San Fernando Valley Los Angeles Attorneys
Navigation Two
Phone Number

Entries in automotive dealers (4)

Friday
Apr282017

Not Your Neighborhood Tesla Dealer; and Special Delivery

Franchise 101 News

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



April 2017

 

Franchise Lawyers

Capitol Times

The International Franchise Association will host its 50th Annual Legal Symposium in early May - Barry Kurtz, Tal Grinblat, David Gurnick and Matthew Soroky will all attend, representing Lewitt Hackman in Washington D.C. The conference brings together franchise owners, operators, executives and attorneys to discuss current laws and regulatory environments.

 

FRANCHISOR 101:
Not Your Neighborhood Tesla Dealer

Among the many differences between Tesla and traditional automakers, Tesla does not sell or service its electric cars through franchised dealers; it sells direct to consumers. Recent legal challenges to Tesla's direct-to-consumer sales model highlight an auto maker's hurdles in selling through its own subsidiaries.

The Utah Supreme Court upheld an agency ruling that Utah's Motor Vehicle Business Regulation Act (the "Licensing Act") and New Automobile Franchise Act (the "Franchise Act") combined to prohibit a Tesla subsidiary from selling new Teslas in Utah showrooms. The relationship between Tesla and its subsidiary was found to be a "franchise" under both statutes, and was barred by the Franchise Act's prohibition against subsidiary relationships.

At first, the subsidiary applied for a required new car dealer license to sell Tesla vehicles at a Salt Lake City showroom. Its application was denied for not having a "franchise" to sell the vehicles, as required by the Licensing Act. The subsidiary responded by entering into a "dealer agreement" with Tesla and reapplying for the dealer license.

The dealer agreement sought to create the required "franchise" relationship needed to satisfy the Licensing Act. Unfortunately for Tesla, the Franchise Act prohibits a franchisor from owning an interest in a new car dealer. Therefore, to avoid creating a "franchise" relationship of the kind that would be subject to the Franchise Act, the agreement prohibited the subsidiary from using the Tesla name.

The court noted the subsidiary was caught "between the rock of the Licensing Act and the hard place of the Franchise Act." Either it lacked the franchise with Tesla required by the Licensing Act, or it was a franchise in conflict with the Franchise Act's prohibition against owning an interest in a new car dealer.

A "franchise" under the Licensing Act is simply "a contract or agreement between a dealer and a manufacturer . . . by which the dealer is authorized to sell any specified make or makes of new motor vehicles." The court ruled that the subsidiary had such a contract.

The Franchise Act was more complex. The first element of a "franchise" is a "license to use a trade name, trademark, service mark, or related characteristic." This requirement was satisfied by the subsidiary's use of Tesla's trademarks. The dealer agreement's disclaimer of a franchise relationship could not be reconciled with the "reality of the relationship" between Tesla and its subsidiary. The second element of a franchise -- a "community of interest" in marketing new cars, was also present because Tesla and its subsidiary had a unity of interest in selling Teslas.

The court said it issued a "narrow, legal decision" that did not rule on "broad policy questions" about how cars should be sold. The Court stopped short of deciding whether Tesla itself was barred from obtaining its own dealer license. A car maker could presumably do so, but the practical and legal effects of Tesla selling direct to customers without the protection of using a subsidiary are likely to leave Tesla between the proverbial rock and hard place.

Read: Tesla Motors UT, Inc. v. Utah Tax Commission

FRANCHISEE 101:
Special Delivery

For a relationship to meet the legal definition of a "franchise" in some jurisdictions, the franchisor must give significant assistance to, or have significant control over, the franchisee's business. A franchisor's prescribed marketing plan can be enough to meet this requirement.

The "marketing plan" element is multifaceted and imprecise. A distributor's marketing plan may be based on a contract, course of dealing or industry customs. A marketing plan need not be mandatory. And a plan need not include traditional advertising or marketing. It is enough for a franchisor to give franchisees instructions or advice on operating techniques or skill training, so that independent franchisees appear to consumers as if they are centrally managed and follow uniform standards.

In Neubauer v. FedEx, a former delivery contractor claimed FedEx violated the North Dakota Franchise Investment Law (NDFIL) when it offered and sold him an unregistered franchise. A federal appeals court in St. Louis found an absence of any appearance of central management in this delivery context, and affirmed a lower court decision to dismiss the contractor's claim.

The court noted FedEx's business is direct-to-customer package delivery. The delivery contractor picked up and delivered packages, but did not claim a right to offer, sell or distribute services to individual customers.

The contract with FedEx said he was an independent contractor who provided transportation services to FedEx, and received payments from FedEx - not from customers - through a weekly settlement check. Noting that the NDFIL's definition of "marketing plan" was nearly identical to the definition in California's Franchise Investment Law, the Court cited a California decision in which a similar delivery contractor failed to prove the existence of a franchise relationship.

In the California case, because there was no allegation that the delivery contractor cultivated customer relationships, the court found the contractor did not offer and distribute goods and services to customers within the meaning of the franchise law.

The "marketing plan" element required to establish a franchise relationship may be satisfied in various ways. A delivery contractor that can allege sufficient encounters with individual customers has a better chance to establish the existence of a marketing plan, but should bear in mind each component of the marketing plan element and the subtle variations to assert a plausible franchise claim.

Read: Neubauer v. FedEx Corporation

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
Nov022016

Franchise 101: Protecting Ops Manuals; & Business Relationship Laws

Franchise 101 News

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

 

October 2016

 

Franchise Lawyers

On the way to the Forum

Barry Kurtz, David Gurnick, Tal Grinblat, Samuel C. Wolf and Gabriel A. Wintner will all attend the ABA's 39th annual Forum on Franchising in Miami next week. David will co-present the annual Judicial Update, providing a recap of key court decisions involving franchise litigation.

David Gurnick Selected

Congratulations to David Gurnick, one of only a handful of franchise attorneys to be named in the Los Angeles edition of Best Lawyers Magazine for 2017.

Barry Kurtz in Valley Lawyer

"...Clients need to be realistic about the costs of becoming a franchise..."

Click to read: How to Lead Your Clients to the Purchase of a Franchise

 

FRANCHISOR 101:
Original Content Needed to Protect Ops Manuals

 

An important part of the franchise system is the confidential operating manual. Many franchisors claim protection of operating manuals under the law of trade secrets and copyright.

Keeping the contents confidential is an important step in claiming trade secret rights. It is a good idea to include a confidentiality notice on the cover, near the front, and in a header or footer of each page, to keep track of each printed copy and restrict access to printed and online copies.

Copyright law protects original creative expression. A recent court decision demonstrated some limits of copyright protection. Civility Experts is in the business of teaching civility, etiquette and good manners, to children and others. It brought a lawsuit claiming contents of its manuals had been copied by Molly Manners, a Colorado company in the same business. The parties had previously settled a similar claim.

In the new lawsuit the court performed a meticulous comparison of the two companies' manuals, finding numerous places where Molly Manners copied from Civility Experts. But in every instance, the court ruled the copied material was so basic, or was the only way of saying something, that the original content that had been copied, was not protectable under copyright law. The court found copying but still rejected Civility Experts' claim.

In the earlier litigation Molly Manners had entered into a settlement agreement, promising not to copy Civility Experts material. Based on the earlier agreement, the court said Civility Experts might have a claim for breach of contract. In view of this potential claim, the later dispute was also settled.

The Civility Experts case presents a valuable lesson for franchisors. Try to develop creative, original content in the operating manual, instruction manuals and other materials, so that these will be protectable under copyright law as well as trade secret law.

One further caveat. To register a copyright, a work must be filed with the U.S. Copyright Office. That makes the work public, which prevents trade secret protection. To protect a confidential manual, it is essential to use the Copyright Office's special handling procedure, which allows the applicant to file and obtain a registration, while preserving the claim of confidentiality and trade secrecy for a manual.

Civility Experts Worldwide v. Molly Manners, LLC, 167 F.Supp.3d 1179 (D. Col. Mar. 7, 2016)

 

FRANCHISEE 101:
Is It a Franchise? Yes and No

A federal court in Indiana made an interesting decision on whether a business relationship was a franchise. Wabash National Corp. is a famous maker of semitrailers. Wabash notified a dealer in Texas that its dealership was going to be terminated. The dealer sued in Indiana where Wabash is based, claiming protection under Indiana's Franchise Investment Act, which requires a franchisor to have good cause to terminate a franchisee, and under Indiana's motor vehicle franchise law, which prohibits unfair practices.

The two Indiana statutes define "franchise" differently. Under the motor vehicle statute, a relationship is a franchise if the manufacturer and dealer have a "community of interest." The court ruled there was a community of interest because the dealer had a large investment in and a large portion of its revenues came from selling Wabash semitrailers. The court allowed the dealer's claim under the motor vehicle statute to proceed. But the Indiana Franchise Act defines a franchise as a relationship involving a marketing plan, brand name and franchise fee. Because the Dealer Agreement said the dealer controls its business and decision making, the court ruled there was no marketing plan provided by Wabash, and therefore no "franchise" under the Act. So this part of the lawsuit was dismissed.

It is often said that the law can be counterintuitive. The Wabash case is an example, because the dealer was found to be a franchisee under one state law, and not a franchisee under a different law. This case shows the importance of understanding how franchise and dealer relationships align with the specific laws that apply in a particular state.

Ervin Equipment, Inc. v. Wabash National Corp. No. 4:15-CV-104-PPS-PRC, 2016 WL 2892132 (N.D. Ind. May 17, 2016).

 

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.

Friday
Apr292016

Joint Employer Liability: Wins, Losses, Lessons; and Understanding Merger/Integration Clauses

Franchise 101 News

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

April 2016

 

Franchise Lawyers

FRANCHISOR 101:
Wins, Losses & Lessons in Joint Employer Liability

As joint employer liability continues to develop, plaintiffs seeking deep pockets continue to claim, with some success, that franchisors are joint employers, responsible for actions of their franchisees' employees. In April, a jury found Domino's Pizza (DP) liable for $10.1 million for a delivery driver's car accident that caused a man's death.

In the accident a franchisee's employee drove in front of an oncoming truck. The truck swerved, crashing into a median to avoid the DP driver. The truck driver was left quadriplegic and later died. The jury found that the delivery driver caused the accident, and that DP controlled the franchisee's operation enough to be liable. DP's attorney argued that DP did not control hiring or firing of the franchisee's employees.

But the plaintiff's attorney focused on overall control by DP, noting that it extended even to particular conduct of delivery drivers, like requiring them not to use radar detectors or carry more than $20 cash. The attorney persuaded the jury that the franchise agreement's description of the franchisee as an "independent contractor" was just an effort by DP to avoid this kind of liability, and did not describe the actual relationship, in which the franchisee was actually DP's agent.

Click to read: Wiederhold v. Domino’s Pizza, 2-11-CA-001589

By contrast, when an employee of a landscape service franchise sued the franchisee and franchisor for discrimination, harassment, and retaliation, the court found that the franchisor was not her employer and could not be liable. The court explained that the franchisor, Mountain View Lawn Care, did not exert control over the plaintiff's employment, since the franchisor did not:

1. Have the ability to hire or fire the plaintiff;
2. Supervise or discipline the plaintiff;
3. Provide the equipment or uniform used by the plaintiff;
4. Possess employment records for the plaintiff;
5. Train the plaintiff or any of the franchisee's employees;
6. Employ anyone with similar duties to the plaintiff's;
7. Receive the sole benefit of the plaintiff's work;
8. Do anything to show that it intended to be the plaintiff's employer.

Click: Wright v. Mountain View Lawn Care, LLC

Juries are less predictable, as shown by the Domino's Pizza case, but a franchisor can improve its prospects of avoiding joint employer liability by following the factors outlined in Mountain View.

FRANCHISEE 101:
Understanding Merger/Integration Clauses

Before a final agreement is signed there are often oral discussions, negotiations, and representations. There may be written memorandums of understanding or letters of intent. But, when the final agreement has a "merger" or "integration" clause, in many states it is as if anything that came before never happened.

After various disputes between Chrysler Group and its distributor in Greece, the parties entered into a settlement agreement. The agreement said the distributor would now sell only Chrysler's "Lancia" branded vehicles. Before they signed the agreement, Chrysler represented to the distributor that it planned to expand the Lancia line over the next few years. When that expansion didn't happen, the distributor sued Chrysler for fraud.

The settlement agreement did not mention expansion of the Lancia line but did have a "merger/integration clause." That clause said the agreement superseded all other agreements between the parties. As a result, regardless of any representations allegedly made by Chrysler, the court denied the distributor's claim.

A merger clause may resemble the following:

Entire Understanding: This Agreement contains all of the terms and conditions agreed on by the parties with reference to its subject matter. This Agreement supersedes and replaces all prior agreements, arrangements, negotiations, representations and understandings among the parties, whether written or oral, concerning its subject matter.

An agreement with a clause like this will be the last, and only, word on the subject in those states that give force to these clauses. Before signing an agreement that contains such a clause, be certain that the agreement also contains every part of the final deal as you understand it.

Details: Lancia Jeep Hellas S.A. v. Chrysler Group Int'l LLC, Mich. Ct. App.

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
Jul302015

Contractual Disclaimers & Distributor/Licensees as Franchisees

Franchise 101 News

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

July 2015

 

Top Attorneys in Southern California

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

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

Most Trusted Advisors

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

Barry Kurtz & Bryan Clements published in Valley Lawyer

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

FRANCHISOR 101:
Contractual Disclaimers Save the Day

 

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

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

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

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

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

 

FRANCHISEE 101:
Hawaiian Distributor May Be a Franchisee

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

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

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

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

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

Read the entire decision: Cycle City, Ltd. v. Harley-Davidson Motor Co., Inc.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2015. All Rights Reserved.

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120