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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.

Friday
Feb022018

Franchise 101: Copycat Restaurant Shutdown; and Out of Time, Out of Gas

Franchise 101 News

Best Law Firms Southern California Badge 2018bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



JANUARY 2018

 

Franchise Distribution Attorneys

2018 Southern California Super Lawyers

Congratulations to Barry Kurtz, Tal Grinblat and David Gurnick, all State Bar of California Certified Specialists in Franchise & Distribution law, and all named 2018 Franchise/Dealership Super Lawyers for Southern California. To be selected, Barry, Tal and David were first nominated by attorneys at other law firms, and then underwent a 12-point selection process based on peer recognition and professional achievement: Super Lawyers 2018

Barry Kurtz inSFV Business Journal

Barry Kurtz was quoted in an article regarding the expansion of franchises in the San Fernando Valley area of Los Angeles. His insights on the post-recession appeal of buying into franchise systems is available here: Franchise Companies Find Retail Room to Grow

David Gurnick in Valley Lawyer

"Under the principal formulation of unconscionability, two elements must be present: procedural and substantive unconscionability. But they need not be present in the same degree. . . ." Read David Gurnick's full article: Unconscionability in California: Contract Power Tool for the Powerless and Powerful

FRANCHISOR 101:
Copycat Restaurant Shutdown

A registered trademark is a valuable corporate asset and can be a significant part of a company's worth. A franchisor has an affirmative legal duty to police use of its mark by licensed franchisees and also third-party infringers. For instance, a federal court in Louisville permanently enjoined a competitor from using "La Bamba" in its name, holding that use by La Bamba Authentic Mexican Cuisine (LBAMC) was likely to cause confusion with the La Bamba Mexican restaurant chain operated by franchisor and restaurant owner La Bamba Licensing (LBL).

Both parties served casual, Mexican food. The court found the marks were similar enough that consumers could mistakenly think the restaurants were related.

LBL owns the registration of La Bamba for restaurant services, and operates eight La Bamba Mexican restaurants in Kentucky and the Midwest. LBAMC opened a casual, Mexican restaurant named "La Bamba" 65 miles from Louisville. LBL sued after LBAMC refused to comply with LBL's demands to cease and desist and change the name of its restaurant.

LBL argued and the court agreed that the La Bamba mark is distinctive, despite some ordinary language usage, because the phrase "La Bamba," a famous Mexican folk song, is unrelated to LBL's restaurant services. LBL provided evidence that its mark acquired distinctiveness for Mexican cuisine, based on its continuous use of the mark for nearly 30 years, particularly in Kentucky. LBAMC argued that the mark was weak due to un-policed third-party use. But LBAMC failed to point to evidence of similar marks, let alone the number, location, or types of goods and services offered by allegedly numerous undisclosed third-party users.

The court found a likelihood of confusion and permanently enjoined LBAMC from using the La Bamba name. In balancing hardship of an injunction, the court noted that LBAMC operated only a single restaurant, only since 2015, while LBL operated several restaurants in multiple states for an extended time period.

A franchisor that tolerates infringers will find its trademark asset has "eroded" and "shrunken" because the strength of its mark as a distinctive symbol is diminished by the presence of similar marks. Vigilance in policing marks helps build a stronger, reputable brand, avoid loss of trademark rights, and minimize the risk of an infringer operating with impunity.

La Bamba Licensing, LLC v. La Bamba Authentic Mexican Cuisine, Inc.

FRANCHISEE 101:
Out of Time, Out of Gas

A California federal judge held that breach of contract claims brought by franchisees of two ARCO-branded gas stations against their franchisor BP West Coast Products were untimely, and declined to adopt the franchisees' argument that equitable estoppel tolled the statute of limitations.

The franchisees operated two gas stations since 1998, one in San Ramon, California and one in Dublin, California. In 2007 a BP sales representative allegedly approached plaintiffs offering to brand the stations as ARCO gas stations. Prior to signing contracts to convert both sites to the ARCO brand and add mini Markets, a BP representative allegedly projected to plaintiffs $40,000 per month of profits for the San Ramon station.

After heavy losses, the franchisees closed the stations and sued. The franchisees claimed that BP breached the franchise agreements by refusing to allow them fuel pricing allowances and ability to use additional vendors for the on-premises mini-markets. Since the franchisees sued more than four years after closure of the stations their action was barred unless equitable estoppel could save the claims.

The franchisees argued equitable estoppel saved their claims based on a purported oral "Walkaway Agreement" in which BP representatives represented that they would not pursue any claims based on the franchise agreements.

The judge found the franchisees could not reasonably rely on the alleged Walkaway Agreement because the franchise agreements had bold disclaimers on their signature pages saying no BP representative could orally modify or amend the agreements. The fact that plaintiffs received BP's demand for $1.2 million for gasoline, unpaid loans and other payments under the franchise agreements approximately one month after the alleged Walkaway Agreement further suggested that plaintiffs' reliance was not reasonable. The judge noted it would have been unreasonable for the franchisees, sophisticated business people, to expect BP to relinquish its claim to those payments.

Equitable estoppel may defeat a statute of limitations defense when the defendant's promises, threats or representations induce a plaintiff to delay filing a lawsuit. But it is not always successful in overcoming the statute of limitations. This case is a harsh reminder that equitable estoppel may not save a time-barred claim even if based on settlement negotiations between the parties.

Power Quality & Electrical Systems, Inc. v. BP West Coast Products LLC

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.

Thursday
Nov302017

Franchise 101: Injunction Bottleneck; and All in the Family

Franchise 101 News

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



NOVEMBER 2017

 

Franchise Distribution Attorneys

Matthew J. Soroky in Franchise Law Committee e-Bulletin

”...the U.S. House of Representatives approved by a vote of 282 to 181 the Save Local Business Act, a bill that would amend the National Labor Relations Act and the Fair Labor Standards Act to limit joint employer liability." How could this bill affect franchisors? Read Matt's summary in the State Bar of California Business Law Section's Franchise Law Committee e-Bulletin: U.S. House of Representatives Passes Save Local Business Act

Katherine L. Wallman in Valley Lawyer

"Although the advantages of social media and the digital age are vast, the ever-changing cyber world raises ethical questions attorneys must address before reaping its benefits." For more, read Kate's MCLE article: Social Media and Common Ethical Problems

 

FRANCHISOR 101:
Injunction Bottleneck

A restaurant franchisor, World of Beer Franchising ("WOB"), recently lost an appeal to enforce a post-termination restriction against a franchisee launching a competing business. Both the trial and appellate court ruled against WOB.

WOB lost because it ignored the franchise agreement requirement to submit the dispute to mediation at the same time as it sought injunctive relief.

WOB and Evan Matz were parties to three franchise agreements to operate World of Beer restaurants. After mutual termination of the agreements, Matz reopened the former franchised locations as competing restaurants. WOB sought to enjoin Matz from using its marks, confidential information, and trade dress and from violating the post-termination non-compete covenant.

A federal district court denied WOB's request on the basis that the franchise agreements required the parties to first mediate their dispute. WOB appealed, arguing that the district court misinterpreted the agreements' dispute resolution provisions.

The dispute resolution clauses each said that a preliminary injunction may be sought, as long as the dispute was submitted for arbitration at the same time. But the agreements required nonbinding mediation before bringing arbitration. Another provision said that all disputes, except those concerning the marks, had to be arbitrated. Harmonizing these provisions, the district court ruled that the franchisor was required to submit its grievance with Matz to mediation and arbitration, at the same time as its motion for an injunction.

The Court of Appeals agreed that the provisions required the parties to mediate first, regardless of whether the dispute was arbitrable. The provisions could be reasonably read as requiring contemporaneous submission of the injunction request to both arbitration and mediation, followed by arbitration under the agreements' injunction clause, if mediation did not resolve the dispute.

The franchisor argued that the dispute was not subject to arbitration, and therefore was also exempt from mediation, because the claim concerned the marks. The courts disagreed, finding that the franchisor's claims extended beyond the marks. The franchisor alleged infringement, but also claimed violation of the non-compete covenant and use of confidential information and trade dress. The court was likewise unmoved by the franchisor's attempts to initiate mediation under the dispute resolution clauses.

WOB contended Matz ignored inquiries about whether he preferred mediating through the American Arbitration Association or a private mediator. The franchise agreement expressly required mediation under AAA Commercial Mediation Rules, which permitted the franchisor to submit the dispute to AAA mediation unilaterally, without Matz's cooperation.

Post-termination covenants are often the franchisor's last remnant of control over former franchisees. It is preferable for a franchise agreement's dispute resolution clause to provide a clear path to enforcing the post-termination covenants.

Read: World of Beer Franchising, Inc. v. MWB Development I, LLC

 

FRANCHISEE 101:
All in the Family

Some creativity can help in passing a former franchised business to the next generation, particularly if the franchisor has no part in the franchisee's succession plan.

A federal court in Nebraska preliminarily enjoined two former franchisees of The Maids International, a home-cleaning business, and also the franchisees' daughters and the competing home-cleaning company the daughters established, from continuing to violate post-termination non-compete and non-solicitation provisions of the franchise agreements.

One might think, as the defendants argued, that the daughters and their business could not be enjoined because they didn't sign the franchise agreements and were part of a separate business entity. According to the franchisees, their daughters' business - "Two Sisters" - had a new website, new uniforms, and new phone numbers. But under case law in some states, those acting in concert or privity with signatory franchisees may be bound by an injunction for actions that violate franchise agreements, even if they did not sign the agreements.

The court found several indicators that the former franchisees were in privity with their daughters' home-cleaning business.

The new business operated from the same locations as the former franchise locations. It offered the same services. It kept the franchisor's logo. It used the same email address. It used two of the same vehicles. And one of the former franchisees was listed as the registrant for the website of his daughters' business.

Most tellingly, in the court's view, was that the franchisee's "retirement letter" to customers made clear that the daughters were "ready to take over," that "most everything will remain the same," and that the daughters would continue the franchisees' business, using the same employees (their daughters), cleaning schedule, cleaning products and insurance. The court added that the defendants failed to comply with other post-termination obligations, such as the return of all confidential and marketing material and stopping use of customer lists, proprietary methods and trade secrets.

Family successors to a formerly franchised business should clearly understand what the franchisor has the power to enforce against them, and franchisees should factor the non-compete provisions of a franchise agreement into their succession plans.

Read: The Maids Int'l, Inc. v. Maids on Call, LLC

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
Aug302016

Franchise 101: Non-Compete Agreements & Projected Earnings

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@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
Sep302015

Franchise Systems Can Fight Online Negativity; Bankruptcy Discharges Franchise Law Claims

Franchise 101 News

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

September 2015

 

ABA Forum: David Gurnick Presenting

David Gurnick will co-present: Finders, Keepers, Losers, Weepers: Opportunities, Risks & Considerations in Using Intellectual Property Created by Others, at the ABA's 38th Annual Forum on Franchising, held in New Orleans October 13-17th. Finders, Keepers is scheduled for 10:15 a.m. on Thursday, 10/15, and 11:15 a.m. on Friday, 10/16. 

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

FRANCHISOR 101:
Franchise Systems Can Fight Online Negativity


 

One of today's challenges faced by franchisors and franchise systems is negative remarks posted online by a customer, ex-employee, or even a dissatisfied franchisee. Negative comments appear in sites created specifically to criticize; on social media like Facebook or Tweets, blogs, personal sites and review sites like Yelp. These posts can reach unlimited numbers of people and hurt a brand's reputation.

Posts, positive or negative, may have First Amendment protection. Website hosts have immunity under the federal Communications Decency Act, for content posted by others on their sites. But companies are learning of ways to fight back. Here are some choices from which franchisors can assemble a strategy against negative online comments.

Proactive Efforts: A proactive way to reduce negative comments is using care to provide quality products, good customer experience and treating franchisees and employees well. Satisfied people are less likely to complain. Dissatisfied people - more likely. As a timely example, consider Volkswagen. Apparently, dishonesty was built into VW's products, and the company's misguided intent to fool the public is generating massive online negative comments that will be around for years to come. Honesty and good product quality would have avoided most of that negativity.

Terms and Conditions: Another proactive step is to have terms with customers, suppliers, franchisees and others, limiting posting of negative online comments

Seek Removal: A franchisor could consider contacting and asking the poster to remove or modify their statement. This course is especially useful if the negative comment is due to a misunderstanding or unique circumstance that is not likely to recur. An explanation to a franchisee, a franchisee's customer or ex-employee could address their concern. Sometimes an apology or other consideration may be needed. Some improper posts can be removed according to a site's terms of use. Many sites have terms for objecting and asking that posts be removed. For a particularly egregious or unlawful posting, a franchisor may find it useful to go beyond the site's stated procedure, and contact their management or attorney to request that the content be removed.

Post a Polite Response: Many sites provide the opportunity to post a reply. A respectful, even-tempered response explaining the circumstance, expressing regret for a poster's experience, and if appropriate noting what corrective action was or will be taken, can partially mitigate some ill effects of a negative online comment.

Cease and Desist Demand: Where justified, such as for comments that are false, exaggerated, or defamatory, a franchisor may choose to have counsel send the poster a strong demand to cease, desist and remove the posting. If the poster has made a threat, or disclosed secret information, civil or criminal implications may arise. Sometimes, people who post comments want this kind of attention, prompting concern that a cease and desist demand will not dissuade their conduct, but will generate more undesired comments.

Prudent Inaction: Because responses to negative online comments may generate more comments and undesired attention, another rational strategy - in the right circumstances - is to take no action. For example, a comment on an active Facebook or other page, whether negative or positive, if not responded to, may receive less attention and be pushed down by later posts on other subjects.

Get Other Posts: Similar to the above is to enlist other customers, friends and associates to post their own truthful, favorable comments. This method provides positive messages and sometimes causes negative reviews to be pushed down, where they get less and eventually no attention.

Digital Millennium Copyright Act Take Down Notice: Where a post includes content that infringes a copyright, federal law has a procedure for notifying and requiring the website to remove that content.

Seek Government Help: In some circumstances it is useful to ask for help from the government. The FTC, Attorney General and elected representatives are possible sources of assistance. For example, when a person posting negative or false comments is really a competitor, or ex-employee now working for a competitor, such agencies and officials may be willing to help.

Litigation: Due to expense, litigation is rarely anyone's first choice. But when someone breaks the law and won't stop, our system provides courts as forums for seeking relief. Courts can help identify anonymous perpetrators and award money damages for defamation, disparagement, false advertising and sometimes injunctive relief.

Sign-Up: It is distasteful but sometimes balancing cost and effect, a practical solution is to sign up with sites where this is known to result in removing or lowering the prominence of negative comments.

Many tools and strategies exist for responding and fighting back. It is not necessary to just accept the injury, harm to reputation and loss of business that come with being a target of negative comments on the internet.

 

FRANCHISEE 101:
Bankruptcy Discharges Franchise Law Claims

A recent Bankruptcy Appellate Panel decision is a reminder of both a benefit of bankruptcy, in appropriate circumstances, and the need to respect the bankruptcy discharge a party obtains in the process.

Mr. Lee was developing a sushi restaurant concept called Little Madfish. Mr. Im and his wife invested $200,000 and obtained stock and rights to open a Little Madfish restaurant. They also applied for a visa to work in the U.S. on the basis of having made a substantial investment in the business.

The restaurant failed. Lee filed for bankruptcy. After he obtained a discharge, Mr. Im sued in state court for franchise law violations, fraud and rescission of the stock purchase. Lee moved in state court to dismiss the claims based on his bankruptcy discharge. The state court dismissed some claims, but not all of them. At trial, a jury found Mr. Lee did not commit fraud and the court ruled that another claim was barred by the bankruptcy discharge.

Lee then asked the bankruptcy court to reopen his case so he could seek sanctions against Im for violating the discharge in bringing the state litigation. The bankruptcy court held Mr. Im in contempt, holding him liable for $50,000, for suing in state court after Mr. Lee obtained a discharge.

A bankruptcy discharge protects against claims for violating franchise laws as well as other claims. (Though under one bankruptcy code exception, a discharge may not protect against securities law claims). A person who is sued for franchise law violations or most other claims, may be able to discharge them through bankruptcy and it is important for claimants to respect the bankruptcy discharge.

Read the entire decision: In re Lee 2015 WL 3960897 (9th Cir. Bankr. App. Panel)

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.

 

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