Beer Brewer’s Wrongful Termination of Dealer Turns Out to be Grist for the Mill for Beer Distributor

Jun 12, 2017 - Franchise Articles by |

Beer Brewer’s Wrongful Termination of Dealer Turns Out to be Grist for the Mill for Beer Distributor By: Jeffrey M. Goldstein The U.S. District Court for the Western District of Washington recently ruled that a terminated beer franchisee could sue the beer manufacturer for non-statutory damages caused by the franchisor’s termination of the distribution contract without cause. Odom Corp. v. Pabst Brewing Co., No. C17-5279-RBL, 2017 U.S. Dist. LEXIS 81348 (W.D. Wash. May 26, 2017). As the Court phrased the issue: “This case concerns whether, when a beer supplier terminates its distributor’s contract without cause, Washington’s Wholesale Distributors and Suppliers of Spirits or Malt Beverages Act, chapter 19.126 RCW, provides the distributor with a single remedy: ‘compensation from the successor distributor for the laid-in cost of inventory and for the fair market value of the terminated distribution rights.’” The case is interesting for four reasons. First, even though almost every state has beer distribution relationship legislation, there is a dearth of reported decisions regarding beer franchise terminations; this is primarily because almost all replacements of beer distributors are negotiated and include the payment of agreed-upon fair market value. Second, Pabst’s defenses in the case were not traditional ‘good cause’ arguments usually asserted to justify a termination; instead, the beer franchisor embraced a troika of somewhat absurd schoolyard bully arguments, to wit: the rules in the statute (enacted to prevent unjust terminations by brewers) don’t apply to me (even though I’m a brewer); the rules in the beer franchisor act allow terminations […]

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New Legal Gestalt Needed for Franchise Relationships in USA

May 13, 2017 - Franchise Articles by |

New Legal Gestalt Needed for Franchise Relationships in USA By: Jeffrey M. Goldstein  A recent franchise termination case involving a French franchisee of a French franchisor has many similarities to the prototypical wrongful franchise termination in the United States; the only real difference is that when the case was tried in France the franchisor was found guilty of an unfair franchise termination while if the case had been tried in the United States the franchisor would have walked scot-free. In this case, the French bakery brand Paul operated under a master franchise agreement that called for the opening of 18 outlets in the south of France over a five-year period. After opening, the franchisee found itself facing debilitating financial difficulties after having opened only five of the 18 required outlets. After the franchisor’s proposed onerous terms for settlement were rejected by the franchisee, the franchisor sent a default notice to the franchisee for failure to open the remaining locations in the franchise agreement. The franchisee was not able to build the new stores, and the franchisor terminated the franchisee. The franchisee’s primary defense was that the franchisor was liable for inaccuracies in the business plan for the opening of 18 outlets in five years and that the plan itself was unrealistic because it was based on overly optimistic and false financial data. On this basis, the franchisee argued that the termination was wrongful based on the franchisor’s pre-contractual duty of disclosure.             In affirming the lower Paris Court of Appeal’s […]

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Franchise Terminations and Self-Inflicted Harm

Feb 16, 2017 - Franchise Articles by |

In a recent franchise case the United States District Court of New Jersey (the “Court”) hammered another nail in the termination coffin of a former 7-Eleven franchisee Karamjeet Sodhi (“Franchisee Sodhi” or “Mr. Sodhi”), Manjinder Singh, and Karamjit Singh (collectively, “the Franchisees”), when it denied the Franchisees’ Motion for a stay of the Court’s Order granting judgment to Plaintiff 7-Eleven. In Sodhi, the Court found that the Franchisees failed to show that they were likely to succeed on the merits of their claims because they breached the franchise agreements by failing to pay payroll and income taxes and then subsequently failing to cure those breaches. 7-Eleven, Inc. v. Sodhi, Civil Action No. 13-3715 (MAS) (JS), 2017 U.S. Dist. LEXIS 14339 (D.N.J. Jan. 31, 2017) In refusing to grant the Franchisees’ Motion for Stay, the Court initially noted that “the standard for obtaining a stay pending appeal is essentially the same as that for obtaining a preliminary injunction, and that such a stay ‘should be granted only in limited circumstances.’” The Court explained that to obtain the stay, the Franchisees must show all four of the following factors, including; (1) the movant is likely to succeed on the merits; (2) denial will result in irreparable harm to the movant; (3) granting the injunction will not result in irreparable harm to the non-movant; and (4) granting the injunction is in the public interest. With regard to the first factor, the Franchisees argued that they were likely to succeed on the merits of their appeal […]

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Franchisee Prevails Early on Covenant of Good Faith and Fair Dealing Claim

Nov 3, 2016 - Franchise Articles by |

Franchisee Prevails Early on Covenant of Good Faith and Fair Dealing Claim By: Jeffrey M. Goldstein, Esquire  (202) 293-3947 One of the few tasks more daunting than trying to get Kant, Nietzsche and Plato to agree on a definition of ‘the good life’ is that of struggling to get two courts to agree on the legal meaning of the covenant of good faith and fair dealing. Indeed, some Courts vociferously object to using the phraseology itself, arguing that the word ‘covenant’ must be replaced by the word ‘duty.’ Other courts refuse to allow such a claim to be prosecuted unless the claimant also pleads a concomitant and redundant breach of an explicit provision in the contract. And, a few other courts adamantly deny the existence of the covenant of good faith and fair dealing. This energetic jurisprudential fracas among courts regrettably has not been quelled by the scores of scholarly articles that have been written on the subject; indeed, the prolific academic commentaries have done little more than throw gasoline on the intense intellectual blaze.  Not surprisingly, this existential inferno has scorched, and continues to char, many franchisees and dealers.  However, despite the terrible historical track record of franchisees that have tried to use the covenant of good faith and fair dealing in litigation against their franchisors, from time to time a franchisee does have success using the theory. One such franchisee is the auto dealer plaintiff in a case now pending before the United States District Court for the […]

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Franchise Termination Litigant Again Shattered by Esoteric Damages Rules

Oct 9, 2016 - Franchise Articles by |

Franchise and Distribution Litigants Seeking Damages Awards are in For a Rocky Ride – We Can Help You My article last month on franchise termination litigation set forth a somewhat detailed assessment of the law of damages in a franchise termination context, concluding in part that: In franchise and antitrust distribution law there is no more exasperating, elusive and esoteric issue than damages. This analytical muddle threatens franchisors and franchisees alike. Further, the doctrinal failure regarding franchise damages is so robust that it has extensively infected damages theory, methodology, and calculation. The Predictably Unpredictable Legal Morass of Franchise Termination Damages, Jeffrey M. Goldstein (August 2016) Within a month of publication of that article another franchisee litigant in Florida federal court, seeking about $7 Million, was unable to successfully run the franchise litigation damages gauntlet. HRCC Ltd. v. Hard Rock Cafe International et al., CA 6:14-cv-02004, U.S. District Court for the Middle District of Florida (September 13, 2016). In Hard Rock, the franchisee’s damages claim was categorically rejected by a federal district court judge granting the franchisor’s motion for summary judgment on the eve of trial. Background Facts of the Franchise Termination Abstracting from the numerous esoteric legal-entity distinctions associated with the many related corporate entities in the Hard Rock case, it appears that the franchisee, HRCC, LTD. (“HRCC”), which operated a restaurant in Nassau, the Bahamas, fell behind in paying its required royalties in 2013 and was terminated in 2014. As expected, the franchisor sued for purported lost future royalties and the […]

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Franchise Termination Damages – the Unpredictable Morass

Aug 23, 2016 - Franchise Articles by |

Franchise Termination Damages – the Predictably Unpredictable Legal Morass By: Jeffrey M. Goldstein, Esq. (202) 293-3947 jgoldstein@goldlawgroup.com Goldstein Law Firm, PLLC   In franchise and antitrust distribution law there is no more exasperating, elusive and esoteric issue than damages. This analytical muddle threatens franchisors and franchisees alike. Further, the doctrinal failure regarding franchise damages is so robust that it has extensively infected damages theory, methodology, and calculation. Georgia Court of Appeals Overturns Franchisee’s Jury Damages Award A recent case from the Court of Appeals of Georgia, Legacy Academy, Inc., et al. v. Doles-Smith Enterprises, Inc., et al., Court of Appeals of Georgia, ¶15, 781, (Jun. 9, 2016),  draws attention to a few of the more ruffling damages issues in a distribution context. In Legacy, the franchisor was Legacy Academy, Inc., (“Legacy” or “the franchisor”) owned by Melissa and Franklin Turner (collectively, the “Legacy Parties”), and the franchisee was originally GMI Smith, LLC, and later Doles–Smith Enterprises, Inc., both of which were owned by Michele Doles–Smith and Gary Smith (collectively, the “DSE Parties” or “the franchisee”). In their complaint, the DSE Parties alleged that various representations in the franchisor’s Offering Circular about Legacy’s litigation history and the projected cash flow of its franchises were materially false and misleading and violated the Federal Trade Commission’s “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures Rule.” The Legacy Parties answered, denying liability, and asserted counterclaims for lost royalties and advertising fees, which, absent the ‘early closing’ of the franchise associated with the termination, would […]

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Exxon’s Zone Pricing Program Exerts Too Much Control Over Franchisees

Jun 7, 2016 - Franchise Articles by |

A recent case decided by the United States District Court for the District of New Jersey may breathe new life into the New Jersey Franchise Practices Act and the Robinson-Patman Act. South Gas, Inc. v. Exxonmobil Oil Corp., 2016 WL 816748 (D.N.J. February 29, 2016). The plaintiff franchisees’ claims in the case focused primarily on Exxon’s pricing practices, which pivoted off of a labyrinthine discriminatory pricing program known as zone pricing.  In ruling for the Exxon franchisees, the Court was careful to point out that its ruling was preliminary, and as such, was limited to the question whether the plaintiff franchisees had alleged enough in the Complaint to meet their initial pleading obligation, not whether the franchisees had substantively proven their claims. The plaintiff franchisees in this case were independent service station dealers that purchased refined gasoline directly from Exxon and other suppliers for resale to the public at retail service stations in New Jersey. Exxon’s zone pricing scheme divided New Jersey into approximately 100 zones and charged retail gas stations different wholesale prices for gas depending on the station’s zone placement. Because Exxon’s zone pricing scheme favored certain stations and disfavored other stations, including the plaintiffs, the franchisees claimed they were forced to charge higher retail prices to cover their operating expenses. Some of these wholesale price differences were so significant that they resulted in wholesale prices in some zones exceeding the retail prices in other contiguous zones. Further exacerbating the financial plight of the franchisees was Exxon’s questionable […]

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Court Not Interested in Terminated Franchisee’s Excuse for Failing to Pay Franchise Fees

Mar 14, 2016 - Franchise Articles by |

Court Not Interested in Terminated Franchisee’s Excuse for Failing to Pay Franchise Fees By: Jeffrey M. Goldstein, Esquire (202) 293-3947 goldlawgroup.com Franchisees and dealers facing a termination grounded on a failure to pay franchise fees frequently make one of three arguments: (1) the franchisor waived the right to insist on the prompt payment; (2) the amount of the arrears was not material; or (3) the franchisor’s wrongful conduct caused the franchisee’s inability to pay. Courts, however, have little patience for such attempts by franchisees to justify the non-payment of fees. Indeed, from a legal standpoint, there is no worse position for a franchisee than to have been terminated for a failure to pay. A recent case in the United States District Court for the District of Puerto Rico clearly demonstrates how most courts deal with a franchisee terminated for failure to pay. Kemco Food Distributors, Inc. v. R.L. Schreiber, Inc., 2016 U.S. Dist. LEXIS 27349 (D.P.R. February 29, 2016). Kemco is notable as it shows that the franchisee was treated harshly despite the existence of an applicable general state franchise statute providing some protection to franchisees from the economic power of franchisors. In the Kemco case, Schreiber, a family-owned and operated food manufacturing company in South Florida, designated Kemco as its exclusive distributor in Puerto Rico, contingent upon Kemco's remaining current on its payments to Schreiber. The evidence showed that Kemco made untimely payments for every invoice that was issued from January 1, 2014 through the termination of the relationship. […]

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Terminated Franchisee Beats the Odds and Sidesteps Injunction

Mar 6, 2016 - Franchise Articles by |

Terminated Franchisee Beats the Odds and Sidesteps Injunction 3/6/16 By: Jeffrey M. Goldstein Goldstein Law Firm goldlawgroup.com (202) 293-3947 jgoldstein@goldlawgroup.com   In a recent decision by the United States District Court for the District of Colorado, the Court denied the plaintiff franchisor’s motion for a preliminary injunction, showing that, in rare situations, it is possible for a terminated franchisee to escape the lethal injunctive pincers of the Lanham Act, the federal law that is frequently relied upon by franchisors to shut down a franchisee’s operations during termination disputes. The Intelligent Office System, LLC v. Virtualink Canada, LTD., 2016 U.S. Dist. LEXIS 20374 (USDC Col. February 18, 2016). In Virtualink, IO was a Boulder-based LLC that had developed methods for establishing, operating, and promoting "virtual" offices, in which customers were enabled to split overhead costs by "sharing" the use of office personnel, office equipment, and office space. On February 1, 2006, IO and the Franchisee Virtualink Canada, LTD (“Virtualink”) entered into a 20-year "Master License Agreement" (“MLA”). Pursuant to the MLA, Virtualink was permitted to use IO’s "licensed methods" to license subfranchisees in most of Canada. In exchange, Virtualink agreed to unremarkable reciprocal franchisee obligations, including: (1) paying IO a percentage of the gross royalty receipts it collected from subfranchisees in Canada; (2) using IO's standards and specifications in developing new subfranchisees, including using IO’s form franchise agreement; and (3) hitting specified minimum "sales and opening goals" of virtual office centers in each year of the 20-year agreement. The Franchisor began […]

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Franchisee’s Wrongful Termination Claim Rejected for Failure to Obtain Franchisor Consent to its Franchise Purchase

Jan 5, 2016 - Franchise Articles by |

Franchisee’s Wrongful Termination Claim Rejected for Failure to Obtain Franchisor Consent to its Franchise Purchase By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC (202) 293 3947   In a recent case in the United States District Court for the Eastern District of Wisconsin, a federal court reversed its own initial decision in which it had upheld a franchisee’s wrongful termination claim against its franchisor. Tex. Ujoints, LLC v. Dana Holding Corp., 2015 U.S. Dist. LEXIS 70468 (E.D. Wis., May 30, 2015). Granting a motion for reconsideration, the District Court held that the plaintiff was not a “franchisee’ under the relevant franchise law because, although the plaintiff had purchased the ‘franchise rights to distribute’ from a former franchisee, it had done so without first obtaining the consent of the franchisor for the purchase. The Court's reconsideration decision focused on an asset purchase agreement (APA) under which an entity created by Daniel Zahn and Martin Brown, called DanMar Holdings LLC, acquired substantially all of the assets of a Texas company, called Automotive Industrial Supply Co., Inc. (AISCO). The purpose of the transaction was for Zahn and Brown's entity to acquire AISCO's purported right, based on an alleged oral agreement, to distribute Dana's "GWB" product line, which consisted of heavy duty industrial drive lines and universal joints used in the fracking industry. After the APA transaction, the distribution assets acquired were then transferred from DanMar Holdings to Texas Ujoints LLC in a second separate deal. There was no dispute in the case that Dana […]

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