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Three Common Franchise Myths A myth is an invented story, idea or concept. Sometimes myths are used to support and justify particular ideas, institutions, and traditions. In two recent columns I’ve identified and discussed three pervasive franchise myths, including: “If you buy this franchise, you’ll be our partner.” “If you buy this franchise, you’ll be rich.” “If you buy this franchise, you’ll benefit from our experience and expertise in successfully operating franchises.” As I previously noted, the first two myths are existentially mysterious in that, one would have thought that, over the course of history, as these myths were passed from one generation to the next, they would have been exposed and debunked. They have not been. And, with regard to the latter myth, incredibly, legal standards have evolved that allow and incentivize franchisors to perpetuate it. In essence, courts have refused to recognize a claim for franchisor malpractice. In this regard, given the force and nature of the “economic loss rule”, it is not likely that this myth will be discredited in the near future. Given the longevity and vitality of these myths, it is not surprising to learn that they cause incredible damage to franchisees, sometimes entirely destroying franchisees’ families, savings, and futures. If you believe that you’ve fallen for one or more of these myths, time is not in your favor. You should promptly seek the advice of an experienced franchisee lawyer who will be able to accurately devise a legal strategy to protect you and your […]

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Domino's franchise operators accused of uttering death threats will keep store… This is one way for a franchisee to hold down franchisee labor costs and at the same time side-step a franchise termination. Not sure, however, if the 'new big brothers' of franchisee organizations (big labor and the unions) would be happy with the result. JMG The operators of a Domino's Canada franchise in North Vancouver who were alleged to have exploited two former employees will keep their pizza store.  On Wednesday, CBC News learned a B.C. Supreme Court civil case, between brothers Keyvan Iranmanesh and Farhad Iranmanesh and Domino's Canada, was settled on Aug. 27, with the owners retaining the store.   The employees filed complaints with police and government, and also said at the time that they feared for their safety.  One of the franchisee employees told CBC News that his bosses said they would "cut his [Dearman’s] head off" and that "they're going to slit our throats and murder us." Domino's terminated the franchise, but the franchisees fought the termination in court. In so doing, the franchisee won a temporary injunction in BC Supreme Court to hold on to their business while the court case was pending. They also adamantly denied any assaults or threats.

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Gas Station Franchise Termination — In Swaziland Fuel Franchisor: “Your gas station franchise is terminated and you must vacate the premises immediately.” No; this was not a petroleum franchisor in the USA, but a gas distribution franchisor in Swaziland. After the gas station franchise termination in Swaziland, the franchisee lawyer for the gas station, in a discussion with the press and in his pleadings, made arguments almost identical to those that would have been, and are made, by franchise lawyers in the USA: “He is arguing that he feels like he has been given a raw deal in the sense that he is now made to lose the business and property without compensation.” “The Supreme Court merely made an assumption that the franchise agreement was for a three year term ignoring the words used in the clause and thereafter ordering the ejectment of the applicants without compensation.” The franchisee’s lawyer said in an affidavit: “The court failed to an interpretation of Clause 6.1 of the agreement.” “He spent E6.5 million in the business so he was pleading with the court to let him continue operating the filling stations. He said if the court ruled in favour of Galp Swaziland, he should be compensated or at least be given an opportunity to sell his businesses.” “He said the respondents of the matter displayed a lackadaisical attitude in this regard because they believed the applicants had no ownership over the business but they were just mere managers of the filling stations they operated.” […]

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http://consumerist.com/2015/08/14/chick-fil-a-franchise-owner-pays-employees-during-5-month-renovation/ Labor costs no different than franchise remodel. Chick-Fil-A Franchise Owner Pays Employees During 5-Month Renovation — When there’s a good location and strong market demand even counterintuitive business decisions are possible. In the land where franchisee costs are rendered irrelevant; this is sort of a self-imposed franchise remodel. If a franchisor had foisted this labor cost increase on franchisees, they would scream more loudly than they would if they were forced to carry out a franchise remodel. 

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  Constructive Franchise Termination Claims are Not Dead. This case provides good advice for franchisors on devising and embracing a franchise impact policy; the problem is that very, very few franchisors follow this advice. Short run profit goals of franchisors, along with terribly thought-out court decisions like DRX Urgent Care, leave franchisees with no place to turn in the face of ongoing franchisor encroachment. This opens up franchisors to viable claims by franchisees of constructive franchise termination. The attached article written by a franchisor lawyer surprisingly shows some compassion for the devastating effects of signficant encroachment on a franchisee's ability to turn a profit, even a meager one.   http://www.thelegalintelligencer.com/id=1202733653046/Encroachment-and-Franchisee-Claims-of-Constructive-Termination

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Constructive Franchise Termination Claim Upheld by Florida Court: HRCC, LTD. v. HARD ROCK CAFE INTERNATIONAL (USA), INC, 2015 WL 3498610 (June 2015):  The Florida federal court ruled that a de facto or constructive franchise termination “‘applies where one party unilaterally modifies the terms' of a contractual relationship in a manner that ‘substantially interferes with the other party's ability to obtain the benefits of the contract.’“ Bert Smith Oldsmobile, Inc. v. Gen. Motors Corp., No. 8:04CV2666T–27EAJ, 2005 WL 1210993, at *2 (M.D.Fla. May 20, 2005) (quoting Banc One Fin. Servs., Inc. v. Advanta Mortgage Corp. USA, No. 00 C 8027, 2002 WL 88154, at *10 (N.D.Ill. Jan.23, 2002)). In so holding, the Court rejected the franchisor’s argument that: Defendants claim that a cause of action for constructive termination requires an express or implied mandate via legislation which governs the relevant franchise relationship. See Cooper Distrib. Co., Inc. v. Amana Refrigeration, Inc., 180 F.3d 542, 553 (3d Cir.1999); Petereit v. S.B. Thomas, Inc., 63 F.3d 1169, 1182 (2d Cir.1995) (requiring the controlling state law to endorse a constructive termination cause of action), cert. denied 517 U.S. 1119 (1996). For a more complete discussion of franchise termination in general see: /wrongful-franchise-terminations/

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Franchise Termination based on franchise menu price fixing http://www.bluemaumau.org/14588/steak_%E2%80%98n_shake_granted_summary_judgment_colorado Franchise termination based on franchisee's refusal to fix franchise menu prices approved by court for franchisee's refusal to fix menu prices as ordered by the franchisor. The court decision also stated the record amply demonstrated that the franchisees were well aware that their actions were in contravention of the franchise agreement, and thus were committed "knowingly" for purposes of the termination. With regard to the franchisees' counterclaim for fraud, the court agreed with Steak 'n Shake that the claim failed as a matter of law because the franchise agreement contained an integration clause that preempted any claim based on statements made prior to the agreement.

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Terminated Hotel Franchise Pays Liquidated Damages With No Trial; Another Wyndham Hotel Terminated Franchisee Fails to Retain Counsel and is Defaulted by Judge in Wyndham’s New Jersey Home-Court – After the hotel franchisee defendants failed to retain an attorney or defend Wyndham’s claims, the Court considered: (1) whether the party subject to the default has a meritorious defense; (2) the prejudice suffered by the party seeking default judgment; and (3) the culpability of the party subject to default.  In so doing, the Court concluded that in the absence of any responsive pleading and based upon the facts alleged in the Complaint, the Defendants did not have a meritorious defense. Further, the Court found that Howard Johnson would suffer prejudice absent entry of default judgment as HJI will have no other means of obtaining relief. In addition, the Court found that the Defendants acted culpably as “they have been served with the Complaint, are not infants or otherwise incompetent, and are not presently engaged in military service.” In turn, the Court awarded both $104,314.02 in “Recurring Fees”, and $177,105.77 in liquidated damages. Howard Johnson Intern., Inc. v. SV Hotels, LLC, United States District Court, D. New Jersey, July 10, 2015Slip Copy2015 WL 4199280 The Goldstein Law Firm and Jeff Goldstein have been particularly successful in obtaining good settlements on behalf of hotel franchise clients in liquidated damages disputes. Call for a free consultation today. 

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Dunkin Franchisee Terminated Despite its being Unable to Complete Remodel Due to Government Interference. In this case, Defendants began, but did not complete, the required renovations. Defendants contracted with an architecture firm approved by Dunkin', A & A Architects,1 to design the remodel. The architect drew up plans for a remodel and submitted the plans to local government authorities for approval of building permits. The plans called for placing a bathroom over a “well stub,” a plugged top of a water well, and county health officials objected to the placement of a well stub in the middle of a bathroom floor. Health officials refused to allow the renovations to continue until the plans changed. Dunkin Donuts Franchising LLC v. Claudia III, LLC, United States District Court, E.D.  Pennsylvania, July 14, 2015 Slip Copy, 2015 WL 4243534

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Opposing Franchisor and Franchisee Advocates Come to Agreement on Languge for New Franchise Amendment for California Franchise Act. The key resolution in the California Franchise Act amendment was that "The parties agreed that the bill's current language “substantially comply with the franchise agreement” was too broad; the new language addresses franchisee concerns that a termination should not be based upon a minor violation." If the goal of the parties were to create one of the most ambiguous franchise termination standards on the books in any state, then the parties were highly successful. The letter from the IFA and CFA is available from GLF by request.

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