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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Liberty Tax Loses Preliminary Injunction to Former Liberty Franchisee Regarding Enforcement of Post-Term Restriction Liberty Tax Franchisee Represented by GLF Wins in Post-Term Covenant Case in Federal Court ——————————————————— UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA JTH TAX LLP, doing business as Liberty Tax Service , Plaintiff, v. MARK KELLY, Defendant. CASE NO. C20-5484RJB ORDER ON MOTION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION JULY 6, 2020 THIS MATTER comes before the Court on the Plaintiff’s Motion for Temporary Restraining Order and Preliminary Injunction (Dkt. 14). The Court is familiar with the file and all documents filed in support of and in opposition to the motion. DISCUSSION This is a business dispute. The facts are sharply in dispute. It is inappropriate, and not justified by the record, for the Court to preliminarily takes a side now for the following reasons: The Court is unable to determine that Plaintiff is likely to succeed on the merits; It does not appear that Plaintiff is likely to suffer irreparable harm in the absence of preliminary relief. If Plaintiff’s position ultimately prevails, monetary damages should adequately recompense Plaintiff. Nothing in the parties’ contract trumps this conclusion; The balance of equities is as hazy as is Plaintiff’s likelihood of success; A preliminary injunction or restraining order is not shown to be in the public interest. Particularly, third party taxpayers’ interests have not been successfully shown to be at risk under the status quo. For these reasons, Plaintiff’s Motion for Temporary Restraining Order […]

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Virtual Healthcare Franchisee’s Fraud Claims Based on Franchisor’s Financials Must be Reasserted  A virtual healthcare franchisee’s common law fraud claim that the franchisor of a cloud-based marketplace for telehealth services fraudulently induced the franchisee to invest in the franchise and in so doing also violated the anti-fraud provision of the New York Franchise Sales Act (NYFSA) based on statements allegedly made at a Franchise Expo regarding future performance were mere puffery under Missouri law, and to the extent other similar claims were based on the franchisor’s misrepresentations made during the negotiations and execution of the parties’ franchise agreement (including specific representations about future revenue and expense ‘projections’), the allegations were insufficient to sufficiently identify which individual defendants made which statements; further, issues of fact remained as to whether the franchisee’s alleged reliance on the representations made by the defendants was reasonable.  CHARLES FABIUS, ET AL., PLAINTIFFS V. MEDINEXO USA, LLC, ET AL., DEFENDANTS, U.S. District Court, E.D. Missouri, Eastern Division. No. 4:19CV2526 JCH. Dated April 3, 2020  ———————————————–  Excerpts from case:   DISCUSSION  Fraud In The Inducement  As noted above, in Count III of their Complaint Plaintiffs assert a claim for fraud in the inducement. (Compl., ¶¶ 86-92). Specifically, Plaintiffs allege as follows: In the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made several false, misleading and fraudulent statements and representations of material facts to him, including unsupported statements about the potential earning capacity as a [] Medinexo franchisee. Subsequently during the negotiation of the […]

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Connecticut Federal Court Rules for Franchisee and Strikes Unfair Floating Forum Selection Clause The United States District Court for the District of Connecticut has ruled that a franchisee of Doctors Express who purchased the exclusive rights to develop and manage Doctors Express Urgent Care franchises in two counties in New York and Connecticut was permitted to sue the franchisor in a court in Connecticut despite a forum selection clause in the agreement requiring that the litigation be filed in Alabama since the forum selection clause could not be presumed enforceable, because it was not reasonably communicated to the franchisee that he agreed to file suit in the jurisdiction where a future assignee of Doctors Express was based and because enforcement by that assignee, AFC Franchising, LLC, was not sufficiently foreseeable to him; accordingly, it would be “unfair, unjust, and unreasonable” to hold the franchisee to a clause that did not provide sufficient notice as to the forum being selected. DANILO PURUGGANAN, PLAINTIFF V. AFC FRANCHISING, LLC, DEFENDANT, Bus. Franchise Guide (CCH) P 16657 (C.C.H.), 2020 WL 3274207 (May 13, 2020)   —————————————————– Excerpt of Court’s Decision:   Because the Defendant’s motion turns on the interpretation and enforceability of the MDA’s forum selection clause, as indicated above, the Court’s assessment of the four inquiries set forth by the Second Circuit supplants the traditional inquiry undertaken in a forum non conveniens analysis. Federal common law governs the fourth inquiry, and the Second Circuit has assumed without deciding that federal common law likewise applies to the first inquiry. Starkey […]

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Court Prohibits Tax Franchisee from Operating by Enforcing Post-Term Restrictive Covenant By: Jeffrey M. Goldstein A federal judge in Washington recently issued a preliminary injunction enjoining a former Liberty Tax franchisee from operating as an independent tax preparer for two years following the termination of the franchise agreements. JTH Tax LLC v. McHugh, No. C20-329RSM, 2020 U.S. Dist. LEXIS 61139 (W.D. Wash. Apr. 7, 2020)  As discussed below, the court agreed with the franchisor’s argument that McHugh knowingly and intentionally breached her Franchise Agreements with Plaintiffs by operating KVC, a competing tax preparation business, after Plaintiffs terminated her franchise. BACKGROUND In 2015, Defendant Lorraine McHugh entered into Franchise Agreements with Liberty Tax and she was given a territory of areas near and including Federal Way, Washington, in which to operate her franchise. The Franchise Agreements included a non-compete clause, which stated that: “[f]or a period of two (2) years following the . . . termination . . . of the Franchised Business . . . you agree not to directly or indirectly, for a fee or charge, prepare or electronically file income tax returns . . . within the Territory or within twenty-five miles of the boundaries of the Territory.” The Franchise Agreements also included non-solicit and non-disclosure clauses. Further, in the Franchise Agreements, McHugh agreed that Liberty Tax is “entitled to a temporary restraining order, preliminary and permanent injunction for any breach of duties under any of the non-monetary obligations of paragraph 9 [post-term obligations] above or of this […]

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Franchisee Lawyer’s Failure to Oppose Preliminary Injunction Motion Results in Imposition of Post-Termination Restrictive Covenant By: Jeffrey M. Goldstein As if the plight of franchisees and dealers in contested litigation were not challenging enough, a recent case from the United States District Court for the Western District of North Carolina arguably makes that predicament more formidable. Maaco Franchisor SPV, LLC v. Sadwick, No. 3:20-CV-147, 2020 U.S. Dist. LEXIS 81391 (W.D.N.C. May 7, 2020). Most damaging to franchisees and dealers is that because the franchisee in Maaco failed to file an opposition to the franchisor’s motion for a preliminary injunction to shut down the franchisee’s business after a challenged termination, the federal court judge decided the injunction request without any opposition evidence or argument from the franchisee. Specifically, the ruling in this case, rather than being based on the rigorous argument and evidence from both sides, ultimately relied upon several quasi-theoretical factoids prepared by the franchisor’s counsel that normally are found in the pro-franchisor ether of restrictive covenant jurisprudence. These types of mutated factual myths, each time they are raised by litigants and then incorporated as ‘valid’ in a court order, further erode the economic realities underlying both the formation of franchise and dealership agreements as well as the restrictions on competition and competitors following the termination or expiration of such agreements. In this regard, the perpetuation by litigants and courts that “the franchisee deserves to be restrained by the preliminary injunction because the franchisee ‘brought it upon himself by acting […]

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Rent-to-own operators Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. agreed to settle FTC charges that they negotiated and executed reciprocal purchase agreements in violation of federal antitrust law. Rent-to-own operators Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. agreed to settle FTC charges that they negotiated and executed reciprocal purchase agreements in violation of federal antitrust law. The complaints allege that from June 2015 to May 2018, Aaron’s, Buddy’s, and Rent-A-Center each entered into anticompetitive reciprocal agreements with each other and other competitors. The three proposed consent agreements prohibited the rent-to-own companies and their franchisees from entering into any reciprocal purchase agreement or inviting others to do so, and from enforcing the non-compete clauses still in effect from the past reciprocal purchase agreements. After a public comment period, the Commission announced the final consent agreements. DISSENTING STATEMENT OF COMMISSIONER ROHIT CHOPRA Office of Commissioner Rohit Chopra UNITED STATES OF AMERICA Federal Trade Commission WASHINGTON, D.C. 20580     In the Matter of Rent-to-Own Market Allocation Scheme Commission File No. 1910074 February 21, 2020   Summary   The FTC uncovered evidence that three major rent-to-own players engaged in a market allocation scheme to close down stores that suppressed competition, but the agency is not asserting that this conduct was per se The proposed settlement deprives affected families of direct notification by the companies of their wrongdoing. This goes against a core element of competitive markets: the dissemination of truthful There is clear evidence that a senior executive served on the board […]

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