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Entries in arbitration (3)

Thursday
Nov022017

Franchise 101: Arbitr-"all"; and 31 Flavors of Fees (or just one)

  

Franchise 101 News

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



OCTOBER 2017

 

Franchise Distribution Attorneys

40th Annual ABA Forum on Franchising

 

Our Franchise & Distribution Practice Group, including three California Bar Certified Specialists (Barry Kurtz, Tal Grinblat and David Gurnick), three associates (Samuel C. Wolf, Matthew J. Soroky and Katherine L. Wallman), and four paralegals (Caitlyn Dillon, Marianne Toghia, Kelly D'Angelo and Peggy Karavanich [not depicted below]) attended the American Bar Association's Forum on Franchising in California's Palm Desert. This three day conference consists of educational programs and networking events designed to keep legal professionals up to date on the latest transaction and litigation concerns affecting both franchisor and franchisee clients.

David Gurnick in Corporate Counsel

When Uber acquired Otto, the autonomous vehicle program headed up by former Google engineer Anthony Levandowski, eyebrows were raised and a lawsuit was filed. Now, more questions come to the fore, this time regarding due diligence by Uber's chief legal officer. Read David Gurnick's quotes on this topic in:


Should Uber’s Salle Yoo Have Taken Earlier Look at Critical Due Diligence Report?

FRANCHISOR 101: Arbitr-“all”

 Conflicting Arbitration Clauses
A federal court in New Jersey granted a franchisor's motion to compel arbitration of disputes involving seven frozen yogurt franchises, even though the claims were subject to different arbitration provisions in different agreements, providing for different arbitral organizations and procedures.

An insolvent franchisee sought to liquidate assets. Each franchise agreement included arbitration and mediation clauses. The franchisee brought a claim against its franchisor for fraud, breach of contract, unjust enrichment and violation of the New Jersey franchise law. The franchisee argued the court should not compel arbitration because the various agreements' arbitration provisions had different language, were in conflict, and did not specify a uniform method of arbitration.

Two franchise agreements provided for arbitration according to rules of the American Arbitration Association. The other agreements called for arbitration with any reputable arbitration services, specifically noting CPR and JAMS.

The court found the various clauses did not require separate arbitrations. The court concluded that while the provisions differed on rules governing arbitration, the differences were minor and did not preclude compelling arbitration. The court also found that the parties could comply with all the provisions by, for example, retaining as arbitrator a neutral, former judge who was willing to proceed according to American Arbitration Association rules.

While speed, cost, and privacy may no longer be persuasive grounds to support inclusion of arbitration provisions in franchise agreements, arbitration often provides control over the location of the dispute, lowers the damages that can be recovered by franchisees, and limits the number of parties to the action. Franchisors often have a tactical advantage if the franchise agreement contains an arbitration provision, particularly in disputes against multi-unit franchisees that own units spread across different jurisdictions.

The nature and extent of these characteristics of arbitration usually advance the business and legal interests of the franchisor.

See Mitnick v. Yogurtland Franchising, Inc., 2017 WL 3503324 (D.N.J. Aug. 16, 2017).

FRANCHISEE 101:
Thirty-one Flavors of Fees (Or Just One)

Baskin-Robbins charges a dairy supplier a so-called "commercial factor" fee for the right to make and sell Baskin-Robbins proprietary ice cream to franchisees. The supplier's pricing to franchisees includes an amount equal to this fee. In Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, LLC, a franchisee association asked a federal court to rule this price component was an unauthorized fee. But the court ruled for Baskin-Robbins, holding that the charge to franchisees was permissible.

The court found that Baskin-Robbins franchisees pay a "price" for products they buy, not a "fee." Relying on dictionary definitions of "fee" and "price," and noting that Baskin-Robbins franchisees pay a single amount to the supplier for products, the court found that while the commercial factor was a fee the franchisor charged its supplier for the privilege of selling ice cream under Baskin-Robbins's name, the supplier simply charged franchisees for the products and that was not a fee.

The court also considered whether Baskin's franchise agreement prohibited the supplier from charging a pass-through cost to franchisees. The court found that the relevant provisions in the franchise agreement required franchisees to buy products from Baskin-Robbins' designated supplier, at the supplier's price. The court noted that pass-through costs and charges along the supply chain are standard industry practice. The court added that even if it found ambiguity in the franchise agreement, the parties' course of dealing showed that a supplier passing along its cost to franchisees was not prohibited. The franchisees paid for many years without objection and Baskin-Robbins disclosure document noted that the franchisor received revenue from franchisees' purchases of products from designated suppliers.

Some franchisors are creative in finding ways to collect monies from franchisees beyond straight royalties and advertising fees. Prospective franchisees should carefully review the disclosure document, talk with other franchisees and learn about practices in their system, to be informed about each source of revenue, and both direct and indirect charges, their franchisor imposes.

Read: Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, 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 2017. All Rights Reserved.

Wednesday
Feb242016

Importance of Arbitration Clauses; and Reliance on Profit Projections

Franchise 101 News

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

 

February 2016

 

Franchise Lawyers

Barry Kurtz, David Gurnick & Tal Grinblat at IFA

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's Annual Convention in San Antonio this month. This is the 56th annual conference, which draws thousands of global business leaders, franchisors and suppliers.

 

Tal Grinblat Selected

For the third consecutive year, Tal Grinblat has been recognized as a U.S. Legal Eagle by Franchise Times Magazine. Legal Eagles are nominated by attorney clients and peers as the best in the industry.

 

FRANCHISOR 101:
The Importance of Arbitration Provisions

 

Though some of the more important terms may appear early in a franchise agreement, some key terms placed near the end - the portion of the agreement that is often called "boilerplate" - may determine who wins or loses a legal fight. A franchisor that has a preference to arbitrate disputes should pay close attention to the arbitration provisions.

Courts have held provisions requiring arbitration to be enforceable time and again. In Jacobson v. Snap-on Tools Co., a franchisee claimed that a provision in his franchise agreement compelling arbitration was unenforceable because the franchisee had not read it, saying it was "hidden", and the franchisor had not called special attention to it. The court found the arbitration provision, which looked no different than the rest of the agreement, was not hidden and the franchisor had no duty to particularly point out that provision to the franchisee. The franchisor was able to compel arbitration.

But not all arbitration provisions are equal. In Meadows v. Dickey's Barbecue Restaurants, Inc., two groups of plaintiffs sued their franchisor claiming fraud and franchise law violations. All the agreements signed by both groups had provisions requiring all "disputes" to be submitted to binding arbitration. Dickey's moved to compel arbitration. The franchisees claimed they should not be bound by the arbitration provisions because, in their opinions, the agreements weren't valid.

The court looked at the franchise agreements and found they were not all the same: for the first group, the definition of what had to be submitted to arbitration included disputes about validity of the agreement itself; but for the second group, "validity of the agreement" was not listed in the definition of "disputes." As a result of the discrepancy, while Dickey's had the right to compel arbitration with the first group, much more analysis and argument was needed to reach the same conclusion for the second group.

In summary: if you want arbitration, make sure you have an arbitration provision in your franchise agreement that is complete and well drafted.

Read the Motion to Dismiss or Compel Arbitration: Jacobson v. Snap-on Tools Company et al, or an Order Granting Defendant's Motion to Compel Arbitration: Meadows et al v. Dickey's Barbecue Restaurants Inc.

 

FRANCHISEE 101:
Relying on Franchisor’s Profit Projections

Most experienced franchisors know better than to make claims about profits franchisees can expect when those claims do not match the information in the franchisor's Franchise Disclosure Document. However, if a franchisor or its representative does make a profit claim, can you rely on it?

In Fantastic Sams Salons Corp. v. PSTEVO, LLC, a franchisee claimed that, before he signed a Fantastic Sams Franchise Agreement, he was given promising financial documents in a private meeting with a company vice president and regional director. According to the franchisee, the documents showed that the salon would be profitable after just three months of operation. When the salon was not, in fact, profitable after three months, the franchisee sued Fantastic Sams for fraudulent misrepresentation.

However, as many franchisors do, Fantastic Sams required the franchisee to sign a disclaimer as a pre-condition to signing the franchise agreement. In that disclaimer was a statement that "NO ORAL, WRITTEN OR VISUAL CLAIM OR REPRESENTATION WHICH STATED OR SUGGESTED ANY SALES, INCOME, OR PROFIT LEVELS WAS MADE TO ME, EXCEPT:" Though several blank lines followed the statement, the franchisee wrote the word "None". The court found this disclaimer defeated the franchisee's claim of fraudulent misrepresentation, and dismissed his claim. Another court recently dismissed a franchisee's fraud claim when the disclaimer was just a provision in the franchise agreement itself. Moxie Venture LLC et al v. UPS Store, Inc.

Had the Fantastic Sams franchisee described representations on the blank lines of the disclaimer, the franchisor may not have moved forward to sign a franchise agreement. For some franchisors, one purpose of the disclaimer is to screen out franchisees having potential to make the kinds of allegations described above. So what should a franchisee do if a franchisor makes profit claims, yet requires signing a disclaimer, or a franchise agreement with a disclaimer? In some systems, the answer is to choose between walking away from a deal that may involve misrepresentations, or going forward based on projections that are not supported, and without being able to rely on the representations provided.

Click to read: Fantastic Sams Salons Corp., v. Pstevo, LLC and Jeremy Baker or, Moxie Venture LLC v. The UPS Store, 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 2016. 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.

 

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