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THE TOP 13 FRANCHISE CASES OF ’13

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Barry Heller John Hughes John Dwyer FRANCHISE LITIGATION PRESENTERS

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• Cases decided in 2013
• Sought cases that provide guidance as to

business considerations for franchisors

• Selected some cases solely because they

represent a growing trend

• No order of priority

CRITERIA FOR SELECTING CASES

CURRENTLY SPEAKING

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Can You Breach A Confidentiality Provision By Disclosing A Settlement In An FDD?

John Hughes

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Caudill v. Keller Williams Realty, Inc.,

2013 WL 5874761 (N.D. Ill. Oct. 31, 2013)

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FACTS

• Plaintiff was the owner and operator of a franchised real estate

agency

• Plaintiff filed suit against Keller Williams for claims arising out of her

former employment

• Keller Williams then terminated the franchise agreement
• The parties settled the dispute and entered into a Settlement

Agreement and Mutual General Release

• Keller Williams sent a FDD containing the terms of the settlement

agreement to existing franchisees, regional owners, regional directors, and prospective franchisees

• The FDD contained the case name, summary of claims, history of the

litigation, the settlement amount, and a statement that the settlement was entered into without a finding or admission of liability

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THE CONFIDENTIALITY PROVISION

• The provision stated that the conditions of the settlement

(including the settlement amount, the settlement agreement itself, and the parties’ allegations) will be held in strict confidence and could only be disclosed:

• “to tax professionals to the extent needed for tax advice, to the

parties insurance carriers, attorneys who represented the parties in the Lawsuit, underwriters and reinsurers, the mediator, and to governmental agencies or regulatory authorities as required by law, and then only to the extent necessary and required to be disclosed by law, by lawful subpoena, or otherwise”

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PLAINTIFFS’ CLAIM

• Plaintiffs claimed that Keller Williams breached the confidentiality

provision in the settlement agreement by disclosing the settlement in the FDD

• Plaintiffs stated that they derived business from referrals in the real

estate industry, including many of the recipients of the FDD

• Plaintiffs alleged that they suffered damages, including the loss of

professional opportunities, future income, embarrassment and reputational harm

• Plaintiffs sought compensatory damages (including liquidated

damages) and injunctive relief

KELLER WILLIAMS’ POSITION

• Keller Williams filed a motion to dismiss
• Keller Williams argued that it did not breach the

confidentiality provision because:

• Settlement Agreement did not prohibit disclosure to

employees who act on or behalf of Keller Williams

• Keller Williams was required by law to disclose certain terms
• f the settlement
• Keller Williams was not required to instruct recipients of the

FDD to maintain the information’s confidentiality

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THE COURT’S RULING

• The court denied the motion to dismiss because issues of

fact existed:

• Purported unintentional drafting error in the settlement

agreement

• Who received the FDD
• In which states those recipients resided
• The applicable state franchise laws

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PRACTICE POINTERS

• Expressly provide in confidentiality provisions in

settlement agreements that the terms of the settlement can be disclosed to anyone when required by law, including any applicable franchise disclosure regulations

• This provision carved out the disclosure “to governmental agencies
• r regulatory authorities as required by law, and then only to the

extent necessary and required to be disclosed by law”

CURRENTLY SPEAKING

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Do Written Disclaimers Defeat Fraud Claims?

John Hughes

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Avon Hardware Co., et al. v. Ace Hardware Corp.,

998 N.E. 2d 1291 (Ill. App. Ct. 2013)

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FACTS

• Plaintiffs were two former Ace Hardware franchisees who
• perated Ace stores in Indiana
• The plaintiffs received “pro forma” documents that

contained sales and cash flow projections

• Estimated opening costs, projected annual sales for first year of

business and additional years, and estimate of first profitable year

• The plaintiffs received UFOCs that contained historical

financial data regarding the performance of Ace stores

• Both stores allegedly never reached the forecasted sales

in the pro formas

PLAINTIFFS’ CLAIMS

• Former franchisees alleged Ace manipulated the numbers in

the pro formas and purposely reported inflated historical store performance in the UFOCs

• Former franchisees alleged claims for violation of the Indiana

Franchise Disclosure Act, violation of the Illinois Consumer Fraud Act, fraudulent inducement, fraud, and negligent misrepresentation

• Trial court dismissed
• Cautionary language in the UFOCs and pro formas rendered

reliance on the statements immaterial as a matter of law

• Former franchisees appealed

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THE DISCLAIMERS

• UFOCs
• The average store performance numbers in the disclosure

documents were based on data submitted to Ace, had not been independently verified by Ace, and only represented a percentage

• f all member Ace stores
• The data in the UFOC and pro formas should not be relied upon

solely or considered as the probable results that would be realized by any member, and the data presented in the UFOC should not be considered the actual, potential or probable results

• New member’s financial results are likely to differ, and there was no

assurance that the former franchisees would do as well

• Identified closed stores

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THE DISCLAIMERS

• Pro Formas
• The projections were “merely estimates and should not be

considered as the actual or potential sales, profits or earnings that will be realized by any specific store operator”

• Membership Agreements
• “Member further represents and warrants” that “the Member has

not received or relied upon any guarantee, whether express or implied, of the sales, revenues, profits or success of the business venture contemplated by this Agreement”

APPELLATE COURT’S RULING

• Former franchisees could not pursue any claim based on the

pro formas because the financial projections in the pro formas were statements of opinion, not fact

• Regarding the historical financial data in Ace’s disclosure

documents, the documents did not contain the false statements the former franchisees claimed that they did because the documents made clear that the historical financial data was not representative of the performance of all Ace stores

• The UFOCs also identified the number of failed Ace stores
• Former franchisees could not have reasonably relied upon the

information to predict the future performance of their stores because of the cautionary language in the documents

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PRACTICE POINTERS

• If a franchisor is going to provide historical financial

information to prospective franchisees, it must have a reasonable basis for the information and warn against using the information to predict future performance

• If the cautionary language is crafted properly, it might

foreclose fraud-based claims

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Will a Disclaimer Clause in Your Franchise Agreement Protect You Against a Fraud Claim?

Barry Heller

Han Hanley, ley, et et al. al., , v.

• v. Doc

Docto tors rs Exp Expre ress ss Fr Fran anch chising ising, , LL LLC

• Civ. Action No. ELH-12-795 (D. Md.) (Memorandum

Opinion)

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FACTS

• Plaintiff was a franchisee of Doctors Express (urgent care

medical center business)

• Plaintiff sued the franchisor and a broker involved in the initial

sale

• Claims under Maryland Franchise Act and common law fraud
• Based on information in FDD:
• initial investment
• operating capital requirements
• physician credentialing
• financial performance representation

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CLAIMS

• Franchisor and broker filed motion to dismiss
• Franchisor argued:
• No misrepresentation of facts – labeled as estimates and projections
• Unreasonable to rely on projections and representations outside of FDD
• Based on disclaimers

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COURT’S ANALYSIS

• Denied motion regarding Maryland Franchise Act and common

law fraud

• Inaccurate projection known to be unreliable at the time made
• Plaintiff: later FDD had different projections which franchisor knew

when provided earlier FDD

2009 v. 2010

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COURT’S ANALYSIS

• Disclaimer did not bar Maryland Franchise Act or common law

claims

• Item 19: no guaranty
• Item 7: an estimate; no guaranty you will not have additional

expenses

• FA: integration clause

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• “As a condition of the sale of a franchise, a franchisor may not

require a prospective franchisee to agree to a release, assignment, novation, waiver, or estoppel that would relieve a person from liability under this subtitle.”

§14-226 of MD Franchise Act

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• Court recognized split in cases on issue
• But court concluded that anti-waiver provision of MD Act

precludes franchisor from avoiding statutory fraud claim as a matter of law

• Cannot use integration clause to protect itself against fraud

claim

• Disclaimers can still be relevant for trier of fact to consider in

assessing reasonableness of reliance and materiality of alleged misrepresentations

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BROKER CLAIMS

• Broker argued:
• MD Act allows suit only against person “who sells or grants a

franchise”

• Broker did not “sell or grant” – only franchisor

Grantor ≠ Broker

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COURT’S ANALYSIS

• Court rejects this interpretation
• Each person who “performs similar functions as a person liable”
• But broker can avoid liability if it can show it did not know or

have reasonable grounds to know the facts on which liability is alleged

“DNK”

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Long John Silver’s Inc., et al., v. Nickleson, et et al. al.

923 F. Supp. 2d 1004 (W.D. Ky. Feb. 12, 2013)

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FACTS

• Franchisor sued franchisees for unpaid franchise fees and

trademark infringement

• Franchisees filed counterclaims for violation of Minn.

Franchise Act and common law fraud

• Alleged untrue information and omissions regarding

estimated costs, revenues and profits (and financial state of

• ther A&W franchises)

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COURT’S ANALYSIS

• Franchisor argued that claim under MFA requires reasonable

reliance and disclaimers render any reliance unreasonable

• Court, recognizing inconsistent treatment of disclaimers under
• Minn. Law, held:
• MFA requires reasonable reliance
• But cannot establish lack of reasonable reliance based on

disclaimers as a matter of law

• Aware of anti-waiver provision

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• Court found that anti-waiver provision of MFA prevents

franchisor from using a disclaimer to defeat a misrepresentation claim under the MFA

• But jury can consider a disclaimer in assessing whether

reliance was reasonable

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• As to the common law fraud claim, court distinguished between

general disclaimers and specific ones

• If general, will not avoid fraud claim
• If specific contradiction of alleged representation, would bar

common law fraud claim

General v. Specific

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PRACTICE POINTERS

• Include disclaimer clauses in franchise agreement
• If information is a projection or estimate, state that and warn

against it being a guaranty

• Make disclaimers specific but inclusive
• If later FDD contains changed, different information, be sure to

have basis for the change

• When choosing choice of law to govern, consider that state’s

law on disclaimers

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CURRENTLY SPEAKING

Will a Covenant Not to Compete Be Enforceable Against a Competing Business Owned by a Nonsignatory?

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John Dwyer

Vict Victor

• ry

y La Lane ne Quick Quick Oil Oil Cha Chang nge, e, Inc.

• Inc. v.

v. Da Darwic rwich, h, et et al. al.

2013 WL 393020 (E.D. Mich. Jan. 31, 2013)

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FACTS

• Franchisor Victory Lane entered into a franchise agreement

with Darwich Brothers, LLC

• Magid Darwich signed the agreement as guarantor
• Victory Lane alleged a breach of the in-term covenant due to

the operation of two competing quick oil change centers

• Magid Darwich claimed the centers were opened by his brother

(Belal Darwich), and that he had no interest in the centers

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FACTS

• Victory Lane was not satisfied with the explanation regarding

the two competing centers and terminated the franchise agreement

• Darwich Brothers then sold the assets of the franchise to Balil

Darwich, who formed a new corporation to operate a quick lube center at the former franchised location

• Darwich Brothers intended to transfer the lease for the location

to the new corporation but the landlord refused

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CLAIMS

• Victory Lane sued, alleging a violation of the post-termination

covenant not to compete

• The signatories to the agreement – Darwich Brothers and Magid

Darwich (Guarantor) – claimed no interest in the competing business

• The alleged owners of the business – Balil Darwich and the new

corporation – were not parties to the franchise agreement

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POST-TERM COVENANT

• The post-term covenant provided:

“The Franchisee, the Owners and the Personal Guarantors will not, for a period of two (2) years after termination or expiration of this Agreement for an Oil Change/Car Wash Center . . . on their own account or as an employee, principal, agent, independent contractor, consultant, affiliate, licensee, partner, officer, director or Owner of any other person, firm, Entity, partnership or corporation, own, operate, lease, franchise, conduct, engage in, be connected with, have any interest in or assist any person or Entity engaged in any Competitive Business which is located . . . .”

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COURT’S ANALYSIS AND DECISION

• The court granted summary judgment in favor of Victory Lane
• The court based its decision on the fact that Darwich Brothers,

LLC (the franchisee) was still the tenant on the lease

• As the tenant, Darwich Brothers, LLC, allowed the new

business to occupy the same location as the former Victory Lane franchise

• The Court found that Darwich Brothers, LLC, was arguably

“connected with,” had an “interest in,” or was “assist[ing] any person or Entity engaged in any Competitive Business”

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PRACTICE POINTERS

• Try to get facts before alerting franchisee to possible violation
• Discover as many links as possible between signatories and

the competing business

• Draft non-compete clauses to cover broad range of involvement

with competing business

• But watch state law (e.g., “in any capacity”)

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CURRENTLY SPEAKING

Will Irreparable Injury Be Presumed from a Franchisee’s Continued Operation of a Competing Business Post-Termination?

44

John Dwyer

Steak N Shake, Inc. v. Globex Company, LLC

2013 WL 4718757 (D. Colo. Sept. 3, 2013)

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FACTS

• Steak N Shake and Defendants were parties to franchise

agreements and a development agreement for Steak N Shake restaurants; Defendants’ owners personally guaranteed the agreements

• Defendants acquired two existing restaurants and agreed to

develop a total of thirteen restaurants

• Steak N Shake had established a $4 meal promotion; it set the

$4 price in the POS system and provided menus and promotional materials to franchisees with the set prices

• The franchise agreements gave Steak N Shake the right to

terminate the agreements if the franchisee sold products in excess of the set maximum price

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FACTS

• Defendants created menus that looked like the menus provided by Steak N

Shake but contained higher prices; Defendants did not use the promotional materials for the $4 menu items

• Defendants changed the price in the POS system by charging for items a la

carte, rather than at the set $4 meal price

• Steak N Shake terminated the two franchise agreements due to Defendants’

failure to comply with the maximum pricing policy and the required promotions

• Steak N Shake also terminated the development agreement due to

Defendants’ failure to open a third restaurant

• Defendants continued to operate as Steak N Shake restaurants and Steak N

Shake sought a preliminary injunction to enjoin the infringement of the trademarks and to enforce the post-term covenant not to compete

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COURT’S ANALYSIS

• The court concluded that Steak N Shake properly terminated

the agreements

• The court found ample evidence that Steak N Shake set the

price at $4 for the meals and instituted promotions for the $4 meals, and that Defendants failed to comply with the pricing and the promotions

• The court granted the preliminary injunction as to the trademark

infringement claim, finding that all of the elements for an injunction, including likelihood of success on the merits and irreparable injury, were met

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COVENANT NOT TO COMPETE

• The court then considered the post-term covenant not to

compete

• The covenant provided that franchisee would not have any

interest in a competing business for two years after termination (1) at the location of the restaurants, (2) within 5 miles of the locations or (3) within 5 miles of a then-existing Steak N Shake restaurant

• The court found a likelihood of success on the merits
• But as to irreparable injury, it found that Steak N Shake failed to

make a sufficient showing to fully enforce the covenant not to compete

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LACK OF IRREPARABLE INJURY

• After the termination of Defendants’ restaurants, there was just one

Steak N Shake restaurant left in Colorado

• The court agreed that due to Defendants’ former operation of Steak N

Shake restaurants and access to confidential information, they would have an unfair advantage if allowed to operate a competing restaurant within 5 miles of the one remaining restaurant, or any other existing Steak N Shake restaurant

• But the court found that Steak N Shake failed to show irreparable

injury from Defendants’ continued operation of competing restaurants at the former locations or within 5 miles of those locations

• Steak N Shake had not shown that it planned to resume expansion of

its restaurants in the area or within the authorized locations of Defendants’ former Steak N Shake restaurants

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PRACTICE POINTERS

• Irreparable injury may not be presumed by a court even where

the franchisee continues to operate a competing business at the former location

• Franchisor must make an adequate showing as to how it will be

irreparably injured

• It must present evidence of injury from the operation of the

competing business at the former location, near the former location and near other existing locations

• Franchisor should also present evidence of other types of
• injury. For example, harm to the system from allowing a

franchisee to continue to operate a competing business at the former location

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CURRENTLY SPEAKING

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Is The Convenience Of The Parties Relevant To Assessing Whether To Enforce A Forum Selection Clause?

John Hughes

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Atlantic Marine Constr. Co. v. U.S. District Ct. for the W. District of Texas, et al.,

134 S. Ct. 568 (2013)

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• Atlantic Marine (a Virginia corporation with its principal place of

business in Virginia) entered into a contract to construct a child- development center in Texas

• Atlantic Marine entered into a subcontract with J-Crew

Management (a Texas corporation)

• Contract had a Virginia forum selection clause
• Dispute over payment arose, and J-Crew sued Atlantic Marine

in the Western District of Texas

• Atlantic Marine moved to dismiss under 28 U.S.C. § 1406(a) and

Rule 12(b)(3) or, alternatively, to transfer venue pursuant to 28 U.S.C. § 1404(a)

FACTS

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• District Court denied both motions
• Held that § 1404(a) is the exclusive mechanism to enforce a

forum selection clause

• Held that Atlantic Marine bore the burden to establish that

transfer was appropriate and considered a list of public and private interest factors, including the forum selection clause

• Atlantic Marine failed to carry its burden
• Court of Appeals denied Atlantic Marine’s petition for a writ of

mandamus

• Agreed that § 1404(a) is the exclusive mechanism to enforce a

forum selection clause, and held that the District Court did not abuse its discretion in balancing the interests and denying transfer

DISTRICT COURT/APPELLATE COURT

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• Section 1406(a): “The district court of a district in which is filed a case

laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer to any district or division in which it could have been brought”

• Rule 12(b)(3): A party may move to dismiss for “improper venue”
• Section 1406(a) and Rule 12(b)(3) only allow dismissal when venue is

“wrong” or “improper”

• Whether venue is “wrong” or “improper” depends exclusively on

whether the court in which the case was brought satisfies the requirements of federal venue laws, which say nothing about forum selection clauses

THE SUPREME COURT’S RULING

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THE SUPREME COURT’S RULING

• Forum selection clauses should be enforced pursuant to § 1404(a)
• Forum selection clause is to be given controlling weight in all but the

most exceptional circumstances

• Requires courts to adjust their § 1404(a) analysis in three ways
• Plaintiff’s choice of forum merits no weight
• Court should not consider arguments about the parties’ private interests
• Any inconvenience was clearly foreseeable at the time of contracting
• Court may consider public interest factors only
• Transfer will not carry the original venue’s choice of law rules
• Proper way to enforce forum selection clause pointing to state or

foreign forum is through the doctrine of forum non conveniens

THE SUPREME COURT’S RULING - REMAND

• District Court improperly placed the burden on Atlantic Marine to

prove that the transfer to the contractually preselected forum was appropriate

• J-Crew must bear burden of showing that public interest factors
• verwhelmingly disfavor a transfer
• District Court improperly considered parties’ private interests
• The fact that compulsory process would be unavailable for the majority of

J-Crew’s witnesses and there would be significant expenses for those willing witnesses should not have been given any weight

• Virginia court could apply Virginia choice of law rules

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PRACTICE POINTERS

• Include forum selection clauses in your franchise agreements

and seek to enforce those provisions

• A franchisee can no longer point to private interests in an

attempt to avoid the enforcement of a forum selection clause

• Only public interests can avoid the enforcement of a forum

selection clause, and those interests will rarely rule the day

• Public interests: Court congestion, local interests in having

localized controversies decided at home, familiarity with the law

CURRENTLY SPEAKING

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Does The Natural End Of The Franchise Agreement Qualify As The “Termination” Of The Agreement?

John Hughes

61

Hamden v. Total Car Franchising Corp.,

2013 WL 6136436 (4th Cir. Nov. 22, 2013)

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FACTS

• Hamden operated a Colors On Parade franchise in Virginia and

West Virginia pursuant to two agreements

• Franchise Agreement
• Non-Competition and Confidentiality Agreement
• At the end of the 15-year term, Hamden continued operating as

a franchisee

• Hamden decided to pursue his own business
• District court held that the restrictive covenants in the

agreements did not bind Hamden because “termination” did not encompass an “expiration” brought about by the natural end of the term

• TCF appealed

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RESTRICTIVE COVENANTS

• Franchise Agreement
• Post-termination non-competition clause
• perational “for 2 years following the termination
• f this Agreement”
• Other post-termination obligations (such as return
• f TCF property) upon termination of the

Agreement “for any reason”

RESTRICTIVE COVENANTS

• Non-Competition and Confidentiality Agreement
• “If the Franchise Agreement is terminated before its expiration date, or

if you assign or transfer your interest in the Franchise Agreement, to any person or business organization except according to Section 7 . . . Then You covenant for a period of 2 years after termination . . .”

• “During the term of the Franchise Agreement and thereafter, you agree

not to . . . use for your benefit . . . any trade secret . . . If there is any termination of this Agreement, You agree that you will never use our confidential information or trade secrets, in the design, development or

• peration of any business specializing in appearance technologies as

Colors on Parade applies them.”

• During the term of the Franchise Agreement and for 2 years after its

termination . . . You will neither directly nor indirectly solicit . . . or take away any customer within the statistical marketing area in which the DMA is located where Hamden actually served during the term of this Agreement”

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THE APPEAL

• TCF argued that termination under the agreements encompassed the

natural end of the contract and all of the restrictive covenants triggered upon termination of the agreements applied to Hamden

• Issue may be resolved by application of dictionary definitions
• Expiration is a form of termination
• Language of contract presented expansive view of termination with use of

broad modifier “any” when referring to termination

• Hamden argued the terms are not necessarily analogous and the

contract’s use of both terms indicated different meanings

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THE COURT’S RULING

• Mere use of both terms within the agreement did not necessitate a

different meaning to each

• According to the definitions, termination includes expiration and

expiration is a type of termination

• Section 8 indicated what events would constitute a termination
• Termination occurs upon an action
• Section 2 explained that renewal could occur if Hamden provided

notice “before this Agreement’s expiration”

• “Any” may broadly apply to any reason for an affirmative act of

termination

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THE COURT’S RULING

• Court analyzed the use of the terms in the agreements and

determined that the language contemplated two separate meanings

• The restrictive covenants that were triggered upon “termination”

were not enforceable

• First clause of non-disclosure provision was enforceable

because termination was not required to trigger the restriction

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PRACTICE POINTERS

• Say what you mean in the franchise agreements
• If mean termination, say termination
• If mean expiration, say expiration
• If mean both termination or expiration, say both
• Review language in franchise agreements for what events

trigger the restrictive covenants

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Will Your Class Arbitration Waiver Provision Be Enforced Even If The Expense Of Individual Arbitration Would Be Prohibitive?

Barry Heller

American Express Co, et al., v. Italian Colors Restaurant, et al.

133 S.Ct. 2304 (2013)

70

FACTS

• Merchant filed class action in court on antitrust claim against

American Express

• treble damages
• Agreement required arbitration
• Agreement barred class arbitration

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• Merchant argued that cost of litigation (e.g., expert fees) would

prevent anyone from filing individual arbitration

• Expert estimated fees to be several hundred thousand dollars

and might exceed $1M

• Maximum recovery would be $12,850 (i.e., $38,549 when trebled)

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THE ISSUE

• Some interim decisions from the lower courts
• Recognized “effective vindication exception”
• Issue for U.S. Supreme Court
• “whether a contractual waiver of class arbitration is enforceable

under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery”

FAA

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THE DECISION

• Arbitration is a matter of contract
• FAA requires arbitration agreements to be “rigorously enforced”

according to their terms

• Antitrust laws do not guarantee an affordable procedural path

to the vindication of every claim

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• Court also rejects the judge-made exception to invalidate

agreements that prevent the effective vindication of federal statutory rights

• Right to pursue remedy v. expense in proving remedy

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AGREEMENT

• Adopting the “effective vindication exception” would require

courts to assess the legal requirements for success on the merits, the evidence needed, the cost involved and the damages to be recovered

• Inconsistent with the goal of arbitration – speedy resolution

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PRACTICE POINTERS

• Include class action waiver in franchise agreements
• If select arbitration, include class waiver
• Expand waiver to preclude any group, joint, common,

consolidated, or representative action

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No Class Action

78

Can You Overturn an Arbitrator’s Determination That a Contract Authorized Class Arbitration Based on That Determination Being in Error?

Barry Heller

Oxford Health Plans LLC v. Sutter,

133 S. Ct. 2064 (2013)

79

FACTS

• Agreement between pediatrician and Oxford Health Plans

requires arbitration

• No mention of class arbitration
• No class arbitration waiver
• Parties agreed that the arbitrator should decide whether the

agreement authorized class arbitration

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• Arbitrator concluded that the clause authorized class arbitration
• Found that intent of the clause was to allow in arbitration the

same form of action that could be brought in court

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• Oxford, trying to avoid a class arbitration, moved in federal

court to vacate the arbitrator’s decision

• Argued that arbitrator “exceeded [his] powers” under §10(a)(4)
• f the FAA
• District court denied motion and the court of appeals affirmed

FAA §10(a)(4)

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• Issue – does §10(a)(4) of FAA allow a court to vacate an

arbitral award which may be erroneous

• Section allows a court to set aside an arbitral award where the

arbitrator “exceeded his powers”

• Held: as long as arbitrator construed or applied the contract,

decision will stand

• Even if the arbitrator committed serious error
• Section deals with arbitrator acting outside scope of his

delegated authority

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• Here, the arbitrator did analyze and interpret the language of

the agreement

• Parties bargained for arbitrator to construe agreement
• As long as that is done, cannot overturn merely because

interpretation is questionable

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• As Supreme Court said:
• “Under §10(a)(4), the question for a judge is not whether the

arbitrator construed the parties’ contract correctly, but whether he construed it at all.”

133 S. Ct. at 2071

85

PRACTICE POINTERS

• Don’t choose arbitration if you want court to analyze

correctness of decision

• Bound by arbitrator’s decision, even if incorrect
• Include class arbitration waiver
• Consider contractual arbitration appeal panel
• Must counterbalance against benefit of arbitration

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87

Can You Be Held Liable On An Agency Theory If Franchisee Violates The Telephone Consumer Protection Act?

Barry Heller

Friedman v. Massage Envy Franchising, LLC

2013 U.S. Dist. LEXIS 84250 (S.D. Cal. 2013)

88

THE TCPA

• The TCPA prohibits “persons” from
• (1) making “any call” (without prior consent of called party)
• (2) “using any automatic telephone dialing system or artificial or

prerecorded voice”

• (3) “to any telephone number assigned to a … cellular telephone

service…”

• A “text message” is a “call” within the Act

89

• The franchisor argued that it cannot be held liable under TCPA

because it did not send the unsolicited text

• Plaintiff claims it alleged an agency relationship between

franchisor and the company that issued the text messages

90

• Held that allegations insufficient because did not assert facts

showing:

• That agent held power to alter legal relations between principal and

third persons and between principal and agent

• That agent is a fiduciary with respect to matters within scope of

agency

• That the principal has the right to control conduct of agent

regarding matters entrusted to him

• Factual allegations too speculative

91

• Plaintiff also argued that franchisor liable under TCPA “as a

beneficiary” of the unsolicited texts sent by the third party

• Court refused to extend liability to any beneficiary of the alleged

unlawful actions

“On whose behalf”

92

FCC DECLARATORY RULING

• Other section of TCPA – regarding “do-not-call-provisions” –

referred to “on behalf of” for liability

• But section regarding “pre-recorded calls” did not
• Bottom line: Sellers who did not place calls may only be

“vicariously” liable and subject to damages for third-party TCPA violations if federal common law principles of agency apply

93

EXAMPLES FROM FCC

• In its ruling, the Commission provided examples of situations in

which vicarious liability might be imposed, including:

• circumstances where a seller “allows the outside sales entity

access to information and systems that normally would be within the seller’s exclusive control, including: access to detailed information regarding the nature and pricing of the seller’s products and services or to the seller’s customer information”

• allowing an “outside sales entity to enter consumer information into

the seller’s sales or customer systems, as well as the authority to use the seller’s trade name, trademark and service mark” (emphasis added)

• situations in which a retailer “knew (or reasonably should have

known)” that a third party was violating the TCPA on the retailer’s behalf and failed to act

94

PRACTICE POINTERS

• Multi-million damage exposure
• Be careful in guidance given to franchisees regarding TCPA
• Don’t recommend company to assist with text/fax messages

unless you check them out

• Review your franchise agreements regarding independent

contractor and indemnification provisions

95

CURRENTLY SPEAKING

Does Retaining the “Right to Control” Make a Franchisor Potent Potentially ially Vicariously Vicariously Liable Liable for the for the Acts Acts of Its

• f Its

Franchisees? Franchisees?

96

John Dwyer

Peo People ple v.

• v. JTH

JTH Tax Tax, , Inc. Inc.

151 Cal. Rptr. 3d 728 (Cal. Ct. App. Jan. 17, 2013)

97

FACTS

• JTH Tax, Inc. (Liberty Tax Services) and its franchisees ran

print and television ads regarding Liberty’s refund anticipation loans and electronic refund checks

• California Attorney General sued Liberty, alleging that the

advertising violated unfair competition and false advertising laws by inadequately disclosing debt collection procedures, costs, interest, the time to obtain the refunds and other matters

• California Attorney General alleged that Liberty was

vicariously liable for its franchisees’ advertising

• Trial court found Liberty liable for ads run by the franchisees

because the franchisees acted as Liberty’s agents

98

TRIAL COURT

• The trial court determined that the focus must be on the extent of the

franchisor’s right of control over the franchisee and whether those controls exceeded those necessary to police the marks

• The trial court focused on Liberty’s operations manual, which it

concluded went beyond what was necessary to police the trademarks

• Liberty required certain banks for the loans and refund checks;

mandated operating hours, computers, how to open the store and clean the bathrooms; reserved the right to intervene in customer disputes; mandated filing systems; controlled discounts franchisees could offer; and retained extensive control over franchisee advertising

• The trial court found that Liberty’s controls went beyond those needed

to protect its marks

99

COURT OF APPEALS

• Liberty argued that the test for vicarious liability should be

actual control over day-to-day operations, not merely the right to control to maintain uniformity of products and services

• The court found Liberty’s arguments unpersuasive
• The court concluded that it is the right to control the means and

manner in which the result is achieved that is significant in determining a principal-agent relationship

• The court concluded that the trial court applied the correct test

100

COURT OF APPEALS

• The court found that there was substantial evidence that

Liberty’s right to control, and in particular the controls as to advertising, exceeded that necessary to protect the trademarks and goodwill

• The court found that Liberty retained the virtually unlimited right

to control, and did extensively control, the manner and means

• f franchisee advertising:
• Operations Manual contained instructions on appropriate

advertising for times of year

• Products and services could not be offered with Liberty’s consent
• Liberty controlled the pricing for products
• Liberty controlled the discounts franchisees could offer to

customers and when they could be offered

101

102

COURT OF APPEALS

• Advertising had to be submitted to Liberty for approval, and

approval was used to control the franchisees’ business strategies, and promote Liberty’s business strategy

• Liberty controlled all advertising regarding refund anticipation

loans and electronic refund checks

• The court concluded that there was substantial evidence to

support the conclusion that even if the franchisees were not Liberty’s agents for all purposes, they were its agents at a minimum for purposes of advertising

PRACTICE POINTERS

• The case demonstrates the difficulty Franchisors face in

seeking to maintain the appropriate balance between having sufficient controls to protect marks and maintain uniformity and not having too much control over franchisees’ businesses

• Retaining the right to control but not exercising it will not

necessarily protect a Franchisor from vicarious liability

• If do not intend to exercise control over a matter, it may be

better not to retain the right to control it

• If do retain the right to control a matter, it is better to exercise

that control to make sure procedures are followed

103

CURRENTLY SPEAKING

Is a Franchisor’s Prior Breach of a Franchise Agreement a Defense to the Franchisor’s Claims Against a Franchisee?

104

John Dwyer

Wyndham Hotels and Resorts, LLC v. Northstar Mt. Olive, LLC

2013 WL 1314747 (D.N.J. March 28, 2013)

105

FACTS

• Wyndham and Franchisee were parties to a franchise

agreement for the operation of Wyndham hotel in Mt. Olive, New Jersey

• Franchisee failed to make required payments (royalties,

marketing fees, etc.)

• Wyndham terminated the franchise agreement due to

Franchisee’s failure to make the payments

• Franchisee continued to operate the hotel with the Wyndham

marks and Wyndham filed suit against Franchisee

• There was no dispute that prior to termination Wyndham was in

breach of the franchise agreement by failing to fulfill the “franchisor room guaranty”

FRANCHISEE’S ARGUMENT

• Franchisee did not dispute that it continued to use the

Wyndham marks after termination of the franchise agreement

• Franchisee argued that it was not liable on Wyndham’s claims

because Wyndham was in breach of the franchise agreement prior to termination

107

THE COURT’S DECISION

• The Court considered two separate claims by Wyndham
• A claim for violation of the Lanham Act due to Franchisee’s

continued use of the marks

• A claim for breach of contract for Franchisee’s failure to pay monies
• wed
• As to both claims, the Court concluded that Wyndham’s pre-

termination breach was not a defense to liability

• The Court held that because Franchisee continued to accept

the benefits of the franchise agreement (i.e., it continued to use the marks), the proper avenue for it would have been to continue to perform (i.e., make the required payments) and sue Wyndham for damages

108

THE COURT’S DECISION

109

• Franchisee could not stop performing its own obligations under

the agreement but continue to accept the benefits of the agreement

• The court found in favor of Wyndham on both claims as to

liability

• The court denied Wyndham summary judgment as to damages,

finding that the prior breach was relevant as to the amount of damages due to Wyndham

PRACTICE POINTERS

• Franchisors should consider including in the franchise

agreement a “limitation of remedies” provision stating that the franchisee is not entitled to receive the benefits of the agreement unless it continues to comply with its obligations under the agreement

• Even if a Franchisor is aware that it may be in breach, it should

still proceed to enforce its trademark rights if a franchisee violates those rights; the prior breach may impact the damages due to the franchisor, but it will still be able to establish liability

110

111

QUESTIONS & ANSWERS