News Business Franchise Guide – Report Letter No 550 BUSINESS
Subway Franchise Termination in Russia
Subway International B.V. (“SIBV”), the international franchising arm of Subway, entered into a series of master franchise agreements (MFAs) with Subway Russia Franchising Company, LLC (“Subway Russia”) beginning in 1993, granting Subway Russia exclusive rights to develop and operate Subway® restaurants throughout Russia, with the initial MFA allowing for unlimited renewals provided timely notice and full compliance with the contract’s terms. The final MFA, executed in 2015 for five years, mandated compliance with a development schedule, “McDonalds clause” (requiring as many locations as Russia’s largest fast-food chain), achievement of specified average unit volumes (AUVs), and included an arbitration clause. Subway Russia was persistently in default of one or more MFA requirements, but previous SIBV management had repeatedly negotiated renewals, citing challenging Russian political and economic circumstances. In 2019, a new, less tolerant SIBV management team opted not to renew the MFA and later terminated it based on Subway Russia’s chronic noncompliance; Subway Russia contended this was improper, arguing that SIBV’s pre-nonrenewal pronouncements constituted a counteroffer, which Subway Russia claimed to have accepted, creating a new MFA.
Arbitration followed, resulting in an award that Subway Russia lacked a right to automatic renewal because of its defaults. SIBV successfully petitioned a federal district court for confirmation, and after a remand to assess Subway Russia’s counteroffer argument, the arbitrator rejected the existence of any renewed agreement. The district court confirmed both awards, and Subway Russia appealed, arguing (1) the confirmation petition’s timeliness, (2) that the district court’s orders were contradictory, and (3) that the arbitrator exceeded her authority. The Second Circuit upheld the district court, holding that the court’s remand correctly addressed only the counteroffer issue and did not contradict prior findings; the court’s corrections were valid under Fed. R. Civ. P. 60(a); the confirmation petition was timely; and the arbitrator acted within her powers conferred by the MFA, with judicial review appropriately deferential to her findings. In sum, SIBV’s termination and nonrenewal of the Russian master franchise were upheld at every stage, affirming the enforceability of the MFA’s compliance conditions and the arbitrator’s authority.
Medical Recruiting Franchisee’s Claims
Pasture Gate Holdings, Inc. (“PGH”), a medical recruiting franchisee, brought claims against Nadia Gruzd, alleging violations of the California Franchise Investment Law (CFIL) and the California Unfair Competition Law (UCL) related to her sale of an “AllMed Search” healthcare professional recruiting franchise in August 2020. PGH accused Gruzd of fraudulent inducement, asserting that Gruzd made unlawful financial performance representations and material misrepresentations regarding the AllMed Search franchise system, provided a Medical Search Consultants LLC Franchise Disclosure Document (MSC-FDD) containing incomplete and misleading information about MSC, AllMed Search, and Gruzd herself, and concealed the financial failures and bankruptcy of 30 franchises sold through Unlimited Med Search Franchise System, Inc. (UMFS), a previous entity she managed. PGH also alleged that Gruzd accessed and manipulated PGH’s computer systems without consent. Central to PGH’s claims was Gruzd’s purported failure to comply with the FTC Franchise Rule requirements for franchise disclosure documents (FDDs), which PGH contended constituted violations of both the CFIL and the UCL.
Gruzd responded with a motion to dismiss all claims for failure to state a claim, arguing, among other points, that the MSC-FDD and a final arbitration award from a different case should be judicially noticed, but the court denied this request as the documents were introduced for their content rather than mere existence. Substantively, Gruzd contended that she was not required to disclose UMFS as it was not a predecessor entity, challenged the sufficiency of PGH’s factual allegations as unsupported legal conclusions, and argued that claims regarding prior litigation and franchise bankruptcies were either factually deficient or time-barred by the one-year knowledge limitations period under the CFIL, asserting that PGH’s review of the FDD in 2020 triggered such knowledge. Gruzd further maintained that any alleged financial performance representations outside the FDD were subject to disclaimer language in the FDD and franchise agreement, precluding reasonable reliance by PGH, and therefore undermining the CFIL claims. She also asserted the CFIL preempted the UCL claim, and that the UCL was additionally inapplicable because the FTC Franchise Rule does not provide a private right of action or was otherwise legally deficient.
The federal district court in San Diego denied Gruzd’s motion to dismiss, holding that PGH had adequately pleaded violations of the CFIL based on failures to comply with the FTC Franchise Rule, including sufficient facts from which it could be reasonably inferred that UMFS was a predecessor to MSC that should have been disclosed. The court found allegations adequate with respect to undisclosed litigation and bankruptcy, including that Gruzd had been “held liable” through a settlement agreement—construed as payment to resolve claims. On the issue of limitations, the court determined it was not evident from the face of the complaint that PGH knew of the FDD’s incompleteness or inaccuracy upon receipt, and thus, it could not be found that the claims were time-barred at this stage.
Regarding the financial performance representations, the court concluded that disclaimer language in the FDD and franchise agreement did not preclude CFIL liability at the pleading stage and, specifically for unlawful statements in required disclosures under CFIL § 31101, the relevant section (CFIL § 31202) does not have a reliance requirement. For the UCL claim, the court rejected the argument that it was preempted by the CFIL, allowing it to proceed to the extent that it asserted grounds independent of the CFIL and the FTC Franchise Rule, such as unauthorized computer access; it also held that alternative pleading for damages and equitable relief was permissible under the federal rules. In sum, the court allowed both CFIL and UCL claims to proceed, systematically rejecting each of Gruzd’s arguments for dismissal.
BIPA Matter Involving Papa John’s
In a lawsuit arising under the Illinois Biometric Information Privacy Act (BIPA), two former employees of Ozark Pizza Company, a Papa John’s franchise, brought claims against Papa John’s International, Inc., the franchisor, alleging improper retention, collection, and disclosure of biometric data. Specifically, they challenged the use of a fingerprint-scanning system that employees were required to use for clocking in and out, asserting that proper informed consent had not been obtained.
The case unfolded against the backdrop of what the court described as a “tidal wave” of BIPA litigation in Illinois. A central issue emerged during discovery when Papa John’s served Requests for Admission (RFAs) on plaintiff Tahesha Streeter. In March 2025, Streeter admitted in writing that Ozark had discontinued use of the finger scanner by 2019. Yet, at her deposition just days later, she contradicted this statement, testifying that she was unaware of the discontinuation and describing the ongoing use of scanners. That same day, she filed a corrected response changing her answer to a denial. Papa John’s moved to strike, but Streeter followed with a formal Rule 36(b) motion to amend or withdraw her admission.
The court granted her motion, explaining that under Rule 36(b), it could not weigh the truth of the matter but only consider whether the amendment advanced resolution on the merits and whether genuine prejudice would result. The court found that Streeter’s deposition testimony created enough inconsistency to justify amendment and that Papa John’s had not demonstrated prejudice beyond inconvenience, as no deadlines had passed and discovery could still address the issue. While the franchisor claimed it relied on the admission to shape its litigation strategy, the court stressed that this did not amount to the type of hardship required under Rule 36(b), especially since the corrective denial was served only a week after the original admission. However, the court cautioned Streeter that if her original admission ultimately proved true, she could be held responsible for Papa John’s attorney’s fees and costs stemming from the change. The ruling illustrates that while defendants in BIPA cases may face added burdens when plaintiffs alter discovery responses, courts prioritize resolution on the merits and expect defendants to actively clarify inconsistencies during depositions. More broadly, the decision underscores the challenges franchisors like Papa John’s face amid the surge of BIPA litigation, highlighting the importance of procedural precision, thorough discovery, and awareness that courts may allow flexibility to plaintiffs when discovery responses evolve.
NASAA Franchising Group’s New Guidance
The NASAA Franchising Group issued new guidance on franchise disclosures, emphasizing the need for transparency and accuracy in light of market changes like price fluctuations and supply chain disruptions. The guidance clarifies that compliance with the FTC Franchise Rule is mandatory, regardless of economic conditions. It highlights the importance of updating Franchise Disclosure Documents (FDDs) to reflect material changes in fees, expenses, and financial performance representations. Franchisors are prohibited from using disclaimers that suggest FDD disclosures are unreliable due to market volatility. The guidance stresses that disclosures must be specific and transparent, avoiding general statements unless they are materially relevant. The International Franchise Association praised the guidance for addressing the challenges posed by economic uncertainties while maintaining transparency.
LUKOIL Franchisee Injunction Denial
A federal district court in Camden, New Jersey denied a preliminary injunction to Horsham Mobile Station Corp. (HMS), a LUKOIL franchisee, after Lukoil North America LLC (LNA) issued a termination notice upon discovering HMS’s noncompliance with the franchise agreement. HMS had obtained a temporary restraining order (TRO) to prevent termination while its lawsuit for wrongful termination was considered, but the court subsequently found that HMS did not satisfy the requirements for injunctive relief under the Petroleum Marketing Practices Act (PMPA) and dissolved the TRO.
The court applied the statutory standard for preliminary injunctions under the PMPA, which requires the franchisee to show: (1) termination or nonrenewal of the franchise; (2) “sufficiently serious questions going to the merits” to make them fair grounds for litigation; and (3) that the balance of hardships weighs in the franchisee’s favor. While there was no dispute that a termination under the PMPA had occurred with the issuance of the termination letter—even if not yet effective—the court found that HMS failed to demonstrate serious questions going to the merits.
The decision’s legal analysis noted that, although PMPA ordinarily requires 90 days’ notice for termination, notice can be shorter when 90 days is impracticable, as long as it’s given as soon as reasonably practical and the franchisor obtained knowledge of the default no more than 60 days before giving notice. LNA had sent a general warning letter to franchisees on March 18, 2025, stating that failure to comply with the franchise agreement—specifically including keeping dispenser pumps inoperative when the store is unattended—would result in termination. Evidence from LNA’s private investigator showed HMS repeatedly violated material provisions by failing to keep the store open during contractually required hours and allowing self-service gasoline pumping while the store was closed and unattended. Notably, Pennsylvania law requires an attendant to be present whenever gasoline is dispensed, and the franchise agreement explicitly mandated full compliance with applicable laws; thus, HMS’s violations of state law also constituted breaches of the agreement.
HMS did not present evidence that LNA knew of these breaches before issuing its March 18 warning letter, undermining any argument that LNA failed to comply with timing requirements for notice under the PMPA. Given these facts, the court found HMS had not raised “sufficiently serious questions” as to its likelihood of success on the merits.
In weighing the equities, the court determined that LNA would suffer greater hardship if an injunction were granted because it faced the risk of a franchise continuing to operate in violation of state safety regulations—a scenario that could damage LNA’s reputation and expose the public to fire hazards, the exact dangers targeted by Pennsylvania’s attendant requirement. These risks, coupled with the strong evidence of repeated and material breaches by HMS, outweighed any hardship HMS would suffer from the denial of an injunction.
The decision highlights that franchisees seeking preliminary relief after termination under the PMPA bear the burden of strict compliance with all franchise and legal requirements; failure to do so, especially where public safety is implicated and there is well-documented evidence of violation, may doom requests for injunctive relief. It reflects a rigorous application of statutory standards and underscores the need for franchisees to be able to present credible evidence and legal arguments on all required elements if they hope to temporarily stay a termination.
Distribution Agreement Dispute Transferred
In National Equipment Dealers, LLC v. IROCK Crushers LLC, the federal district court in Greensboro, North Carolina, considered three motions arising out of a dispute over the termination of an industrial machinery distribution agreement. The plaintiff, National Equipment Dealers (NED), had entered into an agreement with IROCK Crushers in August 2023 to distribute quarry and rock-crushing equipment. The contract allowed either party to terminate “for convenience” with ninety days’ notice and included a forum selection clause requiring disputes to be litigated in Cuyahoga County, Ohio. It also imposed a repurchase obligation on IROCK, but only if the agreement was terminated due to IROCK’s breach. When IROCK exercised its termination rights in August 2024, NED filed suit in North Carolina state court, alleging that IROCK breached the agreement and violated state statutes (the Farm Machinery Franchise Act and the Unfair Trade Practices Act) by refusing to repurchase NED’s inventory. IROCK removed the case to federal court and simultaneously moved to transfer the case to the Northern District of Ohio and to dismiss the claims. NED responded with a motion to remand, arguing that IROCK’s removal was procedurally defective.
The court first addressed NED’s remand motion and rejected its arguments. NED contended that removal was defective because IROCK failed to file a corporate disclosure statement as required by Federal Rule of Civil Procedure 7.1(a)(2)(A) and a corresponding local rule. While acknowledging that IROCK did not immediately submit a separate disclosure statement, the court emphasized that removal is governed by 28 U.S.C. § 1446, which IROCK had satisfied by timely filing a notice of removal with all required documents. Moreover, the notice of removal itself contained all the necessary ownership information, and IROCK filed the corporate disclosure statement separately just over a week later. The court noted that NED showed no prejudice from this short delay, and that minor technical or procedural errors do not justify remand when the substantive requirements of removal have been met. As such, the court concluded that IROCK’s removal was proper and denied NED’s motion to remand.
Turning next to the motion to transfer, the court granted IROCK’s request to move the litigation to the Northern District of Ohio. The court explained that under 28 U.S.C. § 1404(a), a valid forum selection clause is given significant weight, and the party opposing transfer bears the burden of showing “extraordinary circumstances” that would override the parties’ contractual choice. Here, the forum selection clause in Section 22 of the agreement explicitly required that all legal proceedings be conducted in courts located in Cuyahoga County, Ohio, and the agreement also included an Ohio choice-of-law provision. NED attempted to resist transfer by citing “public interest factors,” but the court stressed that when parties have expressly bargained for a forum, arguments about convenience or private interests are irrelevant. The Supreme Court has made clear that courts should not disrupt settled expectations except in highly unusual cases, and the court found that NED failed to identify any extraordinary circumstances that would make enforcement of the forum clause unjust. Because the public interest factors did not overwhelmingly disfavor transfer, the court concluded that the agreement’s forum clause should be enforced.
Finally, with respect to IROCK’s pending motion to dismiss, the court declined to decide the issue. Instead, it held that the Northern District of Ohio, the contractually chosen forum, should consider the motion once the case was transferred. This procedural posture reflected the court’s view that dismissal arguments should be addressed by the court most familiar with the governing law chosen in the agreement.
In sum, the court denied NED’s attempt to remand the case to state court, granted IROCK’s motion to transfer the case to the Northern District of Ohio, and deferred ruling on the dismissal motion, leaving it for the transferee court. The ruling underscores the enforceability of forum selection clauses in distribution and franchise-style agreements, the limited role of technical objections in removal proceedings, and the judiciary’s deference to contractual choices of forum absent extraordinary circumstances.
Partial summary judgment vacated sua sponte on review of surprising application for attorney fees
In a striking decision, the federal district court in Charleston, South Carolina, vacated a previously granted partial summary judgment in a franchise dispute after reviewing the franchisor’s surprising petition for attorney fees. The court discovered that YGM Franchise, LLC had pursued litigation against its former franchisees—the Wongs—not to redress any real injury, but rather to deter other franchisees from terminating their agreements, effectively using the courts as a tool of intimidation. The Wongs had originally purchased a You’ve Got Maids franchise in 2017, paying more than $32,000 in fees and agreeing to ongoing payments. The franchise agreement allowed termination on ninety days’ notice with a general release, and several franchisees, including the Wongs, sought to exercise this right, citing YGM’s failure to support the brand and allegations that YGM’s principals had misused franchisee funds. YGM, however, claimed the Wongs had failed to deliver the required release and had violated an 18-month non-compete provision.
When their attorney withdrew, the Wongs defaulted—likely in connection with a family tragedy—but rather than dropping the case or seeking a straightforward default judgment, YGM pressed ahead for another two years. A judge had already denied YGM’s request for a preliminary injunction in 2023, noting the absence of irreparable harm and citing concerns about YGM’s own misuse of funds, while other franchisees settled on undisclosed terms. In early 2024, YGM moved for partial summary judgment and prevailed, securing declaratory and injunctive relief ordering the Wongs to deliver a general release and refrain from competing.
Seven months later, however, YGM filed a petition for $50,000 in attorney fees that exposed the true character of the litigation. The detailed billing entries showed that YGM had pursued the case with the expectation that the Wongs would be forced to shoulder exorbitant legal costs for what was, in the court’s words, “purposeless litigation.” The petition even included requests for reimbursement for attorney time spent on a previously denied injunction motion, on a personal marital dispute between YGM’s principals, and on extensive hours pursuing summary judgment that could have been obtained far more efficiently through default judgment. Reviewing this record, the court concluded that YGM’s actual motive was to make an example of the Wongs, punishing them through litigation and fee awards in order to deter other franchisees from leaving the system. The fee petition itself contained an admission that an adverse ruling “would have threatened the viability of the YGM franchise system as a whole,” which the court viewed as conclusive evidence of improper purpose.
Applying Federal Rule of Civil Procedure 60(b), the court found exceptional circumstances justifying relief from its prior order. Less than a year had passed since the grant of partial summary judgment, the Wongs had a meritorious defense since they had exited the cleaning business in March 2023, and YGM itself had now admitted that the Wongs caused it no injury. The court stressed that it would never have granted injunctive relief if this fact had been disclosed earlier. Because the record showed both lack of injury and improper motive, the case presented the kind of manifest injustice that Rule 60(b)(6)—the equitable “catch-all” provision—was designed to remedy. The court therefore vacated its earlier summary judgment sua sponte, denied YGM’s motions for attorney fees and costs as moot, and dismissed the case in its entirety. It concluded emphatically that the judicial system should not be used to “pound” franchisees into submission or as an “unwitting participant” in abusive litigation, and it made clear that YGM had no further claims against the Wongs that could justify continuing the action.
Baby Products Manufacturer’s Claims to Trial
Luv N’ Care, Ltd. (“LNC”), a manufacturer of baby products under the “Nuby” brand, brought claims for breach of contract and violation of the Louisiana Unfair Trade Practices Act (LUTPA) against its former distributor, Mayborn Group Limited and its related entities (collectively, “Mayborn”), in the federal district court in Monroe, Louisiana. The dispute centered on 2003 and 2008 Distribution Agreements between LNC and Mayborn; after prevailing in a 2013 jury trial over Mayborn’s copying of LNC products, LNC filed this suit alleging that Mayborn willfully and intentionally used LNC’s products, product designs, and non-confidential proprietary information to develop and sell competing drinking cups without LNC’s consent and without paying owed royalties. Mayborn moved for summary judgment, raising defenses including res judicata, waiver, and equitable estoppel. The court largely rejected these defenses, finding that res judicata did not bar LNC’s current claims because the accused training cup products did not exist until after the prior litigation’s final judgment. On the merits, the court ruled that LNC had not abandoned a “feature-based theory” in earlier cases but clarified that the prior injunction only prohibited copies or colorable imitations of LNC’s silicone valve in soft spout, flip-top, and straw cups, and held LNC cannot argue for “disembodied” features unless tied to specific accused products.
The court granted partial summary judgment for Mayborn on limited issues, finding the contractual term “product” referred to an entire product (not just a feature), and that design-based claims must relate to whole product designs, not individual features in the abstract. Ultimately, the court denied summary judgment on most issues, thus requiring trial to resolve disputes of material fact, particularly whether Mayborn’s products infringed LNC’s protected designs and whether LNC had tied its claims to the four identified accused products, while narrowing the scope of permissible theories LNC may pursue at trial. Thus, nearly all of LNC’s breach of contract and LUTPA claims must proceed to trial, with Mayborn’s res judicata and waiver defenses rejected except to the limited extent set by the court’s contract interpretation rulings.
Puerto Rico Dealers Act Case Dismissed
A federal district court in Puerto Rico dismissed claims brought by a medical device distributor under the Puerto Rico Dealers Act against a supplier, finding the distributor’s pleadings insufficient. The distributor alleged that the supplier had terminated their distribution agreement without just cause, violating the Act. However, the court found that the distributor failed to adequately plead the existence of a dealer relationship as defined under the Act, which requires a showing of a continuous and exclusive distribution arrangement. The court allowed the distributor the opportunity to amend the complaint to address these deficiencies, emphasizing the need for specific factual allegations demonstrating the requisite level of control and exclusivity in the business relationship.
Price Discrimination Claims Against 5-Hour ENERGY®
In a case involving allegations of price discrimination under the Robinson-Patman Act, a federal court dismissed claims brought by wholesalers against Living Essentials, the maker of 5-Hour ENERGY®. The wholesalers accused Living Essentials of offering more favorable pricing to certain competitors, thereby harming their ability to compete. The court found that the plaintiffs failed to demonstrate the requisite antitrust injury, as they did not provide sufficient evidence that the alleged price differences had a substantial effect on competition. The court emphasized that mere price disparity, without a showing of competitive harm, does not constitute a violation of the Act. As a result, the claims were dismissed, underscoring the necessity for plaintiffs to establish a clear link between price discrimination and competitive injury.
Trade Secrets Dispute Fee Denial
The Sixth Circuit Court of Appeals upheld a district court’s decision to deny attorney fees in a trade secrets case, where the plaintiff alleged misappropriation of proprietary information. The district court had found no bad faith on the part of the plaintiff in bringing the claims, which is a prerequisite for awarding attorney fees under the relevant statute. The appellate court agreed, noting that the plaintiff’s claims, while ultimately unsuccessful, were not frivolous or brought with an improper purpose. This decision highlights the high threshold for proving bad faith in order to shift attorney fees in trade secrets litigation, reinforcing the principle that fee awards are reserved for cases involving clear evidence of misconduct or abuse of the judicial process.
Sinclair Oil Trademark Injunction
Sinclair Oil successfully obtained a preliminary injunction against Can-Am for the unauthorized use of its trademarks. The court found a likelihood of consumer confusion due to Can-Am’s use of Sinclair’s distinctive marks, which are well-known in the petroleum industry. The decision emphasized the strength of Sinclair’s trademarks and the potential harm to its brand reputation if Can-Am’s actions were allowed to continue. This ruling underscores the importance of protecting trademark rights and the legal remedies available to prevent infringement and maintain brand integrity.
LeTip Franchisee’s Counterclaims Dismissed
A court dismissed several counterclaims brought by a former LeTip franchisee, including breach of contract and defamation, while allowing the franchisee the opportunity to amend some claims. The court found that the franchisee failed to provide sufficient factual support for the allegations, particularly regarding the defamation claim, which lacked specific defamatory statements. The decision highlights the necessity for clear and detailed pleadings in asserting counterclaims, as well as the court’s willingness to permit amendments to address deficiencies.
Rightline’s Antitrust Claims Against FMC
Rightline Products’ antitrust claims against FMC Corporation survived a motion to dismiss, with the court applying the rule-of-reason test to assess allegations of monopolization in the sulfentrazone market. Rightline accused FMC of engaging in anti-competitive practices that restricted market access and harmed competition. The court found that Rightline’s complaint sufficiently alleged facts to support its claims, allowing the case to proceed. This decision illustrates the complexities of antitrust litigation and the standards for evaluating claims of monopolistic behavior.
Hotel Franchisor’s Default Judgment
A hotel franchisor was awarded a default judgment against a franchisee for prematurely terminating their franchise agreement. The court granted liquidated damages and prejudgment interest, finding that the franchisee’s actions violated the terms of the agreement. This judgment underscores the enforceability of franchise agreements and the potential financial consequences for franchisees who fail to adhere to contractual obligations. The case highlights the importance of compliance with franchise terms and the legal recourse available to franchisors in the event of a breach.
Policy Analysis
Recent legal decisions highlight significant challenges faced by franchisees in navigating compliance with both contractual and statutory obligations. The LUKOIL franchisee case exemplifies the strict adherence required to franchise agreements and relevant laws, particularly when public safety is involved. Franchisees must ensure they meet all operational standards to avoid termination and legal disputes. Similarly, the LeTip franchisee’s counterclaims dismissal underscores the necessity for franchisees to present well-supported legal arguments when contesting franchisor actions. These cases emphasize the importance for franchisees to maintain detailed records and seek legal guidance to uphold their rights and responsibilities effectively.
Moreover, the Sinclair Oil trademark injunction and the hotel franchisor’s default judgment illustrate the potential financial and operational repercussions for franchisees who fail to comply with agreements. These rulings serve as a cautionary tale, highlighting the need for franchisees to understand the full scope of their contractual obligations and the legal frameworks governing their operations. The outcomes suggest that franchisees must be proactive in managing their legal and business strategies, ensuring they are well-prepared to address any disputes that may arise. Overall, these cases reinforce the critical need for franchisees to engage in diligent compliance practices and seek expert legal advice to navigate the complexities of franchise law.
Main Message for Franchisees or Dealers
Ensure strict compliance with all contractual obligations and legal requirements to protect your business interests and avoid costly disputes.
