Franchise 101: Selective Enforcement; and Squeezed at the Pump
David Gurnick in Corporate Counsel
When Uber acquired Otto, the self-driving automobile tech company fronted by former Waymo executives, Google filed a lawsuit alleging misappropriation of trade secrets, among other claims. Corporate Counsel magazine interviewed David Gurnick for his take.
Welcome Katherine L. Wallman!
We are very pleased to announce the arrival of our newest associate, Kate Wallman. Ms. Wallman earned her law degree from the Catholic University of America, Columbus School of Law, where she graduated cum laude. She’s worked as a franchise attorney for various firms in Washington D.C. and most recently served as in-house senior counsel at DineEquity, parent company of Applebees and IHOP.
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Selective Enforcement of Franchise Agreement Provisions
A franchisor’s ability to set renewal terms can bind franchisees to terms in a later franchise agreement before the renewal agreement even exists. In a recent case, a franchisor could enforce a hypothetical non-compete restriction in a renewal agreement, even though it waived the restriction in the currently-effective franchise agreement.
James Robinson, a veterinary hospital franchisee, also ran other veterinary clinics not affiliated with the franchise. The franchise agreement’s non-compete provision would have prohibited operating the independent locations. But the franchisor chose not to enforce it. On expiration of the franchise agreement, the franchisor notified the franchisee of its intent to enforce the covenant in the renewal agreement.
The franchisee refused to divest the independent locations. No renewal agreement was signed. The franchisee sued for breach of the franchise agreement, covenant of good faith and fair dealing, and interference with economic relations – all based on the absence of any renewal.
A federal district court dismissed the complaint, and the Ninth Circuit affirmed. The courts said plain language of the franchise agreement’s renewal provision allowed the franchisor to condition renewal on compliance with a different non-compete provision than the current agreement.
One may ask – how could a franchisee be bound by a future non-compete provision, in a future agreement, when the covenant in the present contract was not enforced? The courts were satisfied that the existing agreement’s renewal provision explicitly said the renewal agreement would be “substantially similar to the then-current form of the franchise agreement.” The Ninth Circuit ruled, based on this clause, that the renewal agreement would have a similar non-compete provision.
The courts ruled that the franchisor’s waiver of the non-compete provision in the franchise agreement did not extend to the renewal agreement, nor was there a promise to never enforce a non-compete provision in the future. Dismissal of the interference claim was upheld because conduct between business competitors is proper if it is to further the defendant’s own business interests. The franchisee alleged only that the franchisor’s act of not renewing him was “done to make a profit,” which was not wrongful.
Squeezed at the Pump
Most dealership and franchise agreements require the franchisor’s prior written consent to the transfer of a business from one franchisee to another. The new franchisee is often required to sign the franchisor’s then-current agreement as a condition to getting the franchisor’s consent to the transfer.
Can a franchisor unreasonably withhold consent, or can an incoming franchisee or dealer be coerced to sign up with a franchisor? A California appellate court has said no and upheld a lower court’s ruling that a petroleum products distributor and franchisor of “76” brand gas stations unreasonably tried to coerce a purchaser to sign a new franchise agreement. The franchisor was found to have breached the seller’s franchise agreement, which excused further performance by the seller and purchaser.
The seller asked several times for the franchisor’s consent and for the original branded reseller agreement. But the franchisor never obliged or responded to the purchaser’s transfer application, short of telling the seller they were “working on it.”
After nearly a month with no response, escrow closed without an assignment of the original reseller agreement. The seller continued to buy gasoline for the purchaser, who paid the seller for the gasoline shipments until the franchisor stopped delivering gasoline.
The franchisor then told the parties it was considering other potential purchasers and never took the purchaser’s application seriously. The franchisor refused to make further gasoline deliveries to the station unless the purchaser signed a 64-page franchise agreement on the spot. The franchisor refused the purchaser’s request for time to review the agreement, and rejected its offer to pay in advance for gasoline deliveries made before finalizing the agreement. The franchisor threatened to sue the purchaser and put it out of business unless it signed “then and there.”
The trial court came down hard on the franchisor, finding the franchisor was unreasonable in failing to respond to the seller’s request to assign the original agreement and in its actions and threat toward the purchaser. The appellate court agreed, affirming that the franchisor breached the original reseller agreement because it gave no notice to the seller or purchaser before placing a hold on the purchaser’s gasoline orders. The purchaser also received an attorneys’ fees award based on the agreement, even though it never entered into any contract with the franchisor.
While franchisors often reserve the right to impose conditions on assignment of a franchise, a franchisor cannot unreasonably withhold consent to impede a transfer.