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Wednesday
Feb242016

Importance of Arbitration Clauses; and Reliance on Profit Projections

Franchise 101 News

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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.

Wednesday
Mar252015

Forum Selection & Automatic Termination Clauses

Franchise 101

bkurtz@lewitthackman.com
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Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

March 2015

 

Barry Kurtz & Bryan H. Clements' Article in Business Law News, a publication of the State Bar of California

 

"The fact that states generally require brewers to provide distributors with exclusive territories in which no competitors may distribute the brewer's beer demonstrates the degree to which beer distributors enjoy greater territorial protections than do franchisees..."

Click to read: Traditional Franchise and Beer Distribution Relationships: A Legal Comparison

 

Samuel C. Wolf Article in Valley Lawyer, a publication of the San Fernando Valley Bar Association

 

"Franchise lawsuits and most business litigation are usually economic in nature, and application of the economic loss rule will often narrow the scope of the claims and damages available as a remedy..."

Read: Using the Economic Loss Rule to Your Client's Benefit

 

FRANCHISOR 101:
Forum Selection Clause Held Enforceable

 

Sushi Restaurant FranchiseA federal court in Sacramento recently upheld a franchisor's forum selection clause and transferred an action brought by an area representative to the federal district court in the Western District of Texas.

HDYR operated a sushi restaurant in Austin, and sought to franchise the concept under the name How Do You Roll? HDYR entered into an area representative service agreement with the plaintiffs under which the plaintiffs were to solicit franchisees to purchase How Do You Roll? restaurants in Northern California.

The agreement contained a forum selection clause providing for exclusive venue for disputes in the state or federal district courts in Texas.

In the Ninth Circuit, a forum selection clause is generally considered unenforceable only if it was the result of fraud, undue influence, or overwhelming bargaining power; if the selected forum was so inconvenient that forcing the plaintiffs to litigate there would essentially deny them their day in court; or if enforcement would contravene a strong public policy in the forum where the suit was brought.  

The court found that the plaintiffs presented no evidence that would void the forum selection clause. The court was not persuaded by the area representative's argument premised on the California Franchise Relations Act's (CFRA's) strong public policy against enforcing out-of-state forum selection clauses in franchise agreements, because the area representative agreement was not a franchise agreement. The court found that the area representative was retained to recruit franchisees, but was not a franchisee itself and was not the type of party that the CFRA was designed to protect.

The HDYR ruling is encouraging for franchisors since it illustrates the value of including well-conceived and well-drafted forum selection clauses in area representative agreements.

See: Estep v. Yuen Yung.

 

FRANCHISEE 101:
Nice Try Mr. Franchisee

In Fantastic Sam's Salons, Corp. v. Moassesfar, a federal court in Los Angeles denied a motion by former franchisees to dismiss Fantastic Sam's claims for breach of contract and trademark infringement based on the contractual limitations period in the parties' franchise agreements.

Hair Salon Franchise

The franchisees were required to pay a weekly franchise fee so long as the franchisee used the franchisor's system or marks, whether authorized or not. The franchise agreement stated the agreements terminated automatically, without notice from the franchisor, if the franchisees' bank failed or refused to honor any authorized bank draft for the payment of any weekly fees for two consecutive weeks.

The franchisees' checks to the franchisor were dishonored, first in January 2011 and again in February 2012. However, the franchisees continued to operate both locations as Fantastic Sam's salons until October 2014, when a stipulation to terminate the franchise agreements was entered into in the franchisor's termination action filed in August 2014.

The Moassesfars argued that the agreement had automatically terminated when two consecutive payments were missed, thus barring the franchisor's claims. The court rejected this theory, noting that the automatic termination clause without notice was contrary to California law and that the requirement of notice and an opportunity to cure prior to termination was intended to protect franchisees against arbitrary terminations.

See: Fantastic Sam's Salon Corp. v. Moassesfar.

 

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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