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Entries in brewer litigation (4)

Friday
Jul282017

Franchise 101: Hilton's Manual Overload; and Pabst's Cold Brew Remedy

Franchise 101 News

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

 

JULY 2017

 

Franchise Lawyers

Barry Kurtz in Los Angeles Daily Journal

"Franchisors will need to adjust their methods when accounting for franchise fees either this year or next, depending on whether the system is publicly owned or not . . ." (Co-written with Christopher L. Passmore, CPA)

Read: New Accounting Rule May Lower Perceived Value of Franchisors

Tal Grinblat in Valley Lawyer

"An applicant that receives an objection claiming that the mark is confusingly similar to another party's trademark has several options..."

Read: Confusing Trademarks | The Next Course of Action

FRANCHISOR 101: Manual Overload

 

A franchisor's investment in brand standards, protection and control often comes at a cost when a consumer believing or claiming to believe the franchisor and franchisee are the same, seeks to hold a franchisor liable for a franchisee's conduct.

A New Jersey federal court has ruled that hotel franchisor Hilton Worldwide must answer for a guest's claim that a franchised Hilton hotel failed to stop over $80,000 in unauthorized charges by a disgruntled ex-employee. The ex-employee extended a 5-night stay on the corporate account by several months. The court found Hilton could be vicariously liable for the franchisee's oversight, based on control it exercised, and reserved, over the franchisee.

A staffing agency ("eTeam") authorized its employee to stay at the Hilton Garden Inn in San Francisco. The hotel had authorization from eTeam's headquarters to charge eTeam's corporate credit account for the employee's five-night stay. After five days passed, the employee remained at the hotel, charging eTeam's account, although she no longer worked for the company. The ex-employee's stay resulted in over $80,000 of unauthorized charges. eTeam sought the money back from Hilton even though it was Hilton's franchisee that ran the hotel and charged eTeam.

The court looked beyond the franchise agreement's disclaimer of an agency relationship and focused on the parties' course of conduct - finding that Hilton had control over the franchisee's personnel decisions, training of employees and day-to-day operations like room cleaning and food service.

Hilton's contractual right to control was also significant. The franchise agreement incorporated Hilton's operations manual. The manual included pre-approval for management hires, and even dictated china, glassware, silverware, and the exact type and number of coffee packets to place in each room. The court found that Hilton had direct control over reservation processing and payment at the franchisee's location. Finding Hilton's control over the franchisee's operations extended far beyond what is necessary to protect the Hilton brand, the court denied Hilton's request to be dismissed on summary judgment.

When a court is asked to find an agency relationship, a franchisor cannot rely on a disclaimer in the franchise agreement. The existence of an agency relationship is fact-specific.

Franchisors should consider this when reserving strong rights of control and incorporating operation manuals by reference into franchise agreements. The franchisor's appearance of unnecessary control over personnel, employee training, or franchisee policies can turn the franchisor-franchisee arrangement into a principal-agency relationship subjecting the franchisor to liability.

See: eTeam, Inc. v. Hilton Worldwide Holdings, Inc., D. N.J., 15,988

FRANCHISEE 101: Cold Brew Remedy

Beer Distribution

Beer distributors can be on common footing with their franchisee counterparts in bargaining with brewers or suppliers. Depending on the jurisdiction, distributors may have protection through beer distribution statutes patterned after relationship statutes adopted in many states to protect franchisees from their franchisors.

A Tacoma, Washington federal court has granted protection to distributors under the Washington Wholesale Supplier and Distributor Act (the "Act"), finding the Act does not authorize a beer supplier to terminate a distributor without cause, and finding that a terminated distributor is not limited to just the remedies in the Act.

Pabst Brewing Co. terminated its agreement with a distributor and arranged for someone else to service the former distributor's territories. The terminated distributor sued Pabst for its investment and lost profits, claiming the termination lacked cause and failure to give 60 days' written notice.

Pabst moved to dismiss, arguing that the Act's only remedy was compensation from the successor distributor for "laid-in cost of inventory" and "fair market value of the terminated distribution rights."

The court agreed with the terminated distributor, finding that both statutory and common law remedies can coexist. Thus, compensation to the terminated distributor did not have to come only from the successor distributor. The Act's purpose was not to create immunity for the supplier for its wrongdoing, or to pass off its liabilities to a successor. Pabst's motion to dismiss was denied.

See: Marine View Beverage, Inc. v. Pabst Brewing Co., LLC, W.D. Wash., 15,984

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.

Thursday
Apr302015

3rd Circuit Affirms Brewer Victory; Forum Selection Clause Trumps MN Franchise Act 

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

April 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, was featured as one of the best attorneys in franchising by the Franchise Times. The full list of honorees was published in the magazine's April edition.

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

Barry Kurtz & Bryan H. Clements' Article in Business Law News, a publication of the State Bar of California

"Many states now regulate the relationship between those who brew or import beer and those who receive, warehouse and distribute to retailers by way of special relationship statutes..."

Read: Traditional Franchise and Beer Distribution Relationships: A Legal Comparison

FRANCHISOR 101:
Time for a Tall One? 3rd Circuit Affirms MillerCoors' Victory in Dispute


Brewer Distributor Litigation 

A U.S Court of Appeals ruled in favor of MillerCoors finding the brewer did not violate its distribution agreement with a beer distributor or Pennsylvania's alcohol beverage laws when it (i) assigned distribution rights for its new craft beer brands to the distributor's competitors and (ii) conditioned the award of future brands on the distributor establishing a new entity devoted to MillerCoors products.

The distributor had exclusivity for specified MillerCoors' products in the Pittsburgh area. The Agreement gave MillerCoors the right to add new products to the exclusive distribution list and gave the distributor the right to sell other brewers' beer brands without MillerCoors' consent. The distributor exercised that right by selling Anheuser-Busch products for many years.

In 2012 and 2013, MillerCoors began marketing three new craft and specialty beers, Batch 19, Third Shift, and Redd's Apple Ale, and awarded distribution rights for these new brands to the distributor's competitors, prompting a lawsuit. The distributor claimed it was denied distribution rights to the new brands because it also sold Anheuser-Busch products; and claimed MillerCoors said it would have to create a new entity dedicated exclusively to MillerCoors to be considered for rights to distribute new MillerCoors products. The distributor sought a judgment saying MillerCoors could not make it a condition to getting other MillerCoors products, that the distributor not sell other brewers' products.

The Third Circuit affirmed a trial court decision that rejected the distributor's claim. The Third Circuit ruled that MillerCoors did not violate its contract or state law by having a selection process and exercising its contractual right to choose another distributor for its new brands. Though state beer distribution laws give protection to beer distributors, brewers can retain significant control over their brands through well-drafted contractual provisions.

See: Frank B. Fuhrer Wholesale Co. v. MillerCoors LLC.

 

FRANCHISEE 101:
Forum Selection Clause Valid Despite MN Franchise Act

A federal court in New Jersey upheld a franchise agreement's forum selection clause in favor of hotel franchisor Ramada Worldwide Inc. and denied a Minnesota hotel franchisee's motion to dismiss the complaint, or alternatively, transfer the case to Minnesota.

SB Hotel Management Inc. terminated its franchise agreement with Ramada for a hotel in Wisconsin. The franchise agreement had a clause saying any litigation would be in New Jersey. Ramada brought an action against SB in New Jersey federal court for breach of contract.

Ramada complained for outstanding fees and damages due to SB's early termination of the franchise agreement. SB argued that an addendum to the franchise agreement, which said that pursuant to the Minnesota Franchise Act nothing in the agreement could require SB to conduct litigation outside Minnesota, created a valid forum selection clause that required any litigation to be in Minnesota.

The Court rejected SB's interpretation. The Court found the agreement's forum selection provisions prohibited Ramada from requiring SB to waive its right to file suit in its home courts in Minnesota.

However, the court ruled, the Minnesota law and its regulations did not prevent a franchisor, like Ramada, from filing suit outside Minnesota, which is what Ramada did. The court also ruled the franchise agreement's forum selection clause was valid and that SB failed to show its witnesses would be unavailable or that litigation of the case in New Jersey would be so inconvenient as to deny SB its day in court.

The same facts could yield a different result in a different state, applying a different state's franchise laws. The case shows the importance of franchisees understanding forum selection clauses in their franchise agreements before signing or taking actions that might result in litigation.

 

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
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.

 

Friday
Feb212014

Franchisor Successfully Fends Off Fraud Claims

Franchise 101

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

February 2014

 

Kurtz Law Group Joins Lewitt Hackman Franchise Practice Group

 

On February 1, 2014, the Kurtz Law Group joined Lewitt Hackman. Known for their "Focus on Franchise Law," Barry Kurtz and his team have been one of the premier franchise law practices in California. Barry will chair the Franchise Practice Group, which now includes Barry, David Gurnick, Tal Grinblat, Candice Lee, Bryan Clements and two franchise law paralegals. Together, we have more than 85 years of experience representing franchisors, licensors, manufacturers, franchisees, licensees and distributors and are one of the largest, most experienced franchise law practice groups.

 

FRANCHISOR 101:
Franchisor Successfully Fends Off Fraud Claims

 

*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal SpecializationThere are circumstances when a fraud claim will not succeed against a franchisor. In Dunkin' Donuts Franchised Restaurants, LLC v. Claudia I, LLC, a franchisee alleged fraud by Dunkin' Donuts, but a US District Court in Pennsylvania rejected its hardest hitting claims.

Fast Food Franchises

A Dunkin' Donuts franchisee purchased a franchise and subleased a deteriorating store in Pennsylvania from Dunkin'. The franchisee's owners believed they were paying above-market rent, and the sublease also overstated the size of the premises, so they believed they were overpaying common area expenses. The donut store lost money, the franchisee asked Dunkin's consent to relocate, Dunkin' declined and the franchisee stopped paying rent. The franchisor terminated both the franchise agreement and sublease and obtained an injunction requiring the franchisee to leave the store. Then, after retaking possession of the store, Dunkin' moved the store to another location.

The franchisee claimed Dunkin misrepresented the store size and that it could renegotiate the sublease. The court ruled the franchisee could not prove fraud based on misrepresented square footage because the franchisee always suspected the stated square footage was wrong. Under the law, a person who believes a representation is false cannot claim to have relied on it and cannot prevail in a claim of fraud.

 The court also found that any statement by Dunkin' that the sublease could be renegotiated was also not actionable. A statement about what may happen in the future is not considered false, unless the speaker knowingly misstates his true state of mind. The court said renegotiation was a promise to do something in the future and noted that Dunkin' actually had offered the franchisee a new, more favorable sublease. Therefore any pre-agreement representations could not have been knowingly false.

The court ruled, however, that the franchisee might be able to show Dunkin breached an implied contractual duty to act in good faith and in a commercially reasonable manner since Dunkin' executives considered the store location to be bad, but had, nevertheless, sold the franchise and subleased the store to the franchisee and then, after taking back the store, relocated it itself, suggesting bad faith.

This case is a reminder to franchisors that appearances count. Here, refusing to consent to relocation, but then relocating a store after terminating the franchisee, gave the appearance of misconduct and was enough for the court to allow the franchisee's breach of contract claim to proceed. For franchisees, the case is a reminder that you cannot claim reliance and recover for fraud if you had doubts or were suspicious about what the franchisor told you, or if the claimed fraud was a franchisor's promise to do something in the future. To see the case, click Dunkin' Donuts v. Claudia I, LLC.

 

FRANCHISEE 101:
Brewer's Subsidiary Could Terminate Distributor

 

Craft Brew LawIn 2008, Heineken made an acquisition that included the Strongbow Hard Cider brand. Esber Beverage Company, founded in 1937, is one of the oldest, family-owned beverage wholesalers in Ohio, as well as the United States, and distributed Strongbow in Ohio. Until 2013, Strongbow was imported into the USA by an independent company, VHCC. In 2013 Heineken terminated VHCC and entered into an agreement with its own subsidiary, Heineken USA (HUSA), naming the subsidiary as its exclusive U.S. import agent for Strongbow Hard Cider.

Under Ohio law, when ownership of an alcoholic beverage brand changes, a new manufacturer is permitted to terminate any distributor without cause upon notice within 90 days of the acquisition, allowing the manufacturer to assemble its own team of distributors. The notice triggers a valuation of the franchise and the new manufacturer must compensate the terminated franchisee for the reduced value of the business that is related to the sale of the terminated brand, including the value of the assets used in selling the brand and the goodwill of the brand.

Heineken and HUSA terminated Esber and, after a trial court in Ohio ruled that only a new owner could terminate the franchise and that Heineken USA was not a new owner, Heineken appealed. In Heineken USA, Inc. v. Esber Beverage Co., the appellate court ruled that Heineken USA was a successor that could terminate the distributor.

The court found that following the 2008 acquisition, Strongbow was imported into the USA by VHCC and  VHCC supplied the Strongbow product to U.S. distributors, such as Esber. Heineken never owned any interest in VHCC. After Heineken terminated VHCC (and compensated VHCC as discussed above), Heineken no longer had an importer to supply Strongbow to U.S. distributors. It subsequently named HUSA as supplier of Strongbow, starting in January 2013. The appellate court ruled that VHCC had been the U.S. supplier of Strongbow, and VHCC, not Heineken, entered into contractual relationships with distributors, such as Esber. Once Heineken lawfully terminated its agreement with VHCC, Heineken acquired the right to decide who would import and supply Strongbow to distributors.

This decision indicates that in some states brewers may have additional flexibility to determine who will distribute their products domestically following an importer's acquisition of the brands. To see the case, click Heineken v. Esber.

 

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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