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Tuesday
Sep162014

California Supreme Court Overturns 2012 Domino's Decision

Franchise 101

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

September 2014

 

Los Angeles Franchise Panel Discussion

Barry Kurtz will participate 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 will be hosted by The Los Angeles Business Journal on October 3rd in Los Angeles. Email: Chris Podbielski for further details about the event.

 

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

California Supreme Court Cites Law Review Article by David Gurnick

In Patterson v. Domino's Pizza LLC (see Franchisor 101 for details below), the Supreme Court cited an article co-authored by David Gurnick, entitled: Minimizing Vicarious Liability of Franchisors for Acts of Their Franchisees. Mr. Gurnick's 1987 article was published in the ABA Franchise Law Journal.

 

Tal Grinblat Appointed as Co-Chair, Franchise Law Committee

The Business Law Section of the State Bar of California appointed Tal Grinblat as Co-Chair of the Franchise Law Committee for the 2014-2015 term. Mr. Grinblat's term began at the end of the State Bar's annual meeting in San Diego on September 14th. The Franchise Law Committee (with franchisee and franchisor constituencies) works with the Department of Business Oversight and the State Bar in sponsoring legislation involving franchising in California.

 

Barry Kurtz and David Gurnick published in Los Angeles Business Journal

What should franchisors look for in potential franchisees? How should investors choose a franchise system? Read: What to Look for in a Franchisee or Franchisor for insights. 

 

FRANCHISOR 101: California Supreme Court Overturns 2012 Domino's Decision

 

Supreme Court Decision Dominos Patterson 

On August 28, 2014, the California Supreme Court reversed a 2012 Court of Appeal decision in Patterson v. Domino's Pizza, LLC. The lower court held that franchise operating systems, like Domino's, deprive franchisees of the ability to control the manner and means of their business operations, thus making the franchisee's employees the franchisor's employees for vicarious liability purposes.

Ms. Patterson, an employee of a Domino's Pizza franchisee, alleged she was sexually assaulted by the store manager. Patterson sued the franchisee, as well as the franchisor, Domino's Pizza, claiming Domino's was vicariously liable for the assault. Domino's argued that it was not Ms. Patterson's employer because the franchise agreement stated that the franchisee was an independent contractor and that Domino's was not involved in the "training, supervision or hiring of [the franchisee's] employees."

The Court of Appeal reversed, holding the case could proceed to trial since reasonable inferences could be drawn from the franchise agreement and Domino's' management guidelines that the franchisee lacked managerial independence and that evidence existed that a Domino's area representative had interfered with the franchisee's employment decisions by suggesting the franchisee should fire the store manager.

Recognizing that system-wide controls in the traditional franchising context, which are designed to protect a franchisor's trademarks, trade name and goodwill, do not necessarily deprive franchisees of day-to-day operational control of their businesses or employment practices, the Supreme Court overturned the Court of Appeal's decision. It held:

The "means and manner" test generally used by the Courts of Appeal cannot stand for the proposition that a comprehensive operating system alone constitutes the "control" needed to support vicarious liability claims like those raised here.

The court instituted a new test for determining whether a franchisee's employees may be deemed employees of the franchisor, holding:

A franchisor becomes potentially liable for actions of the franchisee's employees only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees.

The Supreme Court found Domino's had not retained or assumed a general right of control over the hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees since Domino's had no right or duty to control employment or personnel matters (including sexual harassment training), and did not do so.

To read the entire case, click: Taylor Patterson v. Domino's Pizza, LLC.

 

FRANCHISEE 101: Forum Selection Clauses May Be Enforceable

A recent decision in Allegra Holdings, LLC v. Davis demonstrates that courts are enforcing forum selection clauses in favor of out-of-state franchisors and against in-state franchisees, notwithstanding franchise anti-waiver protections.

In 2003, Allegra Holdings, LLC, a Michigan LLC, as franchisor, entered into a franchise agreement with Fox Tracks, Inc., a Minnesota corporation, as franchisee, for an Allegra Print and Imaging Center in Burnsville, Minnesota.

The franchise agreement provided that all actions arising under the franchise agreement must be brought in Troy, Michigan. But, the Minnesota Franchise Act (MFA) prohibited franchisors such as Allegra, except in certain specified cases, from requiring litigation to be conducted outside of Minnesota. Allegra filed suit in a U.S. District Court in Michigan for trademark infringement and breach of franchise agreement. Fox filed a motion to transfer the case to Minnesota, arguing that the Franchise Agreement and the MFA required Allegra to litigate its claims against Fox in Minnesota.

The district court began its analysis by citing Atlantic Marine Const. Co., Inc. v. U.S. District Court for the Western District of Texas, in which the U.S. Supreme Court ruled that in all but the most unusual of cases, the "interests of justice" are served by enforcing valid forum selection clauses in contracts, including franchise agreements. However, the court rejected Fox's argument that Allegra's suit in Michigan was tantamount to requiring Fox to litigate outside of Minnesota in violation of the MFA, opining that nothing in the contractual language limited Fox from selecting a Minnesota court should Fox choose to file suit against Allegra. Further, the court noted that nothing in the referenced Minnesota statutes or rules precluded parties to a franchise agreement from agreeing on a forum selection. The court held, "A choice of forum is not tantamount to a choice of law." Here, it concluded, "Nothing in [this] choice of forum provision in any way diminishes [Fox's] right to avail [itself] of Minnesota laws."

Similarly, courts have refused to apply a provision of the California Franchise Investment Law (CFIL) that voids any provision in a franchise agreement that restricts venue to a forum outside California when franchisors have sued California franchisees outside of California. In TGI Friday's Inc. v. Great Nw. Rests. Inc., a U.S. district court in Texas enforced a franchise agreement setting venue in Texas, noting that:

Defendants do not explain...why this court should apply California law to void a franchise agreement that provides that Texas law applies to all matters relating to the agreement, and that Texas is the forum for any disputes relating to the agreement.

In contrast, in Frango Grille USA Inc. v. Pepe's Franchising Ltd., a California district court recently refused to enforce an agreement setting venue in London, England, stating that the Atlantic Marine precedent enforces valid agreements on venue selection, but the application of the CFIL rendered the contractual forum selection provision invalid.

Click Allegra Holdings LLC v. Fox Tracks, Inc. to read the opinion.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Friday
Aug152014

NLRB McDonald's Ruling May Put Crimp on Franchising

Franchise 101

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

AUGUST 2014

 

Los Angeles Franchise Panel Discussion

Barry Kurtz will participate 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 will be hosted by The Los Angeles Business Journal on October 3rd in Los Angeles. Click to email Chris Podbielski for further details about the event.

 

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

California Supreme Court Cites Law Review Article by David Gurnick

In Patterson v. Domino's Pizza LLC (see Franchisor 101 for details below), the Supreme Court cited an article co-authored by David Gurnick, entitled: Minimizing Vicarious Liability of Franchisors for Acts of Their Franchisees. Mr. Gurnick's 1987 article was published in the ABA Franchise Law Journal.

 

Tal Grinblat Appointed as Co-Chair, Franchise Law Committee

The Business Law Section of the State Bar of California appointed Tal Grinblat as Co-Chair of the Franchise Law Committee for the 2014-2015 term. Mr. Grinblat's term began at the end of the State Bar's annual meeting in San Diego on September 14th. The Franchise Law Committee (with franchisee and franchisor constituencies) works with the Department of Business Oversight and the State Bar in sponsoring legislation involving franchising in California.

 

Barry Kurtz and David Gurnick published in Los Angeles Business Journal

What should franchisors look for in potential franchisees? How should investors choose a franchise system? Read: What to Look for in a Franchisee or Franchisor for insights. 

 

FRANCHISOR 101:
California Supreme Court Overturns 2012 Domino's Decision

 

On August 28, 2014, the California Supreme Court reversed a 2012 Court of Appeal decision in Patterson v. Domino's Pizza, LLC. The lower court held that franchise operating systems, like Domino's, deprive franchisees of the ability to control the manner and means of their business operations, thus making the franchisee's employees the franchisor's employees for vicarious liability purposes.

Ms. Patterson, an employee of a Domino's Pizza franchisee, alleged she was sexually assaulted by the store manager. Patterson sued the franchisee, as well as the franchisor, Domino's Pizza, claiming Domino's was vicariously liable for the assault. Domino's argued that it was not Ms. Patterson's employer because the franchise agreement stated that the franchisee was an independent contractor and that Domino's was not involved in the "training, supervision or hiring of [the franchisee's] employees."

The Court of Appeal reversed, holding the case could proceed to trial since reasonable inferences could be drawn from the franchise agreement and Domino's' management guidelines that the franchisee lacked managerial independence and that evidence existed that a Domino's area representative had interfered with the franchisee's employment decisions by suggesting the franchisee should fire the store manager.

Recognizing that system-wide controls in the traditional franchising context, which are designed to protect a franchisor's trademarks, trade name and goodwill, do not necessarily deprive franchisees of day-to-day operational control of their businesses or employment practices, the Supreme Court overturned the Court of Appeal's decision. It held:

The "means and manner" test generally used by the Courts of Appeal cannot stand for the proposition that a comprehensive operating system alone constitutes the "control" needed to support vicarious liability claims like those raised here.

The court instituted a new test for determining whether a franchisee's employees may be deemed employees of the franchisor, holding:

A franchisor becomes potentially liable for actions of the franchisee's employees only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees.

The Supreme Court found Domino's had not retained or assumed a general right of control over the hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees since Domino's had no right or duty to control employment or personnel matters (including sexual harassment training), and did not do so.
To read the entire case, click: Taylor Patterson v. Domino's Pizza, LLC.

 

FRANCHISEE 101:
Forum Selection Clauses May Be Enforceable

A recent decision in Allegra Holdings, LLC v. Davis demonstrates that courts are enforcing forum selection clauses in favor of out-of-state franchisors and against in-state franchisees, notwithstanding franchise anti-waiver protections.

In 2003, Allegra Holdings, LLC, a Michigan LLC, as franchisor, entered into a franchise agreement with Fox Tracks, Inc., a Minnesota corporation, as franchisee, for an Allegra Print and Imaging Center in Burnsville, Minnesota.

The franchise agreement provided that all actions arising under the franchise agreement must be brought in Troy, Michigan. But, the Minnesota Franchise Act (MFA) prohibited franchisors such as Allegra, except in certain specified cases, from requiring litigation to be conducted outside of Minnesota. Allegra filed suit in a U.S. District Court in Michigan for trademark infringement and breach of franchise agreement. Fox filed a motion to transfer the case to Minnesota, arguing that the Franchise Agreement and the MFA required Allegra to litigate its claims against Fox in Minnesota.

The district court began its analysis by citing Atlantic Marine Const. Co., Inc. v. U.S. District Court for the Western District of Texas, in which the U.S. Supreme Court ruled that in all but the most unusual of cases, the "interests of justice" are served by enforcing valid forum selection clauses in contracts, including franchise agreements. However, the court rejected Fox's argument that Allegra's suit in Michigan was tantamount to requiring Fox to litigate outside of Minnesota in violation of the MFA, opining that nothing in the contractual language limited Fox from selecting a Minnesota court should Fox choose to file suit against Allegra. Further, the court noted that nothing in the referenced Minnesota statutes or rules precluded parties to a franchise agreement from agreeing on a forum selection. The court held, "A choice of forum is not tantamount to a choice of law." Here, it concluded, "Nothing in [this] choice of forum provision in any way diminishes [Fox's] right to avail [itself] of Minnesota laws."

Similarly, courts have refused to apply a provision of the California Franchise Investment Law (CFIL) that voids any provision in a franchise agreement that restricts venue to a forum outside California when franchisors have sued California franchisees outside of California. In TGI Friday's Inc. v. Great Nw. Rests. Inc., a U.S. district court in Texas enforced a franchise agreement setting venue in Texas, noting that:

Defendants do not explain...why this court should apply California law to void a franchise agreement that provides that Texas law applies to all matters relating to the agreement, and that Texas is the forum for any disputes relating to the agreement.

In contrast, in Frango Grille USA Inc. v. Pepe's Franchising Ltd., a California district court recently refused to enforce an agreement setting venue in London, England, stating that the Atlantic Marine precedent enforces valid agreements on venue selection, but the application of the CFIL rendered the contractual forum selection provision invalid.

Click here to read the opinion for Allegra Holdings LLC v. Fox Tracks, Inc.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Thursday
Jul242014

Location of Dispute Clauses Will Be Enforced

Franchise 101

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

July 2014

 

Top Ranked Law Firms 2014

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

 

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

Heard in Sacramento…

Tal Grinblat, as Vice Chair of Legislation for the Franchise Law Committee of the State Bar of California, was invited to Sacramento by the Department of Business Oversight to discuss Assembly Bill 2289. The bill aims to change the automatic effectiveness statue of the California Franchise Investment law. The DBO agreed to hear the Committee's concerns regarding potential delays for franchisors applying to register or renew franchises in California.

 

David Gurnick and Tal Grinblat published inThe Franchise Lawyer

"Lawyers typically view the accountant's role in franchising to be mainly auditing the franchisor's financial statements and consenting to their use in the FDD. But accountants can play other valuable roles, from developing franchise programs to..."
Continue reading: Finding Value: The Roles of Accountants
in Franchising

 

FRANCHISOR 101:
Location of Dispute Clauses Will Be Enforced

Location of Dispute Clauses

A recent U.S. Supreme Court decision is having a big impact on the locations where franchisor-franchisee disputes are being resolved.

The Supreme Court's conservative-liberal divide is well known. Four of the Justices lean conservative: Chief Justice Roberts and Justices Thomas, Scalia and Alito. Four Justices tilt liberal in their rulings: Justices Ginsburg, Breyer, Sotomayoer and Kagan. Many outcomes hinge on the views of the remaining Justice, Kennedy.

But the recent landmark decision was unanimous! Despite their wide range of political leanings, all nine Supreme Court Justices agreed.

Franchise Agreements often specify the state, county or city where disputes will be litigated. The case of Atlantic Marine Construction Co. v. U.S. District Court concerned such a clause. A construction company, Atlantic Marine, entered into a contract with the Army to build a structure at Fort Hood in Texas, and a subcontract for a management company to work on the project. The subcontract said all disputes would be litigated in Virginia. But when a dispute arose, the management company sued in Texas.

It has been a longtime practice among many lawyers to start lawsuits or arbitrations locally, or in a court of choice, regardless of what the parties' agreement says. Courts and arbitrators applied a variety of legal theories to avoid the contractually agreed location. But in Atlantic Marine, the Supreme Court said an agreement on where disputes will be resolved "represents the parties' agreement as to the most proper forum;" and "enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system."

Therefore, "a valid forum-selection clause should be given controlling weight in all but the most exceptional cases."

The Atlantic Marine decision was announced just seven months ago, in December 2013. Already. It has dramatically affected many franchising cases.

In just the few months since it was decided, published decisions show that Burger King was able to get a franchisee lawsuit moved to Burger King's home court in Florida, and other franchisors such as Country Inn & Suites, Hawthorne Suites and Salad Works were able to defeat franchisee efforts to relocate cases away from franchisor home courts.

A message for franchisors and franchisees is to pay careful attention to the location-for-dispute clauses in franchise agreements and other agreements. As one court stated:

The decision in Atlantic Marine now provides the analytical framework a court should employ when a valid and enforceable forum selection clause exists between the parties.

This means those clauses in the franchise agreement are typically going to be enforced. Read the U.S. Supreme Court Opinion: Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas

 

FRANCHISEE 101:
Think Carefully About Agreeing to Arbitration

Franchise Arbitration Clauses

Another type of clause often appearing in Franchise Agreements (and other agreements) is an arbitration clause. Arbitration is a form of dispute resolution that is an alternative to going to court.

In court, a case follows the court's rules and decisions are made by the judge or jury. Arbitration can be less formal, and decisions are made by a mutually agreeable arbitrator.

Arbitration comes with a significant risk. Most arbitration decisions are not reviewable or appealable. Even if an arbitrator makes a mistake in deciding a case, generally it cannot be appealed.

Recently a franchisee of Wetzel's Pretzels arbitrated a dispute with the franchisor. The franchisee, dissatisfied with the outcome, asked a court to vacate the arbitrator's decision. The franchisee claimed:

The arbitrator exceeded his powers by enforcing certain provisions in the franchise agreement that required the [franchisee] to assign their lease and property interests to Wetzel's Pretzels after the franchise agreement was terminated.

The court would not consider the claim. Even if the arbitrator made a mistake, that would not be grounds. The court said:

In order for us to vacate the award on the ground that the arbitrator exceeded his powers.. the [Franchisees] would have to show that the award was "completely irrational, or exhibit[ed] a manifest disregard of law.

"Completely irrational" or "manifest disregard of the law" are very high, almost insurmountable standards to meet in trying to undo an arbitrator's decision.

A message from the recent Wetzel's Pretzel's decision is to think carefully before agreeing to arbitration of disputes. Many courts have noted that the arbitration process cannot be expected to be error free. Agreeing to arbitration means agreeing to and accepting the risk of errors as part of the decision-making outcome; error that cannot be corrected.

Read the opinion here: Wetzel's Pretzels, LLC v. Johnson

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
Jun242014

Pumped Up and Suing in Seattle

Franchise 101

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

June 2014

 

Top Ranked Law Firms 2014

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

 

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

Barry Kurtz quoted by the Los Angeles Times

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

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

 

Barry Kurtz and Bryan H. Clements in
The Practical Lawyer

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

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

 

FRANCHISOR 101: 
IFA Files Lawsuit Against Seattle

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

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

Minimum Wage Hike Litigation

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

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

 

FRANCHISEE 101:
Unsigned Franchise Agreement Binds Franchisee's Shareholder

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

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

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

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

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

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

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

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Thursday
May222014

When is Unreasonable, Reasonable?

Franchise 101

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

May 2014

 

47th Annual International Franchise Association Legal Symposium

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

 

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

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

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

 

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

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

 

FRANCHISOR 101:
When is Unreasonable, Reasonable?

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

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

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

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

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

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

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

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

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

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

 

FRANCHISEE 101:
Item 19 Misdirection Ultimately Discovered by Franchisee

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

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

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

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

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

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

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

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

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

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