Should Franchisees Foot the Bill for Franchise Remodeling and System Standards Modifications? By: Jeffrey M. Goldstein Franchise remodeling disputes have recently littered the franchise litigation landscape; but this is nothing new. The source of conflict in franchise remodeling disputes is not the ‘control’ issue (e.g., whether franchisees, not franchisors, should exercise final control over the type and amount of the franchisee’s business investments). Instead, the essence of the discord (at least from a static franchisee perspective) is whether a proposed or required remodeling is ‘worth it’ from a dollars and cents point of view. No more, no less. This same conflict that underlies remodeling disputes appears repeatedly in the franchise arena and also undergirds disputes associated with all significant franchise system modifications. Some of the more notable franchise system modifications that regularly give rise to disputes and litigation include menu item changes, new price ‘value programs’, price caps or maximum pricing, distribution channel supplementation, new computer system swaps and new marketing programs. If franchisees were able to trust the business decision-making acumen, motivations and goals of their franchisors, clashes regarding remodeling, like most other significant franchising disputes, would tend to be a ‘non-issues.’ And, of course, if franchisors had a track record of making globally rewarding investment decisions, such trust, as well as an efficient means for resolving breaches of that trust, would already exist. Most franchisees, to the extent they are good businessmen, merely attempt to ensure that each of their franchise-related investments – not just remodeling – reaps […]

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The Covenant of Good Faith and Franchising in 2019: Survival, Opportunism, and Distortion By: Jeffrey M. Goldstein The seemingly-omnipresent, but erroneous, belief that franchisors are legally prohibited at all times and in every instance from acting unreasonably or in bad faith vis-à-vis their franchisees is held not just by franchisees, but also by some prominent franchise lawyers. Rarely a day goes by without a potential client suggesting to me that his or her franchisor has acted unlawfully by having failed to meet its obligation to act in good faith and with fair dealing. Many times these franchisees repeat to me verbatim what they’ve just been told by another franchisee litigator to whom they’ve just spoken on the phone. Whereas franchisees generally readily latch onto the incorrect belief as a matter of survival, some franchise lawyers regularly peddle the myth to generate business. Quite simply, the misuse, misunderstanding and misapplication – intentional and unintentional — of the covenant of good faith in conversation, teaching and litigation leads ineluctably, over time, to a severe diminution in the inherent worth of the covenant of good faith as well as its use as a potential litigation tool for franchisees. The implied covenant of good faith and fair dealing is not applied uniformly by courts. Indeed, the covenant of good faith is a pure doctrinal bastard – sometimes it is viewed by courts as implied, and other times it is viewed as only explicit; sometimes it is used by courts to merely interpret a contract, […]

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In a recent article “Do Franchise Owners Really Own a Business?” Keith Miller addresses franchise ownership head-on:  “Do franchise owners really own a business? That is a very important question. The franchise industry talks about franchise owners as independent business people, working for yourself, but not by yourself. But, what does ownership mean?” https://www.bluemaumau.org/do_franchise_owners_really_own_business Miller goes on to answer: “Usually, if you own something, you have value, or equity, that you can sell. Historically, most franchise agreements contained a “first right of refusal” clause. In most cases, if a franchise owner found a buyer for their franchise, they would first have to offer that to the franchisor under the same terms and conditions.  Unfortunately, for franchise owners, that has taken on a whole new life of its own, with new clauses that eliminate most, if not all, of the equity they have worked to gain in the franchise.” Miller’s insightful observations highlight how franchisor opportunism now blatantly expresses itself directly and explicitly in many current franchise agreements. So long as franchisees and potential franchisees continue to misinterpret (sometimes intentionally) this counterintuitive reality, they will perpetuate the very myth that systematically destroys franchisees on an ongoing basis. It can’t be emphasized enough that franchisees nowadays buy little more than a limited right to receive a token revenue stream for a restricted period of time. These minimal revenue streams frequently are insufficient to allow franchisees to pay all of the aggregate costs associated with their franchises. Under these circumstances it is incorrect […]

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Franchise Disclosure Documents and Dr. Frankenstein By: Jeffrey M. Goldstein An article in the WSJ today provides a glimpse of the interesting results obtained by Professor Uri Benoliel in a new franchise study finding that it takes more than 20 years of education to understand a Franchise Disclosure Document (FDD). The conceptual purpose of disclosure under the FDD is simple – to provide the potential franchisee with all material facts, accurately and concisely, so that he or she may understand and evaluate what he or she is considering buying. Using that simple goal as the benchmark of success, from my perspective, the Federal Trade Commission’s FDD program in practice has been a tremendous failure. The WSJ article accurately sets forth the rote responses to the study of the two other main players in the omnipresent FDD debate: the FTC and the IFA. The FTC, the Dr. Frankenstein of the FDD program, of course “declined comment.” And, the IFA, the titular spokesman for all franchisors, simply ‘read out loud’ one of the canned responses it gives to every inquiry regarding any pro-franchisee observation or proposal: ‘Buying a franchise is complex; make sure that you do your due diligence before buying.’ However, in the IFA’s defense, there’s really no need for it to do any meaningful work on researching the FDD dispute or providing intellectually honest answers regarding it. The number of national lawyers representing solely franchisees has dwindled literally to under a handful, and the number of academics siding with franchisees […]

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2017 Best Franchise Litigators — USA By Jeffrey M. Goldstein   Over my 30 years of practice I’ve from time to time been asked by clients “if we hadn’t chosen you as our litigator, which lawyers would you have recommended that we had chosen to litigate our case?” Just again two weeks ago, during some dead-time during one of the prolific break-out sessions during Mediation for one of my clients, the issue was broached yet again. Interestingly, I had never provided a full and thoughtful answer to the question in the past. In addition, these clients wanted to know the best franchise lawyers ‘on both sides.’ For whatever reasons, prompted by that last Mediation discussion, I finally set about to list those litigators whose names I’d put on my personal informal list of ‘go to litigators’ for franchise and distribution. In preparing my information and non-scientific list I’ve used roughly the following criteria: (1) he or she has a minimum of 10-12 years in the franchise or distribution litigation ‘industry’; (2) franchise or distribution litigation (not franchise or distribution counseling or transactions) must predominate in his or her practice; (3) his or her ability and willingness to do battle in court are commensurate with their reputations; and (4) he or she participates in a full-time private practice. In essence, I have tried to informally distinguish between those who merely have prolific helpful professional ‘connections’ or ‘contacts’ in the franchise world (either within their law firms or in franchise corporations) and […]

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Reasonable Franchise Growth or Unreasonable Encroachment? By: Jeffrey M. Goldstein New franchise openings are a lightning rod in the franchise world; while franchisor advocates see new location openings as a legitimate mode of franchise growth, franchisee advocates view such openings as unreasonable franchise encroachment. On a semantic level, one of the most exasperating problems hindering meaningful discussion of the franchise growth issue is the unsystematic and undisciplined use of the term encroachment. Very simply, encroachment is an outcome-determinative term; as used in the franchise context it includes both reasonable and unreasonable growth. Accordingly, because it includes any growth that could or does cause any negative impact on an existing franchisee, the term is descriptively, conceptually and analytically useless at best, and destructive at worst. Further, the term encroachment similarly fails to account for the crucial distinction between non-opportunistic and opportunistic growth. In this regard, opportunistic behavior may be found in both the reasonable and unreasonable growth scenarios. Making matters worse from a semantic perspective is that the term opportunism itself is uncertain, ambiguous and anecdotal. Although opportunism in the relevant law and economics literature possesses elements of selfishness and self-interest, there is no consensus on whether all forms of opportunism harm efficiency. Again, the literature has failed to provide a uniformly-accepted definition of opportunism in the world of contracts, economics and franchising. Whereas many types of conduct have been identified as opportunistic (e.g., shirking, free-riding, stealing), no uniform theoretical definition has been formulated or accepted. One common element of many […]

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Own ’em all or franchise ’em out? Or, do some of each, and dual-distribute? According to famous Economist Ronald Coase, firms exist to minimize transaction costs. On its face, this theory, even though it is from 1937, generally explains whether particular brands or firms decide to operate as a chain or franchise. In essence, the fewer transaction costs the more likely a firm will contract for distribution services with third parties in the market (thru franchise contracts, for instance) versus doing the distribution functions in-house. Coase’s theory can also explain to some extent the proportion of company-owned stores in any given system that has chosen to offer franchises. However, the empirical evidence regarding such franchise integration decisions does not always dovetail with the theory. Indeed, a recent debate between two CEOs of two smaller pizza chains shows that decisions regarding whether to franchise, or the degree of dual-distribution in a particular franchise system, can derive from individual personality predisposition, and not explicit economic theory. Blaze, &Pizza CEO’s Square Off in Franchise Debate. For instance, Mizes, who explained that he wanted “to expand as fast as possible”, grew his company through franchising. In contrast, Lastoria, who felt that “the goal was to embellish the uniqueness of each restaurant” developed his business through company-owned stores. Interestingly, both Mizes and Lastoria felt that “it would be difficult” to ‘have it both ways” by employing both strategies simultaneously.

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Franchisee Waves Goodbye to Car Dealership due to Ineffective Waiver By: Jeffrey M. Goldstein A recent decision by the United States District Court for the Sixth Circuit affirmed a lower federal court’s ruling that Chrysler (“Chrysler” or “Franchisor”) had legally terminated one of its car dealers in Riverhead, NY, (“Eagle Auto-Mall”, “Dealer” or “Franchisee”) for the Dealer’s failure to have built new dealership facilities within the contractually specified time period set out in the parties’ Letter of Intent (“LOI”).  FCA US LLC v. Eagle Auto-Mall Corp., No. 16-2375, 2017 U.S. App. LEXIS 13232 (6th Cir. July 20, 2017).  Finding that the time deadline terms had not been waived or modified, the Court of Appeals (“Court”) held that Eagle committed a material breach of the agreement by failing to complete its renovations within the LOI’s eight-month window. The facts as related by the Court are as follows. Eagle had been a long-time car dealer selling Chrysler and Jeep vehicles out of a single facility that also housed its Mazda-Kia-Volvo dealership. After Chrysler filed for bankruptcy in 2009, it attempted to cancel its dealership agreement with Eagle; however, Eagle resisted, and Eagle obtained a court order requiring Chrysler to enter into a Letter of Intent (“LOI”) with Eagle for a new dealership. Under the LOI, Eagle was required to complete the construction of a dealer facility before it had a right to obtain a franchise agreement. Specifically, the LOI established three ways in which Eagle could provide for a legally compliant facility, […]

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Franchisee Bill of Rights Doesn’t Ensure Franchisor Competency By: Jeffrey M. Goldstein A recent suit in the United States District Court for the Western District of New York resulted in the denial of a franchisee’s motion for a preliminary injunction to prevent the franchisor from requiring the franchisee to install a new computer system. JDS Grp. Ltd. v. Metal Supermarkets Franchising Am., Inc., No. 17-CV-6293 (MAT), 2017 U.S. Dist. LEXIS 94779 (W.D.N.Y. 2017). In JDS, the franchisee JDS brought a suit against its franchisor Metal Supermarkets Franchising America (MSFA) for violation of the Washington State Franchise Investment Protection Act (FIPA), which includes a Franchisee Bill of Rights, as well as for breach of the implied covenant of good faith and fair dealing. The facts as found by the Court include the following. JDS owned two retail stores that sold metal components used in various industries. The stores were in Kent, Washington, and Portland, Oregon. JDS had been a franchisee of MSFA for approximately ten years. JDS used a software system called “Metal Magic,” that was provided by MSFA. In 2012, MSFA determined that Metal Magic was outdated, inefficient, and unable to accommodate anticipated growth and functionality changes. As a result, MSFA undertook development of a new, modern software system, called “MetalTech,” which cost over $1,000,000 and took three years to develop. In 2015, MSFA began installing MetalTech at its franchisee locations. JDS did not want to use MetalTech in its stores, but instead wanted to keep using Metal Magic. Plaintiff […]

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Subterfuge, Prevarication and Deception – Another Inefficient Franchise Territorial Dispute By: Jeffrey M. Goldstein, Esq. In a recent automobile dealer territorial dispute case, the United States District Court for the District of Colorado dismissed several claims against the manufacturer and allowed one claim to proceed. European Motorcars of Littleton, Inc. v. Mercedes-Benz USA, LLC, 2017 U.S. Dist. LEXIS 93857. The practice of dual assignment, or the appointment of competing dealers near existing auto dealers, seems to be getting more prevalent. Plaintiff Mercedes-Benz of Littleton (MBOL) has been a franchised Mercedes-Benz automobile dealership since 1996. Defendant Mercedes-Benz USA (MBUSA) is the North American distributor and manufacturer representative for the Mercedes-Benz brand of vehicles. In 2015, MBUSA invited Defendant Bobby Rahal Motorcar Company (BRMC) to establish a new Mercedes-Benz dealership less than nine miles from MBOL’s facility. MBUSA did not inform MBOL of its intent to establish a new dealership until July 2016, when an MBUSA employee traveled to Colorado and informally notified MBOL’s management of MBUSA’s plan. In October 2016, MBUSA sent MBOL a formal notice pursuant to Colo. Rev. Stat. § 12-6-120.3 (the Statute), which stated the exact location of the new dealership. The address for the new dealership is nine miles and two freeway exits north of MBOL’s dealership. The notice also identified the new dealer operator as BRMC. MBUSA and BRMC had taken material steps towards establishing the new dealership, such as executing a letter of intent. When MBUSA establishes a dealership, it enters into an agreement with the […]

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