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Wednesday
Feb282018

Franchise 101: Finger Lickin' Restrictions; and Til Expiration Do Us Part

 

Franchise 101 News

Southern California Tier 3 Best Lawyers in Franchise Law 2018bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

FEBRUARY 2018

 

Franchise Distribution Attorneys

IFA 2018 Convention

Barry Kurtz, Tal Grinblat and Matthew J. Soroky all attended the 2018 International Franchise Association's annual convention in Phoenix earlier this month. The convention is geared to further expanding the franchise industry through educational and networking opportunities for legal and business professionals.

David Gurnick inValley Lawyer

David Gurnick reviewed "Legal Ethics and Social Media: A Practitioner's Handbook" for the San Fernando Valley Bar Association's Valley Lawyer Magazine. The tome addresses "the clash between the lawyer's quest for professionalism and the public's freedom of speech..." among other issues lawyers face when using social platforms. Read the review here: Legal Ethics and Social Media: A Practitioner’s Handbook

 

FRANCHISOR 101:
Finger Lickin’ Restrictions

Chicken Franchisee MarketingFranchise agreements give franchisors nearly absolute, unfettered discretion to control advertising of their brands. Franchisors need not regard prior course of dealings with franchisees. An Illinois federal court dismissed a franchisee's claim that KFC (known to many by its former name, Kentucky Fried Chicken) should not force the franchisee to stop advertising halal chicken at his franchised KFC locations simply because KFC in the past permitted, and assisted, in accommodating the franchisee's religious practice. The court found KFC's franchise agreement gave it express power to change advertising policies.

After opening his first franchise in 2002, the franchisee's local marketing campaign emphasized that his restaurant's chicken was halal-processed according to Islamic law. The strategy was so lucrative, the franchisee opened five more KFCs near mosques and Muslim communities.

For 14 years, KFC allowed the franchisee to market halal chicken. KFC allegedly helped the franchisee identify halal-certified processors and distributors. But then KFC revoked consent due to a new policy against franchisees making religious dietary claims. KFC became concerned about varying religious standards and compliance difficulties.

The plaintiff alleged that KFC's prohibition on advertising dietary claims contradicted KFC's earlier representations. But the court's decision rested on the franchise agreements. The court observed that "failure, forbearance, neglect or delay of any kind or extent on the part of KFC" in enforcing and exercising its rights would not "affect or diminish KFC's right to strictly enforce" the agreements. Given the franchisor's unambiguous contractual right to control franchisee advertising, and the agreements' integration clauses, the court would not consider evidence of KFC's previous actions. The court also dismissed the franchisee's promissory estoppel claim because Kentucky law, which governed, does not allow such claims when the parties have a contract.

The court dismissed KFC's counterclaim for attorney fees because the franchise agreement allowed KFC to recover attorney fees only for suits it initiated and won, rather than suits started by the franchisee. The court interpreted the attorney fee clause narrowly, and concluded that KFC did not start the action; rather the franchisee did in filing his original complaint.

When drafting fee shifting provisions in franchise agreements, franchisors should give serious thought to what kinds of disputes are likely to arise for which attorney fee recovery would be a benefit or hazard, before using boilerplate attorney fee clauses (whether narrow or broad). Specific wording of these provisions can impact their application in a dispute.

Lokhandwala v. KFC Corporation, 2018 WL 509959 (N.D.Ill., 2018)

FRANCHISEE 101:
Til Expiration Do Us Part

 Non-Signatory Operators Must Honor Franchise Agreements
Though an individual owner and operator of a formerly franchised Church's Chicken restaurant in Texas was not a signer of the franchise agreement, a district court ruled the individual was subject to the agreement's post-termination provisions. The ruling was based on assumption and equitable estoppel. The operator was enjoined from further use of the franchisor's trademarks or any confusingly similar marks; from breaching the agreement's non-competition provisions; and from taking actions violating the agreement's post-expiration obligations. The court found the franchisor was likely to succeed on the merits for breach of the franchise agreement and trademark infringement against the restaurant operator.

Shortly after a third-party franchisee entered into the franchise agreement, the franchisee sold the restaurant to the operator without notice to the franchisor. The operator performed under the agreement for the entire ten-year term as if he was an authorized franchisee. When the agreement expired, the operator re-branded the restaurant as a competing quick-service restaurant specializing in the sale of fried chicken using a logo, marks and other décor similar to those used at the former Church's Chicken restaurant. The franchisor demanded that the operator cease and desist and upon the operator's refusal, the franchisor filed suit.

Assumption and equitable estoppel applied to prevent the operator from having it both ways. After ten years of performing and enjoying the benefits of the agreement, he could not repudiate the post-expiration obligations in the same agreement. The court enjoined the operator's infringement and unlawful competition based on finding the operator's continued operation was causing the franchisor irreparable injury.

Non-signatory operators who operate under and benefit from a franchise agreement for a long period should understand they cannot avoid post-term obligations simply because they did not sign the agreement. The non-signatory faces risk of being subject to the same injunction order as would an ordinary franchisee who signed the contract with the franchisor.

Cajun Global LLC v. Swati Enterprises, Inc., N.D. Ga., 16,118

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 2018. All Rights Reserved.

Tuesday
Oct282014

Venue and Choice of Law Provisions Not Enforceable in California

Franchise 101

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

October 2014

 

American Bar Association Franchise Legal Seminar

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

David Gurnick Named one of the Best Lawyers in America 2015

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

Los Angeles Franchise Panel Discussion

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

California Bar Business Law Leadership Conference

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

Barry Kurtz published in The Los Angeles Business Journal

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

 

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


Attorney for Franchising 

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

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

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

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

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

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

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

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

FRANCHISEE 101:
Illusory Arbitration Provisions Not Enforceable in Indiana


Franchise Lawyer

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

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

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

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

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

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

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

 

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

 

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