FRANCHISES, COVID-19, WWI, IMPOSSIBILITY AND FRUSTRATION By: Jeffrey M. Goldstein Like many other small businesses, countless franchisees have been devastated by the COVID-19 pandemic. The financial and logistical disruptions of the coronavirus have caused numerous franchisees and small businesses to ponder the effects of the pandemic on contracts in general, including, for instance, their franchise agreements, supply contracts and leases. Although many of these agreements contain force majeure agreements, some of them may be determined to be specifically inapplicable to the COVID-19 situation based on the language in the clause. In such cases, the non-performing business or franchisee must avail himself of one of the common law defenses that could excuse his performance, including impossibility, impracticability, frustration of purpose and mutual excuse. Unlike many obligations imposed by law, the obligation to meet contractual obligations is generally considered absolute. In almost all cases, a person who fails to perform under a valid contract will not be heard to justify the breach or non-performance by a supervening event, no matter how devastating. This is true even though the party seeking an excuse was not negligent in failing to perform. If strict liability were not the rule, breaches of contract would be rampant where the non-performing parties found themselves in a worse financial situation after signing their contracts when it came time to perform. The four major exceptions to the absolute duty to perform under a contract (other than where the specific language in a contract explicitly excuses performance in the face of […]

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Gambling, a Panamanian Government Takeover, and Liquidated Damages By: Jeffrey M. Goldstein Although “force majeure” or “act of god” cases do not arise frequently in the franchise litigation world, a relatively recent case in the United States District Court for the Southern District of New York turned in part on this doctrine. Wyndham Hotel Grp. Int’l, Inc. v. Silver Entm’t LLC, No. 15-CV-7996 (JPO), 2018 U.S. Dist. LEXIS 52144 (S.D.N.Y. Mar. 28, 2018). In this regard, in 2015, the Veneto Hotel & Casino, a Wyndham franchise hotel, was seized by the Panamanian government for failure to pay gaming taxes, leading Wyndham to terminate its franchise agreement. Wyndham then sued for damages, and the hotel franchisee counterclaimed for Wyndham’s alleged breaches of the franchise agreement. The Veneto Hotel & Casino in Panama City, Panama, was owned by Alexander and Andrew Silverman (“the Franchisee” or “Veneto”), who bought the hotel through one of their corporate entities for $85 million in 2006. In March 2007, Silver Entertainment LLC (“Silver” or “the Franchisee”) signed a franchise agreement with Plaintiff Wyndham Hotel Group International, Inc. (the “Franchisor” or “Wyndham”). The hotel operated under the franchise agreement (“the Franchise Agreement”) as the “Veneto — A Wyndham Grand Hotel.” Under the Franchise Agreement, Silver was required to pay Wyndham recurring fees during the ten-year franchise term, including royalties, a marketing fee, reservation system fees, and an international sales fee.  Also under the Franchise Agreement Wyndham was permitted to terminate the agreement for myriad identified reasons, including but […]

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Another Franchise Decision in One Sentence: Former Franchisee Manager Not Liable for ‘Violating’ Post-term Restrictive Covenant Pillar to Post, Inc. v. Md. Home Inspectors, Inc., Civil Action No. DKC 18-3761, 2020 U.S. Dist. LEXIS 41327 (D. Md. Mar. 10, 2020) Where Pillar to Post, Inc. (“Pillar to Post”) a franchisor of home inspection businesses, sued its former franchisee, James Williams (“J. Williams”) and his daughter (Rachel Oslund) for violation of the post-term restrictive covenant, and where the franchisee’s daughter (who had a management role in the franchise before it went out of business) had not herself signed the franchise agreement, and even though the franchise agreement stated that all officers of the franchisee were bound by the franchise agreement, the Court refused to hold the daughter liable for operating an independent business either under the franchise agreement or the “closely related doctrine.” EXCERPTS OF CASE Pillar to Post, Inc. v. Md. Home Inspectors, Inc. United States District Court for the District of Maryland March 10, 2020, Filed Civil Action No. DKC 18-3761 Reporter 2020 U.S. Dist. LEXIS 41327 *; 2020 U.S.P.Q.2D (BNA) 10151; 2020 WL 1158583 Background Unless otherwise noted, the facts outlined here are set forth in the amended complaint, (ECF No. 23), and construed in the light most favorable to Plaintiff. Pillar to Post, Inc. (“Pillar to Post”) is a Delaware corporation and franchisor of home inspection businesses.2 In 2006, James Williams (“J. Williams”) began operating a Pillar to Post franchise in Maryland called Maryland Home Inspectors (“MHI”). MHI […]

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Legal Life after the Coronavirus Death for Small Businesses, Franchisees and Dealers By: Jeffrey M. Goldstein  www.goldlawgroup.com Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS? Those who hope or believe that the consequences, effects, and sources of COVID-19 will soon be arrested and contained might be wondering whether their inability to have complied with their contracts, leases, and mortgages during this waiting period can lead to a subsequent termination of or suit under their agreements for failure to have fully complied with all of the contractual obligations in these contracts. Although I don’t anticipate that ‘other parties to your contracts’ individually or as a group are preparing or conspiring to terminate, default, or cancel anyone’s agreements, this does not rule out the high probability that when things return to normal (when market forces begin to work again unimpeded by the myriad current external shocks), every firm will naturally begin to focus again on ‘maximizing profits’ – the legitimate and necessary goal of individual suppliers in a free market economy. In general, whether you’re able to use COVID-19 as a legal ‘excuse’ for your inability to pay or otherwise perform during the coronavirus downtime is subject to whether the agreement in issue contains a provision or language that excuses your performance for unanticipated or unforeseen events. While many agreements contain such clauses, referred to as ‘force majeure’ clauses (clauses that excuse performance based on unexpected events such as floods, epidemics, riots, wars, etc.), […]

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The coronavirus (COVID-19) (“the Virus”) has made it impossible or impracticable for many businesses to comply with their contracts. The party who must ultimately bear the loss associated with the Virus largely depends on whether the explicit language in their contract contains a ‘force majeure’ clause. In the absence of such language, liability for the non-performance will turn upon the law of ‘impossibility’ in the applicable jurisdiction. Not only has the Virus physically disabled those responsible for meeting contractual obligations, but it also has caused many state and local authorities to issue orders banning or severely restricting association, gatherings and travel, for instance, which, in turn, create such impossibility or impracticability. The evolution of the Virus, as well as government and business responses thereto (quarantine and containment orders), has caused many businessmen, and lawyers in unrelated niches, to ask whether any legal excuses exist to discharge promisors from contractual obligations impacted by the Virus. As discussed below, and as will be discussed in more detail in subsequent articles in this series, businesses, including franchisees, distributors and dealers, who find themselves unable to meet certain obligations in their contracts, should seek legal assistance to determine whether force majeure or the common law of impossibility or impracticability excuses their contractual performance. While force majeure generally refers to unforeseeable “acts of God,” impossibility is a broad-sweeping doctrine that picks up events and occurrences that arguably substantially impede performance even though they are not nature related (e.g., blindness or death of famous artist in […]

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Even though many industries have been devastated by COVID-19, the Antitrust Division in the Department of Justice has publicly warned all companies that they still are ‘being watched’ by government trust-busters. The DOJ Press Release singles out manufacturers and distributors of health products such as face masks, respirators, and diagnostics. Search form Search ABOUT OUR AGENCY PRIORITIES NEWS RESOURCES CAREERS CONTACT You are here Home » Office of Public Affairs » News SHARE JUSTICE NEWS Department of Justice Office of Public Affairs FOR IMMEDIATE RELEASE Monday, March 9, 2020 Justice Department Cautions Business Community Against Violating Antitrust Laws in the Manufacturing, Distribution, and Sale of Public Health Products The Department of Justice today announced its intention to hold accountable anyone who violates the antitrust laws of the United States in connection with the manufacturing, distribution, or sale of public health products such as face masks, respirators, and diagnostics.  The department’s announcement is part of a broader administration effort to ensure that federal, state, and local health authorities, the private healthcare sector, and the public at large are in the strongest possible position to respond to the outbreak of the respiratory disease named coronavirus disease 2019 (COVID-19). “The Department of Justice stands ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time,” said Attorney General William P. Barr.  “I am committed to ensuring that the department’s resources are available to combat any wrongdoing and protect the public.” Individuals or companies […]

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Distributor Not Barred from Assigning Antitrust Claims under No-Assignment Provision In Walgreen Co v. Johnson & Johnson, No. 19-1730, 2020 U.S. App. LEXIS 5336 (3d Cir. Feb. 21, 2020), the United States District Court for the Third Circuit reversed a federal trial court’s decision in favor of the alleged prescription drug manufacturer price-fixer, ruling that an assignment of federal antitrust claims is not barred by a distribution contract provision proscribing the assignment of any “rights or obligations under” that distribution contract; as the Third Circuit determined the antitrust claims are a product of federal statute and thus are extrinsic to, and not rights “under,” a commercial distribution agreement.   Excerpts from Opinion OPINION OF THE COURT JORDAN, Circuit Judge. BACKGROUND Appellants Walgreen Co. and the Kroger Co. (which, for convenience, we refer to collectively and in the singular as “Walgreen”) operate retail pharmacies throughout the United States. One of the many pharmaceuticals that Walgreen dispenses to the public is Remicade, a biologic drug used to treat various autoimmune diseases. Remicade is marketed and manufactured by Appellees Johnson & Johnson and Janssen Biotech, Inc. (which, again, for convenience we refer to collectively and in the singular as “Janssen”). Janssen does not sell Remicade directly to Walgreen. Instead, Walgreen procures Remicade from two wholesale distributors: AmerisourceBergen and Cardinal Health (once more, [*3]  collectively and in the singular “Wholesaler”). Wholesaler acquires Remicade pursuant to a Distribution Agreement with JOM Pharmaceutical Services, Inc. (“JOM”), a Janssen affiliate.1 Only Wholesaler and JOM are identified as parties to […]

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Rent-to-Own Franchisor Operators Settle Charges that They Restrained Competition through Reciprocal Purchase Agreements in Violation of Antitrust Laws FTC alleges that agreements by Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. reduced competition, lowered quality and selection of products  February 21, 2020 – FOR RELEASE The FTC antitrust complaints alleged 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, and that these agreements swapped customer contracts from rent-to-own, or RTO, stores in various local markets, whereby one party to the agreement closed down stores and exited a local market where the other party continued to maintain a presence, such that these reciprocal agreements likely led to store closures that may not have occurred otherwise, resulting in reduced competition for quality and service in the remaining stores. These anticompetitive practices, according to the FTC, caused likely caused many travelers to have to travel to the next-closest location to make their in-person payment, which may have significantly increased their travel time and costs. Further, these wrongful agreements also explicitly required the selling party not to compete within a specified territory, typically for a period of three years. “These agreements affected consumers who already had few options for furnishing a home on a limited budget,” said Ian Conner, Director of the FTC’s Bureau of Competition. “The FTC’s orders get rid of the agreements, reopen affected markets to competition, and bar these companies from doing this again.” https://www.ftc.gov/news-events/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition

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The Sale of a Franchise System May Imperil Franchisees’ Existing Exclusive Territories By: Jeffrey M. Goldstein      The sale of a franchise system to a new third party frequently raises the anxiety of existing franchisees on a broad array of business support issues, specifically including the potential encroachment on existing franchisees’ exclusive territories. In the instance where the new franchisor is already operating its own separate competing franchise system, the merger or acquisition can create an existential threat to those existing franchisees who, after the franchise system sale, are forced to compete with third party branded franchisees owned by the purchaser, or new franchisor. A Florida Supreme Court from 1998, prompted by a question to it from the federal appellate court in Florida, addresses an interesting permutation of this issue under Florida tortious interference law. Gossard v. Adia Servs., 723 So. 2d 182 (Fla. 1998). The case remains good law in Florida. The claim of tortious interference is interpreted broadly in Florida. The franchise business in Gossard began in 1974, when Larry Carr began operating an independent business which provided temporary nurses to health care facilities and individuals. Within a few years, Carr began selling franchises under the name Nursefinders.  In May of 1986, Richard Gossard became a franchisee when he purchased a franchise which covered, among other areas, Florida’s west coast. In 1987, Carr sold Nursefinders to Adia, and the following, year, Adia purchased Star-Med, a company also in the field of temporary nursing help business. Gossard’s franchise […]

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Salute to Richard Solomon This is a short tribute to Richard Solomon, Esquire, who was a great franchise lawyer. Before his passing, Richard practiced in the franchise and antitrust law areas for almost fifty years. Although Richard did not limit his representation to only franchisees, he did vigorously represent many franchisees and dealers during his career. If nothing else, Richard’s views regarding the motives and abilities of participants in the franchise world were always honest and blunt. Many times, my views were in tune with his. Richard’s articles that had been published on his firm’s old website www.franchiseremedies.com no longer publicly exist. However, some of his writings are still found on www.Bluemaumau.org  Below, I’ve taken a few interesting excerpts from the prolific writings by Richard; right below each one, I’ve set forth my brief thoughts.   The Great Conflict of Protecting Markets or Franchisees Richard Solomon October 10th, 2012 …. When the time comes to read and sign a franchise agreement, if the executives read the contract at all – and many later testify that they didn’t read any of it – they find clauses that say that the franchisor never gave any financial performance information that was not contained in Item 19 of the FDD; that no one is authorized to provide financial performance information on the part of the franchisor; that no one did provide any financial performance information about this franchise; and that if anyone did provide financial performance information, the investing executive did not rely upon […]

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