Franchise and Dealer Renewals: Every Minute Counts in Texas to Classicalists By: Jeffrey M. Goldstein In Pizza Inn, Inc. v. Clairday, 979 F.3d 1064 (5th Cir. 2020), a recent decision from the United States Circuit Court for the Fifth Circuit a franchisee entered into an area development agreement with a franchisor, which included an option to renew. However, the franchisee failed timely to notify the franchisor that he wished to renew and submitted a late notice of renewal. In turn, the franchisor did not honor the tardy notice of renewal. After the district court ruled in favor of the franchisee at trial, the Circuit Court reversed finding that the district court had erred in finding that the notice of renewal was sufficiently timely under the doctrine of equitable intervention. In denying the franchisee recovery, the Court of Appeal held that the equitable intervention doctrine was not applicable to support a recovery for the franchisee because the franchisee did not suffer an unconscionable hardship from the franchisor’s failure to honor the tardy notice of renewal since a partial forfeiture of the purchase price, a forfeiture of future profits, and the shuttering of a franchise store were not sufficient hardships warranting strict enforcement of the renewal deadline. The Pizza Inn case is very troubling for several reasons. First, it appears to be a shot over the bow by Texas courts (both state and federal) aimed at neoclassical contracts theory; however, the neoclassical contracts boat left the dock safely in 1950 with the […]

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Tim Hortons Franchisee Association Hits Brick Wall on Case Against Franchisor In a scathing rejection of a complex case filed by an international franchise association, the US District Court for the Southern District of Florida refused to recognize that the franchisee association of Tim Hortons members had associational standing to sue for myriad alleged unfair acts and practices including supply price-gouging, franchisee equity-stripping, and misuse of the franchise advertising fund; similarly, the court rejected the viability of those same claims on substantive grounds as well. Great White N. Franchisee Ass’n-USA v. Tim Hortons USA, Inc., No. 20-cv-20878, 2020 U.S. Dist. LEXIS 239160 (S.D. Fla. Dec. 18, 2020)   Excerpts of the Case: Franchisee Counsel:   For Great White North Franchisee Association-USA, Inc., Plaintiff: Natalie Marlena Restivo, LEAD ATTORNEY, Adam Gruder Wasch, Wasch Raines, LLP, Boca Raton, FL; Gerald A. Marks, PRO HAC VICE, Marks & Klein, LLP, Red Bank, NJ. Franchisor Counsel: For Tim Hortons USA, Inc., Defendant: Michael D Joblove, LEAD ATTORNEY, Aaron Seth Blynn, Genovese Joblove & Battista, Miami, FL; Adam Acosta, John Mark Gidley, PRO HAC VICE, White & Case LLP, Washington, DC. For Jose E. Cil, Defendant: Aaron Seth Blynn, Genovese Joblove & Battista, Miami, FL. Judges: BETH BLOOM, UNITED STATES DISTRICT JUDGE. Opinion by: BETH BLOOM Opinion BACKGROUND This case involves an allegedly illegal and predatory business scheme implemented by THUSA’s holding company to convert the Tim Hortons franchise system into a supply chain business resulting in large profits at the expense of Plaintiff’s franchisee members. Tim Hortons […]

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Burger King Franchisee Hoisted on Own Petard Burger King Corp. v. Berry, No. 1:20-cv-21801-UU, 2020 U.S. Dist. LEXIS 233700 (S.D. Fla. Dec. 9, 2020) A recent franchise decision by the US District Court for the Southern District of Florida appears to have wrecked a Burger King franchisee’s chances of prevailing in the litigation. Although the franchisee attempted to skewer Burger King by slashing wildly with a general covenant of good faith argument, under the Court’s ruling, the Burger King franchisee ended up hoisted on its own petard given that the franchise agreement explicitly accorded to the franchisor complete discretion regarding assistance and training.   Excerpts of Case   Burger King Corp. v. Berry United States District Court for the Southern District of Florida December 9, 2020, Decided; December 10, 2020, Entered on Docket Case No. 1:20-cv-21801-UU Counsel:   For FRANCHISEE Darryl D. Berry, Capital Restaurant Group, LLC, a Georgia limited liability company, Defendants, Counter Claimants: Robert Mitchell Einhorn, LEAD ATTORNEY, Michael Daniel Braunstein, Zarco Einhorn Salkowski & Brito, P.A., Miami, FL. For FRANCHISOR Burger King Corporation, Plaintiff, Counter Defendant: Jessica Serell Erenbaum, LEAD ATTORNEY, Michael D Joblove, Genovese Joblove & Battista, Miami, FL. Judges: URSULA UNGARO, UNITED STATES DISTRICT JUDGE. Opinion by: URSULA UNGARO Opinion   ORDER GRANTING IN PART MOTION TO DISMISS SECOND AMENDED COUNTERCLAIM … ANALYSIS A. The Second Amended Counterclaim Fails to Comply with this Court’s Order, D.E. 37. The Second Amended Counterclaim is full of allegations that the Court ordered Counterclaimants to omit from their Second Amended Counterclaim. For […]

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Question: How Do Franchise Exclusive Territories Work? Answer: They Usually Do Not By: Jeffrey M. Goldstein jgoldstein@goldlawgroup.com 202-293-3947 In a recent franchise case before the United States District Court for the District of Colorado, the trial Court granted in part and denied in part the Defendant Franchisor’s motion to dismiss the Franchisee’s encroachment claims. Plaintiff Zubair Kazi was a president of numerous companies that owned and operated franchises across the United States, including a KFC location in Pueblo, Colorado, KFC of Pueblo (Kazi and KFC of Pueblo together the “franchisee”). Defendant, KFC US, LLC (“KFC” or the “franchisor”) was a national franchisor of Kentucky Fried Chicken restaurants. The case arose when KFC licensed another KFC restaurant (“outlet”) near the franchisee’s then-current location. The parties executed an initial Franchise Agreement (“Franchise Agreement”) allowing the franchisee to prepare fried chicken and other food recipes and to market them with certain trademarks and service marks, and thereafter a renewal Franchise Agreement on June 1, 2017. The Court identified the following provisions in the Franchise Agreement as “relevant”: 3.6 Except as provided in subsection 3.8, during the License Term KFC shall not use or license others to use any of the trademarks licensed hereunder in connection with the sale of any food products at any location within a radius of one and one-half miles of the Outlet, unless [exceptions not relevant here]. Right to Apply for New Franchised Outlets. Before permitting the establishment of any new franchised outlet (defined below) at a location closer […]

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FLORIDA FEDERAL COURT REJECTS FRANCHISE LAWYERS’ FEE REQUEST AS ‘TOO HIGH’ In a recent franchise case in Florida, a federal district court refused to grant the fees requested by the franchisee lawyers’ in their fee petition because the franchisee lawyers’ fees were “too high” when viewed against the rates charged by other lawyers in the area who are experienced in complex litigation; in slashing the lawyers’ requested fees by almost 40% across the board, the court stated: “The case at bar was not complex, and Defendant Childress won on the basis of default [with the other side not putting up a defense].” Drone Nerds Franchising Llc v. Childress United States District Court for the Southern District of Florida October 7, 2020, Decided; October 7, 2020, Entered on Docket Case No. 19-CV-61153-RUIZ/STRAUSS Excerpts of the Case: REPORT AND RECOMMENDATION THIS CAUSE came before me upon Defendant/Counter-Plaintiff’s [(“Defendant Childress’”)] Motion for Attorneys’ Fees and Costs (DE 83) (the “Motion”). The Motion has been referred to me to take all action as required by law pursuant to 28 U.S.C. § 636(b)(1)(A) and the Magistrate Judge Rules of the Local Rules of the Southern District of Florida. (DE 84). I have reviewed the Motion, the record in this case and am otherwise duly advised. For the [*3]  reasons discussed herein, I RECOMMEND that the Motion (DE 83), be GRANTED IN PART and DENIED IN PART. Specifically, I recommend that attorneys’ fees be awarded in the amount of $20,947.50 and that no costs be awarded. DISCUSSION […]

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Edible Arrangements Franchisee Forced to Litigate Fraud Claims in Arbitration Fruit Creations, LLC v. Edible Arrangements, LLC, No. 3:20-cv-00479, 2020 U.S. Dist. LEXIS 156779 (M.D. Tenn. Aug. 27, 2020) In a recent case in the United States District Court for the Middle District of Tennessee, the Court rejected as ‘meritless’ the Edible Arrangements franchisee’s argument that the franchisee’s claims were not subject to arbitration under the Edible Arrangements franchise agreement stating that “the plaintiff’s claim that a reading of the “Enforcement” section of the contract as a whole leads to a conclusion that the parties did not intend to arbitrate their dispute borders on nonsense.” Excerpts of the Case: Fruit Creations, LLC v. Edible Arrangements, LLC United States District Court for the Middle District of Tennessee, Nashville Division August 27, 2020, Filed Case No. 3:20-cv-00479   Reporter 2020 U.S. Dist. LEXIS 156779 * FRUIT CREATIONS, LLC, FRUIT CREATIONS OF CLARKSVILLE, LLC, FRUIT CREATIONS OF NASHVILLE, LLC, TONY CONSTANT, and KIMBERLY CONSTANT, Plaintiffs, v. EDIBLE ARRANGEMENTS, LLC, NETSOLACE, INC., EDIBLE CONNECT, LLC, BERRY DIRECT, LLC, EDIBLE BRANDS, LLC, INCREDIBLE EDIBLES, LLC, and TARIQ FARID, Defendants. Counsel:  [*1] For Fruit Creations, LLC, Fruit Creations of Clarksville, LLC, Fruit Creations of Nashville, LLC, Tony Constant, Kimberly Constant, Plaintiffs: Colby Conforti, Robert F. Salkowski, Robert Zarco, Zarco Einhorn Salkowski & Brito, P.A., Miami, FL; James R. Tomkins, Smith & Tomkins, One Lakeview Place, Nashville, TN. For Edible Arrangements, LLC, Netsolace, Inc., Edible Connect, LLC, Berry Direct, LLC, Edible Brands, LLC, Incredible Edibles, LLC, Tariq Farid, Defendants: Kevin […]

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7-Eleven Prevails on Franchisee’s Vendor and Inventory and Good Faith Breach Claims By: Jeffrey M. Goldstein Takiedine v. 7-Eleven, Inc., No. 17-4518, 2020 U.S. Dist. LEXIS 161103 (E.D. Pa. Sep. 2, 2020) In a recent case in the United States District Court for the Eastern District of Pennsylvania, a former 7-Eleven franchisee Takiedine filed a complaint against 7-Eleven alleging breach of the covenant of good faith and fair dealing and breach of contract. The Court dismissed the franchisee’s complaint, but with leave to amend. In his amended complaint, Takiedine pleaded claims for breach of the covenant of good faith and fair dealing, breach of contract, unconscionability, unjust enrichment, impracticability, conversion, and fraud. In turn, 7-Eleven moved to dismiss the amended complaint and filed a separate motion to stay the arbitrable claims, arguing that certain of Takiedine’s breach of contract claims concerning vendor negotiating practices were required to be arbitrated under the terms of the Franchise Agreements. The Court granted 7-Eleven’s motion to stay the arbitrable claims, ruling that Takiedine’s vendor negotiating practices claims under Section 15 of the Franchise Agreements, including those concerning 7-Eleven’s proprietary products, fell within the scope of the Franchise Agreements’ arbitration provision. The Court also at that time dismissed three of the franchisee’s breach of contract claims concerning (1) fair and accurate merchandise audits under Section 14 of the Franchise Agreements; (2) failure to market and advertise under Section 22; and (3) recommended vendors under Section 15(g). Three of  Takiedine’s breach of contract claims survived relating to […]

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With the novel coronavirus pandemic affecting businesses across the United States in unprecedented ways, franchisors’ responses have largely fallen into two categories: There are franchisors that have stepped up to help their franchisees survive, and there are those that have chosen to aggressively enforce franchisees’ standard contractual obligations—even knowing that their inability to meet their financial obligations is a direct result of the COVID-19 crisis. Franchisors Need to Support Their Franchisees During the Novel Coronavirus Pandemic In a recent blog article, the International Franchise Association (IFA) writes that it is now more important than ever for franchisors to support their franchisees. As the author, Lauren Moorman, writes: “[M]any of the most vulnerable franchise systems will be looking to mitigate those losses by scaling back spending and imposing new austerity measures for franchisees. “This is a mistake. “While budget-tightening will be unavoidable for most franchise systems, franchisors should be careful not to create new burdens or restrictions on franchisees. . . . Instead, franchisors in every segment should focus on fortifying their front lines, ensuring that franchisees have everything they need to stay afloat now and recover quickly later . . . .” In order to help their franchisees weather the storm and ensure that their brands remain as strong as possible, the article recommends that franchisors take several steps during the COVID-19 crisis. Some of these steps include: Listening to Franchisees’ Concerns – Franchisees are on the front lines; and, while franchisors are feeling the effects of the COVID-19 crisis […]

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As discussed in a recent article published by Nation’s Restaurant News (NLN), some franchisors have begun offering financial relief packages to their franchisees during the COVID-19 crisis. According to NLN, major restaurant franchisors including Yum Brands (KFC, Pizza Hut and Taco Bell), Subway, McDonald’s, Chick-fil-A and Qdoba are offering relief ranging from, “deferring all 2020 capital obligations for remodels and new unit development through the end of this year,” to deferral of royalty and rent payment obligations. These relief packages come as these (and other) franchisors are requiring franchisors to severely limit their operations in order to help combat the spread of the novel coronavirus. In many franchise systems, franchisees have the option to implement social distancing and other safety protocols consistent with local practices as well. Regardless of the impetus, many franchisees are struggling as a result of the economic impacts of COVID-19, and this makes financial relief packages an attractive option for franchisees to whom they are available. Do Franchisor Relief Packages Come with Strings Attached? Before accepting financial relief packages from their franchisors, however, franchisees need to make sure that the relief being offered does not come with strings attached. Or, if it does come with strings attached, then franchisees need to know what these strings are, and they need to decide if the associated costs and risks are worth it. If royalty payments are being deferred, are they being deferred with interest? Will past-due royalties eventually be due in a lump sum; and, if so, when? […]

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While buying a franchise is generally considered to be less risky than starting an independent business in the same industry with the same start-up costs, many franchisees still fail. There are several reasons why, and these reasons are not necessarily consistent across industries or franchise systems, or even within individual franchisors’ ranks. The risk of failure is one of the primary reasons why all prospective franchisees need to work with an experienced franchise attorney before buying, and it is why active franchisees should engage legal counsel promptly if they run into issues or have a dispute with their franchisor. While the question, “Why do franchisees fail?” does not have one single straightforward answer, there are a number of possible reasons for franchisee failure. Some of these reasons include: 1. The Franchise System Isn’t Sound Like anything else, some franchise systems are simply better than others. If a franchise system isn’t sound – if the brand doesn’t resonate with customers, if the products or services are subpar, or if the marketing plan just doesn’t work – then franchisees are going to struggle. If Item 20 of the Franchise Disclosure Document (FDD) shows a high volume of franchisee turnover (including a large number of franchisees leaving the system “for other reasons”), this may be a sign that there issues with the system as a whole. 2. The Franchisor Doesn’t Provide Adequate Training or Support Lack of training can be an issue in systems where (i) there are a significant number of complex […]

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