained stock and rights to open a Little Madfish restaurant. They also applied for a visa to work in the U.S. on the basis of having made a substantial investment in the business.

The restaurant failed. Lee filed for bankruptcy. After he obtained a discharge, Mr. Im sued in state court for franchise law violations, fraud and rescission of the stock purchase. Lee moved in state court to dismiss the claims based on his bankruptcy discharge. The state court dismissed some claims, but not all of them. At trial, a jury found Mr. Lee did not commit fraud and the court ruled that another claim was barred by the bankruptcy discharge.

Lee then asked the bankruptcy court to reopen his case so he could seek sanctions against Im for violating the discharge in bringing the state litigation. The bankruptcy court held Mr. Im in contempt, holding him liable for $50,000, for suing in state court after Mr. Lee obtained a discharge.

A bankruptcy discharge protects against claims for violating franchise laws as well as other claims. (Though under one bankruptcy code exception, a discharge may not protect against securities law claims). A person who is sued for franchise law violations or most other claims, may be able to discharge them through bankruptcy and it is important for claimants to respect the bankruptcy discharge.

Read the entire decision: In re Lee 2015 WL 3960897 (9th Cir. Bankr. App. Panel)

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 2015. All Rights Reserved.

 

Tuesday
Aug182015

Franchisor Awarded Lost Future Profits; & Franchisee Keeps Case in Home Court 

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

August 2015

 

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

Valley's Most Trusted Advisors

Barry Kurtz was recently recognized as one of the San Fernando Valley's Most Trusted Advisors by the San Fernando Valley Business Journal. This is the second time he has been named for this award.

 

New Team Member

Gabriel A. Wintner is the newest associate to join our Franchise & Distribution Practice Group. A graduate of Northwestern University School of Law in Chicago, Gabe previously served as head of the legal department for Mathnasium – an international franchisor with over 500 units at the time.

Learn more about: Gabriel A. Wintner

 

David Gurnick Article in Valley Lawyer

"There are distinct differences between parody, satire and lampoon. Intellectual property attorneys should be able to recognize these differences and understand the respective case law to best protect their clients' trademarks and copyrights -- or to best argue their clients' fair use of other people's work..."

Read more: Fun With Trademarks and Copyrights: Parody, Satire and Lampoon

 

FRANCHISOR 101:
Florida Franchisor Awarded Lost Future Profits

 

An arbitration panel in Florida found that a disaster recovery and remediation business franchisee breached his agreement with John Woods, his franchisor, by terminating the agreement 13 years before expiration of the 20-year term. The arbitrators awarded John Woods damages for the future profits it would have earned had the franchisee remained in operation because:

(1) the lost future profits were within the reasonable contemplation of the parties at the time of contracting and

(2) they were proven with reasonable certainty.

The arbitrators found that lost future profits were within the contemplation of the franchisee when signing the franchise agreement even if the potential payment of these damages was not disclosed in the FDD. Rejecting the franchisee's expert testimony, the panel found that future damages were not a fee or one of the franchisee's duties upon termination that were required to be disclosed in the franchisor's FDD. The panel also found that Florida law did not require an explicit reference in the parties' contract to reserve the franchisor's right to lost future profits.

The arbitrators further found that the franchisor proved its damages with reasonable certainty by calculating as past damages the lost profits the franchisor had incurred from the date of termination through the date of the hearing, and for future profits, by analyzing the franchisee's past revenues and assuming the franchisee would generate similar revenues in the future with a modest increase in the first few years. In all, the arbitrators awarded the franchisor past due fees as well as lost future profits in the amount of $908,903 for the remaining 13 years of the term of the franchise agreement.

The arbitrators' ruling demonstrates a danger for franchisees unilaterally terminating a franchise agreement when the agreement does not provide such a right. The ruling also provides franchisors significant ammunition for recovering future damages against a franchisee who fails to perform pursuant to the agreement.

 

FRANCHISEE 101:
Franchisee Keeps Case in Home Court Despite Forum Selection Clause

Rob & Bud's Pizza ("R&B") is a Papa Murphy's franchisee and owns and operates multiple Papa Murphy's Take 'n' Bake Pizza restaurants in Arkansas, Missouri and Kansas. In April 2014, R&B and other Papa Murphy's franchisees sued Papa Murphy's in its home state of Washington alleging that Papa Murphy's induced them to purchase franchises through fraudulent and deceptive misrepresentations and omissions.

While the Washington litigation was ongoing, R&B initiated another lawsuit in Arkansas state court alleging Papa Murphy's was unlawfully attempting to terminate R&B's franchise agreements in retaliation for R&B's refusal to agree to Papa Murphy's settlement demands in the Washington litigation. Papa Murphy's then removed the Arkansas state court case to Federal district court and filed a Motion to Transfer Venue to Washington.

R & B's franchise agreements all contained mandatory forum selection clauses that required all litigation to occur in Washington. However, the Arkansas Procedural Fairness for Restaurant Franchisees Act ("APFRFA") states that:

a party to a restaurant franchise may commence a civil action ... in Arkansas if either party to the restaurant franchise is a resident of Arkansas, [and] [n]either a franchisee nor a franchisor shall be deprived of the application and benefits of this subchapter by a provision of a franchise purporting to designate the law of another jurisdiction as governing or interpreting the franchise, or to designate a venue outside of Arkansas for the resolution of disputes.

The Arkansas court reasoned, under Arkansas public policy, that the Washington forum selection clauses should not be enforceable unless:

(1) neither R&B nor Papa Murphy's were residents of Arkansas; or

(2) R&B and Papa Murphy's were not parties to a restaurant franchise within the meaning of the APFRFA.

The Court found that R&B was indeed a resident of Arkansas due to its operation of Papa Murphy's restaurants in Arkansas and that, despite the Washington forum selection language in the franchise agreements, Arkansas public policy strongly weighed against enforcement of the forum selection clauses, and accordingly denied Papa Murphy's motion to transfer the case to Washington. The Court also found that convenience to the parties weighed in favor of denying a transfer of venue to Washington because the events took place in Arkansas, most of R&B's restaurants were in Arkansas, and R&B's principal who was central to the facts of this case, lived closer to Arkansas than Washington.

This case demonstrates the importance of researching a state's public policy when bringing cases against a franchisor. Franchisees may be able to benefit from the courts in their home state despite language in the franchise agreement to the contrary.

Read the entire decision: Rob & Bud's Pizza, LLC v. Papa Murphy's Int'l, 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 2015. All Rights Reserved.

 

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