Einbinder & Dunn stays apprised of current events in the realm of franchising — not just lawsuits and court decisions but transactions and trends as well. Updates of interest will be posted here regularly.
According to an article in the Franchise Times, franchisors are responding to the current credit crisis by instituting internal financing programs and lending money to franchisees directly. Franchisors have already been reducing royalty rates and waiving franchise fees in attempts to induce prospective franchisees, but now franchisors are also guaranteeing and servicing loans or even lending money outright to franchisees.
Annual applications from franchisors who want to do business in Maryland are down significantly so far this year. First-quarter franchise-registration applications in Maryland fell 16% from a year earlier to 367. Other states report similar falloffs: California's filings from Jan. 1 through its April 20 deadline fell nearly 20% from a year earlier to 769. New York's first-quarter registrations dropped 22% to 348 — the lowest number in five years. Attorneys who process state registrations confirm the pattern. (Richard Gibson, Wall Street Journal, April 28, 2009.)
In Patsy’s Italian Restaurant, Inc. v. Banas, 575 F.Supp.2d 427 (E.D.N.Y. 2008), the court resolved, for now at least, trademark litigation between parties and their predecessors who, for over sixty years, have shared the mark “PATSY’S” for nearly identical restaurant-related services, both within the same New York City market. Finding that both principal parties were to blame for the deterioration of a mostly peaceful co-existence using similar trade names that had lasted decades, the court ruled, in essence, that the parties must distinguish themselves from one another by using the names PATSY’S ITALIAN RESTAURANT and PATSY’S PIZZERIA , respectively; to define the distinct sets of services that they provide; and, “most importantly, to stop encroaching on the others’ usages and to stop impermissibly seeking to push the other party out of the market.”
According to the International Franchise Association, most merger and acquisition activity in 2008 was driven by deals between franchisors and franchisees, not traditional buyout activity. Purchases of an entire concept fell from 36 deals in 2007 to 20 in 2008. Numbers are likely to drop further before they return to previous levels.
A federal judge dismissed a lawsuit filed by 11 current and former franchisees of Mama Fu’s Asian House , finding that the reason many franchisees failed was the inherent riskiness of opening a franchise, not fraud or misrepresentations made by the restaurant concept’s former owner, Raving Brands. After the franchisee plaintiffs had made their case, the defendants moved the court for dismissal. Judge Richard Story granted the motion, ruling that “it was unreasonable for plaintiffs to rely on any representations of prospective earnings or statements,” given that Mama Fu’s was a new system. Peterson, et al. v. Sprock, et al., USDC N.D.Ga. (No. 1:06-CV-3087-RWS; order of Story, USDJ, March 10, 2009).
The plaintiffs in Westerfield v. The Quiznos Franchise Company, LLC, a class action suit filed in the United States District Court for the Eastern District of Wisconsin, have persuaded the court to reverse its November 2007 decision dismissing the plaintiff franchisees’ claims of fraudulent inducement and violation of the federal RICO statute premised on the alleged fraud. On reconsideration, the court ruled that it had been “manifest error” to grant Quiznos’ motion to dismiss the plaintiffs’ claims and accordingly vacated the dismissal and granted the plaintiffs’ motion to amend their complaint. The plaintiffs did not challenge the dismissal of their anti-trust claims, and therefore those claims were not reinstated. Westerfield v. Quizno’s Franchise Company, LLC, 2008 WL 2512467 (E.D.Wis.).
In Bores v. Domino’s Pizza, LLC, 530 F.3d 671 (8th Cir. 2008), the United States Court of Appeals for the Eighth Circuit held that a provision in the Domino’s franchise agreement permits the franchisor to require its franchisees to purchase and install custom-designed integrated computer systems created specially for Domino’s units. The appellate court overruled the trial court, interpreting the words “any” and “specification” in the contractual provision at issue—“We will provide you with specifications for… computer hardware and software…. You may purchase items meeting our specifications from any source.” The court held that the provision contemplates that equipment might be available for purchase from only one source, rejecting the argument of the plaintiff franchisees that such an interpretation would render the provision meaningless. The court held as well that in fact a franchisee can purchase the point-of-sale equipment mandated either new from Domino’s or used from another franchisee.
Einbinder & Dunn represented a franchisee in a very important case for franchisees, in which the Appellate Division, First Department of the Supreme Court of the State of New York in Emfore Corp. v. Blimpie Assoc., Ltd., 46 A.D.3d 389, 848 N.Y.S.2d 89 (1st Dep’t 2007), affirmed as modified, 51 A.D.3d 434, 860 N.Y.S.2d 12 (1st Dep’t 2008), reversed the trial court's order and allowed the plaintiff franchisee to proceed with its claims that the defendant franchisor had violated Sections 683 (disclosure requirements) and 687 (fraud) of the New York State Franchise Act by providing false and misleading earnings statements to the plaintiff. The appellate court ruled that under the Franchise Act there is no difference between contract clauses in the franchise agreement proper and separate questionnaires or other documents containing disclaimers or waivers that the franchisor requires the franchisee to sign, and therefore both are invalid under the Franchise Act.
In Radisson Hotels Int'l, Inc. v. Majestic Towers, Inc., 488 F.Supp.2d 953 (C.D.Cal. 2007), franchisor hotel chain demonstrated clearly that it was entitled to terminate the franchisee agreement at issue because of the franchisee's repeated failure to pay royalties. The franchisee invoked the doctrine of PIP/Sealy to argue that, under California law, its failure to pay past due royalties, resulting in the franchisor's termination of the parties' agreement, could not be the proximate cause of the franchisor's lost future profits, for which the franchisor had sued. The federal district court held that the franchisor had effectively worded the agreement to avoid the rule of PIP/Sealy, inasmuch as the agreement expressly made the franchisee "liable for [the franchisor]'s lost future profits resulting from [the franchisor]'s decision to terminate" based on the franchisee's failure to pay overdue royalties. The court held that there was no rule preventing a party from indemnifying losses that might otherwise not be recoverable under a contract law theory.
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