Franchise Articles

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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What are your rights as a franchisee? Whether you are looking for more ways to grow your business or facing a potential dispute with a franchisor, this is a very important question. While you own your own business, you and your franchisor are inseparably intertwined, and your rights are largely dictated by the terms of your franchise agreement. However, there are various laws that apply to the franchise relationship; and, depending on where you operate your franchise, you may have additional protections under your state’s franchise law as well. Then, there are the general rights that exist by virtue of the fact that your franchise agreement is silent on certain subjects. Q&A with Franchise Attorney Jeffrey M. Goldstein Q: Are franchisors required to impose uniform standards on all franchisees? As a general rule, franchisors can impose different standards on different franchisees. While uniformity is one of the hallmarks of the franchise model, there are a variety of reasons why some franchisees may be subject to different standards than others. For example, franchisees in urban areas may need to do more to stand out from their competition than those in rural towns. Or, some franchisees may have negotiated additional protections into their franchise agreements. However, there are limits on franchisors’ ability to treat franchisees differently. Providing disparate treatment without a justifiable basis may constitute franchise discrimination. Franchise discrimination is a violation of franchisees’ rights, and legal remedies are available. Q: Do I have the right to negotiate my franchise agreement? Yes, […]

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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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Beer Brewer’s Wrongful Termination of Dealer Turns Out to be Grist for the Mill for Beer Distributor By: Jeffrey M. Goldstein The U.S. District Court for the Western District of Washington recently ruled that a terminated beer franchisee could sue the beer manufacturer for non-statutory damages caused by the franchisor’s termination of the distribution contract without cause. Odom Corp. v. Pabst Brewing Co., No. C17-5279-RBL, 2017 U.S. Dist. LEXIS 81348 (W.D. Wash. May 26, 2017). As the Court phrased the issue: “This case concerns whether, when a beer supplier terminates its distributor’s contract without cause, Washington’s Wholesale Distributors and Suppliers of Spirits or Malt Beverages Act, chapter 19.126 RCW, provides the distributor with a single remedy: ‘compensation from the successor distributor for the laid-in cost of inventory and for the fair market value of the terminated distribution rights.’” The case is interesting for four reasons. First, even though almost every state has beer distribution relationship legislation, there is a dearth of reported decisions regarding beer franchise terminations; this is primarily because almost all replacements of beer distributors are negotiated and include the payment of agreed-upon fair market value. Second, Pabst’s defenses in the case were not traditional ‘good cause’ arguments usually asserted to justify a termination; instead, the beer franchisor embraced a troika of somewhat absurd schoolyard bully arguments, to wit: the rules in the statute (enacted to prevent unjust terminations by brewers) don’t apply to me (even though I’m a brewer); the rules in the beer franchisor act allow terminations […]

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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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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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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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Franchise and Distribution Litigants Seeking Damages Awards are in For a Rocky Ride – We Can Help You My article last month on franchise termination litigation set forth a somewhat detailed assessment of the law of damages in a franchise termination context, concluding in part that: In franchise and antitrust distribution law there is no more exasperating, elusive and esoteric issue than damages. This analytical muddle threatens franchisors and franchisees alike. Further, the doctrinal failure regarding franchise damages is so robust that it has extensively infected damages theory, methodology, and calculation. The Predictably Unpredictable Legal Morass of Franchise Termination Damages, Jeffrey M. Goldstein (August 2016) Within a month of publication of that article another franchisee litigant in Florida federal court, seeking about $7 Million, was unable to successfully run the franchise litigation damages gauntlet. HRCC Ltd. v. Hard Rock Cafe International et al., CA 6:14-cv-02004, U.S. District Court for the Middle District of Florida (September 13, 2016). In Hard Rock, the franchisee’s damages claim was categorically rejected by a federal district court judge granting the franchisor’s motion for summary judgment on the eve of trial. Background Facts of the Franchise Termination Abstracting from the numerous esoteric legal-entity distinctions associated with the many related corporate entities in the Hard Rock case, it appears that the franchisee, HRCC, LTD. (“HRCC”), which operated a restaurant in Nassau, the Bahamas, fell behind in paying its required royalties in 2013 and was terminated in 2014. As expected, the franchisor sued for purported lost future royalties and the […]

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