May 7, 2015 - Franchise Articles by |

Franchisees Purchase Half-Million Dollar Franchise Computer System

A recent case by the United States Circuit Court for the Sixth Circuit, Heartland v. La Quinta and Baymont, rejected the hotel franchisee’s argument that the franchisor breached the franchise agreement through its implementation of a new and costly computerized reservations system standards regulation. In so doing, the court held that the franchisee breached the franchise agreement when it failed to install the computer system in conformance with the franchisor’s modified system standard regulation.

After all was said and done, the court rendered a damages award in favor of the franchisor of a cool half of a million dollars, including: (1) $19,852.52 in unpaid recurring fees, (2) $111,325.37 in liquidated damages for early termination; (3) $117,866.16 in treble damages for willful, unauthorized use of Baymont's intellectual property in violation of the Lanham Act; and (4) $246,048.20 in attorney's fees and $8,835.74 in costs.

The court found that Baymont's implementation of the new reservations computer system with its attendant costs was fully contemplated and permitted under the unambiguous terms of the franchise agreement. In so concluding, the court relied upon two sections of the franchise agreement that expressly gave Baymont the right to institute changes to its reservations system and require Heartland to conform to this new system "at its sole expense.”

Franchisees Must Put Themselves Out of Business in Order to Sue Franchisor

In Mac's Shell Service v. Shell Oil Products Company the United States Supreme Court held that the Petroleum Marketing Practices Act (Act) limits the circumstances in which franchisors may “terminate” a service-station franchise or “fail to renew” a franchise relationship. Typically, the franchisor leases the service station to the franchisee and permits the franchisee to use the franchisor's trademark and purchase the franchisor's fuel for resale. The service-station franchisees (dealers) filed suit under the Act, alleging that a petroleum franchisor and its assignee had constructively “terminate[d]” their franchises and constructively “fail[ed] to renew” their franchise relationships by substantially changing the rental terms that the dealers had enjoyed for years, increasing costs for many of them.

The dealers asserted these claims even though they had not been compelled to abandon their franchises, and even though they had been offered and had accepted renewal agreements. The jury found against the franchisor and assignee, and the District Court denied their requests for judgment as a matter of law.

The First Circuit affirmed as to the constructive termination claims, holding that the Act does not require a franchisee to abandon its franchise to recover for such termination, and concluding that a simple breach of contract by an assignee of a franchise agreement can amount to constructive termination if the breach resulted in a material change effectively ending the lease. The Supreme Court reversed as to the constructive nonrenewal claims, holding that such a claim cannot be maintained once a franchisee signs and operates under a renewal agreement.

Franchisor to Franchisees: What You See is What You Don’t Get

In Klosek v. The American Express and Ameriprise Financial, the United States Circuit Court for the Eighth Circuit rejected the claims of a class of financial advisor franchisees against their franchisor and its parent company, American Express, for violation of the Minnesota Franchise Act, breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious interference. The franchisees’ claims arose out of the decision of American Express to spin off the franchisor and the franchisor's subsequent adoption of a new brand, Ameriprise.

Specifically, the franchisees claimed that, although the franchisor retained the right to substitute the brand of its system, it breached its obligation to provide a well-recognized brand for its system when it adopted the new brand Ameriprise. In reaching its conclusion the court stated that: “The franchise agreements expressly reserve Ameriprise's right to substitute new marks at its discretion. Consistent with this reservation, the agreements recognize that the plaintiffs have no rights to the marks, and that there may be circumstances where Ameriprise may not be able to use the American Express marks.” This language, according to the court, “unambiguously indicates that Ameriprise has no obligation to supply a well-established mark to the plaintiffs.”

Franchisor’s Alleged Anticompetitive Conspiracy Held Permissible

In Johnson & Sons, Inc. v. Deere & Co., an Arbitrator in a case tried before AAA held that two tractor dealerships failed to prove any of the essential elements of their claim that a manufacturer and a competing dealer violated the Sherman Antitrust Act. To establish a violation of Section 1 of the Sherman Act, a party must establish a combination or conspiracy resulting in an unreasonable restraint of trade. The only combination or conspiracy alluded to was the one between the manufacturer and the competing dealership; however, no such conspiracy was proven.

Further, the dealerships failed to demonstrate how certain of the manufacturer’s business policies, such as favoring larger dealerships over smaller ones, supported a violation of Section 1. They did not show that such practices constituted an unreasonable restraint of trade or how the manufacturer’s ability to approve or disapprove a dealership purchase supported a violation of Section 1. Moreover, according to the Arbitrator the dealerships did not even address such questions as the relevant market or how anything the manufacturer allegedly did affected competition between the manufacturer and its competitors, or whether any of the manufacturer’s actions constituted an unreasonable restraint of trade.

Personal Guarantee of Franchisees Held Omnipresent

In Raynor Manufacturing v. Kelly and Janet Stoner, the Kansas State Court of Appeals ruled that the personal guaranty executed by two individuals for the debts of a garage door dealership business, which at the time of contracting was not incorporated, was valid and enforceable even after the business entity was incorporated because there was no novation or release of the guaranty. Thus, the individuals were liable for the debts of the dealership to the manufacturer.

The individuals argued that the personal guaranty, executed in 1983 when the dealership was only a partnership but not a corporation, guaranteed the debts of only the partnership entity, and that when a new application for credit was executed on behalf of the incorporated dealership in 1993, there was no new guaranty executed by the individuals. In rejecting the franchisees’ argument, the court pointed out that the language of the guaranty clearly and unambiguously created a continuing guaranty for the debts of the dealership, the relationship between the parties remained status quo after the incorporation of the dealership, and there was no evidence that the manufacturer extinguished, released, and/or modified the guaranty. Although the execution and acceptance of a new credit application after incorporation of the dealership made it a close question, the guaranty remained in effect.

Post-Term Covenant Not To Compete Strictly Construed

In Maaco Franchising Inc. v. Augustin Maaco brought suit to enforce a post-term covenant not to compete against a family-owned franchise after termination of the franchise agreement. The covenant not to compete in the agreements stated that “for a period of one (1) year after the expiration or termination of this [Franchise] Agreement, regardless of the cause of termination, or the date upon which Franchisee cease to operate the business franchised hereunder following termination or expiration of this [Franchise] Agreement, whichever is later, Franchisee shall not either directly or indirectly, for himself or through, on behalf of, or in conjunction with any other person, persons, partnership, or corporation … Own, maintain, engage in, be employed by, lease real estate to, finance, or have any interest in any business specializing in whole or in part in providing automobile painting or body repair services or products at the premises of the Center or within a ten (10) mile radius of any existing or proposed of any existing or proposed Maaco location.”

Even though the court found the covenant to be valid in that it was reasonable as to both time and territory, it refused to enforce the covenant for the full time-period requested by the franchisor because the franchisor had not moved quickly enough to bring the case to court after the termination. The covenant, by its terms, lasted one year from the later of "the expiration or termination of this [Franchise] Agreement … or the date upon which Franchisee ceases to operate the business franchised."

The issue for the court was whether the one year period had commenced, and, if it did, when. Maaco argued that the covenant should not begin to run until Augustin stopped operating any auto painting and body repair shop or one-year from the court's order. Maaco argued that the failure to abide by the covenant and alleged misconduct during litigation required an equitable extension of the covenant. In rejecting the franchisor’s argument that the franchisee’s violation of the covenant not to compete extended the period of the covenant, the court stated that under Pennsylvania law covenants not to compete are to be strictly construed since they are "a partial restraint upon the free exercise of trade.” The court pointed out that “if Maaco wanted such protection, it could have included language extending the covenant in the event it was violated.”

New Iowa Motor Vehicles Act Provides Expansive Coverage

A new Iowa law imposes on the parties to a motor vehicle dealer franchise a duty of good faith in performance and enforcement of the franchise. It provides that certain provisions in a franchise agreement are void, including: a condition, stipulation, or provision restricting jurisdiction to a forum outside the state; a provision that the franchisee consents to the jurisdiction of a forum outside the state; a choice of law provision requiring the application of the law of another state; a provision waiving certain statutory rights; a condition prohibiting the franchisee from continuing another line-make; and a condition requiring the franchisee to provide its customer lists or service files to the franchisor. Senate Bill No. 2234 was approved March 22, 2010, and becomes effective July 1, 2010

New Maryland Franchise Disclosure Law Requires a 14-Day Waiting Period

Maryland has amended its Franchise Registration and Disclosure Law to require the delivery of an offering prospectus 14 calendar days (as opposed to 10 business days) before the execution of an agreement or the payment of consideration or a reasonable request by a prospective franchisee. House Bill No. 1202 was approved April 13, 2010, and becomes effective October 1, 2010.

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