Franchisees Have a Good Month In Court Overall: October 2011
Franchisees Have a Good Month In Court Overall: October 2011
BY: Jeffrey M. Goldstein, Esq.
202-293-3947
Franchisor Not Necessarily Entitled To Damages From Franchisee Under Franchise Agreement; Hardee’s v. Hallbeck; 2011 WL 4407435 (E.D.Mo.)
This case arose out of the closing by the franchisee of a Hardee's franchise in Ottawa, Illinois, approximately one and one-half years before the end of a Renewal Franchise Agreement between the parties, Hardee's Food Systems, Inc. ("HFS") and five individuals the Hallbecks. The Hallbecks were to continue to operate the Hardee's restaurant until June 19, 2010. The Hallbecks first opened the Ottawa franchise as a Hardee's restaurant in the early 1970's, and formerly owned 21 Hardee's restaurant franchises. The Hallbecks alleged that at some point during the renewal franchise term, prior to February 2009, HFS aired lewd TV commercials, which resulted in repeated complaints from the Ottawa Hardee's customers. They also alleged that they did not receive support from the franchisor.
Although the Agreement provided for operation of the franchise until June 2010, the Hallbecks closed the restaurant in 2009. HFS sent the Hallbecks a Notice of Default and Termination, stating that because the Hallbecks had abandoned the franchise they were terminated. HFS sought damages resulting from the early termination by the Hallbecks in the form of the royalty fees HFS would have been paid during the remaining term of the Agreement, in the amount of approximately $50,000.
The Hallbecks asserted such amounts were not recoverable for several reasons, including that the provision in the Agreement providing for the payment of the fees in question did not survive termination of the Agreement, that there is no liquidated damages provision in the Agreement allowing the collection of future fees for services not performed, that it is against public policy, and that the fees that HFS sought were too speculative. The Hallbecks also asserted that HFS itself was the party that actually terminated the Agreement by the letter in February 2009, and that HFS was itself in material breach of the Agreement by not advertising in the Hallbecks' market area and by airing the lewd advertisements.
The Court disagreed with the franchisees, concluding that the agreements were too ambiguous regarding whether the parties contemplated whether damages from an early termination in the form of future lost royalties were permissible, and ordered the case to proceed to trial. In essence, the Court was persuaded that, absent the closure, some revenue would have been realized from continued operation by the franchisees.
Even Big Franchisors Have Trouble Drafting Franchise Agreements
AAMCO Transmissions v. Dunlap; 2011 WL 3586225 (E.D.Pa.)
The issue before the Court was whether the end had arrived for AAMCO and one of its franchisees, James Dunlap. The Court granted AAMCO's motion for a preliminary injunction forcing Dunlap to close his store and sent the litigation to arbitration. Dunlap argued that his agreement expired in 2013, not 2011, and therefore his operation was not a violation of the contract.
The first 1981 Franchise Agreement lasted for a term of fifteen years. Furthermore, “[u]nless either party gives written notice of its intention not to renew the agreement at least one year prior to the expiration of the fifteen year term, then this Franchise shall be renewed for fifteen years.” If the parties renewed their agreement, Dunlap also agreed to execute a franchise agreement of “the type then currently being used by AAMCO.” Neither AAMCO nor Dunlap were able to locate a renewal agreement signed by either party. Thus, the record contains no indication that the renewal agreement was ever signed. All of the evidence pointed to the relationship between the parties ending in 2011. The Court rejected Dunlap's argument that the true date of termination of 2011 in the Settlement Agreement regarding related litigation was an error, stating that it “is convenient but unsupported by the record.”
Further, the 1981 Franchise Agreement included a non-compete clause, which prohibited Dunlap from “doing anything that would indicate that Franchisee is or ever was an authorized AAMCO dealer. Franchisee further agrees that the for a period of 1 year following a termination of this Agreement he will not directly or indirectly engage in the transmission repair business within a radius of 10 miles of the subject center or of any other AAMCO center.” The Court then applied the traditional ‘reasonableness’ test to the clause and determined that the non-compete clause was reasonable in time as it lasted for one year and was applicable only to the transmission repair business. However, and importantly, the Court found that the ten-mile radius provision was not reasonable because it would have prohibited Dunlap from operating a transmission center within ten miles of any AAMCO center and such a restrictive covenant would apply across the United States and Canada. Noting that Pennsylvania courts will modify, or blue pencil, non-compete agreements if their restrictions are too broad, the Court limited the geographic scope of the covenant to within ten miles of the AAMCO center.
Increase of Dealer Rents Was Not “Material Modification” To Franchise Agreement; In re: Conoco Phillips Co. Service Station Rent Litigation, D.C. Cal.
A gasoline station franchisor did not violate the California Franchise Investment Law's (CFIL's) disclosure requirements by failing to make disclosures when it increased the rent charged to many of its franchisees. Specifically, the franchisees asserted that the franchisor violated the CFIL because the franchisor’s rent increase was a "material modification" of the franchise agreement under the meaning of the statute and that the franchisor failed to provide them with the requisite ten business days within which to object or rescind, or alternatively, acquiesce in the rent modification.
In rejecting the franchisees’ argument as ‘fatally flawed’, the Court pointed out that in the "RENTAL" section of their station leases they agreed that they would pay the franchisor rent, as determined in accordance with the franchisor’s rental policy adopted by the franchisor "in good faith and in the ordinary course of business." The lease further provided that the franchisor could amend its rent policy at any time. Thus, the amendment or modification of the rental policy that increased the franchisees’ rent was not a "material modification of an existing franchise" agreement as contemplated by the CFIL; instead, even if it were true that the rental modification was not in good faith or in the regular course of business, the franchisees would have a breach of contract claim under the rental agreement, which was not what the franchisees had argued.
In moving to dismiss the franchisees’ claim, the franchisor was not asserting that it could modify the rental amount with impunity, and recognized that any such modification would need to be made in good faith and in the ordinary course of business. Although the station leases placed only a limited amount of restraint on the franchisor’s ability to increase the rent, that was what the franchisees agreed to by entering into their station lease agreements. Thus, the franchisor's motion to dismiss the franchisees' CFIL claim was granted.
Franchisee’s Refusal to Sign New Agreement Was Not “Good Cause” to Terminate Franchisee; Kaeser Compressors v. Compressor & Pump Repair Services, D.C. Wis.
The refusal by a distributor (franchisee) of industrial compressors to sign a new distributorship contract that permitted the manufacturer to sell its products directly in the distributor’s territory did not constitute "good cause" for termination of the distributor under the meaning of the Wisconsin Fair Dealership Law (WFDL).
According to the Court, the WFDL mandated that new requirements imposed by a manufacturer or franchisor be both essential and reasonable. In this regard, the franchisor was required to show three things in order to justify a proposed change to a dealership: (1) an objectively ascertainable need for change; (2) a proportionate response to that need; and (3) a nondiscriminatory action.
Although the conditions the manufacturer sought to impose on the distributor with the new contract were essentially the same as those imposed on all of its other distributors, this was of little moment since manufacturer’s relationships with its other distributors were not subject to the WFDL and there was no evidence of what the terms of its previous contracts with the other distributors were. Even assuming that complete uniformity was important, a grantor’s desire for uniformity did not trump the additional requirement of the WFDL that the changes sought by the grantor be essential and reasonable, the court commented.
Although the manufacturer framed the issue as whether the distributor’s refusal to sign the new contract constituted good cause, the real issue was whether the manufacturer had good cause to change the competitive circumstances of the dealership since this is what the new contract would have done permitting the manufacturer to directly compete with the distributor for sales in its territory.
The manufacturer conceded that the distributor was an excellent distributor of its products, the court noted. It was the manufacturer’s desire for further growth in the market that prompted its demand for a new contract. The manufacturer made no showing that it was facing substantial losses when it sought to introduce the new contract. Although testimony suggested that the changes were required for the manufacturer’s profitability to increase, the parties stipulated that the manufacturer had been profitable over the last ten years.
Partnership Formed To Purchase Franchise Was Illegal And Unenforceable; Marte v. Hernandez (McDonald’s), Wash. Ct. App.
A partnership formed by two brothers to purchase a McDonald’s franchise was found by a Court to have unlawfully been concealed by them in order to contravene McDonald’s policy against selling to partnerships; accordingly, the Court held that the franchisee’s conduct was deceptive conduct in violation of the Washington Franchise Investment Protection Act (WFIPA). Thus, the Court ruled that the partnership agreement was unlawful and unenforceable by the brothers.
The case arose out of a situation where the brothers decided to purchase two McDonald’s franchises and agreed that one of them would apply for the franchise and the other would supply a portion of the money required for the purchase and other initial operating costs. They were aware that McDonald’s sold franchises only to individuals who owned the entire equity interest of the franchise and that it would not grant a franchise to a partnership. They agreed to conceal from McDonald’s the existence of their partnership and the non-franchisee brother’s involvement. When the franchisee brother died and his estate rejected the investor brother’s claim for an interest in the partnership, the investor brother filed the suit against the estate, alleging that he was entitled to receive the amount of his partnership interest from the estate.
The Court held that the partnership was a violation of a Washington securities statute that made it unlawful for any person—in connection with the offer, sale, or purchase of any security—to engage in any act which operated as a fraud upon any person, the court determined. The partnership violated that statute because the brothers set out to deceive McDonald’s and did so with knowledge of the franchisor’s requirements.
The contention that the partnership did not qualify as a security was without merit, the court held. However, even if the partnership did not amount to a security, the brothers violated the WFIPA’s provisions making it unlawful for any person, in connection with the purchase of a franchise, to employ any scheme to defraud or engage in any act which operated as a fraud upon any person, according to the court.
Not Every New Franchisor Program Imposing Additional Costs on Franchisees Is Permissible; Amar Shakti Enterprises v. Wyndham; United States District Court, M.D. Florida
The Plaintiffs in this ‘class action’ were a group of fourteen hotel franchisees. The Defendants were a group of hotel franchisors, including Wyndham. The dispute involved a customer loyalty program known as “Wyndham Rewards.” Under the program, guests who enrolled who make paid visits to Wyndham brand hotels earned points redeemable for free stays and other benefits. Wyndham charged its franchisees a fee of up to five percent on room sales to Wyndham Rewards members.
The franchisees complained that Wyndham Rewards was simply a way for the Defendants to impose additional fees on their franchisees rather than a way to build loyalty. They contended that at least some of the Rewards members did not even know that they were in a loyalty program. The franchisees asserted that all guests booking stays online at Wyndham hotels were automatically enrolled in Wyndham Rewards. In addition, Wyndham Rewards members, including those who were automatically enrolled, received credit for their stays (and Wyndham received the five percent fee) even if the guests never identified themselves to the franchisees as Rewards members.
Some of the franchisees contended that their franchise agreements did not permit Wyndham to impose the five percent fee or practice proactive matching. They further claimed that by using proactive matching to uncover additional Rewards members staying at their hotels, and then imposing the five percent room fee in regard to these additional Rewards members, Wyndham had imposed fees beyond those contemplated by the franchise agreement, thereby breaching it.
Wyndham, of course, argued that neither the five percent fee nor proactive matching violated those franchise agreements. In trying to rule on this issue, however, the Court pointed out that the contractual language at issue was far from clear-cut. In this regard, Wyndham pointed out that the franchisees agreed to “participate in the VIP Card program and other proprietary frequent guest programs we may require from time to time.” In addition, the franchisees agreed that Wyndham had the authority to “increase or modify the Reservation System User Fees for all System Facilities, and to add other fees and charges for new services.”
The Court on this issue concluded that, at best, the provisions cited by Wyndham were ambiguous. Standing alone, they did not establish, as a matter of law, that these plaintiffs agreed to participate in the challenged Rewards program (including the methods used to implement it, such as proactive matching). Accordingly, the Court held that additional proceedings were necessary to interpret the franchise agreements.
Franchisees Have a Good Month In Court Overall: October 2011
BY: Jeffrey M. Goldstein, Esq.
202-293-3947