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Feb232015

DBO Automatic Effectiveness Date Extension; and Quasi-Franchise Business Models

Franchise 101

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

February 2015

 

Franchise Times Legal Eagles 2015

Tal Grinblat, Certified Specialist in Franchise and Distribution Law and Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California, has once again been selected as one of the best attorneys in franchising by the Franchise Times. The full list of honorees will be published in the magazine's April edition.

IFA 2015

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's annual convention, held in Las Vegas. The event provided an opportunity to participate in roundtable discussions and learn about the latest business and operational challenges franchisors and franchisees face in today's ever-evolving market.

E-Filing Gaining Momentum

As of January 1, 2015, the Department of Business Oversight (DBO) is authorized to accept multiple types of electronic filings under several laws it administers. The Commissioner may now prescribe circumstances under which the DBO accepts electronic records or electronic signatures. This progression suggests that California may be inching closer toward a universal electronic filing system.

 

FRANCHISOR 101: California Increases Time for Automatic Effectiveness from 15 to 30 Business Days


Automatic Franchise Effectiveness Date 

A new California law has given the California Department of Business Oversight, the State's regulator of franchises, more time to review franchise registration and renewal applications, with the result that franchisors, their accountants and their attorneys must work harder and faster to update their franchise disclosure documents, prepare their year-end audited financial statements and submit their applications to renew and maintain their franchise registrations.

The law amends the automatic effectiveness statutes in the Corporations Code (Sections 31116 and 31121) to increase, from 15 to 30 business days, the length of time that the Commissioner of Business Oversight has to review franchise applications and franchise renewals under the Franchise Investment Law. The revised statute provides that registration of an offer of franchises automatically becomes effective at 12 o'clock noon, California time, on the 30th business day after the filing of a complete application for registration.

A complete application is defined as one that includes the appropriate filing fee, Uniform Franchise Disclosure Document, and all additional exhibits, including audited financial statements for the franchisor's prior fiscal year, in conformity with regulations of the Commissioner.

Because most franchisors operate under a January to December fiscal year, franchisors and their accountants should keep the timing requirements of the new law in mind since they will have to file their complete applications early in March to take advantage of the automatic effectiveness statute.

 

FRANCHISEE 101: Is It a Franchise?


Accidental and Quasi-Franchises

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

For decades, non-franchise businesses have tried using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors to avoid onerous franchise investment laws. A recent federal decision from California serves as an important reminder that it doesn't pay to skirt franchise registration requirements when a business arrangement meets the threshold requirements of a franchise.

In Chicago Male Medical Clinic v. Ultimate Management, Inc., a federal district court in Los Angeles ruled that a consulting agreement between a Chicago medical clinic and a management company amounted to the sale of a franchise under Illinois law.

The parties stipulated to the following facts: the clinic and the franchisor entered into a consulting agreement, giving the franchisee: 

  1. the right to use the National Male Medical Clinic trademark;

  2. a suggested marketing plan;

  3. access to the franchisor's expertise and knowledge in advertising and marketing certain medical services; and

  4. call center services.

Pursuant to the agreement, the franchisee paid an initial fee of $300,000, over $56,000 in royalties, and call center fees of over $45,000. The franchisee filed suit, alleging fraud for failure to follow disclosure requirements under the Illinois Franchise Disclosure Act ("IFDA").

Finding that the management company violated the IFDA by failing to register with the Illinois Attorney General's Office and failing to deliver a disclosure document, the court entered judgment in favor of the medical clinic, awarding the return of the initial $300,000 investment, and over $56,000 in royalties paid, plus costs and attorney fees.

Franchise laws are written in broad terms and are designed to protect franchisees. So licensors in business arrangements that fit the criteria of a franchise can wind up paying heavily on the back end if they dodge the franchise registration process.

Click: Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc. et al., DC Cal. for further 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 2015. All Rights Reserved.

Thursday
Jan222015

Accidental Franchises in Atypical Industries; FDA Labeling

Franchise 101

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

January 2015

 

Department of Business Oversight

Tal Grinblat, Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California and Certified Specialist in Franchise and Distribution Law, organized and met with Department of Business Oversight (DBO) members to discuss new legislation proposed by the Committee. Tal chaired the meeting which was held in the DBO's office in San Francisco.

Southern California Super Lawyers 2015

Barry Kurtz, David Gurnick and Tal Grinblat (all are State Bar Certified Specialists in Franchise & Distribution Law) have been named Southern California Super Lawyers for 2015. The designation is determined by a 12 point peer recognition and professional achievement ratings system, and via independent research. The list is published in Los Angeles Magazine, and can be found online. Click to see our 2015 Southern California Super Lawyers.

Comparing Franchise Relationships and Beer Distribution Relationships

Barry Kurtz and Bryan H. Clements had an article published in Orange County Lawyer, regarding the similar laws governing beer distribution and franchising. Click: Comparing Franchise and Beer Distribution Relationships for more information.

Steering Clear of Franchise Financial Disasters

David Gurnick was quoted by CNBC regarding the necessity of research before investing in a franchise. To read the article, click: How to Steer Clear of Franchise Financial Disasters.

FRANCHISOR 101:
Accidental Franchises in Industries Not Typically Associated With Franchising

Accidental Franchise 

Almost everyone recognizes the nation's most prominent franchises: McDonald's, Domino's, Hilton or 7-Eleven, to name a few. And business people are becoming aware that arrangements that look like franchises, but are characterized by parties as something else, may still be franchises under U.S. laws. Examples include a successful restaurant that brings in investors to own new locations, or a plumbing or lock-and-key service that lets its best employees start their own branches. These deals may be or become accidental franchises.

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

The Federal Trade Commission's definition of a franchise may be summarized as a business relationship, no matter what it is called, in which: 

  1. One party will grant another the right to operate a business or sell goods or services, identified or associated with originator's trademark;

  2. There will be significant control or assistance from the trademark owner; and

  3. The operator must pay money to the trademark owner.

It is easy to see how these elements could all be present in the relationships described above. When the elements are present, the franchisor must prepare an extensive "Franchise Disclosure Document" and allow a 14-day cooling-off period before entering into any agreement with a franchisee. The franchisor cannot unilaterally change or terminate or not renew franchise agreements. In 13 states, registration is required before an agreement may be entered into. Violations can mean civil and criminal penalties.

Considering the wide scope of the FTC or state law definitions, the elements can be found in relationships in unexpected fields. Who would think the Girl Scouts, an organization chartered by Congress, would be an illegal franchise? But a federal court ruled the elements were present between the Girl Scouts and one of its local councils, based largely on selling Girl Scout cookies and merchandise.

Commercial shopping centers often require tenants to join and pay money to a shopping center association for advertising. These associations promote members using the center's distinctive brand, organize promotional events, regulate when tenants can and cannot conduct special sales, mandate operating hours, and require tenant members to participate in gift-card and loyalty programs. Possibly, the elements of a franchise are present, meaning the shopping center landlord or its tenant association may be a franchisor.

In some industries, such as software development and pharmaceuticals, independent businesses form networks and consortiums to develop products and services. These organizations require members to make payments to fund operations and create, develop or obtain products for members to use, sell, or distribute. Often the organization adopts a distinctive name which members and re-sellers may use, or be required to use. This scenario could contain all the elements of a business franchise, requiring regulatory and other franchise law compliance.

Unexpected franchises occur in other business relationships, too. For example, a snack-foods distributor or route driver who must pay material fees to the manufacturer (e.g., to purchase a vehicle or for advertising, training, manuals or meetings), follow the manufacturer's policies and promote the brand, could be a regulated franchise. In one case, a California court found a foreign winemaker to be a franchisor because the vintner sold ancillary promotional items to its U.S. importer and assisted in customer sales calls.

Franchise laws are written in broad terms. Companies, and organizations, even nonprofits and consortiums, that develop and distribute products and services, whether through their own members or others who are recruited, should assess whether their arrangements may be franchises.

 

FRANCHISEE 101:
Complying with the FDA's New Menu Labeling Requirement

On November 25, 2014, the Food and Drug Administration (FDA) released final rules governing menu and vending machine labeling to implement some of the Affordable Care Act's nutrition labeling requirements.

The final rule for menu labeling is entitled the Nutrition Labeling of Standard Menu Items in Restaurants and Similar Retail Food Establishments Rule ("Menu Rule"). Its coverage includes restaurant franchise systems.

According to the FDA's website, the Menu Rule "applies to restaurants and similar retail food establishments if they are part of a chain of 20 or more locations, doing business under the same name, offering for sale substantially the same menu items and offering for sale restaurant-type foods." Covered establishments include sit-down restaurants, drive-thrus, take-outs, delis (including grocery store delis), places with self-serve salad/food bars, bakeries, coffee shops, movie theatres, amusement parks, ice cream stores, convenience stores serving ready-to-eat foods and drinks, and certain bars serving alcohol. The FDA claims the Menu Rule will help consumers make informed choices by providing accurate, clear and consistent nutrition information when they eat out. The FDA says that at least two-thirds of adults and one-third of children in the U.S. are overweight or obese and eat one-third of their calories away from home.

The Menu Rule requires posting calorie information for standard menu items on the menu and menu boards, including electronic and online menus, so customers can understand the posted caloric information in context of their total daily diets. The postings must state that detailed, written nutrition information is available to customers on request. A covered establishment must have a reasonable basis for its nutritional declarations, keep records relating to the nutritional data used as a basis for, and methods used to determine, the nutritional information provided to customers, and make the information available to the FDA on request.

Starting December 1, 2015, franchisees, and franchisors operating company-owned locations, need to comply with the Menu Rule. Franchisees should be proactive and communicate with their franchisors and suppliers to obtain accurate nutritional data and determine what new standards their franchisors plan to implement to maintain uniformity and enable franchisees to comply with the Menu Rule's requirements.

Restaurant franchisors are likely starting to test standard menu items and work on new menu and menu board standards to provide to franchisees. But franchisees should not wait to hear from their franchisors since franchisees will be responsible to comply with the Menu Rule in December regardless of any action taken by their franchisors.

 

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
Dec162014

Mixed Results in Delivery Driver Cases

Franchise 101

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

December 2014

 

How to Steer Clear of Franchise Financial Disasters

David Gurnick was quoted by CNBC regarding the necessity of research before investing in a franchise. To read the article, click: How to Steer Clear of Franchise Financial Disasters.

Comparing Franchise Relationships and Beer Distribution Relationships

Barry Kurtz and Bryan H. Clements had an article published in Orange County Lawyer, regarding the similar laws governing beer distribution and franchising. Click: Comparing Franchise and Beer Distribution Relationships for more information.

CalCPA Presentation

Tal Grinblat and David Gurnick presented a franchise law seminar to accountants of the California Society of CPAs' Los Angeles chapter. The seminar focused on accountants' roles in helping clients launch or operate franchise systems or operate as franchisees.

We Are Growing

We are pleased to announce the addition of Samuel C. Wolf to our Franchise and Distribution Practice Group. Sam earned his juris doctor at Southwestern Law School, where he was also a Dean's Merit Scholar and the recipient of a CALI "Excellence for the Future" Award (Trial Advocacy).

Mixed Results in Delivery Driver Cases

Recent court decisions in two delivery driver cases yielded mixed results for the plaintiffs and defendants involved, but serve as helpful reminders to franchisors and franchisees of ways to protect themselves in their franchise relationships.


Franchise Employee Liability

FRANCHISOR 101:
Statutes of Limitation Message for Franchisors and Franchisees

 

Franchise 101 Attorneys*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal SpecializationIn Kroshnyi v. U.S. Pack Courier Services, Inc., a case pending for 13 years (and not over yet), numerous drivers claimed their package delivery franchisor violated New York's franchise law. From 1996 to 1998 the drivers entered into franchise agreements with U.S. Pack Services (USP), a New York franchisor. Drivers paid a $15,000 "subscription fee," training fees, beeper fees and other charges to receive delivery assignments from USP's central dispatch.

In 2001 the franchisees sued in federal court claiming violations of the New York Franchise Sales Act (NYFSA), for alleged misrepresentations in USP's Franchise Disclosure Document, and state labor laws. The court dismissed the labor claims. At trial a jury found the company liable to the drivers for franchise law violations.

However, an appeals court reversed the jury award. The NYFSA has a statute of limitations requiring any action to be brought "before the expiration of three years after the act or transaction constituting the violation."

The court agreed with the franchisor that the "act or transaction constituting the violation" occurred in 1998 and earlier when the franchises were sold. It ruled the claims were time barred because the lawsuit was not filed until 2001.

The franchisees argued that the statute of limitations started anew since they made payments to the franchisor over time and because their franchisor transferred the business to a new entity and provided them new "Rules and Regulations" that purported to be a new agreement. But the appellate court rejected their arguments that these acts created new franchise relationships.

The court opined that under New York law, "continuous violations do not toll the statute of limitations" and that the new Rules and Regulations expressly provided they did not alter the parties' original agreement. The court noted that the NYFSA requires disclosures and prohibits fraud in making an "offer" and "sale" of franchises, "but does not seek to regulate the ongoing operations of a franchise."

A few drivers bought their franchises after 1998. The appellate court ruled their claims were not barred. The company challenged the damages award to them, claiming the franchisees had profited so they could not have suffered damages. But the appellate court upheld money awards to the franchisees whose claims were timely, ruling that in view of the numerous expenses they incurred over the years, the jury could properly have found that they lost money.

The Appellate Court's decision underscores the importance to franchisees of bringing claims promptly, before statutes of limitations expire - and reminds franchisors of the benefit of these statutes in defending franchise law claims.

Click Kroshnyi v. U.S. Pack Courier Services, Inc. to read the Court's decision.

 

Franchsise Employer Liability

 

FRANCHISEE 101:
Independent Contractors or Employees?

 

In Ruiz v. Affinity Logistics Corporation, another recent delivery driver case that arose in California, Affinity Logistics' drivers claimed they were employees and had been misclassified as independent contractors. The trial court ruled that the drivers were independent contractors since each had its own business name, business license, commercial checking account, federal employer identification number, and could hire its own employees, if it wished.

But the Ninth Circuit Court of Appeals reversed, finding the drivers were all employees. The appellate court emphasized that Affinity Logistics had the right to control the details of the drivers' work.

Affinity Logistics controlled their rates, schedules and routes; provided the trucks the drivers drove; controlled the mobile phones they used; specified the uniforms the drivers had to wear; and closely monitored the drivers through morning meetings, setting start times, inspecting their appearance and loading of trucks, conducting follow-alongs and customer interviews and requiring drivers to call a company supervisor after every two or three stops.

The appellate court rejected the drivers' indicia of being independent (business names, tax ID numbers, etc.) as determinate factors because Affinity Logistics required the drivers to take these steps. For these reasons, the appellate court ruled the drivers were employees, not independent contractors.

Parties to franchise agreements should be mindful of the level of control the franchisor exercises over its franchisees to avoid jeopardizing the independent contractor relationships.

Click Ruiz v. Affinity Logistics Corporation to read the 9th Circuit Court decision.

 

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.

 

Wednesday
Nov192014

Avoid Liability for Acts & Incidents at Franchisee Locations

Franchise 101

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

November 2014

 

Risky Business: Franchising Too Early

Barry Kurtz was quoted in the Los Angeles Business Journal regarding the dangers of selling franchises based on the success of only one or two company stores. Click here to read the entire article: Solo Shops Buy Into Franchises.

 

Common Ground: Craft Brews

The laws governing the distribution of beer are very similar to the laws governing the franchise and distribution of other products or services. Get the details in Barry Kurtz and Bryan H. Clements' recent publication in the Orange County Lawyer here: Comparing Franchise and Beer Distribution Relationships.

 

 

FRANCHISOR 101:
Avoid Liability for Acts and Incidents at Franchisees' Locations

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

There has been a lot of news lately about risks of franchisors being liable for acts and incidents at franchised locations. The National Labor Relations Board's general counsel recently announced he intends to claim McDonald's Corporation is liable for labor violations concerning employees of franchised locations who protested for higher wages.

In California, an appellate court ruled Domino's Pizza could be liable for sexual harassment alleged against the manager of a franchised location. The State Supreme Court reversed and ruled that Domino's Pizza is not liable.

Three main legal theories are used to claim franchisors should be liable for what happens at franchised locations.

  1. Someone may claim a franchisor exerted so much control over details of the franchise relationship that courts should find the franchisee is not truly independent, but due to the controls, has become an extension of the franchisor itself - an agent or employee.

  2. Some people claim the franchisee identified itself so completely with the franchisor, without any indication of being independent, that the person making the claim thought the franchised location was just a branch of the franchisor, not an independently owned and operated business.

  3. Or the claim is sometimes made that the franchisor is directly responsible for an injury at a franchised location. One common example is the claim that the franchisor selected equipment negligently.

Rather than fight liability through litigation, franchisors can take pro-active steps to reduce the risks of being sued, or held liable, for incidents at franchised locations. Here are a few steps that can be taken:

  1. Allow franchisees as much freedom as possible when it does not jeopardize the brand. Stated differently: don't over-control franchisees. They should hire and fire their own personnel, set compensation, and make all the other decisions that business owners make. The franchisor should only implement those controls that are needed to protect the franchisor's brand. For example, control over decor, good customer service, quality product or service, and cleanliness. Matters that are not necessary to protect the brand should be left to the franchisee to control.

  2. Let the public, suppliers and others know that the franchise is independently owned and operated. Notice of independent ownership can be on signs, store placards, advertising, business cards, stationery, checks, lists of locations, the franchisee's fictitious business name filing and the franchisee's form of job application. The franchisor can tell the public in its advertising and on the Internet that its locations are independently owned and operated.

  3. Operate the business and recruit and train franchisees with care. A good way to avoid liability is to not have an injury or other incident to begin with. Recruit and award franchises only to those who will follow the system and act properly toward personnel, customers and others. Require franchisees to be trained in safety and good customer service and conduct their businesses honestly and in good faith. Use care in designating construction standards and equipment. If an inspection discloses a health or safety hazard, follow up with the franchisee to ensure the hazard is eliminated. (See Franchisee 101 below). These steps can mean fewer accidents and injuries. Fewer of these mean less risk of claims against anyone, including the franchisor.

  4. Maintain insurance and require franchisees to maintain insurance naming the franchisor as an additional insured. Broad liability insurance with endorsements for all possible risks can mean that if a claim is made, the insurance company for the franchisor or the franchisee will provide the defense, work to get the case settled, and pay if there is any liability. Consider requiring your franchisees to obtain and maintain employment practices liability insurance with a co-defendant endorsement for your benefit.

  5. Similarly, the franchise agreement and other agreements should provide for indemnification from the franchisee. This can be accompanied by a personal indemnification and guaranty from individual owners of the franchise. When individual franchise owners have their assets at risk, their promise to indemnify and guaranty leads to more careful operation and reduces the risk and the franchisor's ultimate exposure to claims and liabilities.

By following these steps, a franchisor can reduce the risks of claims and liabilities for acts and incidents arising from its franchisees' operations.

 

FRANCHISEE 101:
Avoid Acts & Omissions That Expose Your Franchisor to Potential Liability

A West Virginia Court refused to dismiss an action brought under its state workers' compensation law. That law permits an employee to recover greater damages when deliberate intent exists.

An employee of a Hardee's franchised restaurant suffered first and second degree burns from spilled hot grease while manually cleaning a fryer box. The employee brought an action against the restaurant franchisee, as well as the franchisor. He claimed the franchisor should be liable based on allegedly having actual knowledge of unsafe working conditions at the restaurant, providing the equipment and setting the safety procedures.

The employee alleged the frying machine's pump and filter were broken for a long time, requiring manual cleaning which led to his injuries. The Court noted the franchisor presumably had actual knowledge of the long-standing unsafe working conditions because the franchisor provided training, supervision, inspections, equipment, cooking supplies and procedures for operation of the restaurant. The franchisor argued it did not control daily operations and therefore had no legal duty to the employee. But the court disagreed and held it was reasonable to infer the franchisor had control over the equipment and procedures that contributed to the injury. As a result, the franchisor owed the employee a legal duty to use reasonable care and the franchisor's conduct created a risk of physical harm.

The lawsuit and resulting ill-will between the franchisor and franchisee could have been avoided had the franchisee repaired the defective equipment when notified by the franchisor to do so.

For details about the case, read: Estate of Nathaniel Hamrick v. Restaurant Management Group, 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 2014. All Rights Reserved.

 

Tuesday
Oct282014

Venue and Choice of Law Provisions Not Enforceable in California

Franchise 101

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

October 2014

 

American Bar Association Franchise Legal Seminar

Barry Kurtz, David Gurnick, Tal Grinblat and Bryan H. Clements attended the American Bar Association's annual legal seminar for franchise attorneys. The seminar provides an opportunity for attendees to focus on industry-wide legal concerns. Barry Kurtz co-chaired a special industry relationship workshop on beer distribution, oil and gas and automobile dealership law.

David Gurnick Named one of the Best Lawyers in America 2015

David Gurnick was recently selected by his peers for inclusion in The Best Lawyers in America 2015, for Franchise Law. The list was published in a special supplement to the Wall Street Journal earlier this month. Click: Best Lawyers to see the listing. 

Los Angeles Franchise Panel Discussion

Barry Kurtz participated in a panel discussion and Q&A for potential franchisors, franchisees, business attorneys and accountants in Southern California regarding the A-Zs of franchising a business, buying a franchise, accessing capital, and other topics. The breakfast event was hosted by The Los Angeles Business Journal on October 3rd. 

California Bar Business Law Leadership Conference

Tal Grinblat, representing the State Bar of California Franchise Law Committee, participated in a two day leadership conference hosted by the Business Law Section in Dana Point, California. The conference addressed steps to improve the Committee, sponsorship of legislation, and the promotion of the Business Law Section of the Bar. 

Barry Kurtz published in The Los Angeles Business Journal

Franchising is a flexible, tried and true method of distributing products and services and offers business owners an alternative avenue to expand... To read more, click: Is Franchising the Right Model for Your Business?

 

FRANCHISOR 101:
Venue and Choice of Law Provisions Not Enforceable in California


Attorney for Franchising 

In 2013, Pepe's Franchising, a U.K. company, entered into a Master Franchise Agreement with Frango Grill, based in California, granting the right to operate and franchise Pepe's restaurants in California. The Agreement's venue clause required all disputes to be brought in London, where Pepe's was headquartered, and required U.K. law to apply.

In 2014, Frango sent a letter to Pepe's stating its intent to rescind the Master Franchise Agreement. Frango sued Pepe's in Los Angeles alleging franchise law claims. Pepe's moved to dismiss the action or move it to London pursuant to the Agreement's venue clause. Frango, citing California's Franchise Relations Act (CFRA), opposed Pepe's motion, claiming the California statute trumped the Agreement's venue requirements. Section 20040.5 of the CFRA states that:

a provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.

Pepe's argued the CFRA should only apply when it would be unfair to apply the forum selection clause. The court ruled that the statute covers all venue restrictions, not just clauses imposed unfairly, and held that due to California's strong public policy, Section 20040.5 invalidated the agreed forum for resolving disputes. The court also held that California law would apply despite contrary provisions of the Master Franchise Agreement because Pepe's admitted that the laws of both jurisdictions were the same.

Furthermore, the court found that Pepe's sought to do business in California and registered its franchise disclosure document in California. Therefore, Pepe's should have contemplated that any franchisee dispute would be litigated in California.

When dealing with franchisees in multiple jurisdictions, a franchisor should not assume that its choice of law and forum agreement will be enforced. Review of the laws in jurisdictions where franchises are granted may be useful to assess risks related to the parties' selected forum and choice of law.

Franchisors should also consider the benefits of filing lawsuits preemptively against non-compliant franchisees in the jurisdiction stated in the franchise agreement to lessen the risk of litigating disputes in the franchisee's choice of forum.

To read about the case, click: Frango Grille USA Inc., v. Pepe's Franchising Ltd. 

FRANCHISEE 101:
Illusory Arbitration Provisions Not Enforceable in Indiana


Franchise Lawyer

In 2010, Steak 'n Shake, a franchisor of hamburger restaurants, adopted new pricing and promotion policies that required all franchisees to follow company mandated pricing on every menu item and to participate in all promotions mandated by the franchisor.

Three franchisees resisted this policy, claiming that all Steak 'n Shake franchisees enjoyed the right to set their own menu prices and participate in corporate pricing promotions at their option since 1939. They sued the franchisor in federal court.

One month later, Steak 'n Shake adopted an arbitration policy requiring franchisees to engage in non-binding arbitration of all disputes at Steak 'n Shake's request. Then Steak 'n Shake moved to stay the federal lawsuit and compel arbitration based on a provision in its franchise agreement that granted Steak 'n Shake the right to initiate a system of non-binding arbitration and mediation at any time.

The court denied Steak 'n Shake's motion, holding that the arbitration clause was illusory and unenforceable because there was no limit on Steak 'n Shake's ability to arbitrate at its whim and, as a result, it was purely optional. An illusory promise is one that makes performance entirely optional with the promisor.

On appeal, Steak 'n Shake argued that the arbitration provision was not illusory. The appellate court disagreed, holding that Steak 'n Shake did not satisfy an essential requirement needed to compel arbitration: a clear agreement to arbitrate. The appellate court found the arbitration agreement was illusory because performance of the arbitration provision was optional to Steak 'n Shake and the provisions were so vague and indefinite that the material terms could not be determined.

All parties can benefit from reviewing the franchise agreement's arbitration provisions to determine whether to proceed in a dispute through litigation or arbitration. Though an agreement may require arbitration, if its terms are illusory or ambiguous, it may be possible to pursue claims in court.

For more information, click: Appellate Court's opinion for Steak 'n Shake Enterprises, 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.

 

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