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Entries in convenience store franchise (4)

Tuesday
May232017

Franchise 101: State Taxes on Franchise Fees; and Breach of Contract Claims

Franchise 101 News

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

 

May 2017

 

Franchise Lawyers

New Rules re Financial Performance Representations

Tal Grinblat, a member of the Executive Committee of the Business Law Section of the State Bar of California, co-wrote a notice distributed to state bar members regarding new guidelines franchisors must follow when using financial performance representations (FPRs). The new guidelines impact all franchisors in the U.S. and its territories. The e-bulletin alerts those in the industry about the North American Securities Administrators Association's (NASAA) adoption of financial performance guidelines which require a number of new disclosures and a certain admonition. The guidelines also set requirements for franchisors using "averages" or "medians" in their FPRs.

Read the e-Bulletin: NASAA Issues New Commentary on Financial Performance Representations in Franchise Disclosure Documents


FRANCHISOR 101:
State Taxes on Franchise Fees

Franchisors collect weekly or monthly "franchise fees." In many cases, fees are for particular services, such as marketing assistance or IT support. In franchising, the parties may be in any number of different states: for example, a franchisor may be headquartered in California, provide IT support from Texas to a franchisee in Florida, and receive payments at an office in Washington. Which states may tax the franchisor on franchise fees, and in what proportion?

In Upper Moreland Township. v. 7-Eleven, the convenience store franchisor provided advertising services (store signage development) and information technology services to franchisees. Advertising services were provided from Texas. Information technology services were provided from Massachusetts. Franchisees in Pennsylvania and New England sent their payments to a 7-Eleven regional office in a Pennsylvania town where 7-Eleven also had one corporate store and one franchisee-owned store.

The town imposed "Business Privilege Taxes" (BPTs) at a rate of 3.5 mills on gross receipts of "[e]very person engaging in a business ... in the Township." 7-Eleven paid the tax on activities of its corporate store in the town, but not on fees collected at that office from franchisees. After an audit, the town assessed 7-Eleven over a million dollars for unpaid BPTs, interest, and penalties.

7-Eleven challenged the constitutionality of the assessment. A Pennsylvania court relied on a 1970s- era U.S. Supreme Court decision, Complete Auto Transit, Inc. v. Brady (1977), to determine if a local tax on interstate commerce is constitutionally permissible. To be "fairly apportioned," as Brady requires, the local tax must be "externally consistent." To be externally consistent, a tax must apply to "only that 'portion of the revenues from the interstate activity which reasonably reflects the instate component of the activity being taxed.'" A tax does not meet this standard if the amount of income taxed is "disproportionate to the business transacted by the taxpayer in that municipality."

Applying the Brady rule, the Pennsylvania court found the town's assessment was unconstitutional because it was not fairly apportioned to reflect the location of the various interstate activities that generated the 7-Eleven service charges. 7-Eleven just received payments in the town, but the rest of the activities occurred elsewhere. The court remanded the case to the town for a "constitutional recalculation of the assessment."

A franchisor may consider using constitutional limits on local tax powers to protest some municipal taxes. It may also be useful to identify as many components of its interstate commerce activity as it can in locales with lower tax rates.

Read: Upper Moreland Twp. v. 7 Eleven, Inc. 144 CD 2016, before the Pennsylvania Commonwealth Court


FRANCHISEE 101:
Contract Curveballs

In every Franchise Agreement, the franchisor and franchisee promise to fulfill obligations to the other. For some promises, whether or not they were performed can be a clear "yes" or "no." For example: either a franchisee paid the royalty to the franchisor on the specified date of the month, or it did not - there is usually no third option. However, other obligations - such as a franchisor's promise to provide the franchisee with "support" - may be vague. How much assistance and what kind of help a Franchisor must provide may not be clear. These are judgment calls that may ultimately be presented to a jury as questions to decide at trial.

In Anne Armstrong v. Curves International, Inc., franchisees owning 83 locations sued Curves International, the franchisor of 30-minute women's gyms, after suffering losses in their Curves businesses. The franchisees claimed their losses were due to Curves not giving them support promised in their franchise agreements. The agreements said Curves would "make available certain services," followed by a list of services that "may" be included, such as opening assistance, pre-opening training, periodic reviews of franchisee operations, periodic training, ongoing support, and advertising data and advice. The franchisees claimed they generally did not receive any of the promised assistance.

As evidence of their losses, the franchisees provided tax returns, and a statement by Curves' founder that Curves felt "a reasonable return on the franchise was probably $30,000 a year," though no level of profit was guaranteed by the agreements.

Curves moved to dismiss the claims, arguing that the agreements stated only that Curves "may" provide the listed services. Curves also argued that clauses allowing it to exercise "business judgment" gave it "unquestionable discretion" regarding support it provided, as long as its decisions were intended to or could benefit the entire Curves system. Curves presented evidence that it provided franchisees with local marketing materials, and informed franchisees of other advertising initiatives Curves was pursuing.

A jury found that Curves breached its contracts, and awarded the franchisees more than $1.5 million. This included individual plaintiff awards ranging from $0 to $143,928. Counsel for the franchisees stated that the franchisees were pleased with the award, which they calculated to have compensated them for approximately 80 percent of their losses. Curves stated that it strongly disagreed with the decision and plans to file post-trial motions and potentially appeal the verdict.

Had Curves been able to point to text in the agreements literally stating it had no obligation to provide certain services, or that it actually had "unquestionable discretion" to decide what support to provide to franchisees, the outcome may have been different. As it was, the jury had to decide if franchisees received the reasonable support they paid for.

Read: Armstrong v. Curves International, Inc. - 6:15-cv-00294-SDD, Order on Motion for Summary Judgment, in the United States District Court for the Western District of Texas

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.

Tuesday
Mar292016

Protecting Interests in Preliminary Injunctions; & The Purposes and Limits of Non-Compete Clauses

Franchise 101 News

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

 

March 2016

 

Franchise Lawyers

Tal Grinblat in Valley Lawyer

The ever-pervasive Happy Birthday to You - sung by waiters in corporate restaurants around the world to embarrassed celebrants and diners - may now reside in the public domain..."

Click to read: Music Publisher Caught in Birthday Suit, Agrees to Settle by Tal Grinblat and Nicholas Kanter

 

FRANCHISOR 101:
Protecting Interests in Preliminary Injunctions

 

A franchisor in a termination dispute with a franchisee may request a preliminary injunction to force the franchisee to immediately stop operating the franchised business and using the franchisor's trademarks and intellectual property. A court will grant a preliminary injunction when the party asking for it can show that it is likely to succeed on the claim and that, without an injunction, the party will suffer irreparable harm. Recently some franchisors have had difficulty obtaining preliminary injunctions. Courts have clarified when they will and will not grant injunctions in a franchise context.

In 7-Eleven, Inc. v. Sodhi, 7-Eleven issued termination notices to a franchisee because the net worth of five of his locations fell below amounts required by the franchise agreements. The franchisee disputed that he breached the franchise agreements, so he continued to operate despite receiving the notices. 7-Eleven sued the franchisee for trademark infringement and asked the court for a preliminary injunction.

The court found that several factors calling for an injunction were satisfied, including a likelihood that 7-Eleven would succeed in its claim. However, it also found that 7-Eleven did not prove exactly what irreparable harm it would suffer to its reputation or property from temporary continuation of the stores' operation. 7-Eleven submitted evidence of customer complaints on lack of cleanliness. But the court found those insufficient to show harm to reputation, in part because 7-Eleven received them before the franchisee's breach. The complaints did not prove the franchisee's continued operation was causing new harm to 7-Eleven's reputation that hadn't already occurred. The court declined the injunction.

In Intelligent Office System, LLC v. Virtualink Canada, Ltd., Intelligent Office System (IOS) entered into a Master License Agreement (MLA) with Virtualink Canada, Ltd. (Virtualink). The agreement granted Virtualink the exclusive right to license IOS's trademarks and business concept (for "virtual offices") to subfranchisees in Canada. In March 2013, IOS sent Virtualink a notice of defaults that Virtualink committed, including not meeting sales and opening goals and not providing reports and tax returns. IOS claimed Virtualink continued committing defaults, until IOS sent Virtualink a termination notice in October 2015. IOS filed suit in December 2015 and shortly after sought a preliminary injunction to shut Virtualink down.

The Colorado court noted that the purpose of a preliminary injunction is to maintain the positions of the parties until a trial could be held. So any preliminary injunction that would change the parties' positions would be disfavored and scrutinized carefully. The court reasoned that forcing Virtualink to stop the business it had run would change the parties' positions that existed in which Virtualink had been the "Master Licensee" for Canada. In declining to grant an injunction the court explained that IOS failed to show that it would be irreparably harmed without an injunction, since for years Virtualink had committed the defaults IOS claimed it wanted to stop, yet IOS allowed them to continue.

Both IOS and 7-Eleven show that a franchisor must act quickly and show urgency in response to franchisee defaults or courts may be unsympathetic when an injunction is requested. This can result in a franchisee receiving a notice of termination and yet continuing to operate the franchised business, possibly for years to come.

Click to read: 7-Eleven, Inc. v. Karamjeet Sodhi or Intelligent Office System, LLC v. Virtualink Canada, Ltd. 

FRANCHISEE 101:
Purposes and Limits of Non-Compete Clauses

Many franchise agreements have "non-compete clauses", which state that after termination or expiration of the franchise agreement, the ex-franchisee may not operate a business that is similar to or that would compete with the franchised business. These clauses apply for a stated time and cover a stated geography. In some jurisdictions, such as California, non-compete clauses are not enforceable. In other jurisdictions where these clauses can possibly be enforced, courts also decline to enforce them in some circumstances.

In AAMCO Transmissions, Inc. v. Romano, Robert and Linda Romano sold their AAMCO franchise in Florida and terminated their AAMCO franchise agreement. Then they opened a new transmission repair shop over 90 miles away from their old location. The Romanos' franchise agreement had a non-compete clause barring them, for two years, from opening a competing business within 10 miles of any AAMCO location. The Romanos' new location was only 1.4 miles from an AAMCO business. Despite this, a court refused to enforce the non-compete provision. The court ruled that the provision was too broad in its geographic scope, and limited enforcement to 10 miles from the franchisees' former location, and 10 miles from any other AAMCO location within the county in Florida where the franchise had been located.

In MEDIchair LP v. DME Medequip Inc., MEDIchair franchise businesses sold and leased medical equipment to be used at home. The MEDIchair franchisor also owned and operated similar businesses, but under the name "Motion Specialties." A MEDIchair franchisee in Ontario, Canada discovered it was competing with a nearby Motion Specialties store serving the same area. When the franchisee's franchise agreement ended, it de-identified its store as a MEDIchair franchise, and operated a similar business in the same location, with the same employees selling the same or similar products. MEDIchair then sued the franchisee to enforce the non-compete clause in the franchise agreement. That clause prohibited the franchisee from operating a competing business within 30 miles of the franchised location or any other MEDIchair franchise for 18 months after expiration of the agreement.

The Ontario court noted that, to be enforceable, a non-compete clause must serve a legitimate business interest of the franchisor - namely, to protect the franchise system. In this case, the evidence suggested the franchisor did not seek a replacement franchisee for the vacated location, since the territory was already served by its own Motion Specialties location. MEDIchair's actions showed that it had no interest in protecting the interests of its franchise system in Ontario. Therefore, the court refused to enforce the non-compete clause against the former franchisee in that territory.

AAMCO and MEDIchair show that even in jurisdictions where non-competes can be enforced, courts may narrowly construe the franchisor's legitimate business interests that may be protected by a non-compete clause. A court may find, as in AAMCO, that the non-compete only protects the franchisor's interests in the particular franchised location sold. Or, as in MEDIchair, a court may conclude that the franchisor has no business interest to protect - or, that the interest it seeks to protect is not "legitimate."

Read: AAMCO v. Robert V. Romano and Linda Romano, and MEDIchair LLP v. DME Medequip 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
May282015

Freshii Not Joint Employer; 7-Eleven to Disclose Metadata

Franchise 101 News

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

May 2015

 

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

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic is entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others. The event takes place in October.

Tal Grinblat published in Business Law News Annual Review

Tal Grinblat co-authored an article highlighting recent case law regarding franchising and legislation passed affecting both franchisors and franchisees in California. The article appeared in the State Bar of California's Business Law News, which publishes an update every spring. Click: Selected Developments in Franchise Law to read the article.

Are You Ready?

Upcoming state and federal laws go into effect soon. Click the links for more information:

 

FRANCHISOR 101: Freshii Not Joint Employer 


Joint Employer Liability

The National Labor Relations Board ("NLRB") recently published a memo finding that Canadian fast-casual restaurant franchisor Freshii is not a joint employer of its franchisee's employees. The ruling concerns unfair labor claims made by an employee against a Chicago franchisee.

The ruling is important in light of another initiative at the NLRB, claiming McDonald's Corporation is a joint employer of franchisees' employees at many McDonald's locations.

In the Freshii case, a franchise owner fired employees who tried to organize a union. A regional NLRB branch requested advice from NLRB's general counsel whether to treat the franchisor as a joint employer, rendering the franchisor potentially responsible with the franchisee if the firings were found unlawful.

Under Freshii's franchise agreement, system standards do not include personnel policies or procedures. Even if Freshii shared policies with franchisees, each franchisee decided if it wished to use the policies in its own restaurant. The franchisees were solely responsible for setting wages, raises and benefits for employees. Freshii provided its franchisees with a sample employee handbook, but did not require the franchisees to use it. Potential candidates could apply for jobs with franchisees through the franchisor's website, but Freshii did not screen resumes or do anything more than forward them to its franchisees. Franchisees made their own hiring decisions. Freshii only passively monitored sales and costs, and the franchisor and any software it provided were not involved in scheduling workers.

In a key finding, NLRB's General Counsel noted Freshii stayed silent after the franchisee sought advice on how to resolve the union issue. After the union started to organize at the franchisee's restaurant, the franchise owner informed Freshii's development agent, but neither the franchisor nor the development agent advised the franchisee on how to respond.

Under the NLRB's current standard, joint employer status over franchisees' employees may exist if a franchisor "meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction." Freshii was found not to have a meaningful impact over the franchisee's hiring, compensation, scheduling, discipline, or ongoing supervision.

A broader standard proposed in several cases against McDonald's indicates the NLRB may look at "totality of the circumstances," including how the separate entities structure their commercial relationship, to decide if a franchisor influences working conditions of a franchisee's employees to the extent that collective bargaining cannot occur without the franchisor's involvement.

This so-called "industrial realities" test does not distinguish between direct, indirect, or potential control over franchisees' working conditions. Its broader scope would make more companies joint employers. In the Freshii case, the NLRB Memo said that even under the broader standard, there was no "joint employer: "Freshii does not directly or indirectly control or otherwise restrict the employees' core terms and conditions of employment." Therefore "meaningful collective bargaining could occur in Freshii's absence."

The NLRB's Freshii memo is good news for franchisors and provides guidance on steps franchisors can take to reduce the risk of being deemed a "joint employer" whether for matters concerning labor practices, or other vicarious liability matters.

To read the entire NLRB memo, click: Advice Memorandum re Nutritionality, Inc. d/b/a Freshii.

 

FRANCHISEE 101: 7-Eleven Ordered to Disclose Metadata

 

Litigation and Metadata

A federal court has ordered 7-Eleven to disclose its metadata in three franchisees' claims that they were targeted for termination for financial, political and racially discriminatory reasons. Metadata is deep down "data about data" in computer files. It is created when documents are created, collected and processed to be produced in discovery.

The franchisees sought metadata of documents 7-Eleven filed in litigation, including dates of creation, authors, custodians, dates of each modification, author of each modification, and data showing who documents were electronically sent to. The Court found the franchisees showed that many paper documents exchanged in discovery were missing source, date, and other key background. The Court rejected 7-Eleven's claim of hardship or undue expense to produce the metadata.

Read the Opinion and Order: Younes v. 7-Eleven, Inc. (D.N.J. 2015) 2015 WL 1268313.

 

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.

 

 

 

 

 

Tuesday
Apr222014

False Financial Representation Slams Franchisor

Franchise 101

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

April 2014

 

Craft Brewers Conference 2014

 

Barry Kurtz and Bryan H. Clements were invited to speak at the annual Craft Brewers Conference and BrewExpo America, the largest brewer's trade show in the country. The three day event was held in Denver. Lewitt Hackman represents craft brewers in distribution and related transactions. Barry and Bryan's presentation focused on the federal three-tier system of beer distribution law, and its similarities and contrasts with franchise and distribution law.

 

*Certified Specialist in Franchise & Distribution Law as designated by the State Bar of California Board of Legal Specialization

David Gurnick in Valley Lawyer Re Non-Compete Clauses

 

Generally, California Courts will not enforce a restrictive covenant. But there are several circumstances in which such covenants can be enforced. Read, Enforcement of Non-Compete Clauses in California by David Gurnick for details.

 

FRANCHISOR 101:
False Financial Representation Slams Franchisor

 

In Rogers Hospitality, LLC v. Choice Hotels International, Inc., a panel of arbitrators found that the franchisor of Choice Hotels violated Minnesota franchise laws by making false financial performance representations to its franchisee.

Hotel FranchiseThe franchisee proved that in a 2008 investor conference, the franchisor's Director endorsed financial projections for a potential Sleep-Inn and Suites Hotel in Minnesota. The projections were adopted into a pro-forma that identified average daily rates the hotel could expect.

At the conference, Choice Hotels' Director claimed the pro forma numbers were "attainable, conservative, and/or spot-on." The statements were made outside Item 19 of the Franchise Disclosure Document. Therefore they were unlawful.

The arbitration panel also found the information was false because only 2.3% of Choice's Sleep-Inn and Suite hotels achieved such performance, and Choice's Director failed to disclose this low percentage. The arbitrators concluded that some of the franchisee's representatives at the conference relied on the statements in electing to purchase the franchise. Accordingly, the panel ruled against Choice Hotels and in favor of the franchisee.

For franchisors, the Choice Hotels case is a reminder of the importance not to give financial performance information to franchisees or endorse pro formas prepared by franchisees, if not included in the Franchise Disclosure Document, Item 19.

This case should also remind franchisees to tread carefully when given earnings information outside Item 19. The information may be inaccurate, false or misleading.

 

FRANCHISEE 101:
Terminated Franchisee Can Pursue Fraudulent Disclosure Claims

 

In Solanki v. 7-Eleven, Inc., a U. S. District Court in New York ruled that a terminated 7-Eleven franchisee who decided to purchase a third location before receiving the Franchise Disclosure Document (FDD) could proceed with claims that 7-Eleven made false presale revenue and earnings claims in violation of the New York Franchise Sales Act.

The franchisee owned two 7-Elevens and contacted the franchisor to buy a third. At that time, he received the New York version of the 7-Eleven FDD, which contained unaudited financial statements showing averages of actual sales, earnings, and other financial performance of franchised 7-Eleven stores.

7-11 Franchise LitigationIn a deposition, the franchisee testified he decided to buy the third store before receiving the FDD. Later, he explained that he committed to the purchase only after seeing the FDD.

Prior to signing the franchise agreement, he provided a business plan to 7-Eleven for approval. When he was approved, he was told the projections in his business plan were consistent and in line with 7-Eleven's estimates.

However, 7-Eleven never provided its revenue projections for the store he purchased. In the first year of operation, the store never achieved the sales projected in the business plan. Later he was unable to make payroll. At the franchisee's request, 7-Eleven terminated the Agreement.

The franchisee brought an action claiming 7-Eleven's representation that the revenue projections in his business plan "were consistent with and in line with 7-Eleven's estimates" violated New York's Franchise Sales Act because:

 

  • 7-Eleven's revenue estimates and their basis were not in the FDD, as required by the Franchise Sales Act, and

  • 7-Eleven's earnings estimates were false, misleading and lacked any reasonable basis.

 

Though the franchisee testified he decided to purchase a third franchise before receiving the FDD, the court rejected 7-Eleven's defense. The court explained that making up one's mind to buy a particular store and committing to go through with the purchase based on information received from 7-Eleven were two different actions. The court also held that any disclaimers reviewed, acknowledged, or agreed to by the franchisee in the franchise agreement could not bar his claims.

For franchisees the 7-Eleven case shows that claims for damages and fraud against franchisors can be won, even though it is not clear how much a franchisee relied on an FDD when deciding to purchase the franchise and even though a franchise agreement contains customary disclaimers.

For more information regarding this case, click Jimmy Solanki v. 7-Eleven, 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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