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Thursday
Mar202014

Franchisee Not Bound by Arbitration Provision

Franchise 101

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

March 2014

 

Tal Grinblat Selected to 2014 Legal Eagles

 

Tal Grinblat was named a Franchise Times' 2014 Legal Eagle. Nominated by peers, Tal was then chosen for the distinction by the publication's editorial board. The list of 2014 Legal Eagles will be published in April.

 

*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Barry Kurtz, David Gurnick & Tal Grinblat Honored as 2014 Southern California Super Lawyers

 

Barry Kurtz, David Gurnick and Tal Grinblat have each been selected as a 2014 Super Lawyer in their specialty of Franchise & Distribution Law. This honor is bestowed by the Journal of Law and Politics, in conjunction with Los Angeles Magazine. The Super Lawyer designation is the result of peer evaluation. Nominations are received from thousands of lawyers throughout the state. According to the Journal of Law and Politics, this honor is reserved for the top five percent of the lawyers in each practice area.

 

David Gurnick in Los Angeles Lawyer Re Cooperatives

 

How are cooperatives organized and regulated? David Gurnick's article, Cooperative Conditions: California Law Allows for Flexible Application of the Operative Principles of Cooperatives takes an in-depth look at these enterprises. Click: Cooperative Conditions to read the full article.

 

 

FRANCHISOR 101:
Franchisee Not Bound by Arbitration Provision

 

 

In March 2013, Edison Subs, LLC, a Subway franchisee/transferee, filed a complaint in New Jersey against Subway and Aliya Patel (the original franchisee/transferor) and Subway's affiliate for breach of contract, fraud, violations of the New Jersey Consumer Fraud Act, negligent misrepresentation and violations of the covenant of good faith and fair dealing. Edison alleged that it entered into an oral franchise agreement with Subway that Patel induced Edison to accept through misrepresentations and omissions and that Subway and Patel breached the oral agreement by ejecting Edison from the premises after Edison had operated the Subway restaurant for two years.

The Subway Franchise Agreement required all claims to be arbitrated in Connecticut, so Subway brought an action to compel arbitration of Edison's claims. The U.S. District Court in Connecticut observed that it was undisputed that Edison did not sign, and denied ever receiving, a copy of the Franchise Agreement.

Subway argued that Edison could be bound by the terms of the Franchise Agreement under common law principles of contract and agency, including estoppel. Despite the fact that Edison never signed the Franchise Agreement, the court noted that a signatory may be able to compel a non-signatory to comply with certain terms of an agreement when the non-signatory directly benefits from the agreement.

To rely on this theory and enforce arbitration, Subway had to prove that Edison received notice of the Franchise Agreement and the arbitration provision and knowingly accepted the Franchise Agreement's benefits. The court found there was no evidence offered that Edison had notice of Subway's written Franchise Agreement or that Edison knowingly exploited the Franchise Agreement. Therefore the court denied Subway's plea for an injunction to compel arbitration.

Franchisors should maintain a signed and dated copy of each Franchise Agreement for each franchised business and a signed and dated FDD receipt that predates the Franchise Agreement and any payments made to the franchisor under the Franchise Agreement by at least 14 days. Click: Subway Franchise Arbitration Ruling to see the ruling.

 

FRANCHISEE 101:
Franchisor May Be Joint Employer Under Federal Law

 

Franchise AttorneyA U.S. District Court in New York found that the plaintiffs, current and former employees of a Domino's Pizza franchisee, sufficiently alleged multiple violations of federal and state labor laws against their franchisee-employer to add the franchisor, Domino's, as a "joint-employer" defendant under the federal Fair Labor Standards Act (FLSA) and New York labor laws and to survive a motion to dismiss their case.

The franchisee's employees alleged that Domino's:

(1) dictated compensation policies that were implemented in the franchisees' stores; required a system of tracking hours and wages; and required franchisees retain payroll records that were submitted to Domino's for review,

(2) created management and operations policies and practices that were implemented at the franchisees' stores by providing materials for use in training store managers and employees, posters with directions on how employees were to perform tasks, and monitored employee performance through required computer hardware and software,

(3) developed and implemented hiring systems for screening, interviewing, and assessing applicants for employment at all franchised stores, and

(4) had the right to inspect franchisees' stores to ensure compliance with the franchisor's policies, including those related to day-to-day conditions of the employees.

The court found that, taken together, these facts were enough to establish Domino's as a joint employer for the purpose of a motion to amend, notwithstanding the fact that other courts in the U.S. have generally concluded that franchisors are not employers within the meaning of the FLSA. Click: Domino's Challenges Joint Employer Liability for more information.

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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