Franchise Articles

A recent case decided by the United States District Court for the District of New Jersey may breathe new life into the New Jersey Franchise Practices Act and the Robinson-Patman Act. South Gas, Inc. v. Exxonmobil Oil Corp., 2016 WL 816748 (D.N.J. February 29, 2016). The plaintiff franchisees’ claims in the case focused primarily on Exxon’s pricing practices, which pivoted off of a labyrinthine discriminatory pricing program known as zone pricing.  In ruling for the Exxon franchisees, the Court was careful to point out that its ruling was preliminary, and as such, was limited to the question whether the plaintiff franchisees had alleged enough in the Complaint to meet their initial pleading obligation, not whether the franchisees had substantively proven their claims. The plaintiff franchisees in this case were independent service station dealers that purchased refined gasoline directly from Exxon and other suppliers for resale to the public at retail service stations in New Jersey. Exxon’s zone pricing scheme divided New Jersey into approximately 100 zones and charged retail gas stations different wholesale prices for gas depending on the station’s zone placement. Because Exxon’s zone pricing scheme favored certain stations and disfavored other stations, including the plaintiffs, the franchisees claimed they were forced to charge higher retail prices to cover their operating expenses. Some of these wholesale price differences were so significant that they resulted in wholesale prices in some zones exceeding the retail prices in other contiguous zones. Further exacerbating the financial plight of the franchisees was Exxon’s questionable […]

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Court Not Interested in Terminated Franchisee’s Excuse for Failing to Pay Franchise Fees By: Jeffrey M. Goldstein, Esquire (202) 293-3947 goldlawgroup.com Franchisees and dealers facing a termination grounded on a failure to pay franchise fees frequently make one of three arguments: (1) the franchisor waived the right to insist on the prompt payment; (2) the amount of the arrears was not material; or (3) the franchisor’s wrongful conduct caused the franchisee’s inability to pay. Courts, however, have little patience for such attempts by franchisees to justify the non-payment of fees. Indeed, from a legal standpoint, there is no worse position for a franchisee than to have been terminated for a failure to pay. A recent case in the United States District Court for the District of Puerto Rico clearly demonstrates how most courts deal with a franchisee terminated for failure to pay. Kemco Food Distributors, Inc. v. R.L. Schreiber, Inc., 2016 U.S. Dist. LEXIS 27349 (D.P.R. February 29, 2016). Kemco is notable as it shows that the franchisee was treated harshly despite the existence of an applicable general state franchise statute providing some protection to franchisees from the economic power of franchisors. In the Kemco case, Schreiber, a family-owned and operated food manufacturing company in South Florida, designated Kemco as its exclusive distributor in Puerto Rico, contingent upon Kemco's remaining current on its payments to Schreiber. The evidence showed that Kemco made untimely payments for every invoice that was issued from January 1, 2014 through the termination of the relationship. […]

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Terminated Franchisee Beats the Odds and Sidesteps Injunction 3/6/16 By: Jeffrey M. Goldstein Goldstein Law Firm goldlawgroup.com (202) 293-3947 jgoldstein@goldlawgroup.com   In a recent decision by the United States District Court for the District of Colorado, the Court denied the plaintiff franchisor’s motion for a preliminary injunction, showing that, in rare situations, it is possible for a terminated franchisee to escape the lethal injunctive pincers of the Lanham Act, the federal law that is frequently relied upon by franchisors to shut down a franchisee’s operations during termination disputes. The Intelligent Office System, LLC v. Virtualink Canada, LTD., 2016 U.S. Dist. LEXIS 20374 (USDC Col. February 18, 2016). In Virtualink, IO was a Boulder-based LLC that had developed methods for establishing, operating, and promoting "virtual" offices, in which customers were enabled to split overhead costs by "sharing" the use of office personnel, office equipment, and office space. On February 1, 2006, IO and the Franchisee Virtualink Canada, LTD (“Virtualink”) entered into a 20-year "Master License Agreement" (“MLA”). Pursuant to the MLA, Virtualink was permitted to use IO’s "licensed methods" to license subfranchisees in most of Canada. In exchange, Virtualink agreed to unremarkable reciprocal franchisee obligations, including: (1) paying IO a percentage of the gross royalty receipts it collected from subfranchisees in Canada; (2) using IO's standards and specifications in developing new subfranchisees, including using IO’s form franchise agreement; and (3) hitting specified minimum "sales and opening goals" of virtual office centers in each year of the 20-year agreement. The Franchisor began […]

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Franchisee’s Wrongful Termination Claim Rejected for Failure to Obtain Franchisor Consent to its Franchise Purchase By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC (202) 293 3947   In a recent case in the United States District Court for the Eastern District of Wisconsin, a federal court reversed its own initial decision in which it had upheld a franchisee’s wrongful termination claim against its franchisor. Tex. Ujoints, LLC v. Dana Holding Corp., 2015 U.S. Dist. LEXIS 70468 (E.D. Wis., May 30, 2015). Granting a motion for reconsideration, the District Court held that the plaintiff was not a “franchisee’ under the relevant franchise law because, although the plaintiff had purchased the ‘franchise rights to distribute’ from a former franchisee, it had done so without first obtaining the consent of the franchisor for the purchase. The Court's reconsideration decision focused on an asset purchase agreement (APA) under which an entity created by Daniel Zahn and Martin Brown, called DanMar Holdings LLC, acquired substantially all of the assets of a Texas company, called Automotive Industrial Supply Co., Inc. (AISCO). The purpose of the transaction was for Zahn and Brown's entity to acquire AISCO's purported right, based on an alleged oral agreement, to distribute Dana's "GWB" product line, which consisted of heavy duty industrial drive lines and universal joints used in the fracking industry. After the APA transaction, the distribution assets acquired were then transferred from DanMar Holdings to Texas Ujoints LLC in a second separate deal. There was no dispute in the case that Dana […]

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Federal Court in Michigan Becomes One Stop Shop for Constructing Coffin for Terminated Franchisee   1/5/2016   By: Jeffrey M. Goldstein (202) 293-3947             Many times a terminated franchisee fails or refuses to attend court proceedings initiated by its franchisor or distributor. The main reasons invoked by franchisees for failing to attend such proceedings vary, including (1) having no money; (2) believing that the franchisor is limited by law regarding how much or the type of relief that can be awarded against it where the franchisee fails or refuses to defend; or (3) imagining that the franchisee or dealer has no real defenses to the claims. A case decided in federal court on New Year’s Eve, 2015, Domino's Pizza Franchising, LLC, Plaintiff, v. VTM Pizza, Inc., and Terrence M. Williams, Defendants, shows just how far an aggressive franchisor and a motivated court can go ‘in just one court hearing’ in deciding against an absent franchisee.           Generally, when a dealer or franchisee defendant fails to answer or reply to a Complaint, the Court will enter a default, meaning that the franchisee has a judgment entered against it for all of the substantive claims asserted by the franchisor in its Complaint. The next, and related step, is where the franchisor requests that the Court award it money damages for the franchisee’s alleged misconduct underlying the Complaint; claims for such monetary damages are asserted via a motion for default judgment. These two steps usually are separated by a period of weeks, with the latter award […]

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Child Care Franchisee Thwarts the Impact of its Franchise Termination by Confusing Everyone By: Jeffrey M. Goldstein (202) 359-0441 In The Art of War, Sun Tzu states, inter alia, that “The whole secret lies in confusing the enemy, so that he cannot fathom our real intent.” Sometimes, but not often, this strategy, if used by a franchisee, works in combatting the enforcement of a post term restrictive covenant following a franchise termination. As an attorney representing only franchisees and dealers, I’ve historically been repeatedly accosted by potential franchisee and dealer clients demanding that I provide them with a certifiable blueprint for how to ‘get around’ the post term restrictive covenants in their franchise and dealership agreements. These provisions in essence prevent a terminated franchisee from operating an ongoing or future business similar to that of the former franchise business for a period of time after the termination of the franchise, thereby, in some cases, preventing the terminated franchisee from earning a living. I usually tell them that, although in the old days it was possible to devise a ‘work around’ to this legal road block, today it is exceedingly difficult to do so.  Very simply, most franchise and dealer agreements nowadays do not contain many of the old-style loopholes (e.g., sales to wife, child, brother, mother-in-law, close friends, etc.) Further, in today’s legal system, courts have become much more adept at factually piercing the corporate veils and trails associated with secret transfers and sales. Accordingly, after reading a recent decision […]

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Arbitration Clause in Subway Franchise Agreement Booted by Court of Appeals  9/24/15 By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC goldlawgroup.com 202 293-3947 Doctor’s Associates Inc. v. Jose Luis Carbonell, et al., New Mexico, 2015 WL 4380284 (June 29, 2015), addressing an arbitration clause in a Subway franchise agreement.  My view is that Arbitration clauses in franchise agreements are on balance more helpful than not to franchisees and dealers, and this position has remained consistent throughout my career representing exclusively franchisees and dealers as a franchise lawyer. That is not to say, however, that during my frequent, ongoing and methodical reassessments of the benefit of Arbitration clauses I have always reached the same net value on the balancing scale. To the contrary; over time, my positive assessments have been veering downward. Is it possible to explain this notable downhill secular trend against the benefits of Arbitrations for franchisees and dealers? Yes. The unadorned answer is that large franchisors, especially those with forum selection clauses in their franchise agreements, have over time become increasingly adept at obtaining biased Arbitrators during the Arbitrator selection process. This obviously does not mean that every arbitrator is intentionally biased. Nor does it mean that every arbitration association despises franchisees. It does mean, though, that the arbitrator selection process itself is inherently biased.  Understandably, this observation will be attacked by many who regularly serve and make money as ‘Arbitrators.’ Despite their anticipated sincere objections, these critics cannot show that they are immune from the forces of human […]

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The Unintended Consequences to Franchising of the NLRB’s New Joint Employer Test Like all other government regulation, the new NLRB joint employer test has unavoidable unintended consequences. The Browning-Ferris joint-employer decision will likely send many franchisors back to the drawing board to find aspects of their systems about which they can relinquish legal and operational control and responsibility to their franchisees. Unfortunately, the increased costs that the new standard will impose on franchisors will be passed along, in large measure, to franchisees, some of which will be unable to maintain a profitable business. Of these, some will simply shut their doors, and others will be terminated. Last week, the National Labor Relations Board (NLRB) decided the Browning-Ferris decision, one that was long-awaited by the franchise industry. Although the case did not directly involve franchise industry parties, the decision did establish a new standard for determining whether an entity is an employer subject to the statutory obligation to engage in good faith collective bargaining with workers. Under the new standard, franchisors can be found to be employers, along with their franchisees, of their franchisees’ workers. The NLRB, in jettisoning the established test of “direct control” (e.g., hands-on efforts regarding hiring and firing), embraced a far more expansive test of “indirect control.” In so doing, the NLRB has exposed franchisors, which, although not the actual employers of their franchisees’ workers, nevertheless exert indirect control of their franchisees’ workers. As the dissent in the Browning-Ferris decision pointed out, for many years the NLRB did not […]

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Court Closes Dairy Queen Franchise in Franchise Termination   By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC jgoldstein@goldlawgroup.com (202) 293-3947 goldlawgroup.com   American Dairy Queen Corporation v. Wardlow, 2015 WL 5178454, United States District Court, D. South Dakota (September 4, 2015)   When a Dairy Queen franchisee failed to show up in federal court to defend against its franchisor’s (ADQ or Dairy Queen) emergency motion to enforce the franchisee termination by getting a court order to shut it down, the Judge, embracing a very traditional legal analysis, ordered that the franchisee cease operations. Not surprisingly, preliminary injunctions arising out of disputes in the fast food franchise industry are prolific.  The traditional test for determining whether to grant emergency relief to shut down a franchisee normally, in some fashion, encompasses four equitable issues, including: (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest. Regarding the first point, the Court pointed out that irreparable harm occurs when a party has no adequate remedy at law, typically because its injuries cannot be fully compensated through an award of damages. Interestingly, rather than ruling that the franchisor would suffer per se damages as a result of the trademark infringement, the Court examined the factual basis underlying this claim. In so doing, the Court ironically further solidified the jurisprudential principle that […]

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Post-Term Franchise Noncompete Provision Succumbs to Franchisee’s Legal Attack By: Jeffrey M. Goldstein Goldstein Law Firm goldlawgroup.com (202) 293-3947 Jani–King of Omaha v. Anthony Waadah, 290 Neb. 629, Supreme Court of Nebraska. April 10, 2015 The infamous and ruinous post-term franchise noncompete clause reared its ugly head again, this time in the Nebraska Supreme Court. Although many post-term restrictive covenants (also known as franchise covenants not-to-compete or franchise noncompete clauses) in distribution and franchise agreements are upheld as valid and reasonable, some of them nevertheless remain vulnerable to successful legal challenge. In a recent case, the Supreme Court of Nebraska held that the noncompete clause in a professional cleaning and maintenance services franchise agreement was unenforceable against a former franchisee. As discussed more fully below, in the Nebraska case, the one-year noncompete covenant contained within the larger two-year noncompete clause in the franchise agreement was not severable from the different, two-year noncompete covenant, and thus the entire noncompete clause was ruled invalid. In this Nebraska case, in 2008, appellant, Unlimited Opportunity, Inc., doing business as Jani–King of  Omaha (“Jani–King” or the “Franchisor”), granted appellee, Anthony Waadah (“Waadah” or the “Franchisee”), a Jani-King franchise in Omaha, Nebraska. After the franchise agreement was ultimately broken, Waadah diverted a number of Jani–King’s Omaha customers to his new independent business. Jani–King thereafter sued Waadah for breach of the noncompete clause in the franchise agreement. The trial court held that the noncompete clause encompassed a sub-provision that was an unreasonable restraint on competition and refused […]

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