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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  This food franchise dispute now in litigation in Florida has all of the expected allegations and markings of a prototypical franchisor-franchisee litigation battle in 2017: (1) a believable ulterior motive for termination (the franchisee store’s closure, according to the franchisee, was part of a scheme by the franchisor (B&B’s parent company) to oust the franchisee from the West Palm Beach dining center so the franchisor could do a competing deal with the franchisee’s competitor (Revolutions); (2) traditional ‘fraud and breach of contract’ claims by franchisee; (3) franchisee termination follows its alleged failure on a quality assurance inspection conducted by the franchisor; (4) ‘other hidden off-the-contract’ motivations for getting rid of the franchisee (franchisee was operating a gay bar on the second floor of the location, which had never before been objected to); (5) the franchisor allegedly failed to meet its contractual obligations (although the franchisee was assured 162 hours of classroom and on-the-job training, franchise claims it was provided with “zero training”; similarly, the franchisor’s “operations manual” allegedly wasn’t any help because it ‘was cut-and-pasted from manuals for sushi and Mexican restaurants’); (6) the franchisor, after the franchisee purchased the franchise, modified the entire strategic thrust of the franchise business (the franchisor allegedly moved the franchise company into the movie theater and bowling alley business — and away from a nationwide franchise roll-out, as promised); (7) the franchisor’s undisclosed strategic decision caused the franchisee to fail (according to the franchisee, with the company’s new direction, the franchisee was left […]

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Courts, Lawyers, Franchise Agreements, Right of First Refusal, Restrictive Covenant, Competing Franchisor all combine to Create the Efficient Free Market Outcome: “No Beer for Any Consumers at an Empty Restaurant.” Interestingly, from a law and economics point of view, the legal rules and process associated with this dispute have resulted in an inefficient outcome: unused restaurant space, unemployed workers, less beer being sold, and one fewer businesses paying taxes. http://www.heraldtribune.com/news/20170327/jdubs-dub-shack-beer-bar-closes  

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It appears that no post-termination restrictions on smoking pot will be imposed on terminated former licensee. It would have been interesting to see how a court might have applied the doctrine of unclean hands in any injunctive action. What is also notable in this dispute is that the business relationship between the parties, even though it was based on a non-traditional product, was hindered by a very traditional point of conflict between franchisors and franchisees selling more traditional products — “a differing vision of what a traditional “Hempfest” event should be, so we have amicably dissolved the licensing relationship to allow the Las Vegas event to follow its vision unhindered by the contractual agreements.” http://mjnewsnetwork.com/events/seattle-hempfest-and-las-vegas-hemp-festival-end-franchise-agreement/  

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Instant Replay:  According to the franchisor, the franchisees are thieves and the franchisor is the good guy who is saving the community from corrupt people. Result: Massive investigations, terminations, and take-backs. The franchisor: (1) vows to stamp out underpayment of franchisee employees; (2) removes store owners who broke the rules from its system; (3) claims that “When a franchise is terminated, an independent valuation of the franchisee’s assets is undertaken and, in general, the franchisee is paid accordingly for their assets….The process for refranchising a site is also very costly and takes considerable time and corporate resources.”; (4) announced the outcome of an independent review that he said “confirmed our [franchise] model allows franchisees to draw a wage, make a profit and pay employees in accordance with lawful wage rates”. In contrast, the franchisees: (1) claim that when Caltex forces out an owner it does so without paying compensation beyond assets, which means it could gain back stations almost free and profit from their resale or merge them into its corporate-owned store network; (2) claim that “no site with weekly shop sale of about 30K to 35K … can be profitable in your current model by fulfilling its [workplace] obligation”; (3) explain that “The truth is they [the franchisor] want the stores back to make them into company stores and that is the best way to do it – they are going to get their stores back for free.” http://www.smh.com.au/business/caltex-denies-profiting-from-terminating-franchisees-for-wage-fraud-20170221-guhqd0.html

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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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Alternative Fact: “Franchisees are happy with existing laws governing franchise ownership.” Passing state franchise relationship laws, which aim to protect many of the basic rights of franchisees and dealers that have been stripped from by the language of their individual franchise agreements, is a contentious, arduous and lengthy process. Indeed, even today, many states still do not have legislative protection for franchise owners in their states. See State Franchise Law Protects Franchisees Florida is the most recent state to begin the process toward enacting such franchise legislation. The Protect Florida Small Business Act (the “Legislation”), sponsored by Florida State Senator Jack Latvala (SB 750), claims that it will bring fairness to the relationship between corporations and the Floridians who own and work in franchise establishments. The Legislation was filed in the Florida Senate on February 7, 2017. View Bill Info The Legislation states that its intent “is to promote fair business relations between franchisees and franchisors and to protect franchisees against unfair treatment by franchisors.” The Legislation generally focuses on three areas including protection from unfair terminations of franchises, protection from unfair restrictions on transfers and sales of franchises, and protection from non-renewals of franchise agreements. As soon as the Legislation was announced, the usual adversaries in the franchise world dusted off their muskets, ran to the front lines, and began shooting. One franchisee advocacy group, the Protect Florida Small Business (“PFSB”), pointed out that industry-specific franchises in Florida were treated better than non-industry-specific franchises: “Florida laws already provide safeguards for […]

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If you are facing a dispute with your franchisor, there is a good chance that you will need to submit to arbitration in order to obtain a resolution. Why? Because arbitration is the preferred dispute resolution method among franchisors, and franchise agreements commonly include “mandatory arbitration” clauses which require franchisees to go to arbitration instead of seeking to enforce their rights in court. What is Arbitration? Arbitration is a form of alternative dispute resolution (ADR) that can in some ways be thought of as a “light” version of courtroom litigation. The process is still adversarial (unlike mediation, where the parties seek to work toward an amicable resolution), and a neutral third-party (either an arbitrator or a panel of arbitrators) still issues a binding decision based upon the evidence and arguments presented. The parties also still engage in discovery, although discovery is typically limited, and they still attend hearings at which their attorneys present arguments and question witnesses. However, arbitration moves at a faster pace than litigation, and as a result it is generally less expensive as well. Why Do Franchisors Prefer Mandatory Arbitration? Franchisors generally prefer arbitration for a number of reasons. Some of these reasons have to do with the controls they can exercise within the terms of their mandatory arbitration provisions, but others have to do directly with the nature of the arbitration process. Five of the top reasons that franchisors generally prefer mandatory arbitration include: Arbitration denies franchisees the right to a jury trial Franchisors can designate […]

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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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Buying a franchise is a process. From the time you formulate the idea to become a franchisee to the time you sign the franchise agreement, you will go through a number of steps – some more complicated than others – that are all critical to ensuring that you open your doors with the best possible chance for success. If you are considering buying a franchise, here is a brief overview of what you can expect along the way: Steps in the Franchise Buying Process Step #1: Get in Touch with the Franchisor The first step is to get in touch with the franchisor. This could be through the franchisor’s website, over the phone, or at an expo or other franchise event. You will likely be asked to complete an application, and at this point you may also receive a copy of the franchisor’s Franchise Disclosure Document (FDD). By law the franchisor is required to provide a minimum 14-day waiting period before you sign a franchise agreement, and as a result you will likely be asked to sign two copies of a standard receipt page confirming the date on which you received the FDD. Step #2: Hire an Attorney to Review the Franchise Agreement and FDD Once you receive the FDD (which will include a copy of the franchise agreement), you will want to give these documents to an attorney to review. For more information on choosing an attorney to review your franchise agreement and FDD, we encourage you to read: […]

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