Franchise 101: Trashing the Competition; and Meet the New Boss

Franchisor 101: Trashing the Competition

A trash collection business brought claims against a franchisor and franchisee of Smash My Trash, a mobile waste compacting brand. The business, Republic Services of Kansas City, claimed the defendants wrongfully solicited customers, used Republic’s dumpsters for trash compacting and made false statements about consumers’ legal rights against competitors. A federal court denied Republic’s motion for summary judgment, finding triable issues of fact.

Republic provides dumpsters to business customers and comes to the customer at scheduled times to haul away the waste. Republic’s agreement requires customers to use a Republic dumpster “only for its proper and intended purpose.”

Based on this language, Republic asked the court to rule that Smash My Trash could not use Republic’s dumpsters to provide mobile waste compacting services. Summary judgment was denied because the agreement was unclear whether Republic’s customers had exclusive control over the dumpsters, required under Missouri law to keep Smash My Trash from using them.

The court said the jury must decide whether Smash My Trash unjustly benefitted from using Republic’s dumpsters and whether its compacting services exceeded the “proper and intended purpose” of the dumpsters. The court was persuaded by the franchisor’s evidence and expert testimony that the franchisor’s “Smash Truck” did not damage the containers or exceed their intended design purpose, and that other waste-hauling companies also had franchisees compact waste in containers leased to customers.

The alleged false statements were posted on the franchisor’s website: “Q” Will my waste company let me Smash my trash? A: It’s not their waste, it’s yours. Well established legal doctrines protect your rights to manage your waste while under your control at your facility. This includes the right to Smash your trash.” The district court was not persuaded that any statement was false or misleading.

The first and third sentences of the FAQ were arguably true because Republic’s customer services agreement says Republic only acquires ownership to the waste after loading it onto Republic’s vehicles. Since waste belongs to the customer before pickup, such rights “include[ ] the right to Smash your trash.”

Nor was the second sentence literally false or misleading because the law regarding a customer’s right to smash their trash is unsettled, and the way Republic’s customers manage their waste presented a fact dispute not amenable to summary judgment.

Companies that rely on franchising to introduce new business models to existing industries, such as trash collection, should be prepared to defend the legality of the model. Such franchisors should also be mindful of their need to support franchisees from challenges from competitive businesses.

Franchisee 101: Meet the New Boss

A Tim Hortons franchisee sued the franchisor for breach of six franchise agreements and an area development agreement. Tim Hortons counterclaimed for breach of contract based on failure by the franchisee to meet the development schedule and pay royalties and advertising fees. The franchisor brought a claim against the franchisee’s guarantor. After a nine-day trial the court rejected the franchisee’s claims and entered judgment for the franchisor.

In 2014, the franchisee agreed to develop 40 Tim Hortons restaurants over five years. Tim Hortons approved 14 of the franchisee’s proposed sites. However, due to capital shortfalls, higher than expected construction costs and other financial difficulties, only half were opened.

That year (2014) the franchisor was acquired. The new owners used a different business model in which franchisees, not Tim Hortons, did site selection and construction. The parties negotiated a more aggressive development schedule under a new agreement. But the agreement was never signed. The franchisee presented another company as a potential equity partner, but the franchisor rejected the proposal. By 2017, the franchisee closed all its restaurants.

The franchisee claimed Tim Hortons anticipatorily breached the development agreement by seeking to replace it with the new agreement. The court held the franchisor’s actions were not a clear and unequivocal manifestation of intent to repudiate the 2014 agreement, because the parties continued under their original agreement after discussing the new one.

The franchisee also claimed the franchisor breached the implied covenant of good faith and fair dealing by rejecting its proposed equity partner to pressure the franchisee to accept the new agreement. The court held the franchisor’s rejection of the proposed equity partner was not unreasonable, because approval would have deprived the franchisee’s majority owner of his controlling interest.

The court awarded judgement to Tim Hortons and against the franchisee and its guarantor. Changes by new management did not violate the franchisor’s actual or implied contractual obligations. Changes to the franchise model imposed by new management had no effect on the franchisee’s financial obligations.

A franchisee considering substantial minimum development obligations in a short time should negotiate reasonable extension procedures, credits for closed locations, and other mechanisms in the development agreement to safeguard against economic and other unforeseen factors outside the franchisee’s control.

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