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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.

 

Thursday
Jul302015

Contractual Disclaimers & Distributor/Licensees as Franchisees

Franchise 101 News

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

July 2015

 

Top Attorneys in Southern California

Barry Kurtz was recently recognized as one of Southern California's Top Rated Lawyers by American Lawyer Media and Martindale-Hubbell. David Gurnick and Tal Grinblat were chosen among the nation's "2015 Top Rated Lawyers in Intellectual Property" by the same organizations. 

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

Most Trusted Advisors

Barry Kurtz and Tal Grinblat have been nominated for the San Fernando Valley Business Journal's "Most Trusted Advisors" awards, which honor top professionals working in law, accounting, banking and insurance in Los Angeles's San Fernando Valley. Area business leaders will select the finalists in these areas - award winners will be announced in August. 

Barry Kurtz & Bryan Clements published in Valley Lawyer

"Too often, expansion minded business owners choose to offer trademarked products or services through purported licensing agreements or distribution or dealership arrangements only to discover well into the game, that what they have actually done is sell franchises..." 

FRANCHISOR 101:
Contractual Disclaimers Save the Day

 

A federal court in Florida has ruled that a disclaimer of representations contained in the franchise agreement between a childcare business franchisor and its franchisees barred claims against the franchisor for alleged pre-sale misrepresentations.

The franchisees claimed they relied on oral and written misrepresentations about the required initial investment and other matters relating to their purchase of the franchise. They claimed the misrepresentations induced them to enter into their franchise agreements. The franchisor argued that the contractual disclaimer, stating in capital letters that the franchise agreement was the parties' entire agreement, that there were no oral or written understandings outside the franchise agreement, and that the franchisees were not relying on representations outside the franchise agreement, prevented the franchisees from any action or recovery on these claims.

Some evidence supported the franchisees' allegations. Still, the court ruled the agreement's disclaimer of representations limited the potential claims to misrepresentations contained in the franchise agreement itself and that any claim of reliance by the franchisees on alleged misrepresentations outside the agreement was unreasonable. The court's ruling was consistent with other court decisions on disclaimers of representations and reliance.

It is easy, after an agreement has been made, for someone to later claim there were additional promises outside the agreement. A disclaimer of representations provision in a franchise agreement or any agreement, is useful to thwart claims brought later, by franchisees or anyone. This type of disclaimer is included in most well drafted franchise documents. Many franchisors also require franchisees to answer and sign pre-sale questionnaires that confirm the franchise agreement is the entire agreement between the parties, that there are no oral or written understandings not included in the franchise agreement, and that the franchisee is not relying on any representations outside the franchise agreement.

Click to read the entire decision: Creative American Education v. The Learning Experience

 

FRANCHISEE 101:
Hawaiian Distributor May Be a Franchisee

A long-standing distributor and licensee of Harley-Davidson motorcycles in Hawaii was entitled to proceed on its claim that the business relationship with Harley-Davidson Motor Company, Inc. was a "franchise" under Hawaii's Franchise Investment Law (HFIL), according to the decision of a federal court in Hawaii.

Cycle City was a distributor and dealer of Harley-Davidson products in Hawaii under various agreements since 1966. Cycle City was also a party to a license agreement with Harley-Davidson that let Cycle City manufacture and sell certain Harley-Davidson trademarked products. When Harley-Davidson declined to renew the agreements, Cycle City sued for breach of the agreements and violations of the HFIL.

Cycle City claimed the license agreement was a "franchise", which is described in the HFIL as a business relationship under which (i) a license is granted to use a trade name, service mark, trademark, or logotype; (ii) the franchisee pays a "franchise fee" to the franchisor; and (iii) there exists a "community interest" between the franchisor and franchisee in the operation of the franchise business.

The HFIL defines a "franchise fee" as any fee or charge that a franchisee must pay or agrees to pay for the right to enter into or continue to operate a business under a franchise agreement and a "community interest" as a continuing financial interest between the franchisor and franchisee in the operation of the franchise business. Cycle City claimed the grant of the license to use the Harley-Davidson trademarks, a required annual minimum payment of $30,000 to Harley Davidson on the sale of licensed products, Cycle City's substantial investment in the licensing venture and Harley-Davidson extensive controls over Cycle City's sale of licensed products all combined to satisfy the three elements of a "franchise".

The court agreed with Cycle City and noted there is "no precise line between when a company is simply a distributor or a manufacturer's trademarked goods and when the company is a franchise. The mere licensing of a trademarked good, without more, does not give rise to a franchise relationship. How much more is required is a matter of degree and, in many cases such as this one, a question for the finder of fact."

Read the entire decision: Cycle City, Ltd. v. Harley-Davidson Motor Co., 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 2015. All Rights Reserved.

 

Thursday
Jun252015

Disclosure Violations and Running the Risks of Rescission; & Pay Now or Pay Later: Liquidated Damages

Franchise 101 News

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

June 2015

 

Bryan H. Clements Named Rising Star

Congratulations to Bryan H. Clements, named one of Southern California's Rising Stars for 2015 by Super Lawyers Magazine. To be recognized, Bryan underwent Super Lawyers' rigorous selection process quantified by peer evaluations and professional achievements. Less than 2.5 percent of nominated attorneys are finally selected to the Rising Stars list. 

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

Tal Grinblat & Franchise Law Committee

The California Bar's Franchise Law Committee chaired by Tal Grinblat recently submitted proposed legislative changes to state law. One would make it easier for franchisors to negotiate terms of the franchise agreement with prospective franchisees. Another would permit franchisors to present at trade shows without formal registration, to gauge interest in a franchise concept before investing resources in developing a franchise program. If the Business Law Section's Executive Committee approves, the proposals will be submitted to the Bar for introduction in California's legislature.

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic, entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others, takes place in October.

FRANCHISOR 101:
Disclosure Violations & Running the Risks of Rescission

 

Despite a district court's recent decision in Braatz, LLC v. Red Mango FC, LLC, franchisors are well advised to comply with applicable disclosure requirements to a "T" to ensure new franchisees will not have an ongoing right to rescind their franchise agreements.

Braatz was disclosed with Red Mango's franchise disclosure document (FDD) on November 4, 2011. On December 28, 2011, Braatz received an execution version of the franchise agreement and a franchise compliance questionnaire from Red Mango. On January 5, 2012, Braatz paid Red Mango an initial franchise fee and entered into a franchise agreement with Red Mango for a Red Mango yogurt store.

After cashing Braatz's check for the initial fee and countersigning the franchise agreement, Red Mango re-sent a blank closing questionnaire to Braatz asking Braatz to change two answers it had previously provided and resubmit the questionnaire. Braatz completed and signed the replacement questionnaire and returned it to Red Mango before January 16, 2012. Braatz closed the store on March 2, 2014, filed for bankruptcy soon thereafter, and filed a claim against Red Mango for violation of the Wisconsin Fair Dealership Law (WFDL) on December 23, 2014. Braatz sought to rescind the franchise agreement since Red Mango had not provided Braatz 14 days to review the replacement questionnaire before accepting Braatz's initial franchisee fee payment.

The WFDL provides "No franchise [...] may be sold in [Wisconsin] unless a copy of an offering circular is provided to the prospective franchisee at least 14 days prior to [its] execution of any binding franchise agreement or other agreement with the franchisor or at least 14 days prior to the payment of any consideration...." If the franchisor materially violates this provision, the franchisor shall be liable to the franchisee and the franchisee may bring an action for rescission.

The court ruled that even if Red Mango was required to provide Braatz an additional 14 days to review, complete and resubmit the questionnaire, the alleged violation was not material. Since Braatz promptly completed and resubmitted the questionnaire, the court opined, the violation did not affect Braatz's decision to enter the franchise. Also, the representations Red Mango had asked Braatz to change in the questionnaire conflicted with representations Braatz had made in the franchise agreement. In the court's opinion, asking Braatz to align its representations did not present any new requirements for franchise ownership, and thus, was not enough to amount to a material violation of the WFDL's disclosure requirements. Accordingly, the court granted Red Mango's motion to dismiss Braatz's claim.

Had this case been heard by a different court, or had the court been asked to apply the franchise disclosure laws of a different state, the result could have been different. So, keeping in mind that an ounce of prevention is worth a pound of cure, franchisors are best advised to provide franchisees no less than 14 full days to review all documents before accepting any signed documents or monies for a new franchise.

See: Braatz, LLC v. Red Mango FC, LLC.

 

FRANCHISEE 101:
Pay Now or Pay Later – Liquidated Damages & Future Royalties

 

Super 8 Worldwide, Inc. v. Anu, Inc. serves as a reminder to franchisees that, in general, courts will hold franchisees and their guarantors liable to their franchisors for losses suffered when franchisees abandon their franchises before their franchise agreements have expired.

Super 8 sued its former franchisee and the franchisee's guarantors for breach of contract alleging the franchisee unilaterally terminated the franchise when it stopped operating the facility without Super 8's prior consent. Applying New Jersey law, the court granted Super 8's motion for summary judgement against the franchisee's guarantors and awarded Super 8 liquidated damages, lost royalties and attorney's fees (the court had earlier granted Super 8's Motion for Default Judgment against the franchisee and awarded Super 8 $317,591.65 in liquidated damages and recurring fees).

The result in this case would likely have been the same had it been tried in California. California generally follows the rule that a non-breaching franchisor "... is entitled to recover damages, including lost future profits, which are proximately caused by the franchisee's specific breach." Postal Instant Press, Inc. v. Sealy, 43 Cal.App.4th 1704. Therefore, if a California franchisee's actions, such as abandonment of the franchise, are the cause of the franchisor's failure to realize future profits, the franchisor may recover its lost profits from the franchisee. Interestingly, though, a district court interpreting California law in Radisson Hotels Intern., v. Majestic Towers, Inc. went a step further. It ruled, based on a specific provision in the franchise agreement, that Radisson's franchisee was liable to Radisson for lost future profits, even though Radisson had terminated the franchisee for its failure to pay past due royalties.

Most states, though, including Washington and New York, follow the general rule that "a [franchisor] is entitled to recover lost profits [future royalties] if the [franchisor] demonstrates that (1) the [franchisee's] breach caused [the franchisor's loss of future royalties]; (2) the loss may be proved with reasonable certainty; and (3) the particular [lost future royalties] were within the contemplation of the parties to the contact at the time it was made." ATC Healthcare Services, Inc. v Personnel Solutions, Inc., 2006 WL 3758618; see also Ashland Mgt, Inc. v. Janien, 82 N.Y.2d 395 (1993); and see Tiegs v. Watts 135 Wash.2d 1. Following this rule, a franchisor would not be able to collect lost future royalties if it terminates its franchisee for failing to pay past due royalties, but could for acts by the franchisee, such as abandonment, which proximately cause the franchisor's damages.

Many franchise agreements provide a provision calculating the damages the franchisor will be entitled to receive if the franchisee abandons or otherwise terminates the franchise before its expiration date (i.e. 2 years' royalties based on the past 12 months). As the Super 8 case demonstrates, these provisions are typically enforceable, even against the franchisee's guarantors

Click: Super 8 Worldwide, Inc. v. Anu, 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 2015. All Rights Reserved.

 

 

 

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