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Tuesday
Aug302016

Franchise 101: Non-Compete Agreements & Projected Earnings

Franchise 101 News

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

 

August 2016

 

Franchise Lawyers

FRANCHISOR 101:
Non-Competes for Franchisees’ Employees

A "non-compete" provision limits the franchisee's ability, after the franchise agreement ends, to continue to work in a similar type of business to the franchise within a certain time period and geographic area. The purpose is to protect the franchise system for a time against a competitor who "knows the system from the inside." Non-compete provisions are often disfavored by courts. What about non-compete agreements for the employees of franchisees?

Until recently, Jimmy John's, a franchisor of sandwich shops, provided its franchisees with sample non-compete agreements for franchisees to use with their own employees, including order takers, sandwich makers, and delivery drivers. The agreements stated that, for two years after leaving employment, a former employee could not work at any business within a 2-mile radius of a Jimmy John's location if that business made more than 10 percent of its revenue from sandwiches.

However, last June Illinois Attorney General Lisa Madigan filed suit against Jimmy John's to stop this imposition of "unlawful" and "highly restrictive" non-compete agreements on its low-wage workers. Illinois requires that non-compete agreements be "premised on a legitimate business interest and narrowly tailored in terms of time, activity, and place." The complaint alleges the agreements lock these employees into their jobs and prevent them from seeking higher-paying jobs elsewhere, while giving their employers no reason to increase their wages or benefits.

Shortly thereafter, New York Attorney General Eric T. Schneiderman announced that his office reached a settlement with Jimmy John's regarding the agreements, stating that "Non-compete agreements for low-wage workers are unconscionable." Under the settlement, the franchisor will stop providing the sample agreements to its New York franchisees and will also inform those franchisees that the Attorney General considers such agreements unlawful and void.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

FRANCHISEE 101:
How Far Do Earnings Projections Go?

A franchisor is allowed to make "financial performance representations" in its disclosure documents. These figures may project how much money a franchisee is likely to make and can play a critical part in the franchisor's sales process. But if the numbers are way off, what kind of legal recovery can the franchisee get?

In Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc., a Legacy Academy ("Legacy") franchisee suffered losses during the first 3 years of operating its daycare franchise. The franchisee sued, claiming that Legacy had misrepresented the projected cash flow of its franchises in the Franchise Offering Circular they provided to the franchisee. At trial, the franchise owners showed that they paid $40,000 for the franchise and took out $200,000 in loans to cover start-up expenses before the daycare was operational. They also testified that they lost their life savings in order to keep the daycare operational while it lost money. The jury agreed and awarded the franchisee $390,000 in damages.

However, an appeals court found the franchise owners failed to present evidence of damages necessary to receive an award. The court explained that the owners certainly could not recover the difference between what their business made and what the Offering Circular projected because the figures given were only a projection - not a guarantee.

The owners may have been able to recover their costs to buy and start the business - the $40,000 franchise fee and $200,000 in loans - had they asked to "rescind" the franchise agreement: to be put back into the financial place they were before they signed the agreement. But instead, the owners asked for all of the damages they suffered as "consequences" that flowed as a result of the franchisor's misrepresentation. The court concluded that only the owners' ongoing losses due to operating the franchise qualified as such consequential damages. But testimony the franchise owners gave about those particular damages - the "loss of their life savings" - was so vague that a jury had to speculate what the fair recovery should be. Therefore, the appeals court reversed the jury verdict and found in favor of Legacy.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

 

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.

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.

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