Mohajerian Law Corp. Franchise Lawyers

January 2006 Franchise Law and Legislative Review

New York Beer Law's Arbitration Ban Preempted
John G. Ryan, Inc. v. Molson USA, Inc., DC N.Y.

The New York beer law's provision banning pre-dispute arbitration clauses between beer brewers and wholesalers was preempted by the Federal Arbitration Act (FAA) and its implementation of a national policy in favor of arbitration notwithstanding conflicting state laws, a federal district court in New York City has decided. Therefore, a brewer and a wholesaler were required to arbitrate their dispute over termination. The wholesaler sought a dismissal or permanent stay of the arbitration of the parties' dispute.
The wholesaler contended that the anti-arbitration provision of the beer law was "saved" from FAA preemption by the Twenty-first Amendment which bestowed on the states virtually complete control over the importation and sale of liquor and the structure of their liquor distribution systems. However, the statue's ban on pre-dispute arbitration clauses was a purely procedural matter and did not implicate the core concerns of the Twenty-first Amendment, the court held. The anti-arbitration provision was not a necessary component of the beer law's regulatory scheme. Moreover, and importantly, it was not disputed that the substantive provisions of the state law would apply in any arbitration that occurred, in accord with the choice of law provision in the parties' agreement, the court noted. Because a core concern of the Twenty-first Amendment was not implicated, the balance between the federal and state issues involved tipped decidedly in favor of FAA preemption of the statutory ban.

High Court Rejects Truck Dealer's Price Discrimination Claim
Volvo Trucks North America v. Reeder-Simco GMC, U.S. Sup. Ct.

Heavy-duty truck manufacturer Volvo Trucks North America, Inc. (Volvo) was not shown to have engaged in price discrimination in violation of the Robinson-Patman Act by providing more favorable discounts or price concessions to some of its regional dealers than to others, the U.S. Supreme Court has ruled. A decision of the U.S. Court of Appeals in St. Louis upholding a jury verdict in favor of a complaining dealer was reversed. The jury had concluded that the complaining dealer's damages from Volvo's Robinson-Patman violation amounted to $1,358,000.

The dealer filed suit against the manufacturer after learning that the manufacturer had given another dealer a price concession greater than the concessions it normally received, causing the dealer to suspect that it was one of the dealers it south to eliminate in an announced plan to reduce its number of dealers from 146 to 75.

Writing for the majority, Justice Ruth Bader Ginsburg explained the scope of the Robinson-Patman Act in a secondary-line price discrimination case: "The Act centrally addresses price discrimination in cases involving competition between different purchasers for resale of the purchased product. Competition of that character ordinarily is not involved when a product subject to special order is sold through a customer-specific competitive bidding process." Looking closely at the facts of the underlying transactions, the Court concluded that the Act did not extend to the case presented by the complaining dealer.

The heavy-duty truck market was characterized by a competitive bidding process. In this process, retail customers stated their specifications and invited bids, generally from dealers franchised by different manufacturers. Only when a Volvo dealers' bids were accepted did the dealers arrange to purchase the trucks, which Volvo then built to meet the customers' specifications.

The complaining dealer failed to establish the competitive injury required under the Act. In order for a manufacturer to be held liable for secondary-line price discrimination under the Robinson-Patman Act, it must have discriminated between dealers competing to resell its product to the same retail customer, the Court held. The complaining dealer offered three categories of evidence: (1) comparisons of concessions it received for four successful bids against non-Volvo dealers, with larger concessions other successful Volvo dealers received for different sales on which it did not bid (purchase-to-purchase comparisons); (2) comparisons of concessions offered to it in connection with several unsuccessful bids against non-Volvo dealers, with greater concessions accorded other Volvo dealers who competed successfully for different sales on which it did not bid (offer-to-purchase comparisons); and (3) evidence of two occasions on which it bid against another Volvo dealer (head-to-head comparisons). The complaining purchaser did offer evidence that Volvo charged it higher prices than other dealers. However, its purchase-to-purchase and offer-to-purchase comparisons fell short, because in none of the discrete instances on which the complaining purchaser relied did it compete with beneficiaries of the alleged discrimination for the same customer. With respect to the evidence of head-to-head competition, the complaining dealer did not establish that it was disfavored vis-à-vis other Volvo dealers in the rare instances in which they competed for the same sale --let alone that the alleged discrimination was substantial. If price discrimination between two purchasers existed at all, it was not of such magnitude as to affect substantially competition between the complaining dealer and the "favored" Volvo dealer, the Court explained. Satisfied that the complaining dealer did not support its case, the Court refused to go so far as to hold that the Act did not reach markets characterized by competitive bidding and special-order sales, as opposed to sales from inventory, an argument raised by the United States as amicus curiae.

In closing, the Court noted that interbrand competition was the "primary concern of antitrust law." It added that the rejection of the complaining dealer's claim was consistent with the broader policies of the antitrust laws --protecting competition rather than competitors.
Dissent

A dissenting opinion, written by Justice John Paul Stevens and joined by Justice Clarence Thomas, contended that the majority's "novel, transaction-specific concept of competition" eliminated Robinson-Patman Act protections for dealers who routinely engage in negotiations with prospective purchasers. Moreover, it was unclear whether the majority's holding was limited to franchised dealers who did not maintain inventories or excluded all franchisees from the effective protection of the Act, according to the dissent.

Auto Dealers Had Standing to Challenge Certification Program
Danvers Motor Co., Inc. v. Ford Motor Co., CA-3

Eight motor vehicle dealers had standing to sue their franchisor for the introduction of its Blue Oval Program (BOP), a nationwide customer service and satisfaction incentive program designed to improve dealer performance, the U.S. Court of Appeals in Philadelphia has ruled. A decision by a federal district court in Newark, New Jersey, holding that the dealers failed to allege that they suffered a concrete and particularized injury-in-fact was reversed.
The dealers alleged that the manufacturer's imposition upon them of the BOP certification and re-certification processes violated the Automobile Dealer's Day in Court Act, several state franchise statutes, and the Robinson-Patman Act. In addition, they alleged claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Although participation in the program was technically voluntary, all of the franchisor's dealers were required to bear the costs of the program, while only those who were "BOP certified" could reap the program's benefits. In order to finance its BOP, the franchisor charged an additional 1% for its automobiles, leaving the Manufacturer's Suggested Retail Price unchanged. Certification required dealers to meet standards under a number of performance criteria, including leadership, concern resolution, sales, service, facilities, and customer service.
To state an injury-in-fact sufficient to survive the franchisor's motion to dismiss on the basis of lack of standing, the dealers were simply required to plead that they suffered some kind of concrete harm because of the BOP, according to Circuit Judge Samuel A. Alito, writing for a unanimous panel of the appellate court. The dealers' complaint was replete with assertions of cognizable harm, the court observed. The dealers alleged that each of them made very significant investments to comply with the BOP certification requirements and specified the amount of money spent by each dealership. There was no doubt that the financial harm alleged by the dealers counted as injury-in-fact, the court reasoned. Additionally, the dealers alleged that the certification process illegally intruded into the dealers' operations and that the BOP's facilities criteria included all the ordinary routine aspects of running the dealerships, which had always been the normal responsibilities and concerns of the dealer, without the franchisor's intrusion. Although this type of injury was more difficult to monetize, it was no less cognizable under Article III standing, the court determined. At its heart, the alleged injury was an invasion of the dealers' property rights, the court noted.

Staffing Office Enjoined from Post-Rescission Trademark Use
Manpower, Inc. v. Mason, DC Wis.

A temporary staffing business franchisor was highly likely to succeed on the merits of its claim that one of its franchisees breached its franchise agreement for its Columbus, Ohio, area franchisee in material ways that destroyed the essential object of the agreement and justified the franchisor's rescission of the agreement, a federal district court in Milwaukee has ruled. In addition, the franchisor would be irreparably harmed if the Columbus franchise continued to use the franchisor's name and trademark and the balance of the harms favored the grant of an injunction enjoining the Columbus franchise's continued use. Therefore, the franchise was prohibited from further use of the franchisor's trademarks. However, the franchisor was denied injunctive relief with respect to the continued use of its trademarks by the franchisee's other two franchises and was preliminarily enjoined from rescinding its agreements for the other two franchises pending the outcome of the litigation between the parties.
After becoming dissatisfied with the operation of the Columbus franchise, the franchisor notified the franchisee that it was rescinding all three of their agreements, and moved for a preliminary injunction barring the franchisee from using its trademark in connection with the three businesses. The franchisee cross-moved to enjoin the rescission of the three agreements.

Likelihood of Success

The Columbus franchise violated the territorial restriction in its agreement and did so repeatedly, after numerous warnings and with the intent to deceive the franchisor and the franchisor's other franchisees, the court determined. The Columbus business became a rogue franchise doing business all over the country in violation of its agreement and the rights of other franchisees, according to the court. Its extra-territorial activities generated numerous complaints and compelled the franchisor to constantly attempt to police its conduct. In sum, the operation of the Columbus franchise displayed a lack of commitment to the franchise relationship and destroyed one of its essential objects. Therefore, it was highly likely that the franchisor would prevail on the merits of its claim that it justifiably rescinded the agreement for the Columbus franchise.

Balance of Harms

The balance of harms favored enjoining the franchisee from operating its Columbus business in the franchisor's name, the court ruled. Applying a sliding scale approach taking into consideration the franchisor's high likelihood of success on the merits and the degree of irreparable harm to both parties, the franchisor was entitled to preliminary relief.

Other Two Franchises

The franchisor was not entitled to an injunction prohibiting the franchisee's other two franchises from continuing to use its trademark and was enjoined from rescinding its agreements for those franchises, the court decided. The franchisor did not claim that either of the two franchises were operating in material breach of their agreements. The fact that a franchisee operating a number of franchises breached one agreement did not mean that it breached another, the court reasoned.

Franchise Agreement's Renewal Option Strictly Enforced
Keelboat Concepts, Inc., Ala. Sup. Ct.

A restaurant franchisee failed to effectively renew its agreement with a franchisor pursuant to a renewal option in the parties' agreement, the Alabama Supreme Court has decided. The franchisee's notice of renewal was sent after the expiration of the six-month period provided in the agreement for exercise of the renewal option. The terms of the agreement required the franchisee to send the franchisor written notice of his election to renew his franchise for an additional 20-year term between July 3, 2002, and January 3, 2003. However, the franchisee did not send the franchisor his written notice that he was exercising the option to renew the agreement until January 22, 2003.

On January 30, 2003, the franchisor notified the franchisee that the agreement had not been validly renewed, and that the agreement had terminated. Under Alabama law, because time was of the essence in option contracts and because option contracts were to be strictly construed, the notice of renewal sent by the franchisee on January 22, 2003, was not effective, the court held. Nothing in the evidence indicated that the franchisor either failed to object to the franchisee's untimely attempt to exercise the option or that the franchisor waived the timely exercise of the option, the court reasoned. Moreover, there was no evidence that the franchisor took any action to prevent the franchisee from exercising the option to renew within the required six-month period. Therefore, the facts did not support the franchisee's argument that the terms of the option provision should not be strictly enforced.
A trial court had examined the intent of the parties and held that strict adherence to the terms of the franchise agreement was not required. It held that the franchisee had validly exercised the option. However, because the option provision was unambiguous, the trial court erred by looking outside the terms of the agreement, according to the Alabama Supreme Court. Although the trial court explained its judgment in terms of substantial compliance, the judgment could also be construed as holding that the franchisor waived its right to timely performance of the option provision by not requiring the franchisee to strictly adhere to other terms of the franchise agreement, the court observed. However, even if the franchisor did not require the franchisee to strictly adhere to other terms of their agreement, the agreement contained an anti-waiver provision, and pursuant to that provision the franchisor's failure to strictly enforce the terms of the agreement relating to the day-to-day operation of the restaurant could not amount to a waiver of the requirement that notice of the election to renew be timely given.

Donut Shop Terminations Did Not Violate Illinois Act
Dunkin' Donuts, Inc. v. N.A.S.T., Inc., DC Ill.

A donut shop franchisee failed to sufficiently allege damages resulting from a franchisor's alleged termination of four franchise agreements without "good cause" and without an opportunity to cure, a federal district court in Chicago has ruled. Therefore, the franchisor did not violate the Illinois Franchise Disclosure Act by terminating the agreements. Although Massachusetts law governed the dispute pursuant to an enforceable choice of law provision and the parties' agreements, the franchisee's claim under the Illinois statute was entertained because: (1) the agreements provided that state statutory cure periods, if longer than the one provided for in the agreement, were to be applied; and (2) the Illinois Act's non-waiver provision prevented parties to Illinois franchise agreements from opting out of the Act's coverage via choice of law provisions, according to the court.

Illinois Franchise Disclosure Act

In providing a private right of action for a franchisor's violation of the Act, Section 26 of the statute required that there be "damages caused thereby," the court noted. Some of the franchisee's claimed injuries, such as losses due to the franchisor's alleged failure to provide adequate training and supervision, were clearly not caused by the asserted violations of the Act and thus could not support the claim. Other claimed injuries, such as the franchisee's inability to relocate his franchises, were negated by the express terms of the agreements which each specifically granted the franchisee a franchise at "one location only." As to the franchisee's other asserted grounds for damages, losses caused by his inability to sell or remodel his franchises, the franchisee failed to offer any more than vague and unsubstantiated conjecture or speculation. Instead, the franchisee proffered a blithe statement of his purported damages, assertedly based on "the value of [the] business, lost opportunity costs and related damages," and said to be "in excess of $2,000,000." No attempt was made to allocate the purported $2,000,000 lump sum among the value of the business lost, the lost opportunity costs, and the franchisee's unspecified related damages, according to the court. Even more fundamentally, the franchisee stated vaguely that his determination was "based on an analysis of sales at the [franchisor's] shops and the sales at the shops in the area with whom [the franchisor] has provided favored status," with no effort at further explanation. As to documentary support, the franchisee made no attempt to specify which documents were relevant or at which of several locations they could be found.

Breach of Contract

Despite the franchisee's failure to raise a substantial question of material fact as to any damages it might have suffered due to the terminations, the terminations could have breached the parties' agreements, the court held. Under Massachusetts law, a breach of contract carried with it at least nominal damages. The franchisor failed to meet its burden of demonstrating that the franchisee engaged in intentional underreporting of sales or falsification of financial data that would have permitted termination without an opportunity to cure. However, only nominal damages could be awarded to the franchisee even if it prevailed on the merits of its breach of contract claim at trial, the court reasoned.

FTC STAFF COMMENT

Ohio


Alcoholic beverages legislation.

The staffs of the FTC Office of Policy Planning, Bureau of Competition, and Bureau of Economics commented on December 12, 2005, that proposed Ohio House Bill No. 306 was likely to increase competition among wine wholesalers and decrease the costs of wine distribution. The measure would repeal current statutory requirements prohibiting a manufacturer or distributor of wine from canceling or failing to renew a franchise or substantially change a sales area or territory without the prior consent of the other party for other than just cause and without at least 60 days' written notice to the other party setting forth the reasons for the action. Overly restrictive termination requirements prevented suppliers from reacting quickly and efficiently to changes in market conditions and consumer preferences, the staffs commented. In addition, the bill would eliminate mandatory exclusive territories for the wholesale distribution of wine and eliminate the mandatory minimum wholesale markup for wine. The exclusive territory requirement limited suppliers' freedom to respond to changes in market conditions by, for example, preventing suppliers from combining sales territories to achieve scale efficiencies, according to the FTC staffs. Ohio House Bill No. 306 was being considered by the House Financial Institutions, Real Estate, and Securities Committee as of October 27, 2005. Further details will be available in a forthcoming report.

JURY TRIAL WAIVERS
Bakrac, Inc. v. Villager Franchise Systems, Inc., CA-11

Enforceability

Knowing and voluntary.

A jury trial waiver in a hotel franchise agreement was valid and enforceable. The franchisee's ability to negotiate with the franchisor for an addendum to the agreement providing for a reduced franchise fee, reduced royalty fees, a credit, and multiple no-penalty termination rights indicated that the parties' agreement was negotiable. The waiver was conspicuously set forth in the franchise agreement in large type and in bold language. The franchisee was a college-educated mechanical engineer who had 11 years experience as a hotel operator. There was no indication that the franchisee was under duress at the time of the agreement's execution or that the franchisor pressured him to sign it. The franchisor merely offered the franchisee what he thought was a good deal and he had ample time to consider the terms. Under the circumstances, the franchisee knowingly and voluntarily waived his right to a jury trial.

MOTOR VEHICLE DEALERS
Arciniaga v. General Motors Corp., DC N.Y.

Federal Dealer Law

Good faith.

A motor vehicle manufacturer did not violate the Automobile Dealer's Day in Court Act (ADDCA) by pressuring a dealer to purchase a dealership near its existing location when the manufacturer knew all along that it intended to establish another competing dealership nearby. In order to sustain a claim under the ADDCA, a plaintiff was required to allege and prove a breach of a manufacturer's duty to act in "good faith," which was defined in terms of "coercion, intimidation, or threats of coercion or intimidation." The statute explicitly provided that "recommendation, endorsement, exposition, persuasion, urging or argument shall not be deemed to constitute lack of good faith." The dealer complained of the manufacturer's lack of good faith and pressure, but failed to aver any coercion or intimidation or any activity on the part of the manufacturer that could rise to the level of such coercion or intimidation under the statute and the relevant case law. Rather, the essence of the dealer's claim was unfairness, "a far cry from the basis for a claim under the ADDCA" (Cutrone v. Daimler-Chrysler Motors Co., LLC, CA-3).

Stockholder agreement.

A stockholder agreement between a motor vehicle manufacturer and a dealer to jointly invest in a dealership was a "motor vehicle franchise contract" under the meaning of the Automobile Dealer's Day in Court Act (ADDCA). The dealer filed suit against the manufacturer after the dealership's reported losses triggered a provision in the agreement permitting the manufacturer to call the balance of the dealer's stock under the agreement. The parties also entered into a second, separate agreement, a Dealer Sales and Service Agreement (dealer agreement), at the same time they entered into the stockholder agreement. The dealer alleged claims relating to the stockholder agreement (but not the dealer agreement) for discrimination, breach of express and implied contract rights, and fraud pursuant to the ADDCA. The manufacturer sought to stay the dealer's claims and to proceed to arbitration. Under the ADDCA, whenever arbitration was contemplated in a motor vehicle franchise contract both parties were required to consent to arbitration after the dispute arose.
The manufacturer contended that the ADDCA did not apply because the stockholder agreement was not a motor vehicle franchise contract. However, nowhere in the ADDCA was a franchise contract limited to one piece of paper. Taking into account the policy behind the ADDCA and the fact that it was a remedial statute that should be construed broadly, Congress did not intend to limit the definition of motor vehicle franchise contract so as to exclude instances like the current dispute where the corporate structure was not strictly a franchise agreement in form but closely resembled one in substance. In enacting the ADDCA, Congress was concerned about manufacturers using side agreements such as the stockholder agreement at issue to sidestep the Act.

TRADEMARK INFRINGEMENT
R..J. Gators Franchise Systems, Inc. v. MBC Restaurants, Inc., DC Fla.

Lanham Act

Post-termination use.

A hotel franchisee violated the Lanham Act by continuing to display a franchisor's trademarks without authorization following the franchisor's termination of their relationship. The franchisee's contention that it did not intentionally use the franchisor's marks following the termination and that it made every effort to have a sign bearing the franchisor's mark removed as soon as possible was without merit. Specifically, the franchisor terminated the agreement on November 22, 2002, and the franchisee alleged that it entered into a contract with a sign company to remove the sign, but the company would not remove the sign during the winter months. According to the franchisor, the signs bearing its marks were not removed from the facility until March 8, 2004, when it contacted a sign removal company itself. Although the franchisee contended it made every effort to remove the signs, it only contacted one removal company. Even if the franchisee was found to be the non-breaching party in the dispute, it would still have been obligated to remove the signs. The franchisee's actions in failing to have the signs removed could not be reasonably viewed as anything but intentional (Travelodge Hotels, Inc. v. Elkins Motel Associates, Inc., DC N.J.).

Injunctive relief.

A restaurant franchisor was likely to succeed on the merits of its Lanham Act claims of trademark infringement and unfair competition against a franchisee that continued to display the franchisor's trademarks and operate its restaurant following the termination of its franchise. The franchisor would be irreparably harmed if it was not granted its requested relief of a preliminary injunction enjoining the franchisee's continued unauthorized display of the franchisor's trademarks. In addition, the requested injunctive relief would further the public interest because it was in the public interest to prevent confusion over the source or origin of products provided to the public. Therefore, the franchisee was enjoined from displaying or otherwise infringing the franchisor's trademarks and from causing a likelihood of confusion as to the source or sponsorship of its business, products, or services. The franchisor sued the franchisee after the franchisor terminated the parties' agreement and the franchisee continued the unauthorized use of the franchisor's trademarks and continued to hold its business out to the public as an authorized member of the franchisor's system. The overwhelming likelihood of consumer confusion caused by the terminated franchisee's unauthorized use alone established the franchisor's irreparable injury and entitlement to an injunction.


ANTITRUST LAWS
Cumberland Truck Equipment Co. v. Detroit Diesel Corp., DC Pa.

Price Fixing

Venue.

In an antitrust action against a Michigan-based truck engine manufacturer and its distributors in which personal jurisdiction was based solely on the nationwide service of process clause of Sec. 12 of the Clayton Act, venue had to be established pursuant to Sec. 12. The complaining truck dealers alleged that the manufacturer and its distributors engaged in price fixing and a group boycott in violation of Section 1 of the Sherman Act. The dealers, who were either terminated or downgraded in dealer classification by the manufacturer, unsuccessfully argued that Sec. 12's venue provision could be supplemented by any venue statute. They contended that venue was proper in any district in the United Statutes because Sec. 12 allowed for nationwide service of process. Sec. 12's venue clause could only be supplemented for alien defendants and not for domestic defendants. Because venue was improper in a federal district court in Pennsylvania (the moving defendants were not incorporated in Pennsylvania and did not have a presence in the district or engage in continuous local activities in the district), the case was transferred to a federal district court in Michigan.

RELATIONSHIP/TERMINATION
Int'l House of Pancakes, Inc. v. Hajloo, DC Colo.

California Franchise Act

Arbitration awards.

An arbitrator's award which determined that four restaurant franchise agreements could be terminated by the franchisor without notice and an opportunity to cure did not violate California public policy embodied in the California Franchise Relations Act. The franchisee of the four restaurants argued that Sections 20020 and 20021 supported the proposition, with limited exceptions, that there was a California public policy against terminating franchise agreements without advance notice and an opportunity to cure. However, California limited the scope of that public policy to franchisees and franchised businesses operating in California. The Act applied "to any franchise where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state." The franchisee was not domiciled in California, and the franchised businesses were operated in Colorado. In addition, the franchisee's contention that the arbitrator mischaracterized the issue of the notice of termination because he misrepresented the nature and content of certain evidence was a challenge to the arbitrator's factual findings and was not cognizable under the Federal Arbitration Act.

JUDGMENTS
7-Eleven, Inc. v. Dar, Ill. Ct. App.

Postjudgment Interest

Arbitration awards.

A convenience store franchisee was not entitled to an award of postjudgment interest on an arbitration award from the date of its original entry on December 29, 1998, because the entire award had been vacated. In 2001, an Illinois appellate court remanded an appeal of the award to the trial court with directions to enter an order vacating the award and ordering a rehearing before an arbitrator. The appellate court determined that the arbitrator had exceeded his authority when he awarded the franchisee damages for breach of the implied covenant of good faith and fair dealing by its franchisor. On rehearing, the arbitrator determined that since his finding that the franchisor had wrongfully terminated the franchisee had not been overturned, his award of $195,720 to the franchisee for wrongful termination was not subject to redetermination. The franchisee's contention that he was entitled to postjudgment interest on the $195,720 awarded for wrongful termination from December 29, 1998 was rejected because the entire 1998 award had been vacated. The substantive effect of the appellate court's order vacating the entire award was to restore the parties to their original status in the case as though no arbitration award had been entered.

CAUSE FOR TERMINATION
Dunkin' Donuts, Inc. v. Dough Boy Management, Inc., DC N.J.

New Jersey Franchise Act

Proof of damages.

A donut shop franchisor could have violated the New Jersey Franchise Practices Act by terminating the agreements of four franchisees without "good cause" and by imposing unreasonable standards of performance on the franchisees. Although the franchisees failed to establish damages as an element of their claimed violations, the Act did not explicitly require a showing of damages in order to establish a violation. Given the importance of the Act in protecting franchisees, its civil remedy provision specifying that a franchisee could bring an action against a franchisor for a violation to "recover damages," could not be read so restrictively as to preclude the franchisees' claims. There were issues of fact with respect to each of the claimed violations of the Act. A reasonable jury could conclude that the franchisees' businesses were operated in accordance with the franchisor's standards and procedures and that there was no substantial breach that justified the termination of the franchises under the Act. Similarly, whether the standards imposed on the franchisees by the franchisor were unreasonable was a question for a jury.

COLLATERAL ESTOPPEL
Ford Motor Credit Co. v. Daugherty, DC Cal.

Bar to Claims

Vehicle board proceedings.

A motor vehicle dealer's claims for breach of contract and the implied covenant of good faith and fair dealing, unfair business practices, interference with contractual and prospective contractual relations, and misrepresentation against a franchisor were barred by the doctrine of collateral estoppel under California law. The identical factual allegations supporting the dealer's claims were raised and decided in an administrative hearing before the California New Motor Vehicle Board as a result of a protest filed with the board by the dealer. The dealer's protest challenged whether the franchisor had "good cause" under the meaning of the California motor vehicle dealer law to terminate the dealer's franchise. The board concluded that the franchisor had good cause for the termination based on findings that the dealer ordered an excess number of cars causing the dealership to fail and that the dealership was not conducting an adequate amount of business. The proceedings before the board were adjudicatory in nature. It was an adversary proceeding in which opposing parties were present and represented by counsel. Moreover, the dealer had the opportunity for judicial review of the board's decision and did in fact appeal it to a California trial court. Moreover, judicial economy and public policy against vexatious litigation weighed in favor of applying collateral estoppel to the claims.

CONTRACT LAW
Dalton v. General Motors Corp., DC N.J.

Release of Claims

Enforceability.

A motor vehicle manufacturer was entitled to summary judgment on the claims of a motor vehicle dealer that was the proposed representative of a putative class of dealers because the dealer was granted leave to withdraw his affidavit in support of his claims. However, summary judgment against the dealer's claims was proper whether or not his affidavit was withdrawn because the claims were barred by an enforceable release agreement he entered into with the manufacturer as part of a 2002 reorganization of his dealership. Pursuant to the reorganization, the manufacturer agreed to forgive certain debts of the dealership, made a donation of additional capital to the dealership in exchange for the general release of the dealer's claims against the manufacturer. The dealer's contentions that the release of claims was unenforceable due to lack of consideration, unconscionability, fraud, and duress were without merit. The dealership reorganization, and the parties' respective consideration given, did not shock the conscience. Consideration in the form of $3.4 million flowed from the manufacturer to the dealership, an entity in which the individual dealer had an economic interest as shareholder and president. In addition, the release was not procedurally unconscionable because, instead of signing it, the dealer could have refused the reorganization and sued the manufacturer.

GASOLINE DEALERS
Chevron U.S.A., Inc. v. SSD & Associates, DC Cal.

PMPA

Dealer termination.

Because a gasoline station franchisor could have properly terminated a franchisee in compliance with the Petroleum Marketing Practices Act, therefore, the franchisee's motion to dismiss the franchisor's action for a declaratory judgment that the termination was proper was denied. The franchisor alleged that the franchisee failed to maintain and produce particular business records in breach of the parties' agreement. It claimed that the requirement to maintain and produce the records was "reasonable and of material significance to the franchise relationship" under the meaning of the Act because without that provision it would have no way to ensure that it was not being cheated by the franchisee. The dispute presented a factual dispute over the materiality of the documents the franchisee failed to provide. The franchisor's side of the dispute was adequately presented by its evidence, hence. Hence, there was no basis for dismissal.

HOTELS
Best Western Int'l, Inc. v. Oasis Investments, LP, DC Ariz.

Liquidated Damages

Enforceability.

Under Arizona law, a liquidated damages provision in a hotel franchise agreement awarding the franchisor daily damages for each day during which any of the franchisor's trademarks was displayed in connection with the hotel, after 15 days following the termination of the agreement in an amount equal to 15 percent of the mean of the hotel's room rates per room per day multiplied by the total number of rooms was enforceable. It would be very difficult for the franchisor to estimate accurately the loss it suffered due to the franchisee's unauthorized post-termination use of its trademarks. Therefore, the court gave great weight to the agreement's formula for the calculation of liquidated damages. The franchisee did not contest the reasonableness of the liquidated damages formula and, therefore, there was no issue of material fact regarding liquidated damages. The franchisor was entitled to recover liquidated damages from the franchisee in the amount of $50,976.00 as calculated by the agreement's formula.

ARBITRATION AWARDS
Realshare Int'l, Inc. v. Coldwell Banker Real Estate Corp., DC N.Y.

Confirmation

Manifest disregard of the law.

A real estate office franchisor failed to satisfy its "very stringent burden" to show that an arbitrator manifestly disregarded the law by determining that the franchisor had breached its agreement with a franchisee by permitting and sanctioning the use of the franchisor's trademarks in Manhattan in connection with real estate brokerage. Therefore, the award was confirmed. The parties' agreement provided that, with respect to its exclusive territory of Manhattan: "neither Franchisor nor any of its Related Parties shall open or operate, or license any other Person to open or operate, any office engaged primarily in a residential real estate brokerage business using the [franchisor's trademarks] within the Territory during the original ten year" term of the agreement. The franchisor's contentions that the arbitrator's determination was premised solely on a generalized finding that the franchisor promoted, directly or through corporate affiliates, the business of a head-to-head competitor of the franchisee was without merit. Rather, the arbitrator specifically found that the franchisor had violated the parties' agreement by permitting its corporate affiliate, a brokerage operating in the City of New York, including Manhattan, to use the franchisor's marks in connection with residential real estate brokerage. It was not a manifest disregard of the law to conclude that it was a breach of the agreement for the franchisor, by and through its affiliate, to substantially undercut the economic value of the exclusive grant of the contract.

NEW FRANCHISING LAWS

New Jersey

Malt alcoholic beverages.

New Jersey has recently enacted The Malt Alcoholic Beverages Protection Act regulating the relationships between brewers and wholesalers of malt alcoholic beverages. The Act provides that the terms of an agreement between a brewer and a wholesaler shall not permit a brewer to terminate, cancel or refuse to renew a contract, agreement or relationship with a wholesaler: (1) except where the brewer establishes that it has acted for good cause and in good faith; (2) because the wholesaler refuses or fails to accept an unreasonable amendment to the contract, agreement or relationship; and (3) without first giving the wholesaler written notice setting forth all of the alleged deficiencies on the part of the wholesaler and giving the wholesaler a reasonable opportunity of cure. Further, an agreement between a brewer and a wholesaler shall not: (1) require the brewer's consent to the acquisition, sale or transfer of distribution rights for products other than those of the brewer; (2) unreasonably withhold consent to a proposed sale or transfer of any ownership interests in the wholesaler to certain individuals; (3) unreasonably withhold consent to a proposed sale or transfer of any ownership interests in the wholesaler or the distribution rights for the brewer's products under certain circumstances; (4) allow more than one wholesaler to sell any of the brewer's product lines or brands within the same territory or area at the same time under certain circumstances; and (5) fail to act, during the term of the contract, in a manner consistent with the covenant of good faith and fair dealing; among other things. In addition, the new law specifies that the New Jersey Franchise Practices Act does not apply to those agreements that are subject to this new Act. Assembly Bill No. 3619 was approved December 15, 2005, and becomes effective March 1, 2006 (Malt alcoholic beverages).
Wisconsin

Fermented malt beverages.

A new Wisconsin law prohibits a wholesaler (including a brewer or out-of-state shipper that holds a wholesaler's license) from selling, transporting, or delivering any brand of fermented malt beverages unless the wholesaler has entered into a written agreement with the brewer or out-of-state shipper supplying the brand that grants to the wholesaler the distribution rights for the brand and precisely identifies the designated sales territory for which such rights are granted. Additionally, a brewer or out-of-state shipper may not grant to more than one wholesaler distribution rights for the same brand in the same designated sales territory. Within a wholesaler's designated sales territory for any brand, the wholesaler may not refuse to sell the brand, or refuse to offer reasonable service related to the sale of the brand, to any retailer. With specified exceptions, the bill prohibits a wholesaler from selling, transporting, or delivering, or causing to be sold, transported, or delivered, any brand of malt beverages to any retailer outside the wholesaler's designated sales territory. Assembly Bill No. 787 was approved January 5, 2006, and becomes effective August 1, 2006. (Fermented malt beverages).

ENCROACHMENT
Bloomington Chrysler v. DaimlerChrysler, DC Minn.

Motor vehicle dealers. A motor vehicle manufacturer did not breach the Minnesota motor vehicle dealer law by establishing a new dealership for one of its vehicle lines at a dealership location within the relevant market area of another dealer without proper notice, according to a federal district court in St. Paul, Minnesota. The dealer law required a manufacturer seeking to establish or relocate a dealership to notify each dealer of the same vehicle line within the relevant market area, defined as a radius of ten miles around an existing dealership, of the proposed new dealership. However, the establishment of the new dealership fell within the dealer law's relocation exception which eliminated the notice requirement if the relocation was "within five miles of its existing location" and "not within a radius of five miles of an existing dealer of the same line make," the court determined.

The protesting dealer contended that the manufacturer should be prohibited from using the relocation exception to do indirectly that which it was prohibited from doing directly. Specifically, the dealer argued that the manufacturer manipulated the relocation exception to evade the law's notice requirement by relocating three dealerships over a five-year period to finally establish a new dealership at a location 5.9 miles away from the dealer without affording the dealer a statutory right of protest. The dealer alleged that the manufacturer never intended to permanently establish the new dealership at any of the locations other than the final one, making each of the prior relocations as an interim step to its ultimate goal and frustrating the purpose of the dealer law. However, the dealer did not provide any caselaw directly interpreting the Minnesota law, and its reliance on an opinion in which a Massachusetts appellate court interpreted the Massachusetts dealer law was unpersuasive because the two laws were markedly different, the court stated.

Good Faith/Fair Dealing

The manufacturer could have breached the implied covenant of good faith and fair dealing in its agreement with the dealer by its actions in the establishment of the new dealership, the court held. The manufacturer contended that the parties' agreement expressly authorized it to add dealerships within the protesting dealer's sales territory as "appropriate." However, that provision was ambiguous, the court ruled. The facts alleged by the dealer called into question whether the manufacturer breached the implied covenant by allowing multiple relocations throughout the sales locality of the protesting dealer.


CHOICE OF VOICE
Hellex Car Rental Sys., Inc. v. Dollar Sys., Inc., DC N.Y.

Franchise assignment agreement. A forum selection clause in a rental car office franchise assignment agreement encompassed a dispute between the franchisor and the assignee-franchisee in which the franchisee sued the franchisor for alleged breach of the underlying franchise agreement, a federal district court in New York City has decided. The assignment agreement specified that "any suit, action or proceeding with respect to" the assignment was required to be brought in Oklahoma, and that the parties waived all objections to venue in "any suit, action or proceeding arising out of or relating to" the assignment "or any other agreements by and among" the parties. The franchisee's action against the franchisor for breach of the franchise agreement was an action "with respect to" the assignment agreement because the existence of the franchisee's claim was dependent upon its succession to the rights, responsibilities, and obligations under the original franchise agreement between the assignor-franchisee and the franchisor, according to the court. Moreover, it was the assignment that gave the assignee-franchisee standing to bring suit against the franchisor. The assignee-franchisee was not a party to the underlying franchise agreement and could not pursue its action on the basis of it alone, the court reasoned.

Enforceability

The forum selection clause was not unreasonable or contrary to public policy, the court determined. The New York franchisee argued that the clause was unreasonable because it did not reserve to the franchisee the protections provided by the New York Franchises Law, and that the unqualified designation of the law of a foreign state as the law governing an agreement subject to the New York Franchises Law was not permitted under New York public policy. However, the failure of the clause to explicitly reserve to the franchisee the protections of New York law was irrelevant to its enforceability, the court held. The substantive law applicable to the franchisee's claims was not presently at issue, and any restrictions New York law placed on the underlying dispute were distinct from the parties' ability to contract for the place where the legal actions were brought. Furthermore, the argument that New York franchise law prevented the parties from designating a forum other than New York in which to resolve their disputes was entirely without support.


INJUNCTIVE RELIEF
Pirtek USA, LLC v. Zaetz, DC Conn.

Trademark infringement. A franchisor of industrial and hydraulic hose businesses would not be irreparably harmed by the denial of a preliminary injunction enjoining a terminated franchisee and his business, the franchisee's son, and a competing business run by the son from infringing the franchisor's trademarks in violation of the Lanham Act, or from violating a noncompetition covenant in the terminated agreement, a federal district court in Hartford, Connecticut, has decided. The requested injunctive relief was denied.
Of the several infringements alleged by the franchisor, only two, the use by the son's business of the phrase "hose and assemblies" and its use of a symbol, a "Cog," appeared to be ongoing and therefore appropriate objects for preliminary injunctive relief, according to the court. However, the franchisor did not assert that the phrase "hose and assemblies" was part of its trademark and they were too general to plausibly engender confusion among consumers. In addition, although the franchisor's "Cog" symbol did have some resemblance to a symbol used by the son's business, the figures were not so similar as to cause confusion and harm to the franchisor.

Noncompetition Covenant

The franchisor alleged that when the franchisee was winding down his business, his son and his son's business violated, and aided and abetted the father in violating, a covenant not to compete in the terminated agreement. A Florida statute specified that, in the event a noncompetition covenant was breached, a presumption of irreparable harm was created. However, the statute also stated that a noncompetition covenant could only be enforced unless it was in a writing signed by the person against whom enforcement was sought and the franchisee's son was not a signatory to the covenant. Even if the statute applied, the requisite irreparable harm was still not present, the court determined. In light of the franchisor's admissions that: (1) the franchisee and his business were not currently involved in the operation of the son's business or any other competing business; and (2) that the son and his business were not currently illegally competing with the franchisor, there was no continuing harm. In addition, denying the injunction would not encourage other franchisees in the franchisor's system to abandon their franchise agreements as they could be held liable for doing so, the court noted.


ARBITRATION AGREEMENTS
English v. Cornwell Quality Tools Co., Inc., Ohio Ct. App.

Unconscionability. Because the arbitration clause in the franchise agreements for several automotive tools and equipment businesses was not substantively or procedurally unconscionable under Ohio law, an Ohio appellate court has required arbitration of several causes of action against the franchisor. The franchisees alleged that the franchisor had misled them as to numerous aspects of their businesses, including startup and recurring costs, potential income, and the risks and chances of their success. The franchisees all suffered the failure of their franchises, resulting in substantial losses. The franchisor filed a motion to arbitrate the claims pursuant to the arbitration clauses in the parties' agreements.

Substantive Unconscionability

The franchisees argued that the costs associated with arbitration made the clause substantively unconscionable because arbitration imposed undisclosed, excessive, and prohibitive costs. The franchisees stated that they were unaware of the fees charged to pursue arbitration, as there was no language in the arbitration clause itself that gave notice as to the costs involved, thus, the clause was not a commercially reasonable term. However, the costs of arbitration could easily be exceeded by litigation expenses, both at the trial and appellate level. Therefore, the potential cost of arbitration, by itself, was not enough to render the clause unenforceable, the court decided.

Procedural Unconscionability

The franchisees contended that there was no meeting of the minds between themselves and the franchisor regarding arbitration, rendering the clause procedurally unconscionable. They franchisees alleged that the franchisor discouraged them from even reading the contract before signing it and that the bargaining power between the two sides was disparate enough to create procedural unconscionability. However, the franchisees' arguments were without merit, the court determined. All of the franchisees could have sought out professional advice prior to signing their contracts. Additionally, the franchisor was not under an obligation to explain the arbitration clause, and was not remiss when it failed to suggest that each franchisee read the contract fully or retain counsel.


RELATIONSHIP/TERMINATION
Tippecanoe Beverages, Inc. v. Heineken USA, Inc., DC Ind.

Indiana beer law. The Indiana Beer Wholesaler Protection Statute did not apply to a contract between a beer importer and a beer wholesaler because the statute applied only to brewers and wholesalers, but not to importers, a federal district court in South Bend, Indiana, has ruled. Therefore, the wholesaler's claim that the importer violated the statute by terminating the distribution contract in 2002 without providing appropriate compensation was without merit.

Using the plain and ordinary meaning of the statutory terms "brewer" and "importer," the statute was unambiguous on its face. A brewer --one that manufactured brewed beverages --and an importer --one whose business was the importation and sale of goods from another country --were separate and distinct entities within the distribution process and were not interchangeable. Because the statute was unambiguous, it was required to be interpreted to mean what it plainly expressed and interpreted literally so as to carry the law into effect without limiting its extent or extending its operation. The wholesaler's argument that a strict interpretation undermined the statute's purpose and created an absurd result since there was no logical reason to protect the wholesaler who dealt with a brewer, but not protect the wholesaler who happened to deal with an importer was rejected. The Indiana General Assembly's choice to protect only contracts with brewers did not produce an absurd result requiring judicial modification, the court held.


ARBITRATION AWARDS
Handel's Enterprises, Inc. v. Wood, Ohio Ct. App.

Confirmation. An Ohio trial court did not err by failing to vacate an arbitration award granting damages to an ice cream shop franchisor in its dispute with a franchisee on the franchisee's asserted grounds that the award was contrary to public policy, an Ohio appellate court has determined. The franchisee contended that the parties' franchise agreement was unenforceable because the franchisor failed to comply with numerous requirements of the Ohio Business Opportunity Purchasers Protection Act. However, since the franchisee voluntarily submitted to arbitration of the dispute without raising, prior to the arbitration's completion, the defense that the agreement was unenforceable, it could not later argue to a trial court that the award should be vacated for that reason.

Even if the fact that the franchisee did not address its unenforceability contention to the arbitration panel was ignored, its argument would still fail because the alleged public policy would not justify reversing the award's confirmation, according to the court. The fact that an arbitration panel granted an award on a franchise agreement which did not allegedly conform to Ohio law was not clearly against public policy. There was no case to support the proposition that failing to comply with the Ohio business opportunity statute was against public policy, the court observed.

Law and Legislative Summary Information Provided By
BUSINESS FRANCHISE GUIDE, Letter No. 315, January 20, 2006
CCH.BUSINESS.COM/NETWORK

Franchise Registration & Renewal Requirements

In states that mandate presale registration, franchises cannot lawfully be granted until the franchisor has complied with the registration requirements. Failure to comply can result in administrative proceedings, public or private civil actions, or even criminal prosecution.

What are Registration and Renewal Requirements?

All registration states accept the Uniform Franchise Offering Circular format. Some also accept the FTC disclosure format. However, the laws and regulations of each state must be consulted in order to ensure compliance with its individual registration and disclosure provisions. These laws and regulations are included in the GUIDE, as are the UFOC and FTC forms.
Registrations are not necessarily immediately effective; instead, waiting periods of up to 30 days might be imposed in order to give the regulators the opportunity to review the filed documents for completeness. By law or regulation, many states require franchisors to renew a registration, or file a report, annually.

The North American Securities Administrators Association (NASAA) has developed a coordinated review procedure for franchise registrations in multiple states. The procedure is designed to streamline the franchise registration process by funneling communication and comments on registration applications through a "lead state" chosen to coordinate the review. In order to be eligible for coordinated review, a franchisor must file applications in two or more participating states and must provide audited financial statements with its registration application. The franchisor must be filing an initial registration application in each participating state. There is no additional fee for coordinated review; however, the franchisor still must pay the applicable registration fees for each state in which it is registering.
A franchisor could not be refused registration of an offering prospectus on the grounds that the franchisor's felony conviction created an unreasonable risk to prospective franchisees without the procedural due process rights of a fair hearing, cross-examination of witnesses, and notice of evidence to be considered. Lee Myles Associates Corp. v. Abrams (NY S Ct 1982).
An offer to sell a franchise need not qualify as an "offer" under ordinary contract law standards. "Offer to sell" is often defined broadly enough to include the attempt to offer to sell or the solicitation of an offer to buy a franchise or an interest in a franchise. The Illinois statute specifically includes coverage of the offer or sale of an option to purchase a franchise.
However, the renewal or extension of an existing franchise is not generally considered a sale if there has been no interruption in the franchisee's business.
Furthermore, the effect of registration laws is not restricted to what are commonly thought of as sales. "Sale" normally includes any disposition of a franchise for value.

What Affect does Non-Compliance have on these Requirements?

State laws frequently give officials the authority, without a prior hearing, to order a halt to franchise sales if there has been a failure to register successfully. The violation of such a stop order could constitute a criminal offense. In some states, any violation of the registration laws is a crime, regardless of whether there is a stop order in effect.
Whether a franchisee can rescind an agreement that was not properly registered before the sale varies from state to state. Some always allow a rescission, while others provide the remedy if there was a willful violation of the state laws or regulations. A "willful" violation is usually considered to be one that was performed knowingly or willingly, not necessarily one that was intended to injure or defraud another. Liability for a failure to register is not limited to the franchisor. Owners, shareholders, officers, and others who control the franchise seller, directly or indirectly, can be liable.

Who Regulates the Registration and Renewal Requirements?

State franchise registration regulators have been given broad enforcement and rulemaking authority. In various states, their powers include the ability to: sue for equitable relief or damages; undertake investigation inside or outside of the state; hold hearings; administer oaths, subpoena witnesses, and compel the production of evidence; order franchise sales stopped pending a hearing; accept service of process for nonresidents; make rules; prescribe forms; issue interpretive opinions; grant exemptions from registration or disclosure requirements; and deny, suspend, or revoke registrations.
Of course, the powers --both rulemaking and enforcement --must be exercised within constitutional limitations.

Are there Exemptions to the Requirements?

Franchise offerings can be exempt from the registration requirements of state laws based on characteristics of the franchisor, the franchisee, or the offering. Exemptions can be conferred by statute, by regulation, or by a state regulator. Exemptions must be considered in light of a state's registration requirements --one state might declare an offering to be exempt from registration while another simply does not include it within those transactions that must be registered. For example, Illinois excludes from the definition of a franchise a transaction requiring the payment of a fee of less than $500, while Michigan defines the arrangement as a franchise but exempts it from registration.
Registration exemptions based on the net worth of the franchisor or the franchisor's corporate parents are perhaps the most important, existing by statute in eight states. The experience of the franchisor and the sophistication of the prospective franchisee are other factors that might qualify an offering for an exemption.

A franchisee's sale of a franchise, for its own account and not through the franchisor, is generally exempt from registration, as are offers to sell an additional franchise to an existing franchisee and renewals of existing franchises. Offers and sales to banks and other financial institutions are frequently covered by statutory exemptions.
Isolated sales --sometimes described as no more than one sale in 12 months --that are not part of a franchise distribution plan are exempt under some state laws. Franchise sales by executors or administrators and by bankruptcy trustees are frequently exempt from registration.

A franchisor must file a request with the state regulator in order to secure an exemption from registration. Prospective franchisees are entitled to notice and disclosures as provided by the various state statutes. It has been held that strict compliance with exemption requirements is necessary or the exemption will be lost.

Since each state that requires registration has unique criteria determining which offerings are subject to registration, and which of those are eligible for exemption from registration, close attention to state statutes and regulations is necessary.

ALL SUMMARY INFORMATION FOUND AT HTTP://BUSINESS.CCH.COM/
CCH BUSINESS GUIDE, FRANCHISE AND DISTRIBUTION #315, JANUARY 20, 2006.

General Recommendations:

Franchisors and franchisees need to be certain they comply with all local, state, and federal laws. The very complex nature of franchise and distribution laws can make compliance and success difficult. Experienced legal counseling is best to ensure your rights and obligations are being protected – protecting your future. Mohajerian Law Corp. can help you understand the law, how it affects you, and actively protect your rights.

Key Strategies of Investigating a Potential Franchise

Any potential franchisee will tell you, choosing the right franchise system for you can be a grueling and tedious process. How do you really know when a franchise system is legit? How can you really understand the franchise system and its processes? How can you make sense of the overwhelmingly large UFOC you just received? The answer to these questions lies in how you investigate a franchise system. There are many strategies, some may or may not bring any real value to decision-making. With ten years of successful experience in guiding business owners to the right franchise system, Mohajerian Law Corp has this one piece of advice: Conduct thorough interviews of current and past franchisees.

Who better to explain the franchise’s system than those who are knee-deep in the trenches? All franchisees have been through the same process, faced with a very complex decision. They likely carried the same fears, anxiousness, and overwhelmed feelings at the seemingly jumbled information presented in the franchise system’s UFOC. More importantly, they have been through the rigors of the entire franchise system. From the initial selection of the franchise system as a business investment to the daily demands of operations; this knowledge places them in a select group of individuals who can provide you with exceptional access into the system itself.

Interviewing current and past franchisees can be the perfect way to evaluate the true nature of a franchise system – from how they support their franchisees to the requirements and obligations for which you will be accountable.

Considerations to Make Before Interviewing

1. Acquaint yourself with the dynamics of the franchisor/franchisee relationship. Experienced legal counsel can assist you in this understanding.
2. It is important to conduct more than one interview, several if possible, to gain an overview of what a group of franchisees has to say about the franchise system. It is unwise to rely on the stories or input of one or two franchisees.
3. When interviewing franchisees of the system make sure to include current and past franchisees. As well, consideration should be made to include those with an established, long-term relationship and new franchisees for both current and past.

The ultimate goal of the interview process is to have a good understanding of how the group feels towards the opportunity, its results, the franchise system itself, and the franchisor.

Important Topics to Cover

• Training and Support: For many new franchisees the venture of opportunity can often be overwhelming. The industry and its processes may be entirely new or the franchisee may lack some skills and knowledge. Ensuring a franchise system that provides adequate training and support to all franchisees, at all phases of the business, and is often critical to the success or failure of your business.
• Marketing Programs and/or Sales Requirements: The manner in which a franchise system provides marketing support, materials, and the requirements that it holds its franchisees to in regards to sales are very important topics to cover. A franchise system that provides high levels of support and materials may be a better fit for a new franchisee and vice versa.
• Investment and Earnings: A franchise system UFOC will provide information regarding the range of necessary capital for successful operation – however, it is always a good idea to cover this topic in your interviews. Franchisees can shed some light on how they opened, what range of capital they found to be successful, is there any cost-saving advice they can give you, and the earnings they have seen given the investment made. Of course, this will not indicate or guarantee your results. However, if a majority of the group is not seeing any return on investment, at all stages in the business, this would be an issue.
• Possible Purchase Power: Most franchise systems have purchasing programs, which can provide a considerable competitive advantage in costs compared to other establishments. These purchasing programs rely on the quantity, bulk buys similar to those in a co-operative. The potential purchasing power of the franchise system has many advantages for the franchisee.

Truly understanding the franchise system before making the critical decision to invest can be accomplished with a little effort on your part and the advice of experienced franchise counsel. While any investigation strategy can not guarantee your success in a franchise system – Mohajerian Law Corp. believes the more knowledge you carry into the decision-making process, the more likely you are to succeed in making the right decision for you.

Franchise Law Team - Mohajerian Law Corp.
www.mohajerianlaw.com

WHAT IS A FRANCHISE: FRANCHISE BASICS

Franchising is a specific manner of business, in which companies attempt to expand their market share more rapidly and less expensively than by other means. There are three basic types of franchises:

Distributorships which grant the right to sell the company's products.

Trademark and brand name licensing allows the licensees to use the company's trademark or brand in operating their own business.

Business franchises which allows the franchisee the right to use their trademarks, products, and business systems.

Business franchises usually have an initial fee or investment for the rights to sell its goods and services and/or use its business systems. After the initial investment, franchisees are typically required to pay a percentage of their gross profits to the franchisor during the length of the franchise agreement.

Purchasing the rights mentioned above, usually entitles the franchisee to also recieve initial training and on-going support. The franchisee has responsibilities to the franchisor in order to retain the rights above. These obligations can include:

• Ability to meet established quality requirements for products and services sold.
• Adhere to restrictions on how and what you can sell while operating within the agreement.
• Meet requirements for location and site appearance.

While this list is not exhaustive, it is important to note that franchisees have a great obligation to the franchising company to adhere to the specifications and requirements of the franchise agreement.

Often times the obligations of the franchisee are well worth it, as they often carry an advantage over their non-franchised competitors. These advantages can include: a well-recognized brand, product, or service; proven business systems training; and uniform business systems for ease of management with multi-units. These advantages are integral to the statistically higher success of franchised businesses over traditional start-ups.

Franchise Law Team - Mohajerian Law Corp.
www.mohajerianlaw.com
Franchise Law Team - Mohajerian Law Corp.

This article can be found in HTML, Word, and Adobe PDF format at:
http://www.mohajerianlaw.com/FranchiseLawTeam/franchisebasics.html

Franchisor Had “Good Cause” For Termination Under Act:

Maple Shade Motor Corp. v. Kia Motors of America, Inc., DC N.J.

A motor vehicle franchisor had “good cause” under the meaning of the New Jersey Franchise Practices Act to terminate a franchisee for failing to construct a separate showroom for the franchisor’s brand of vehicles, a federal district court in Camden, New Jersey, has held. By failing to construct the showroom as required by the parties’ agreement, the franchisee “failed to substantially comply with those requirements imposed on him by the franchisor,” thereby satisfying the Act's definitional requirement for good cause.

An addendum to the parties’ agreement specifically provided that the construction of the separate showroom was a material term of the agreement and that failure to construct the showroom was grounds for nonrenewal, the court noted. The construction provision had been separately negotiated by the parties and appeared to have been an important factor in the franchisor’s decision to grant the franchise, the court observed. The addendum required the franchisee to submit plans for the showroom to the franchisor by July 1, 1997, acquire the necessary permits by October 1, 1997, and complete construction by November 1, 1998. The franchisee’s contention that the agreement to build the separate showroom was void ab initio because the first two dates in the timetable had already passed when it signed the agreement on October 13, 1997, was without merit. At the heart of the addendum was the obligation to construct a separate showroom, which was not impossible in any sense of the word at the time it was signed. The fact that the franchisee did not execute and return the agreement until after the first two deadlines had passed did not undermine the basic understanding that it would construct a showroom, the court determined.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)


Insurance Agent Was “Franchise” Under Connecticut Act:

Charts v. Nationwide Mutual Insurance Co., DC Conn.

A jury's findings that an independent insurance agent's relationship with an insurance company was a "franchise" under the meaning of the Connecticut Franchise Act and that the company violated the Act by terminating the agent without "good cause" were supported by substantial evidence, according to a federal district court in Hartford, Connecticut. In addition, substantial evidence supported the jury's determination that the termination violated the Connecticut “little FTC Act” and its award of $2.3 million in compensatory damages to the agent. However, the insurance company was entitled to judgment as a matter of law on the jury's finding that the termination breached the implied covenant of good faith and fair dealing in the parties' agreements, the court ruled.

What is a Franchise?

The Connecticut legislature did not intend to preclude insurance agents from invoking the protection of the Connecticut Franchise Act, the court decided. The decisions from other jurisdictions cited by the insurance company to support its contention that the legislature could not have intended for the Franchise Act's “good cause” requirement to apply to insurance agents concerned factual settings and legislative schemes different from the Connecticut statutes and regulations. Moreover, the company’s catalogue of failed legislative attempts to impose a good cause termination requirement for insurance agents in Connecticut showed no clear indication that the legislature intended preemption of the Franchise Act by the insurance statutes and regulations.

There was substantial evidence supporting the jury’s finding that the agent was “granted the right to engage in the business of offering, selling, or distributing [goods or] services under a marketing plan or system prescribed in substantial part by” the insurance company, thereby satisfying the first element of the Connecticut Franchise Act’s definition of a “franchise,” the court ruled.

The company disputed whether the agent had the ability to bind it to a policy of insurance, and therefore could actually “sell” its policies. However, there was no dispute as to the agent’s ability to “offer” the company’s policies to customers and to execute initial, non-binding contracts with customers. Moreover, the agent testified that he did have the ability to bind the company to insurance policies on the basis of his prior success as an agent. There was considerable testimony from the agent, as well as employees of the insurance company, that supported the jury’s finding that the agent operated pursuant to a marketing plan or system prescribed in substantial part by the company. A company representative testified that the company employed managers to ensure that agents met its standards, provided agents with sample advertisements, and had to approve any use of the company’s logo in local advertisements. Additionally, a company manager assigned to the agent’s franchise testified that he would “sit down with [the agents] and go through what they had in plans as far as advertising, marketing,” and other aspects of the business, the court observed. The company did not challenge the jury's finding that the agent's business was substantially associated with the company's trademark.

“Good Cause”

Substantial evidence supported the jury’s finding that the company did not have “good cause” within the meaning of the Franchise Act to terminate the agent, the court decided. The company contended that the agent violated the Connecticut Insurance Code by paying for the policies of at least two individuals. The company alleged that the agent’s actions in paying for the policies constituted illegal rebating under the insurance law. However, at no time during the trial did the company introduce the appropriate provisions of the Insurance Code into evidence or elicit testimony from any witnesses stating that the reasons underlying the termination of the franchise were violations of state insurance law. Moreover, the jury could have found that the evidence submitted by the company on the issue was not persuasive, the court determined. Although the company could be correct in its assertion that the evidence was enough for the jury to determine that it had good cause to terminate the agent, the jury also had enough evidentiary support to find to the contrary. For example, the termination letter sent by the company failed to mention the alleged rebating incidents, and other agents testified that they had engaged in similar actions when selling the company’s policies.

“Little FTC Act”

The finding that the insurance company violated the Franchise Act provided the jury with a sufficient basis for its determination that the company also violated the Connecticut “little FTC Act,” the court ruled. Connecticut courts read the “little FTC Act” broadly, and the Connecticut Supreme Court had rejected an argument that claims under the statute could be brought only by a consumer, and not a business, according to the court. Moreover, in Hartford Electric Supply Co. v. Allen-Bradley Co. the Connecticut Supreme Court held that a defendant violated the “little FTC Act” through its conduct in attempting to terminate a franchise without good cause.

Good Faith/Fair Dealing

The company was entitled to judgment as a matter of law on the agent’s claim that it breached the implied covenant of good faith and fair dealing in their contracts by the termination and the jury's finding on that claim was reversed. Under Connecticut law, the implied covenant of good faith and fair dealing could not be used to achieve a result contrary to the clearly expressed terms of a contract. The parties’ contracts expressly provided that they were terminable at any time after written notice. The agent contended that there was sufficient evidentiary support for a jury to find that despite the language of the contracts, they contained an implied promise that they would only be terminated for cause. However, none of the evidence submitted by the agent concerning the lack of prior terminations by the company without cause, language in the insurance company’s handbook, or the company’s internal appeal process served to modify the termination language in the contracts, the court held.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

Maine Warranty Reimbursement Provision Constitutional:

Alliance of Automobile Manufacturers v. Gwadosky, CA-1

A provision of the Maine motor vehicle dealer law that a manufacturer “may not otherwise recover its costs for reimbursing a [dealer] for parts and labor” pursuant to the law's warranty reimbursement section was not unconstitutional in violation of the Commerce and Contracts Clauses, the U.S. Court of Appeals in Boston has decided. An order denying a request from an association of vehicle manufacturers for an injunction prohibiting the enforcement of the provision was affirmed.

The Maine legislature added the challenged provision to its dealer law in 2003, effectively prohibiting manufacturers from attempting to recover their costs associated with the law's mandatory retail-rate of reimbursement for warranty work. A manufacturer had reacted to the dealer law's retail-rate provision by adding a “warranty parity surcharge” to the wholesale price of vehicles it sold in Maine. The challenged provision was enacted at the urging of the Maine Auto Dealers Association to prevent such surcharges in the future, according to the court.

Commerce Clause

The challenged provision did not have a discriminatory purpose, discriminatory effect, or extraterritorial reach violative of the Commerce Clause, the court decided. The overriding legislative objective behind the dealer law’s regulation of warranty work reimbursement was to prevent an unfair price differential between warranty and non-warranty repair work —a differential that the Maine legislature reasonably viewed as detrimental to consumers and motor vehicle dealers alike. The challenged provision was closely tailored to achieve the legislative purpose by plugging the loophole that the manufacturer was exploiting with its “warranty parity surcharge” with perfect precision and ensuring that manufacturers, not dealers or consumers, would bear the true cost of retail-rate warranty work reimbursement. To support its assertion that the challenged provision’s recoupment bar had an advantage-stripping effect on dealers in Maine’s border state of New Hampshire, the association relied primarily on a stipulation that there was competition between Maine dealers and dealers in other states. That stipulation bore only a tangential relation to the theories of discriminatory effect, and there was no evidence of the provision’s supposed interference with the competitive process. The association's contention that the provision had the impermissible “practical effect of tying the wholesale price of motor vehicles in Maine to the wholesale price of identical motor vehicles outside of Maine” by making “the wholesale price of motor vehicles in Maine the minimum wholesale price in the 49 other states” was rejected. The challenged provision did not transform Maine prices into national minimum prices because automobile manufacturers retained the ability to adjust those prices for any reason save one —to recover their costs for warranty work reimbursement, the court reasoned.

Contracts Clause

The association's argument that the provision trespassed on the manufacturers’ franchise agreements by eliminating components of the manufacturers’ pricing discretion was without merit, the court held. Therefore, the provision did not substantially impair the reasonable expectations of the manufacturers in their contracts with dealers in violation of the Contracts Clause. Maine had heavily regulated the motor vehicle manufacturer-dealer franchise relationship, including warranty work reimbursement rates, since 1975, the court noted. Therefore, the provision’s recoupment bar was a foreseeable addition to that regulatory regime. It was, therefore, permissible under the Contracts Clause at least with respect to those franchise agreements entered into after 1975. The proper inquiry with respect to the six pre-1975 agreements in evidence was whether the challenged provision’s contractual impairment, albeit substantial, was reasonable and necessary to fulfill an important public purpose. The challenged provision’s purpose as a consumer and dealer protection measure was squarely within the category of remedies to generalized social or economic problems that constituted legitimate subjects for legislation, notwithstanding the Contracts Clause, according to the court.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

Termination of Farm Equipment Dealer Violated Idaho Law:

Sitco, Inc. v. Agco Corp., DC Ida.

A farm equipment dealer and manufacturer had a “dealer agreement” within the meaning of the Idaho farm equipment dealer law, a federal district court in Boise has determined. Therefore, the manufacturer wrongfully terminated the dealer without “good cause” and proper notice, as required by the law, when it notified the dealer that it was required to sign the manufacturer’s form dealer agreement to continue purchasing its tractors and refused to process any more of the dealer’s orders.

The dealer had a written dealer agreement with the manufacturer’s predecessor-in-interest, which expired on December 31, 2003. In 2004, the manufacturer acquired the predecessor-in-interest and continued to supply dozens of its predecessor-in-interest’s tractors to the dealer for sale. In late 2004, the manufacturer notified the dealer in writing that it was required to sign its form dealer agreement and in February 2005 the manufacturer refused to process any more of the dealer’s orders because the dealer had not signed the form agreement. Subsequently, the dealer brought suit against the manufacturer for damages under the dealer law, alleging that the manufacturer failed to comply with the statutory notice and good cause provisions.

The language of the dealer law clearly rejected common law requirements for the formation of a long-term dealership contract —such as offer and acceptance —as a prerequisite to the statutory protection the law afforded farm equipment dealers, according to the court. Rather, it defined a “dealer agreement” as including either a contract or an agreement, whether express or implied and whether oral or written, as long as there was a “continuing commercial relationship” between the supplier and dealer. The statute’s application was further broadened by defining a “continuing commercial relationship” as “any relationship in which the equipment dealer has been granted the right to sell or service equipment manufactured by the supplier.” The legislature intended that the statute’s protection would extend to informal business relationships, including those established by a course of conduct rather than a formal agreement satisfying the formalities of contract law, according to the court.

The parties had a dealer agreement under the law for two different reasons, the court held. First, the dozens of completed transactions during 2004 and early 2005 created a dealer agreement. The first element, granting the right to sell or service equipment, was satisfied dozens of times. The second element, a continuing commercial relationship, was satisfied because there were dozens of sales. Second, the parties also had a dealer agreement under the law because the manufacturer was the successor-in-interest to its predecessor, which had a written dealer contract with the dealer. By the terms of the statute, the manufacturer assumed its predecessor’s statutory obligations to the dealer.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

Manufacturer Did Not Tortiously Interfere with Agreement:

Crown Equipment Corp. v. Toyota Materials Handling, DC Ohio

A manufacturer of lift trucks (Toyota) did not tortiously interfere with a dealership agreement between a competing manufacturer of lift trucks (Crown) and a dealer by inducing the dealer to enter into a relationship to distribute Toyota trucks in the Tampa, Florida, area without first obtaining the approval of Crown, a federal district court in Akron, Ohio, has ruled. Crown, the complaining manufacturer, could not prove: (1) that Toyota had knowledge of Crown’s agreement with the dealer; (2) Toyota’s intentional procurement of the contract breach; or (3) Toyota’s lack of justification for interference with the contract.

The contract between the dealer and Crown required the dealer to refrain from acting as a dealer or agent for any competitor of Crown without first obtaining Crown’s prior written approval. It was undisputed that the dealer breached its agreement with Crown by entering into the agreement with Toyota for the Tampa area. After Crown notified the dealer of the breach, the dealer chose not to cure the breach, and Crown terminated their agreement. Toyota asserted that, although it presumed the dealer had a contract with Crown because that practice was standard in the industry, it had no specific knowledge of the terms of the agreement or that the dealer would have needed prior the approval of Crown to enter into an agreement with Toyota. Such a contractual provision could not have been anticipated, Toyota alleged, because it was not standard in the industry.

Crown failed to prove that Toyota had any more than a general belief that there was probably a dealer agreement between Crown and the dealer and, thus, could not establish the requisite knowledge element of tortious interference, according to the court. In addition, there was no evidence that Toyota had any intention to interfere with Crown’s contract with the dealer. Given that the dealer distributed products for both Crown and Toyota in the Orlando, Florida, area without incident, Toyota had no reason to believe that there would be a problem with a similar arrangement in the Tampa area. Moreover, it was only after the dealer insisted that it wanted to handle both of the manufacturers’ product lines in the Tampa area that Toyota offered the dealer financial assistance in the termination proceedings. Further, because the agreement between the dealer and Crown was terminable at will, a competitor such as Toyota was protected by privilege.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

FTC ENFORCEMENT:

FTC v. USA Beverages, DC Fla.

Franchise Rule

Coffee display racks. Two corporations and several of their principals were temporarily restrained and enjoined from violating or assisting others to violate the FTC Franchise Rule and from making any material misrepresentation or assisting others in making any material misrepresentation in violation of Section 5 of the FTC Act in connection with the sale of any business venture, including franchises. In addition, the assets of the defendants were frozen and a receiver was appointed to take exclusive custody and control of the defendants’ assets. The FTC was likely to succeed on the merits of its claims and the issuance of a temporary restraining order (TRO) was in the public interest. Immediate and irreparable injury would result if notice was provided to the defendants before the issuance of the TRO because the defendants appeared to have taken numerous steps to conceal the location of their businesses and even their own identities. There was a very real danger that the defendants would dissipate assets and destroy evidence absent the requested relief. Therefore, the FTC met its burden for issuance of the TRO without notice to the defendants.

The FTC alleged that the defendants operated out of Costa Rica and used Voice over Internet Protocol (VoIP) services, shell corporations, aliases, and shills to con U.S. consumers into investing in bogus coffee display rack franchises. The defendants used classified ads and a Web site to advertise their franchises and claimed that in exchange for payments from $18,000 to $85,000, they would provide customers with what they needed to operate successful businesses, including location assistance. The scam was based in Costa Rica, but the defendants used VoIP services to obscure their location and make it appear as if they were operating from New Mexico. The complaint alleged that the defendants violated the Rule by making false earnings claims and by failing to make required disclosures in their initial disclosure documents and in advertisements. Additionally, the defendants failed to have a reasonable basis for their earnings claims in violation of the Rule, the FTC alleged.

FTC v. Wealth Systems, Inc.

"Project Biz Opp Flop"

“Web broker” packages. Two Internet-based companies and their principals have agreed to refrain from misrepresenting any product or service and to pay approximately $80,000 in refunds to consumers to settle FTC charges that they violated the FTC's Franchise Rule and the FTC Act. In a complaint filed in February 2005, as part of "Project Biz Opp Flop," a criminal and civil crackdown on promoters of illegal business opportunity and work-at-home schemes, the Commission alleged that the marketers of the Internet-based business opportunities enticed consumers to become what the defendants called "Web brokers." The FTC complaint alleged that the defendants claimed that consumers could earn $20,000 to $50,000 "next year" by purchasing "Web broker packages" priced from about $300 to $1,400 or more. Consumers received a mailing with testimonials from Web brokers, one of whom claimed to have made "over $300,000 in a little over a year." As alleged in the complaint, few, if any, consumers who purchased the defendants' business opportunity and/or advertising services made any money, and few consumers received refunds The defendants agreed not to violate the Franchise Rule by failing to: (1) provide a complete and accurate disclosure document, (2) have a reasonable basis for any earnings claim at the time the claim is made, (3) immediately disclose that material constituting a reasonable basis for any earnings claim is available to the consumer, or (4) provide an earnings claim document.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

COMMON LAW:

Roger Edwards, LLC v. Fiddes & Son Ltd

Fraud

Relief from judgment. A furniture wax distributor was not entitled to relief from a judgment against him in favor of a wax manufacturer on the asserted grounds of fraud or fraud on the court. The distributor alleged that the manufacturer had breached the terms of their alleged distribution agreement by selling its wax products directly into the distributor’s protected territory or by allowing others to do so. Ultimately, a jury found that there was a distribution agreement between the parties but that the manufacturer had not breached it. The distributor sought to reopen the federal district court’s judgment by invoking Rules 60(b)(3) and 60(b)(6) of the Rules of Federal Civil Procedure by alleging that the manufacturer committed fraud and “any other reason justifying relief,” a catchall sometimes taken to include what was called “fraud on the court.” None of the statements or omissions alleged by the distributor remotely involved an unconscionable scheme or the most egregious conduct designed to corrupt the judicial process sufficient to conclude that the manufacturer had perpetrated a fraud on the court under Rule 60(b)(6). The basis for the distributor’s several 60(b)(3) fraud claims was the manufacturer’s allegedly fraudulent product labeling and certification practices. However, it was fraud perpetrated in the course of litigation which interfered with the process of adjudication that principally concerned Rule 60(b)(3)’s fraud provision, not fraud committed in the course of a commercial transaction. Moreover, there was no reason the distributor could not have unearthed the alleged deficiencies in labeling or certification prior to trial.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

DISCLOSURE/REGISTRATION:

Randall v. Lady of America Franchise Corp

Florida Franchise Act

Misrepresentations. Claims against a Florida health club franchisor brought by several health club franchisees alleging violations of the Florida Franchise Misrepresentation Act were not dismissed, even though the plaintiff-franchisees’ franchises were not located in Florida. The weight of case law seemed to favor the application of the Act to claims where the franchisor —but not the franchise —was located in Florida. The franchisees brought suit against the individual and the franchisor after their franchises failed to flourish as intended. They alleged that many of the franchisor’s representations regarding the franchises were false and that the franchisor failed to fulfill its obligations under their agreements. Specifically, the franchisees alleged violations of the Minnesota Franchise Act, the Florida Franchise Misrepresentation Act, the Florida Sale of Business Opportunities Act, and the Florida “little FTC Act,” in addition to breach of contract and the implied covenant of good faith and fair dealing, unjust enrichment, and fraud.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

“LITTLE FTC ACTS”:

Jacobs v. Physicians' Weight Loss Centers of America, Inc

North Carolina

Weight-loss centers. A North Carolina trial court erred by granting partial summary judgment to a franchisor of weight-loss centers and several of its franchisees on the claim by a class of customers of the centers for violation of the North Carolina “little FTC Act.” The class alleged that the franchisor and its franchisees committed an unfair or deceptive act in violation of the statute by prohibiting the doctors at its centers from giving the prescriptions they wrote for weight-loss medicines to the customers themselves. The trial court granted summary judgment dismissing those claims of members of the class who did not specifically request copies of their prescriptions from their doctor at the center. The trial court held that a customer did not suffer an actual injury unless it requested, and a doctor at one of the centers refused to provide, a prescription. However, the trial court’s reasoning assumed that those customers who did not request their prescription knew of their legal entitlement to their prescriptions —a fact that the franchisor and its doctors did not disclose —and waived their right to their prescriptions. There was no evidence to support that assumption. If the customers did not know they were entitled to their prescriptions under the law and would have sought to take their prescriptions to another pharmacy had they known of their entitlement, they suffered actual injury.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

CONTRACT LAW:

Livonia Hospitality Corp. v. Boulevard Motel Corp.

Statute of Frauds
Hotels. A hotel franchisee did not breach an alleged agreement with another franchisee by requesting its franchisor to change its hotel from a Quality Inn to a Comfort Inn in 2003 because the alleged agreement was barred by the statute of frauds. The complaining franchisee operated a Comfort Inn hotel in Livonia, Michigan, and alleged that the defendant franchisee, which operated a nearby Signature Inn in Plymouth, Michigan, agreed not to convert its hotel to a Comfort Inn in 1994. As a result of the alleged 1994 agreement between the two franchisees, and with some concessions made by the franchisor for the defending franchisee’s switch from converting to a Comfort Inn to a Quality Inn, the defending franchisee agreed with the franchisor to convert its hotel to a Quality Inn in 1994. However, in 2003 the defending franchisee entered into an agreement with the franchisor to convert its hotel to a Comfort Inn, and the complaining franchisee brought suit.

The complaining franchisee contended that a 1994 memorandum between the defending franchisee and the franchisor evidenced the alleged agreement between the parties. However, the memorandum only recited the concessions made by the franchisor to the defending franchisee for switching from converting to a Comfort Inn to a Quality Inn and did not evidence the alleged agreement. Further, the alleged agreement could not be performed in less than one year and was therefore barred by the statute of frauds. The complaining franchisee’s contention that the 1994 memorandum, as merged with other documents, evidenced the alleged agreement between the parties thereby satisfying the statute of frauds was rejected.

Sensormatic Electronics Corp. v. First National Bank Pennsylvania

Florida

Substantial performance. Under Florida law, the doctrine of substantial performance could not be invoked to prevent the forfeiture of a home security business franchisor’s option to repurchase a franchise from a franchisee pursuant to an option in the parties’ Franchise Lease Agreement (FLA). The FLA required the franchisor to provide not less than 90 days written notice to the franchisee of its intent to exercise the repurchase option. However, the franchisor sent the franchisee written notice of its intent to exercise the repurchase option only 47 days before the end of the lease term. Since the repurchase option was the only provision under which the franchisor could claim a right to buy the franchise, failure to properly invoke that option resulted in the loss of the purchase right. The franchisor was a sophisticated entity that was fully aware of the terms of the FLA when that agreement was signed and could not now complain that the result was unfair, especially since the timing of the notice was completely under its control.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

LIQUOR DISTRIBUTORS:

Tang v. Jinro America, Inc.

Termination

Existence of contract. An importer of Korean alcoholic beverages could not have breached a contract with a wholesaler by terminating the wholesaler’s distribution rights because the wholesaler failed to raise a genuinely disputed issue of fact as to whether a valid contract between the parties existed. In addition, the wholesaler failed to allege or show that the importer made any misrepresentation of material fact, or that the importer intended that such conduct be acted upon by the wholesaler sufficient to justify equitably estopping the importer from terminating the distribution rights. The wholesaler brought suit against the importer after he received a letter from the importer indicating that their written distribution agreements had expired and that it would cease accepting orders from the wholesaler. Although the wholesaler produced a translation of an alleged 2001 agreement which the parties had negotiated after the expiration of their previous agreements, neither party produced the original document in Korean. The translated copy was unsigned and the importer claimed that it was never executed. Indeed, the wholesaler was inconsistent about whether or not he actually signed the agreement.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

RACIAL DISCRIMINATION:

Hubmann v. McKenna BMW

Statutes of Limitations

Employee of franchisee. An automobile salesperson’s claims against a motor vehicle franchisor for violation of the California Fair Employment and Housing Act (FEHA), several statutory and constitutional provisions and the public policies embodied in them, and for intentional and negligent infliction of emotional distress were time-barred by the relevant statutes of limitation, which in each instance was one year. The salesperson was terminated from his employment at a dealership franchised by the franchisor after his supervisor allegedly made rude remarks about the salesperson’s German ancestry. According to the salesperson, the remarks created a hostile, racist, and discriminatory work environment. The salesperson alleged that the dealership he was employed by was a franchisee of the franchisor and, as such, was subject to the franchisor’s contracts, policies, and procedures. Further, the salesperson contended that the franchisor was aware or should have been aware of its franchisee’s unlawful conduct. However, because the unlawful conduct complained of took place no later than the salesperson’s termination on October 10, 2000, the complaint, which was not filed until March 3, 2003, was time-barred.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

STATE REGULATION:

Hawaii

Filing fees. Hawaii has lowered its franchise application, amendment, and renewal filing fees by 50%, from $250 to $125, beginning on November 1, 2005, according to the state's Department of Commerce and Consumer Affairs Business Registration Division. The reductions are effective only for one year and the fees will automatically readjust to their statutory levels on November 1, 2006. Due to Hawaii's robust economy, the Department's revenues were expected to exceed expenditures in 2006, prompting the fee cuts.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

PRICE DISCRIMINATION:

United Magazine Co. v. Murdoch Magazines

Magazine wholesalers. Several magazine wholesalers could not establish that the national distributors from which they received magazines engaged in “allocation discrimination” or “return policy discrimination” in violation of Sec. 2(a) of the Robinson-Patman Act, according to a federal district court in New York City. The wholesalers failed to come forward with admissible evidence to support their legal theory and failed to demonstrate the existence of a disputed material fact sufficient to defeat summary judgment.

A Robinson-Patman Act claim could have been made if the distributors' return policies were applied in a discriminatory fashion, such that those policies affected the price paid by the wholesalers for the magazines and caused injury, the court noted. However, the wholesalers argued that they were allocated more magazines to sell than a favored competitor, which meant that the complaining wholesalers had more returns than the favored competitor. The complaining wholesalers contended that, as a result, they incurred expenses not incurred by the favored competitor, but the wholesalers could not establish a violation of the Act based on the fact that they incurred expenses that a competitor did not incur, the court ruled. Such expenses could increase a purchaser's costs, or reduce its profits, but they did not change the price paid by either the purchaser or the competitor to the seller. Additionally, the wholesalers could not state a claim for indirect price discrimination under the Act. It was well established that the forms of indirect price discrimination encompassed by the Act were limited to rebates, discounts, free goods, promotional payments, or similar forms of compensation that were given by the seller to the buyer and that effectively lowered the price. The wholesalers offered no evidence of any labor assistance given to the favored competitor to reduce its handling costs, the court observed.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

PREMISES LIABILITY:

Corrales v. Days Inn Worldwide, Inc., Colo. Dist. Ct

Hotels. A hotel franchisor was not directly or vicariously liable for the injuries a hotel guest sustained while showering at one of its hotels, a Colorado trial court has ruled. The guest, who alleged that he was burned while showering at the hotel, contended that the franchisor was a “landowner” for purposes of the Colorado premises liability statute and that it was liable for his injuries under theories of direct negligence or vicarious liability.

There was no agency relationship between the franchisor and the hotel, either actual or apparent, according to the court, because there was insufficient control exercised by the franchisor through the license agreement and its actual practices to establish that the franchisor was a principal in an agency relationship. Each party to the license agreement between the franchisor and franchisee had independent rights and obligations. Although the guest argued that the nature of the agreement and the franchisor’s system standards demonstrated such control, in reality, the agreement and the actions of the parties established no more than standards to safeguard the uniformity, value, and integrity of the franchise system, the court determined.

The agreement specified that the franchisee was an independent contractor, was not the franchisor’s representative or agent, and had no power to obligate the franchisor for any purpose whatsoever. It did not grant the franchisor a role in managing the day-to-day operations of the hotel. System standards, training, inspection, and the franchisor’s right to terminate the agreement did not alone establish sufficient control to charge the franchisor with liability for injuries sustained by a guest in connection with the hotel’s operation, the court held.

The franchisor was not a landowner under the meaning of the Colorado premises liability statute because it was not “legally responsible for the condition of the real property or for activities conducted or for the circumstances existing on real property,” the court decided. At no time was the franchisor in “possession” of the hotel or have “on-the-ground” control of the hotel essential for a finding of legal responsibility.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

INJUNCTIVE RELIEF:

Home Instead, Inc. v. Velez, DC Neb

“Good cause” for termination. A franchisor of companionship and domestic care service businesses for senior citizens was entitled to a preliminary injunction requiring a franchisee to: cease operating its franchised business; cease displaying the franchisor’s trademarks; and comply with the terms of post-termination covenants in the parties’ franchise agreement, a federal district court in Omaha, Nebraska has ruled. The Nebraska franchisor terminated the parties' agreement after several alleged breaches by the New Jersey franchisee. The evidence appeared to confirm the franchisor’s claim that it had “good cause” under the New Jersey Franchise Practice Act to terminate the relationship, according to the court. The Act defined “good cause” as the failure of the franchisee to substantially comply with the requirements of the franchise agreement and the franchisee clearly breached the agreement by failing to timely pay franchise fees. In addition, there were affidavits from other franchisees stating that the franchisee solicited business in their territories in breach of its agreement. The franchisor would be irreparably harmed by market confusion and loss of reputation if the injunction was not granted. Both the public interest and the balance of the harms also weighed in favor of granting requested relief.

Personal Jurisdiction

The guarantor of the parties' franchise agreement, an individual citizen of New Jersey, was subject to personal jurisdiction in Nebraska, the court determined. The guarantor contended that all of his contacts with Nebraska occurred as the president of the franchisee and that there were insufficient minimum contacts to establish jurisdiction over him in his individual capacity. However, the guarantor executed his personal guarantee in Nebraska and made personal phone calls to and negotiated with the franchisor to try and purchase a franchise, the court noted. In addition, the individual admitted that he was in Nebraska doing business with the franchisor in 2000, 2002, and 2003. Finally, although not dispositive, the individual admitted that the franchise agreement contained a forum selection clause designating Nebraska as the place for trial in the event of a dispute.

Report-Letter, Business Franchise Guide, Letter No. 314, CCH (www.business.cch.com/network)

Understanding Franchise Agreement Relationship & Termination Laws

BASED ON THE A SUMMARY OF FEDERAL AND STATE FRANCHISE RELATIONSHIP AND TERMINATION LAWS.

“This is a quick summary of the Relationship and Termination provisions of federal and state requirements. For an in-depth analysis of the specific requirements applicable to you, please contact Mohajerian Law Corp. at www.mohajerianlaw.com. This newsletter is not intended to be legal advice and is for informational purposes only.”

Franchise relationship and termination laws deal directly with conduct in the context of an existing franchise agreement. Generally agreed upon is the concern by legislatures regarding franchises being wrongfully terminated or dominated unfairly by large franchisors and distributors. The conduct of concern has been discrimination, franchisor competition, market encroachment, and dilution.

What do Termination, Cancellation, and Nonrenewal Really Mean?

The act of ending a franchise relationship is deemed a “termination,” “cancellation,” or “nonrenewal.” While “termination” and “cancellation” generally refer to ending a relationship during its intended term, “nonrenewal” generally means the end of a franchise agreement at expiration. Often times, the franchise agreement will outline the grounds for termination or cancellation. As well, the basis for renewal a signified in the franchise agreement.

Regardless of the terms set forth, the franchise relationship and termination laws set standards that franchisors must follow to avoid successful legal action on the part of a franchisee. It is important that careful consideration by franchisors be made to comply with law of their applicable jurisdiction.


How is Alteration Different?

In addition to termination, cancellation, and nonrenewal some franchise relationship and termination laws govern changes to franchise agreements otherwise known as alterations. For example, under Section 1 of the Indiana Deceptive Franchise Practices Law, it is unlawful for a franchise agreement to provide for or allow substantial modification of the franchise agreement by the franchisor without written consent of the franchisees. However, the change may have to be proven to be “substantial.” In Wright-Moore Corp. v. Ricoch Corp. a photocopier manufacturer’s unilateral change in credit terms for the sale of copiers to a distributor, as authorized by the distributorship agreements, was held not to be a substantial change due to the lack of resulting harm to the distributorship’s business.

Are There Standards of Conduct for Franchisors?

Under the franchise relationship and termination laws, a common requirement of conduct specifies that franchisors must act “fairly,” “justly,” or with “good cause.” These standards apply variously in attempts by franchisors at termination, cancellation, nonrenewal, alterations, and sometimes changes in competitive circumstances. For example, the “good cause” standard, in most states, applies to termination, cancellation, and nonrenewal. However, under Section 20 of the Illinois Franchise Disclosure Act of 1987, the “good cause” standard does not apply to nonrenewal. In other cases, the “good cause” is defined precisely, as with the Iowa Code, Title XX, Section 523H.7 which defines “good cause” to be:

“The failure of the franchisee to comply with a lawful requirement of the franchise agreement, provided that the termination by the franchisor is not arbitrary or capricious when compared to the actions of the franchisor in other similar circumstances. In addition, the burden of proof rests with the franchisee.”

What is a Change of Competitive Circumstances?

As noted the conduct of franchisors towards franchisees requires some level of “good cause” in connection with termination, cancellation, and nonrenewal. Some states require “good cause” for what is termed a “change in competitive circumstances.” For example, Wisconsin’s Fair Dealership Law makes this requirement.

However, the question of what constitutes a “change in competitive circumstances” has been the subject of considerable litigation. A variety of activities have been found to fall under the definition. These have included, for example, inadequate advertising, imposition of a discount for case program, change of distributorship to a non-exclusive basis, ineffective managements, installation of other distributorships in territory, bans on mail order sales, and withdrawal from the market.

Still in some cases, fairly substantial changes imposed by a franchisor have been held not to have substantially changed the franchisee’s competitive circumstances. In Bresler’s 33Flavors Franchising Corp. v. Wokosin, an ice cream franchisors imposition of a new standard agreement on a Wisconsin franchisee – requiring remodeling, advertising, and increased franchise fee – did not substantially change the franchisee’s competitive circumstances.

General Recommendations

Understanding and complying with the complex nature of franchise relationship and termination laws can be quite a challenge for most franchisors. The best advice you can receive is to make sure you fully understand and comply with all applicable laws regarding your business. In most cases, review and counseling from an experienced franchise lawyer is the best way to ensure your compliance.

Mohajerian Law Corp. encourages you to contact our firm with questions or concerns regarding the franchise relationship and termination laws that are applicable to you. We proudly serve franchisors and franchisees in their quest for sound, prudent legal counseling.

Overtime Obligations of Employers
Exempt & Non-Exempt Employees

BASED ON THE FAIR LABOR STANDARDS ACT (FLSA), THE INDUSTRIAL WELFARE COMMISSION (IWC), AND THE A.B. 60.

“This is a quick summary of the overtime provisions of federal and state requirements. For an in-depth analysis of the specific requirements applicable to you, please contact Mohajerian Law Corp. at www.mohajerianlaw.com. This newsletter is not intended to be legal advice and is for informational purposes only.”

Overtime computations and the requirements regarding who should be paid overtime have always been a point of difficulty for employers. The rules by which some people are entitled to overtime payment and some are not can be extremely challenging to understand. Failure to pay overtime is one of the leading causes of claims against employers, probably more than wrongful discharge, harassment, and stress combined.

Starting Point

An important mind-set for business owners is to start with the premise that everyone is entitled to payment of the overtime they have worked. There are numerous rules that apply based on the industry you are in. However, the most common include:

• Hours worked in excess of 8 in one day are paid at time and a half.
• Hours worked in excess of 40 a week are paid at time and a half.
• Hours worked in excess of 12 a day are paid at double time.

Further, if you have employees who work alternative schedules, such as 10 or 12-hour shifts, you need to determine further the rules which may apply.

Who Is EXEMPT From Overtime Payment Requirements?

The rules that govern the exemptions from overtime payment requirements are often narrowly interpreted by the labor commissioner, and should be given extreme care in application to avoid expensive mistakes. Exempt positions are not subject to payment for overtime requirements. While employer policy may allow for overtime payment, there are no restrictions on rates used or the number of hours for which payment is required. There are seven exemption categories under the FLSA and IWC orders.

1. Executive Exemption

• Receives at least two times the state’s minimum wage as a salary for full-time employment – also known as the “minimum salary level test.”
• The position has a primary responsibility for the management of the company or a recognized department of the company.
• The position has direct supervisory role for two or more persons.
• The position has the authority to hire and fire, give consideration of pay, or make a recommendation on either.
• The position can handle employee complaints and discipline issues.
• The position devotes less than 50% of their time focusing on tasks other than that are managerial.
• The position has the ability to use discretionary power on a regular basis.
• OR, owns at least 20 percent of equity interest in the company and actively assists in its management.

2. Learned Professional Exemption

• The position has the primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized study.
• In most cases, only certified or duly licensed occupations are exempt under state law. This can include: law, dentistry, medicine, optometry, engineering, teaching and accounting.
• Wage Orders 1 (Manufacturing), 4 (Professional, Technical, Clerical, Mechanical, and Similar Occupations), 5 (Public Housekeeping), 9 (Transportation) and 10 (Amusement and Recreation) allow for exemptions for the positions that require learned professionals.
• The minimum salary test must be met.

3. Creative Professional Exemption

• Position’s primary duties include performing work requiring invention, imagination, originality, or talent recognized in a field of artistic or creative in nature.
• The position’s minimum salary meets the ‘Minimum Salary Test.’

4. Administrative Exemption

• Position’s primary duty of performing office or non-manual work that is directly related to the management or operations of the company.
• Regularly exercises discretion and independent decision-making in the performance of intellectual work.
• Regularly assists a proprietor or other exempt administrator only under general supervision or duties that require special training and knowledge.
• Position devotes more than 50% of time to the above activities.
• Position meets the ‘Minimum Salary Test’ requirement.

5. Outside Sales Exemption

• Primary duty of position is to make sales, obtain orders, or solicit contracts for services.
• The person filling the position is 18 years or older.
• Position usually works outside of office selling items or services.
• Position performs outside sales more than 50% of time.

6. Computer-related Occupational Exemption

• Job titles of position can include: computer programmer, systems analyst, computer systems analysts, applications systems analysts, and systems engineer and systems specialist.
• Position is primarily engaged in intellectual or creative work that requires the exercise of judgment.
• The position is highly skilled and proficient in highly technical applications related to computer systems.
• Position is paid; at least, $44.63 per hour (may change every year).
• Position is primarily engaged in one of the following:
• The application of systems analysts techniques.
• The design, development, documentation, analysis, creation, or otherwise of computer systems.
• The design, development, documentation, analysis, creation, or otherwise of computer software applications.
• A combination of these duties.

7. Highly Compensated Positions

• Any position that is guaranteed a total annual compensation of $100,000 or above.
• Position regularly performs functions under exemptions listed above.
• Excluded from this exemption are “blue collar” workers – police, fire, other emergency and the like.
• Total base salary for this position can include base salary, commission, non-discretionary bonuses, and more.
• Total annual compensation can not include:
• Medical insurance payments.
• Life insurance payments.
• 401k pension plan payments.
• Retirement plan contributions.
• Other fringe benefit costs.

NOTE: If you have employees who perform exempt functions part of the time and non-exempt the other part, anytime spent in non-exempt functions must adhere to overtime requirements.

What About Seventh Day Work Rules?

There are requirements on how employers can treat overtime on the seventh day work week, according to A.B. 60. These requirements include:

• Employees must be paid time-and-a-half the regular rate for the first eight hours worked on the seventh consecutive day worked in a work week.
• Double time must be paid for all hours worked beyond eight on any seventh consecutive day of a workweek.
• Part-time exemption is eliminated. Part-time employees who work on the seventh consecutive day must be paid according to the rules.
• Workweeks must remain constant. If the workweek runs from Monday to Sunday, the seventh workday in the workweek will be Sunday.

Are There General Overtime Rules I Should Follow?

• Only straight time hours apply toward computing overtime hours worked in excess of 40 hours in a week.
• Only work hours actually work count toward computation.
• An employee’s regular pay rate is used for overtime calculations.


Which Work Order Applies to My Company?

California employers are subject to both state and federal wage and hour laws. Typically, whichever law is more favorable to the employee will prevail. In California, there are 17 wage orders that may apply to your company.

Wage Orders set forth information such as the minimum wage, hours, overtime requirements and limitations, and meals/rest periods. Employers are generally classified by the main function/purpose of the company. To comply, it is very important to determine the appropriate Wage Order that is applicable to your company. However, determining the correct Order can be difficult and costly if mistakes are made. Any Wage Order determination should be made with your company’s legal counsel to ensure you are in full compliance of all laws and orders.

General Recommendations

• Have a detailed job description in the employee manual that outlines the status of the position, its functions, and other pertinent information.
• Keep detailed written time records for all employees, exempt or non-exempt.
• Pay for all overtime worked, as required by applicable IWC regulations.
• Post the required IWC Order that pertains to your industry.

Summary Judgment Denied - Gasoline Dealers Covered by Indiana Acts Fee Exception:

Ayers v. Marathon Ashland Petroleum, LLC

In a decision made by a federal district court in Indianapolis, a group of gasoline dealers could proceed with their claims against an oil company and its subsidiary for unfair competition and unfairly discriminating against its franchisees – a violation of the Indiana Deceptive Franchise Practices Act. The oil company and its subsidiary’s request for summary judgment was denied because there were questions of fact over whether the dealers satisfied the Act’s definition of “franchise” by operating under a marketing plan or system prescribed by the oil company and its subsidiary. The subsequent claim by the dealers of unfair competition was time-barred by the Act’s two-year statute of limitations.

The summary judgment was denied, in part, because the oil company failed to show that the dealers were not “franchises” under the meaning of the Act. The oil company contended that the dealers did not pay a franchise fee to the company and the Act’s exception to the franchise fee requirement did not apply. The court determined that the language of the Act, pertaining to the exception, was ambiguous in nature and not clear whether the Indiana legislature intended for the exception to apply only to those who sold both motor vehicles and fuel. One interpretation, according to the court, was that only businesses selling both were relieved of the franchise free requirement. However, the court determined that interpretation in this manner would be absurd, because the exception would be applied so narrowly that no business would receive the exception. The court ruled that the legislature must have meant for the exception to apply to both motor vehicle dealers and gasoline dealers. Therefore, because it was undisputed that the dealers were engaged in the sale of gasoline, there were covered by the exception.

The oil company further disputed the fact that the dealers were “franchises” because they did not have adequate control over the dealers’ marketing plans or systems for the parties’ agreement to constitute “franchises.” The act itself does not provide for a list of factors to use in determining if the control was sufficient over the marketing plans or system to constitute a “franchise.” The Indiana Court of Appeals, in Master Abrasives Corp. v. Williams, did provide guidance by listing five factors to consider making the determination. These five factors included: (1) it divided the state into marketing areas, (2) it authorized the establishment of sales quotas, (3) it gave the franchisor approval rights for any sales personnel hired by the franchisee, (4) it established mandatory training for the franchisee’s sales personnel, and (5) it required the franchisee to elicit information from customers regarding how they would use the products so that the franchisor could determine which products to sell.

According to the district court, the five factors presented did not constitute an exhaustive test. Rather, a court would need to examine the nature of the obligations that an agreement imposed on a putative franchisee. In particular, the nature of the mandates regarding the sales of goods or services put forth by the franchisor. The dealers argued that most were required to pay rent based on sales volume. The court held that a reasonable jury could view the oil company’s policy of correlating rent to sales volume as a de facto sales quota. The dealers also argued that other applicable company mandates included: (1) gasoline station owners were required to travel to Indianapolis for company training if they had no previous experience, (2) the oil company conducted quarterly mystery shop programs to assess the performance of the service stations, and (3) the oil company mandated operating hours for its service stations. Given the five factors and the dealers’ arguments, it is reasonable to determine the dealers operated under a marketing plan and system prescribed by the oil company, the court determined.

The last claim of the dealers regarding unfair competition on the part of the oil company, was time-barred, the court determined. The dealers filed their lawsuit on October 28, 2003, and each knew of the possibility of unfair competition prior to October 28, 2001. The court determined that under the continuing wrong doctrine, the statute of limitations continued to run if the plaintiff learned the facts that should lead to discovery of a cause of action.

Report-Letter, Business Franchise Guide, Letter No. 313, CCH (www.business.cch.com/network)


Motor Vehicle Dealers’ Claims of Violations to the Indiana Deceptive Franchise Act Time-Barred:

Kahlo Jeep Chrysler Dodge v. DaimlerChrysler Motors, Co.

An Indian appellate court has decided that a group of motor vehicle dealer cause of action against a manufacturer for violation of the Indiana Deceptive Franchise Practices Act was time-barred by the Act’s two-year statute of limitations. The dealers contended that the manufacturer violated the act by including a provision in their franchise agreements that permitted them to amend the arguments unilaterally.

In May 2004 the manufacturer gave notice to its dealers within the United States of an amendment to the franchise agreement concerning dealer sales performance requirements. In June 2004, the dealers filed suit claiming the amendment violated the Act. The Act’s statute of limitations is an occurrence-based statute that began to run with any violation, not when a franchisee suffered injury due to the franchisor’s actions. According to the court, because all of the dealers’ franchise agreements had been executed more than two years before the suit was filed, their complaints were time-barred.

In addition, the dealers argued that even though the agreements reserved the right of the manufacturer to unilaterally amend the agreement at any time, it was not feasible to determine whether the modification provision permitted “substantial” modification as prohibited by the Act until the manufacturer actually attempted a “substantial” modification. The court rejected this argument stating that the modification provision in the franchise agreements permitted the manufacturer to make any modification to the agreement so long as it did so unilaterally.

Report-Letter, Business Franchise Guide, Letter No. 313, CCH (www.business.cch.com/network)


Illinois Dealer Law Deemed Not Unconstitutional:

General Motors v. Illinois Motor Vehicle Review Bd.

An Illinois appellate court ruled that the Illinois motor vehicle dealer law was not unconstitutional on any of the grounds contended by a manufacturer and dealer. The complaint challenged the constitutionality based on due process, the Commerce Clause, the Sherman Act, and the Illinois constitution’s prohibition of special legislation.

The court ruled that the Illinois motor vehicles dealer law’s “good cause” standard was not unconstitutionally vague – a violation of due process. The complaint filed did not cite any cases where a “good cause” standard was determined to be unconstitutionally vague. Further, the court reasoned that the dealer law went beyond other laws which had been found to not be unconstitutionally vague. Additionally, the dealer law did not violate due process simply because it failed to provide a prompt post-deprivation hearing. The court reasoned that even if due process required a hearing, the manufacturer and dealer failed to cite any cases in which a court found a statute facially unconstitutional because it did not provide for a prompt post-suspension hearing. Lastly, the court held that the complaint failed to demonstrate a constitutional violation of due process based on the facts of the case.

With regards to the Commerce Clause, the court deemed the dealer law did not place an excessive burden on interstate commerce. As previously recognized by the U.S. Supreme Court, where a statute regulated evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce were incidental, it should be upheld, unless the burden imposed on such commerce was clearly excessive in relation to the putative local benefits. The manufacturer and the dealer failed to demonstrate that the statute had any other effect beyond only a restriction on interurban competition. Thus, the dealer law did not place an excessive burden on interstate commerce.

The court also ruled that the dealer law did not violate the Sherman Act because the manufacturer and dealer failed to distinguish the present circumstances from a case in which the U.S. Supreme Court rejected an argument that the California motor vehicle dealer law barred by the Sherman Act in New Motor Vehicle Board of California v. Orrin W. Fox Co.. In New Motor, the Supreme Court ruled that the California law fell under the Sherman Act’s state-action exemption.

The special-legislation clause of the Illinois Constitution prohibited the legislature from conferring special rights, privileges, or immunity, or imposing a specific burden on a specified portion of the population to the exclusion of others who were similarly situated. The complaint attacking the statute’s validity was required to demonstrate the classification’s unreasonableness or arbitrariness. By prohibiting the addition of new franchises when good cause did not exist, the dealer law protected the equities of existing dealers. Accordingly, the manufacturer and the dealer failed to satisfy the burden of proving that the classification was unreasonable.

Report-Letter, Business Franchise Guide, Letter No. 313, CCH (www.business.cch.com/network)


Refusal to Grant Dealer Approve Not Antitrust Violation:

Care Heating & Cooling, Inc. v. American Standard, Inc.

The U.S. Court of Appeals in Cincinnati has decided that an agreement between a heating and cooling equipment manufacturer and its authorized dealer to not approve a competing dealer as an authorized dealer did not violate the Sherman Antitrust Act or the Ohio Antitrust statute. The complaint argued that the agreement between the manufacturer and authorized dealer should be considered a per se violation of the antitrust laws due to its destruction on free competition, without providing any redeeming benefit, that its legality should be presumed. According to the court, the agreement satisfied the test for vertical restraint on trade and was per se legal because a manufacturer had a right to select its customers and refuse to sell its goods to anyone, for reasons sufficient to itself. Because it was a vertical restraint, the complainant was required to establish the unreasonableness of the alleged trade restraint under the rule of reason. The complaint failed to satisfy the rule of reason test, the court ruled.

The court also noted that the complaint failed to establish adverse effects on the market as a whole. The Sherman Act was read narrowly to prohibit only unreasonable restraints on trade, the court observed. Because protecting competition was the sine qua non of the antitrust laws a complaint alleging only adverse affects suffered by an individual competitor could not establish an antitrust injury.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

U.S. Supreme Court

U.S. Supreme Court Hears Price Discrimination Claims:

Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. Dkt. No. 04-905

The U.S. Supreme Court heard price discrimination claims by a group of dealers who claim heavy-duty truck manufacturer Volvo violated the Robinson-Patman Act by charging one dealer lower wholesale prices than another dealer when there was no evidence that the dealers were competing for the same customers. Arguments were heard on October 31. The decision at issue, by the U.S. Court of Appeals in St. Louis, upheld a jury verdict in favor of a complaining dealer of heavy commercial trucks, which bid for the trucks in a competitive bidding process common in the industry.

The complaining dealer presented evidence that it had lost a specific sale to another Volvo dealer that was given a larger discount by the manufacturer. Volvo’s discriminatory pricing policy resulted in a dramatic loss of business and the eventual loss of the complaining dealer’s Volvo franchise. It is likely the case will hinge on the central issue of how Volvo supplied vehicles to dealers – specifically, the fact that the dealers did not keep inventory in stock for sale to customers. Volvo’s lawyer argued that courts have laid down the rule that at least two purchases are needed to violate the Robinson-Patman Act. When dealers, such as the complaining dealer, received unfavorable price concessions from Volvo, they did not make a sale to a customer and therefore did not purchase a vehicle from Volvo for resale – mere offers did not violate the Act.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Injunctive Relief

Non-compete Agreement

KJ Loughery, Inc. v. KRK, Inc.

A home inspection business franchisor was entitled to a preliminary injunction enforcing the terms of a restrictive covenant in its agreement with a former franchisee. The franchisee was previously enjoined from operating a home inspection business for the period of two years in Delaware County, Pennsylvania, and any adjacent county. He was also enjoined from continuing to use his presently utilized form for home inspections.

The injunctive relief was granted because the franchisor was likely to succeed in demonstrating that the franchisee knowingly breached the agreement by ceasing operation of the franchise and, following termination, continuing to utilize the benefits of the agreement. The franchisor would be irreparably harmed if the franchisee’s actions continued and the restrictive covenant in the agreement was not enforced. As well, the business interest and public interest was larger that the inconvenience to the franchisee that would be caused by enforcing the restrictive covenant.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Likelihood of Success

Brighton Optical, Inc. v. Vision Service Plan, Inc.

A federal district court denied a motion for a preliminary injunction enjoining the termination of their membership in a vision insurance plan and the optometrists proceeded with an interlocutory appeal. According to the court, the optometrists only demonstrated a possibility of success on the merits of their claims and the dispute was not a “rarest of cases” requiring a reversal of the federal district court’s balancing of equities. In addition to their motion for injunctive relief, the optometrists alleged that the administrator violated their right to due process by terminating them arbitrarily, breached their agreements, attempted monopolization in violation of the Sherman Act, and violated the Michigan antitrust laws.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Permanent Relief

Planet Smoothie Franchises, LLC v. Massey

A smoothie franchisor terminated the parties’ agreement and brought suit against the franchisees and two limited liability companies after they failed to satisfy their obligations under the agreement. The terminated franchisee and LLCs were held jointly and severally liable for $50,000 to the franchisor and were permanently enjoined from using the franchisor’s trademarks or confusingly similar trademarks on smoothie products and from causing any products with the franchisor’s trademarks from entering commerce.

Additionally, the franchisee and the companies were ‘permanently enjoined from: (1) representing that they or their business operations were connected with the franchisor; (2) using any trade dress logos, or other commercial symbols associated with the franchisor’s marks, and from operating a smoothie business on any premises using décor in the color purple, except that they could continue to use the purple countertops currently in use at their business; (3) using or adopting any manuals or materials delivered to them by the franchisor; and (4) making any statement about the franchisor apart from “We were a franchisee of Planet Smoothie and that relationship has ended.”’

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Liquidated Damages

Enforceability

Days Inn Worldwide v. Mandir, Inc.

A provision in a hotel franchise agreement which required a franchisee to pay the franchisor $200,000 in the event of the franchisee’s breach, was determined to be reasonable and enforceable. The actual damages that would be incurred with a breach are impossible to determine at the time of execution and the amount was not disproportionately large to the amount of damages anticipated to result from the agreement’s early termination. In fact, several factors are highly unpredictable making the amount a reasonable estimation of potential loses.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Trademark Infringement

Lanham Act

Ramada Franchise Systems, Inc. v. Bridgeton, Inc.

A hotel franchisee violated the Lanham Act by continuing to display a franchisor’s trademarks without the franchisor’s consent after the termination of their franchise agreement. The franchisor terminated the agreement in April of 2003 for the franchisee’s failure to pay the amounts due under the franchise agreement. The franchisee did remove some of the trademarks being used, but continued to the franchisor’s trademarks until they eventually closed in October of 2004. The franchisee’s unauthorized use of the marks was clearly likely to cause confusion as to the hotel’s association with the franchisor.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Non-compete Agreement

Post-Termination Duties

O.J. Distributing, Inc. v. Hornell Brewing Co.

The issue of material fact over whether a beverage distributor breached its agreement with a manufacturer by failing to comply with the agreement’s post-termination provision following the manufacturer’s termination of the agreement. The manufacturer claimed that the distributor failed to provide it with sales and customer information, as required by their agreement, and although the distributor eventually supplied the information, it was not “immediately” in accordance with the agreement. The court did not agree with the manufacturer and denied the claim.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Arbitration Awards

Arbitrator Partiality

Doctor’s Associates, Inc. v. Dhalwal

A court denied the motion of a sandwich shop franchisee to vacate an arbitration award in favor of the franchisor on the grounds the arbitrator failed to disclose the nature of prior dealings with the franchisor. The franchisee made the conclusory assertion that the “evidence will demonstrate that this disclosure was incomplete and inaccurate.” The franchisee failed to show the extent of the disclosure and why it only became an issue after the award was made. The court reasoned that failure to provide evidence left the franchisee’s claims unlikely and the award could not have been made in an impartial manner.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Procedure

First-Filed Rule

Valpak Direct Marketing Systems, Inc. v. Valpak of Cincinnati, Inc.

A franchisor of direct mail advertising businesses’ action for a declaratory judgment determining the rights and liabilities of itself and a franchisee of five units was stayed pursuant to the first-filed rule. The parties’ dispute concerned the franchisee’s proposed ownership transfer notice. The franchisor filed an action 14 minutes before the franchisee, in different courts. The court determined that the first-filed rule applied, when parties filed competing or parallel claims in separate federal courts, the court in which the case was first filed should hear the case.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Common Law - Fraud

Sufficiency of Pleading

John Deere construction and Forestry Co. v. Mahnen Machinery, Inc.

A construction equipment dealer’s counterclaim against a manufacturer for fraud was sufficiently pled to survive the manufacturer’s motion to dismiss. The court reasoned that although fraud claims are subject to more stringent standards than other claims, that standard applied to the facts surrounding the fraudulent statement, not the reasonableness of the complaining party’s reliance on those statements. Further development of the facts surrounding the dealer’s fraud claim should be sought in discovery.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Antitrust Law

Distributor Termination

Campbell v. Austin Air Systems, Ltd.

A distributor of air cleaners did not adequately allege a concerted action between a manufacturer of air cleaners and its other distributors in support of his claim that the manufacturer violated the Sherman Act. According to the federal district court in New York, the manufacturer was entitled to summary judgment on the distributor’s claim. The court determined, construing the evidence in a light most favorable to the complaining distributor, there was no direct or circumstantial evidence that tended to prove the claim made. It was unlikely the manufacturer and the competing distributors shared a conscious commitment to a common scheme designed to fix prices.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Contract Interpretation

Agreement to Agree

Kosher Provisions v. Blue & White Food Prod., Corp.

A federal district court in New York City has concluded that a kosher food products manufacturer did not breach a 2002 security agreement promising to use commercially reasonable efforts to conclude a distribution agreement with the distributor. The court reasoned that in no way did the agreement
S language suggests that the manufacturer was required to offer the distributor a distribution agreement; it reflected only an agreement to agree, binding the parties in good faith negotiations. Also, the court concluded that any resulting agreement be “mutually acceptable” also provided an “unmistakable” indication that the manufacturer did not intend for either party to be bound by the agreement.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Overtime and Non-Exempt Employees

California and federal law both provide for payment of overtime compensation based on a multiple of the employee’s ‘regular rate’ of pay (generally time-and-a-half) for hours above the statutory maximum (generally over 40 hours in a week under federal and state law, but also over eight hours per day under California law.

Under both federal and California law, a ‘workweek’ means seven consecutive days beginning with the same calendar day each week.

State law requires employers to authorize rest periods of specified minimum duration (generally 10 minutes of paid rest for every four hours worked). No employer may require an employee to work during any meal or rest period under IWC Wage Order mandates.

Employees who work more than five hours in a day are entitled to a meal period of at least 30 minutes and a second meal period of at least 30 minutes if they work more than 10 hours in a day. An employer who fails to provide meal or rest periods as required by an applicable Wage Order must pay the employee one additional hour of pay at the employee’s regular rate of pay for each work day that the meal or rest period was not given.

When Does Overtime Start?

In California, the IWC Wage Orders broadly define ‘hours worked’ to include ‘the time during which an employee is subject to the control of the employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.’

The critical issue in determining hours worked is whether the employee was ‘suffered and permitted’ by the employer to work. It is irrelevant whether it was necessary for an employee to work long hours in order to complete an assignment, or whether another employee could have done the work in less time. ‘It is immaterial whether it was necessary for (the employee) to work long hours, so long as he did, with the actual or constructive knowledge of his employer.’ Donovan v. Kentwood Develop. Co., Inc.; see also Skipper v. Superior Dairies, Inc. – fact another employee could or did perform same duties in less time does not negate claimant’s right to overtime pay; Davis v. Food Lion – no overtime pay where employer had no actual or constructive knowledge of employee’s ‘off the clock’ work.

An employee must be paid for time considered to be on duty while on the employer’s premises. See Bartholomew v. Heyman Properties. Preparatory activities that are an integral part of the employee’s principal activity are compensable as time worked. Examples include: Mitchell v. King Packing Co. – in meatpacking plant, time spent sharpening knives before and after work considered integral and compensable; Alvarez v. IBP, Inc. – time spent donning and doffing unique protective gear, walking to job station and waiting for assembly line to begin, were ‘integral and indispensable’ to job and therefore compensable; but see Tum v. Barber Foods, Inc. – employer not required to compensate employees for time spent walking to place where safety gear was stored and a ‘short amount of time’ waiting in line to obtain protective gear.

Employers need not compensate employees for activities preliminary or postliminary to their principal duties unless those activities are an ‘integral and indispensable part’ of the principal activities for which the workers are employed. See Alvarez v. IBP, Inc. – donning and doffing required by law and done for the benefit of employer is integral and indispensable part of workday; compare Turner v. Barber Foods, Inc. – time spent donning and doffing of non-required gear not compensable.

Some activities that may qualify as ‘work’ and nevertheless do not require compensation because the activities involve such little time that they are adjudged de minimis: ‘A few seconds or minutes of work beyond the scheduled working hours … may be disregarded.’ Anderson v. Mt. Clemens Pottery Co. Whether the additional time spent on preliminary and postliminary activities is ‘de minimis’ may depend on:

• The aggregate amount of time spent on such activities;
• The activity’s regularity;
• The ‘practical administrative difficulty of recording the additional time.’ Reich v. Montfort, Inc.

As little as 10 minutes spent on preliminary and postliminary activities ‘goes beyond the level of de minimis.’ Reich v. Montfort, Inc. – time spent in donning and removing safety gear and cleaning knives at meat processing plant.

Who is responsible for record-keeping?

Every employer is required to make, keep, and preserve such records of the persons employed by him and of the wages, hours, and other conditions and practices of employment maintained by him, and shall preserve such records’ for specified periods of time.

The following records must be maintained for at least three years from the last date of entry:

• Payroll records, including each employee’s name, address, occupation hours worked each day and week, wages paid and date of payment, amounts earned as straight-time pay and overtime, and deductions;
• Plan, trusts and collective bargaining agreements;
• Employee notices; and
• Sales and purchase records.

The following additional records must be retained for a minimum of two years from the date of last entry:

• Basic time and earning cards;
• Wage rate tables;
• Work schedules;
• Order, shipping, and billing records; and
• Records of additions to or deductions from wages.

Employees are not penalized because of their employer’s failure to keep adequate records. They can meet their burden of proof in wage actions by their own testimony showing that they have in fact performed work for which they have not bee properly compensated. They need not prove the precise hours worked; they need only produce sufficient evidence to show the amount and extent of such work as a matter of a just and reasonable inference. Beliz v. W.H. McLeod & Sons Packing Co. – ‘Because precise evidence of the hours worked by each individual is not available due to the failure of (employers) to keep adequate records, the workers may satisfy their burden with admittedly inexact or approximate evidence’; see also Mumbower v. Callicott – court properly relied on plaintiff’s own recollections to determine number of hours she worked where employer failed to maintain adequate records.

The burden then shifts to the employer to come forward with evidence of the precise amount of work performed or that negates the reasonableness of the inference the employee’s evidence supports. If the employer fails to produce such evidence, the court may then award damages to the employee, even though the result is only approximate. Anderson v. Mt. Clemens Pottery Co.

The employer must provide an employee or former employee copis of his or her payroll records within 21 days after a request, or permit the employee to inspect those records. (Failure to comply results in a $750 fine, and the employee may sue to obtain the information and recover

costs and fees). Also with each pay check the employer must give an itemized wage statement showing the hours worked by the employee. A knowing failure to comply can result in a $100 penalty per an offense and a maximum statutory penalty of $4,000.

How can unauthorized overtime be prevented?

Courts examine the employer’s personnel documents to determine if there is an implied agreement. Tomlison v. Qualcomm, Inc., Thus, an employee handbook may give rise to an implied-in-fact contract, by setting self-imposed limitations, such as discipline and termination procedures. Foley v. Interactive Data Corp. When an employer promulgates formal personnel policies and procedures in handbook, manuals, and memorandua disseminated to employees, a strong inference may arise that the employer intended workers to rely on these policies as terms and conditions of their employment, and that employees did reasonably so rely. Guz v. Bechtel Nat. Inc.

Failure to have a handbook will not necessarily prevent a finding o an implied-in-fact contract since the implied contract may be based in part on employer policies and procedures. Whether those procedures have been memorialized in a handbook does not seem to be determinative. See, for example, Harden v. Maybelline Sales Corp. (no discussion of handbook, yet court concluded that employee could state action based on implied-in-fact contract based in part on oral representations from personnel department of just cause for standard for termination.)

The first step to prevent employees from taking unauthorized overtime is to have a firm policy stated in an employee handbook prohibiting overtime or permitting overtime only if certain requirements are met. Although an employee’s failure to follow the procedures in an employee handbook may not be able to defeat a wage and hour claim, the employee handbook should help greatly when it comes time to determine what the employer’s stated policy regarding overtime was. Obviously you must be sure to enforce your own written policies and not make regular informal exceptions to the written policy.

California Case Law Review

Charges Not Indirect Franchise Fee Under California Act:

Adees Corp. v. Avis Rent-a-Car System, Inc.

A fleet surcharge and a refueling charge that a rental car company withheld from its commission payments to a rental car agent did not constitute an “indirect franchise fee” under the meaning of the California Franchise Relations Act (CFRA), the U.S. Court of Appeals in San Francisco decided. Since there was no franchise relationship, the Act could not be applied to invalidate a contract provision allowing termination by either party upon 30 days’ written notice. Summary judgment in favor of the rental car company on the CFRA claim was affirmed.

The trial court observed that although there was little authority on what constituted a franchisee fee under California law, other states considered a number of interrelated factors to determine whether a payment was a franchise fee. Those factors included: (1) whether the party making the payment received something of value in exchange for the payment, (2) whether the payment was an ordinary business expense of an unrecoverable investment, and (3) whether the party making the payment put its own money at risk.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Class Arbitration Ban Unconscionable Under California Law:

Indep. Assn. of Mailbox Center Owners v. Super. Ct., Cal.

A ban on class-wide arbitration in an arbitration clause within several mailing service business franchise agreements was unconscionable and unenforceable under California law, a California appellate court has decided. Additionally, certain limitation of remedies provisions in arbitration clauses within some of the group's agreements were unconscionable and unenforceable to the extent that they deprived the franchisees of statutorily authorized remedies or relief in court that would otherwise be allowable to them.
Specifically, limitation of remedies provisions found in some of the agreements restricted an arbitrator from awarding punitive, consequential, or incidental damages, lost wages and/or profits, attorney fees and/or costs, and specified that, "in no event shall any monetary damages be recovered by a franchisee in excess of the amount of the franchise fee and the cost of building" its franchised location. The franchisees brought suit against their franchisor challenging the conversion of their stores into a new format and alleged violations of the California Franchise Investment Law, the California antitrust and "little FTC" acts, along with breach of contract, tortuous interference, and defamation.

The trial court's denial of the franchisees' motion for consolidation of the claims and its ruling that the ban on class wide arbitration in some of the agreements was not unconscionable was substantively incorrect because it disregarded applicable law governing adhesion contracts in the franchise situation, where broad statutory arguments implicating the public interest were raised, the appellate court ruled. The franchisees made a statutory showing that there were separate arbitration agreements, that their disputes arose from the same facts or series of related transactions, and that there were common issues of law or fact.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Non-California Case Law Review

Engine Distributor Had Good Cause to Terminate Dealer:

River Valley Truck Center v. Office of App.

A distributor of a particular brand of truck engines had “good cause” under the Minnesota heavy equipment dealer law to terminate its dealer agreement with a truck dealership because the dealership failed to substantially comply with the agreement, the Minnesota Supreme Court has held. The agreement required the dealership to “actively and effectively” promote the sale of the brand of engines to its customers. However, in 2002 the manufacturer of the type of trucks sold by the dealership decided to no longer offer the particular brand of engines in new truck sales. Therefore, the dealership’s resulting inability to sell new trucks equipped with the brand of truck engine prevented it from “actively and effectively” promoting the sale of such engines as required by the parties’ agreement, the court decided. The fact that the dealer was able to comply with some other essential requirements of the agreement – i.e. selling replacement engines to current owners – did not eliminate good cause for renewal. Therefore, a decision by a Minnesota appellate court was affirmed.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Termination Did Not Violate Illinois, Minnesota Laws:

Sound of Music Co. v. Minnesota Mining and Mfg. Co.

A dealer's claims that a company that provided background music through a network of dealers violated the Illinois Franchise Investment Act and the Minnesota Franchises Law by terminating their agreement were without merit, a federal district court in Chicago has ruled. Furthermore, the dealer was not permitted to amend its complaint to allege a violation of the Illinois "little FTC" Act. The company terminated the parties' agreement upon 12 months' notice of its decision to exit the background music business.

The dealer's claim that the company violated the Illinois Act by terminating their 1995 dealership agreement without "good cause" was barred by the Act's one-year statute of limitations, the court determined. However, contrary to the impression created by the dealer's claims, the putative franchise fees were far from being hidden, according to the court. The fees were located in the parties' previous dealer agreement, executed in 1988.
The dealer's claim that the company violated the Minnesota Franchises Law by terminating their agreement was waived because the agreement contained a clause explicitly stating that the dealer was not a franchisee, the court decided. Although the Minnesota law contained an anti-waiver provision, it was limited to Minnesota franchisees and the dealer was located in Illinois. It was undisputed that the dealer was neither a Minnesota resident nor "a franchise to be operated" in Minnesota under the meaning of the Minnesota statute.
The dealer was denied leave to file an amended complaint adding a claim under the Illinois "little FTC" Act against the company because such a claim would be futile, the court held. The agreement stated in unequivocal terms that the corporation could exit the business at any time on 12 months notice and that the agreement would last, at the latest, until December 31, 1999. During the negotiations for the parties' agreement, when the company told the dealer that it would not agree to a 60-month notice period, that was a clear warning sign, the court observed.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Labs Could Sue for Resale Price Fixing, Not Exclusivity Pacts:

Howard Hess Dental Labs v. Dentsply Int’l, Inc.

Dental laboratories could pursue a resale price fixing claim against an artificial tooth manufacturer and 26 of its authorized dealers, the U.S. Court of Appeals in Philadelphia has ruled. The laboratories first filed suit in 1999, claiming that the manufacturer monopolized, attempted to monopolize, conspired to monopolize, and unreasonably restrained trade in the market for artificial teeth by entering into agreements with nearly all of its dealers setting their resale prices and prohibiting them from also selling teeth made by its competitors. Standing to pursue damages was denied under the Illinois Brick doctrine. In Illinois Brick Co. v. Illinois (431 U.S. 720, 1977), the U.S. Supreme Court held that indirect purchaser plaintiffs did not have statutory standing to recover damages for "passed-on overcharges." The laboratories filed another suit in 2001 making substantially similar claims of wrongdoing, but additionally naming the dealers as co-conspirators and asserting that the labs were direct purchasers from the dealers. Again, however, a federal district court ruled that Illinois Brick barred the labs from pursuing damages and the claims were rejected.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Tortious Interference & Unlawful Actions (Optometrists):

Hardy v. Vision Service Plan, Inc., Mont. Sup. Ct.

A nonprofit corporation that contracted with optometrists to provide prepaid vision care services to beneficiaries of its insurance plans did not tortuously interfere with business relations by terminating an optometrist's membership in its plan after it discovered that the optometrist had entered into a franchise agreement with a franchisor of optometrists. The optometrist contended that the corporation intentionally caused him damages without justifiable reason when it terminated their relationship and engaged in a campaign to discourage current and prospective patients from patronizing his business. However, his complaint failed to detail which actions, if any, the corporation unlawfully engaged in to damage his business after the termination. The agreement between the nonprofit corporation and the optometrist required the optometrist to maintain majority ownership and complete control of all aspects of his practice, including his dispensary. Unbeknownst to the corporation, the optometrist had previously entered into a franchise agreement prior to his contracting with the nonprofit corporation. The optometrist's actions in entering into the franchise agreement conflicted with the plain language of his agreement with the nonprofit corporation that he retain control of all aspects of his practice because the franchise agreement required the optometrist to operate his business in a manner that strictly adhered to the franchisor's standards and policies. Thus, the nonprofit corporation had justifiable cause to terminate its contract with the optometrist.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Vicarious Liability & Agency (Auto Repair Shops):

Rosser v. AAMCO Transmissions, Inc., Ala. Sup. Ct.

An Alabama trial court did not abuse its discretion in denying further discovery on the issue of whether an automobile repair shop franchisee was an actual or apparent agent of an automobile repair shop franchisor. A minor passenger in an automobile was injured when the automobile experienced a malfunction that caused it to collide with another vehicle. The automobile had been repaired at the franchisee's business and the minor passenger and her mother sued the franchisee and the franchisor, alleging that the franchisee had negligently or wantonly failed to properly repair the automobile and that the franchisor was liable because the franchisee was the franchisor's actual or apparent agent. Under the undisputed facts, the plaintiffs could not claim that the franchisee exhibited to them any apparent authority as an agent of the franchisor, and could not claim that they were misled to their detriment by any appearances that the franchisee was the franchisor's agent. Even if the plaintiffs had been able to develop the names of witnesses who could testify to the indicia of apparent authority, that indicia would be irrelevant because the plaintiffs would have been ignorant of it. Moreover, given the significant expenditure of attorney fees and expenses by the franchisor over the long course of the litigation, the trial court did not exceed its discretion in concluding that the plaintiffs had a full and fair opportunity to ascertain facts pertaining to both the apparent and actual agency theories.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Racketeering & Pattern of Activity (Predicate Acts):

Mougrabi v. Covenant Air & Water, LLC, DC Ill.

Two shareholders of a water purification systems distributor who sued a manufacturer of water purification systems and its president for violation of the federal RICO statute sufficiently alleged both the relationship and continuity prongs of a pattern of racketeering for purposes of surviving a motion to dismiss. The shareholders alleged that for at least 18 months, on numerous occasions, and in furtherance of their scheme to defraud the shareholders, the defendants committed: (1) mail fraud; (2) wire fraud; and (3) travel fraud. Violations of all three of those statutes served as predicate acts for a RICO violation. Taken together, the allegations demonstrated that the defendants sought to defraud the shareholders through multiple, related predicate acts which were committed over a closed-end period of conduct. The defendants argued that any predicate acts occurring after the parties executed a dealership agreement in October 2001 should not be considered. However, the shareholders did not allege the existence of any dealership agreement which was central to their RICO claims; and, on a motion to dismiss, matters outside of the complaint which were not central to a plaintiff's claim were not considered.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Good Faith & Open Price Terms (Gasoline Dealers):

Bob's Shell, Inc. v. O'Connell Oil Associates, Inc., DC Mass.

A gasoline station franchisor could have breached its contractual obligation with several franchisees to set an open price term for gasoline in good faith by setting gasoline prices
unreasonably high. Although the evidence submitted by the plaintiff franchisees was weak, it was enough to submit the issue to a jury. There were genuine issues of material fact over whether there was a substantial difference in price between what the franchisor charged the franchisees for gasoline and what it charged independent or franchisor-owned dealers, and over whether the franchisees genuinely competed with such independent or franchisor-owned dealers. The evidence proffered by the franchisees could demonstrate to a jury that the franchisor made it impossible for their businesses to survive and that it set prices in an attempt to drive them out of business.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Injunctive Relief & Irreparable Harm (Purified Water Business):

H2O to Go, LLC v. Martinez, DC Fla.

A purified water business franchisor was not entitled to a preliminary injunction enjoining a franchisee from operating its business pending resolution in arbitration of the franchisor's claims against the franchisee for various breaches of the parties' agreement as well as breaches of a noncompetition agreement between the parties. The franchisor alleged that the franchisee relocated its franchise without the requisite approval, failed to timely pay royalty and advertising fees, failed to provide monthly sales reports, and improperly used the franchisor's trademarks in a manner causing injury to the franchisor. The franchisor did not terminate the parties' franchise agreements, but merely brought suit, and invoked the arbitration clause in the parties' agreement three days later by filing a demand for arbitration of its claims and the instant motion for a preliminary injunction. The franchisor failed to establish that it would suffer any irreparable harm as a result of the franchisee's continued operation of his franchise, that any imminent breach of the franchise agreements would occur, or that the status quo of the parties' relationship had been altered to such an extent that court intervention was required. The only evidence of irreparable harm offered by the franchisor consisted of conclusory claims about the theoretical harm that could result from the continued operation of the franchise. Moreover, the franchisor provided no substantiation to sharply disputed, vague references in the franchisor's affidavit referring to the possibility that the franchisee could attempt to transfer his franchise to an unapproved third party.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Balance of Harms (Staffing Business):

Manipower, Inc. v. Mason, DC Wis.

The balance of harms tipped decidedly in favor of granting a temporary staffing business franchisee's requested preliminary injunction prohibiting a franchisor from terminating their relationship without an opportunity to cure. Even assuming that enjoining the franchisor from terminating the parties' relationship would likely damage the franchisor's reputation, the fact that termination would cause the franchisee to suffer irreparable harm combined with the fact that the franchisee was likely to succeed on the merits of its claim that the franchisor's proposed termination of the relationship was not contractually authorized, tipped the balance of harms decidedly in favor of granting the franchisee's requested injunction.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Vicarious Liability & Apparent Agency (Restaurant Franchise):

D.L.S. v. McDonald's Corp., Wash. Ct. App.

McDonald's Corporation was not the principal of one of its franchisees under theories of apparent agency asserted by a minor employee of the franchisee and her father, a Washington appellate court has determined. Therefore, the franchisor was not vicariously liable for the minor and father's claims that an assistant manager of the franchisee's business introduced the minor to drugs and sex. The franchisee hired the assistant manager as an employee despite the individual's disclosure that he had "legal problems" and had committed a bank robbery. After she was hired by the franchisee, the minor plaintiff spent the night at a hotel with the assistant manager and, four months later, ran away from home to be with the assistant manager.

The father alleged that he allowed his daughter to work at the restaurant believing that the franchisor stood for a uniform, quality, wholesome environment. Thus, he argued that a question of fact existed as to whether the franchisor, through its intentional creation of a wholesome image, held out its franchisees as its agents. However, the father pointed to no representations or acts by the franchisor upon which he relied in believing that his daughter worked for the franchisor or that the franchisor would assure a safe working environment in its franchised restaurants, the court noted. Using young people in advertisements, serving "Happy Meals," sponsoring the Ronald McDonald house, and supporting Olympic athletes were not enough to create an apparent employment relationship between McDonald's Corporation and its franchisees' employees, the court decided.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Choice of Forum & Contractual Stipulations:

Whipple Industries, Inc. v. Opcon AB, DC Cal.

A distribution agreement between a Swedish engine parts manufacturer and a California distributor contained a forum selection clause selecting Sweden as the forum for resolving disputes between the parties, a federal district court in Fresno, California, has determined. The distributor contended that the parties' agreement did not contain a forum selection provision. However, a typographical error in the agreement was reformed under California law to include a missing word: "of," that had been left out of the agreement in error.

The distributor contended that the phrase "Swedish court law" in the second sentence meant that disputes would be settled according to "Swedish court law." However, it was doubtful that the distributor's construction of the phrase was a meaning to which it was reasonably susceptible, according to the court. There was no evidence that "Swedish court law" was a phrase typically used, either in contracts or generally. Moreover, under the distributor's construction, both sentences of the provision served to designate Swedish law as the governing law and, therefore, the second sentence was redundant. It was only through the addition of the word "of" that the phrase "Swedish court law" became meaningful, the court reasoned.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Petitions For Review:

Exclusive Dealing (New Petition for Review):

A maker of artificial teeth has asked for U.S. Supreme Court review of whether a manufacturer's exclusive dealing arrangements with some --but not all --of its distributors would violate Section 2 of the Sherman Act, even if the arrangement neither impeded nor precluded rival manufacturers from reaching consumers and had been found to have no anticompetitive effects under the Clayton Act. At issue is a ruling of the U.S. Court of Appeals in Philadelphia granting a government request for injunctive relief against the manufacturer's exclusivity policy. The petition for review (Dentsply Int'l, Inc. v. U.S., Dkt. No. 05-337) was filed September 14, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Taxation (Denial of Review):

The U.S. Supreme Court has declined to review a decision of a North Carolina appellate court holding that nine Delaware corporations, which had no physical presence in North Carolina but licensed trademarks to related retail companies operating stores within the state, were subject to North Carolina franchise and income taxes. The petition for review (A & F Trademark, Inc. v. Tolson, Dkt. No. 04-1625) was denied October 3, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Naked Licensing (Denial of Review):

The U.S. Supreme Court will not review a ruling by the U.S. Court of Appeals in Cincinnati that a company that sold retrofitted school buses to people wishing to enter the mobile gymnastics instruction market was likely to succeed on its claim of infringement despite a defending bus purchaser's affirmative defense that the company had abandoned the unregistered service mark through naked licensing. The petition for review (Cranmer v. Tumblebus, Inc., Dkt. No. 04-1684) was denied October 3, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Relationship & Termination (Denial of Review):

The U.S. Supreme Court also declined to review a decision by the U.S. Court of Appeals in Philadelphia that a motor vehicle dealer's failure to substantially comply with its franchise agreement was a complete defense to the dealer's claim that the franchisor violated the New Jersey Franchise Practices Act by imposing unreasonable standards of performance on the dealer. Specifically, the appellate court determined that the plain meaning of Section 56:10-9 of the Act, which provided that it "[i]t shall be a defense for a franchisor, to any action brought under this act by a franchisee, if it be shown that said franchisee has failed to substantially comply with requirements imposed by the franchise," as a complete defense to "any action" under the Act, was consistent with the Act's stated legislative purpose. The petition for review (Coast Automotive Group, Ltd. v. Volkswagen Credit, Inc., Dkt. No. 04-1737) was denied October 3, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Procedure (Denial of Review):

A decision by the U.S. Court of Appeals in Denver holding that sandwich shop master franchisees were entitled to only $1 as nominal damages under Colorado law for a franchisor's breach of a termination agreement will not be reviewed by the U.S. Supreme Court. The petitioning master franchisees asked the Court to consider whether the moving party in a cross-motion for summary judgment should bear the same burden of proof as the moving party in the initial motion for summary judgment. The petition for review (Mollinger-Wilson v. Quizno's Franchise Co., Dkt. No. 04-1306) was denied August 1, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Motor Vehicle Dealers (Denial of Review):

The U.S. Supreme Court will not review a decision by the U.S. Court of Appeals in Boston ruling that a vehicle distributor did not commit coercion under the federal Automobile Dealer's Day in Court Act by engaging in an option-packing scheme. The dealers asked the Supreme Court whether "coercion" under the federal Automobile Dealer's Day in Court Act was limited to violation of a dealer's contractual rights. The petition for review (George Lussier Enterprises, Inc. v. Subaru of New England, Inc., Dkt. No. 04-1465) was denied October 3, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

FTC Franchise Rule Enforcement:

Internet Kiosks (FTC Franchise Rule Enforcement):

There was good cause to believe that two companies and their principals had engaged and were likely to engage in practices that violated the FTC's Franchise Rule and the FTC Act through their operation of an Internet kiosk business opportunity scheme. Therefore, the allegedly illegal scheme was temporarily restrained and the assets of the defendants frozen pending a preliminary injunction hearing. The complaint was filed in a federal district court in Miami on September 26,

2005 and the court granted a temporary restraining order, froze the defendants' assets, and appointed a receiver on September 27, 2005. The defendants told consumers they could use the kiosks to start their own business, promising them a substantial income and help finding high-traffic, high-volume profitable locations for the machines. According to the FTC, consumers typically lost the money they invested, and the defendants rarely, if ever, delivered the terminals to profitable locations. The FTC alleged that the business opportunity ventures marketed by the defendants were "franchises" under the meaning of the Rule and that the defendants made earnings claims without a reasonable basis and provided inaccurate and incomplete disclosures (FTC v. Transnet Wireless Corp., DC Fla., Case No. 05-61559-Civ-Marra/Seltzer).

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

ATMs & Internet Kiosks (FTC Franchise Rule Enforcement):

A company and its principal have agreed to a stipulated final order, entered August 30, 2005, settling FTC charges that their sales of ATMs and Internet kiosks violated the Commission's Franchise Rule. The FTC alleged that the defendants sold consumers cashless ATM and Internet kiosk franchises without providing them with disclosures identifying prior franchisees or justifying purported earnings. The Department of Justice filed the complaint on behalf of the FTC in February 2005, as part of Project Biz Opp Flop, a multi-agency law enforcement sweep targeting fraudulent business opportunities (U.S. v. American Merchant Technologies, Inc., DC Fla., Case No. 05-20443-Civ-Huck).

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

New Franchise Laws:

California & Equipment Dealers:

A recently enacted California law expands the definition of equipment to include all-terrain vehicles and other machinery, equipment, implements, or attachments used for specified purposes including: lawn and grounds maintenance; planting and cultivating; livestock production; and industrial, construction, maintenance or mining activities. In addition, the new law designates a person or entity primarily engaged in the retail sale of equipment as a dealer or dealership. The enactment adds definitions for "single-line supplier" and "single-line dealer" and provides that a single-line supplier shall not terminate a single-line dealer without good cause and defines certain circumstances where good cause exists. It revises and expands the provisions prohibiting dealer termination, cancellation, and failure to renew and substantially change the competitive circumstances of dealer agreements as applied to dealers and suppliers who are not to single-line suppliers or single-line dealers. Assembly Bill No. 585 was approved and became effective October 7, 2005 (Equipment dealers).

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

North Carolina & Motor Vehicles:

A new North Carolina law amends the requirements for franchise-related form agreements offered to motor vehicle dealers. It also adds provisions prohibiting any manufacturer or factory branch from requiring franchised dealers to enter into certain financing agreements with a captive finance source and defines "captive finance source" as any financial source providing automotive-related loans for motor vehicles in North Carolina that is owned or controlled by a manufacturer, factory branch, distributor, or distributor branch. Additionally, the measure prohibits manufacturers from requiring dealers to use certain types of computer equipment and from accessing dealer computer information under certain circumstances. House Bill No. 1527 was approved September 20, 2005 and becomes effective November 2, 2005 (Motor vehicles).

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Pending Legislation:

Gasoline Dealers & Petroleum Marketing Practices Act (U.S.):

Two recently introduced federal bills address the subjects of gasoline dealers and would amend the Petroleum Marketing Practices Act (PMPA). One of the bills (H.R. 3926) would prohibit a franchisor of leased marketing premises from transferring or assigning its interests in the franchise during the term of the franchise unless the franchisor, at least 45 days before the proposed transfer or assignment either: (1) made a bona fide offer to sell, transfer, or assign to the franchisee the franchisor's interests in the leased marketing premises; or, (2) if applicable, offered the franchisee a right of first refusal to purchase or acquire the franchisor's interests in the leased marketing premises. The bill would also make null and void any provision of a franchise or marketing agreement that required either party to the agreement to pay for the prevailing party's legal fees and expenses. In addition, excepting retail outlets operated by the refiner or distributor, the bill would prohibit a refiner or distributor from fixing or maintaining the retail price of motor fuel at a retail outlet supplied by that refiner or distributor. H.R. 3926 was introduced and referred to the House Energy and Commerce Committee September 27, 2005.

The other bill would amend the PMPA by providing that no franchise could include as a condition a limitation on the source from which a franchisee could obtain motor fuel, except that the franchisee could be required to obtain only motor fuels with respect to which the franchisor, or the refiner that supplied the franchisor, owned or controlled a trademark. H.R. 3964 was introduced and referred to the House Energy and Commerce Committee September 29, 2005.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH


Standing to Sue:

Connecticut Wine Law:

The Connecticut Liquor Control Act did not convey a private right of action authorizing a group of wholesale wine distributors to sue a competing wine wholesaler for alleged violations of the Act, the Connecticut Supreme Court has ruled.

The group of distributors possessed standing to sue the competing wholesaler under the Connecticut "little FTC" Act premised upon their allegations that the wholesaler violated the Liquor Control Act, the court decided. The "little FTC" Act was designed to provide protection to businesses as well as to consumers. The fact that the Liquor Control Act did not convey a private right of action to the plaintiff distributors was irrelevant to whether they had standing to bring a "little FTC" Act claim, the court observed. Eder Brothers v. Wine Merchants of Conn., Conn. Sup. Ct.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

Arbitration Agreements:

Non-Signatories & Compact Disk Store Franchisor:

Three principals of a compact disc store franchisor were entitled to enforce the arbitration clauses in four franchise agreements between the franchisor and a franchisee despite their status as non-signatories of the franchise agreements, the U.S. Court of Appeals in St. Louis has ruled. Evisceration of the arbitration clauses in the franchise agreements would be avoided only by allowing the three principals to invoke arbitration, the court reasoned. The franchisee alleged

claims of negligence, negligent misrepresentation, and fraudulent misrepresentation against all three of the principals.

The tort claims were within the scope of the broad arbitration clause in the franchise agreements, the court held. Broadly worded arbitration clauses such as the one at issue were generally construed to cover tort actions arising from the same set of operative facts covered by a contract between the parties to an agreement. CD Partners, LLC v. Grizzle, CA-8.

Report-Letter, Business Franchise Guide, Letter No. 312, CCH

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