Feb 23, 2020 - Franchise Articles by |

The Sale of a Franchise System May Imperil Franchisees’ Existing Exclusive Territories

By: Jeffrey M. Goldstein

     The sale of a franchise system to a new third party frequently raises the anxiety of existing franchisees on a broad array of business support issues, specifically including the potential encroachment on existing franchisees’ exclusive territories. In the instance where the new franchisor is already operating its own separate competing franchise system, the merger or acquisition can create an existential threat to those existing franchisees who, after the franchise system sale, are forced to compete with third party branded franchisees owned by the purchaser, or new franchisor. A Florida Supreme Court from 1998, prompted by a question to it from the federal appellate court in Florida, addresses an interesting permutation of this issue under Florida tortious interference law. Gossard v. Adia Servs., 723 So. 2d 182 (Fla. 1998). The case remains good law in Florida.

The claim of tortious interference is interpreted broadly in Florida. The franchise business in Gossard began in 1974, when Larry Carr began operating an independent business which provided temporary nurses to health care facilities and individuals. Within a few years, Carr began selling franchises under the name Nursefinders.  In May of 1986, Richard Gossard became a franchisee when he purchased a franchise which covered, among other areas, Florida’s west coast. In 1987, Carr sold Nursefinders to Adia, and the following, year, Adia purchased Star-Med, a company also in the field of temporary nursing help business.

Gossard’s franchise agreement contained an exclusivity clause which provided that neither Nursefinders “nor any person or firm authorized or licensed by it shall establish an office for the purposes” of providing competing services within the franchise territory. However, Carr and Gossard testified that during negotiations over the franchise, they agreed that neither Nursefinders,  nor its parent or affiliates, would provide similar services within the franchise territory.

After Adia purchased Star-Med, Gossard filed suit alleging that by purchasing Star-Med, Adia caused Nursefinders to violate Nursefinder’s promise of noncompetition within Gossard’s franchisee’s territory. In defense, Adia argued that it did nothing to interfere with that alleged promise, and that Adia – a non-party to the original franchise agreement — was under no contractual or fiduciary duty to abide by the exclusivity clause of the franchise agreement between Nursefinders and Gossard. The jury found for the franchisee Gossard on the factual issues and awarded $ 2,488,000.

The magistrate in federal court found no evidence that would suggest that Adia “induced” Nursefinders to breach the franchise agreement. In turn,the magistrate concluded that Adia did not “otherwise cause” Nursefinders to violate the franchise agreements and entered a judgment as a matter of law in Adia’s favor. The lower federal court, thereafter, agreed, reasoning that “Adia took no action at all toward Nursefinders” and that the Restatement “clearly demands something far more direct than what occurred here to Nursefinders.” Gossard, 922 F. Supp. at 561. On appeal, the federal circuit court framed the issue as whether “Adia ‘otherwise caused’ Nursefinders to violate the franchise agreements.” Gossard, 120 F.3d at 1231.

Finding no Florida case law on point, however, the federal circuit court, before ruling on the case, certified the above legal question to the Florida State Supreme Court for an answer to the tortious interference question. The Supreme Court began its analysis by pointing to Ethan Allen, Inc. v. Georgetown Manor, Inc., 647 So. 2d 812 (Fla. 1994), in which it had set forth the elements of tortious interference with a business relationship as including the following: “(1) the existence of a business relationship . . . (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.” Tamiami Trail Tours, Inc. v. Cotton, 463 So. 2d 1126, 1127 (Fla. 1985).

Notably, the Court stated that “a protected business relationship need not be evidenced by an enforceable contract.” Id. In so stating, however, the Court appeared to set a floor of sorts when it declared that “the alleged business relationship must afford the plaintiff existing or prospective legal or contractual rights.” Register v. Pierce, 530 So. 2d 990, 993 (Fla. 1st DCA 1988). The Court also instructed that “as a general rule, an action for tortious interference with a business relationship requires a business relationship evidenced by an actual and identifiable understanding or agreement which in all probability would have been completed if the defendant had not interfered.”

The Court answered the certified question as follows:

From the factual background provided by the federal circuit and district courts, we understand Gossard’s claim to be based on the following assertions. Nursefinders and Gossard had an “agreement” that neither a parent nor affiliate of Nursefinders would provide similar health care services within Gossard’s territory. Adia was aware of this “agreement” at the time it purchased Nursefinders. Adia then purchased Star-Med, a direct competitor of Gossard located in Gossard’s territory. Consequently, Star-Med became Nursefinders’ affiliate by virtue of their common parent, Adia. Therefore, by purchasing Star-Med, Adia knowingly caused Nursefinders to be in breach of its “promise” to Gossard that neither a parent nor affiliate of Nursefinders would provide similar health care services within Gossard’s territory. Stated another way, because of Adia’s purchase of Star-Med, Nursefinders had “no choice” but to be in violation of its franchise agreement with Gossard. See Restatement (Second) of Torts, § 766 cmt. h. (1979). Id.

Based on these facts, the Court held that “the trial record contains sufficient evidence to support this theory, [and] we conclude that these allegations establish a prima facie case of tortious interference under our decision in Ethan Allen.”” Pointing specifically to section 766 of the Restatement and comment h. thereto, the Court concluded that “Gossard’s assertions regarding Adia’s conduct in this case fall within the “otherwise causing” language of the Restatement.” Under the Court’s view of the facts, Adia had knowingly caused Nursefinders to be in breach of its ‘promise’ to Gossard that neither a parent nor affiliate of Nursefinders would provide similar health care services within Gossard’s territory. On this point, the Court found that: “Adia was aware of [the non-compete agreement between Nursefinders and Gossard] when [Adia] purchased Nursefinders. Adia then purchased Star-Med, a direct competitor of Gossard located in Gossard’s territory.” Id.

It is important to note that the issue in Gossard — that the defendant (new franchisor) caused its subsidiary (also a new franchisor) to breach a contractual obligation not to compete against the plaintiff (the existing original franchisee) – in some franchise post-purchase encroachment cases there is not a similar promise. Without a related promise, as was extant in Gossard, interference – tortious or not — cannot usually be found. Further, unlike the franchise agreement in Gossard, some franchise agreements expressly authorize the franchisor to merge, acquire, joint venture or affiliate with any existing franchise business, whether competitive or not.

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