2014 Annual Franchise and Distribution Developments

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2 2014 Annual Franchise and Distribution Developments

4 Holdover Franchisee Counterfeiting

5 Traditional Lanham Act 15 U.S.C and 1125(a). Monetary remedies 15 U.S.C. 1117(a). Accounting of profits and actual damages. Attorneys fees in exceptional cases. Road blocks to recovery.

6 Trademark Counterfeiting Monetary remedies - 15 U.S.C. 1117(b). Absent extenuating circumstances, three times the infringer s profits, or the trademark owner s damages; or Statutory damages up to $2 million. Reasonable attorney s fees.

8 Century 21 Real Estate LLC v. Destiny Real Estate Properties LLC 101 U.S.P.Q.2d 1423 (N.D. Ind. 2011) Does former franchisee s post-termination use constitute trademark counterfeiting? Counterfeiting includes use of the genuine mark on unauthorized goods. General Electric v. Speicher, 877 F.2d 531 (7th Cir. 1989). Century 21 Counterfeiting includes use of genuine mark on unauthorized services.

10 All Star Championship Racing, Inc. v. O Reilly Automotive Stores, Inc. 940 F. Supp. 2d 850 (C.D. Ill. 2013) Post-termination use of O Reilly s federally registered trademarks = counterfeiting. Three elements to establish counterfeiting. Use of identical or substantially identical mark. For goods or services covered by registration. Use is unauthorized.

11 All Star Championship Racing, Inc. v. O Reilly Automotive Stores, Inc. 940 F. Supp. 2d 850 (C.D. Ill. 2013) Sponsorship agreements v. franchise agreements. Endorsement of Century 21.

12 State Tax Apportionment

13 Changes on Apportionment statutes. Unitary group. Nexus. 11 states => DC, Ill., Mass., Mich., Miss., Mo., N.Y., Or., Pa., R.I., Va.

14 Indiana Dept. of State Revenue: Letter of Findings - Non-Indiana hotel franchisor taxed on income from Indiana franchisees royalties and fees. - Value is from ability to exploit IP in commerce. - Income attributable to Indiana due to income producing activity in Indiana.

15 Privacy and Protected Information

16 DesignWare Software Cases: Byrd v. Aaron s, Inc WL (W.D. Pa. 2014) Sneed v. SEI/Aaron s, Inc WL (N.D. Ga. 2013) Arrington v. ColorTyme, Inc. 972 F. Supp. 2d 733 (W.D. Pa. 2013) Software captured images and keystrokes.

17 Lawsuits in Pennsylvania. PA s long arm statute. WA franchisee s ability to command PA software manufacturer to collect data on PA servers and to send information to WA. Assess all software capabilities.

19 Federal Trade Commission v. Wyndham Worldwide Corporation 2014 WL (D.N.J. 2014) Unfair and deceptive practices alleged on data protection. FTC alleged that the franchisor and its related entities had a lack of distinction and insufficient common control.

20 Vicarious Liability

22 Bright v. Sandstone Hospitality, LLC Bus. Franchise Guide (CCH) 15,258 (Ga. Ct. App. Mar. 26, 2014) Display of Wingate external signage on premises. Display of internal sign informing of franchisee s ownership and operation. Is Wingate vicariously liable?

24 Bartholomew v. Burger King Corp. Bus. Franchise Guide (CCH) 15,248 (D. Haw. Apr. 14, 2014) Display of Burger King external signage on premises. Display of internal sign informing of franchisee s ownership and operation. Is Burger King vicariously liable?

26 Estate of Anderson v. Denny s 987 F. Supp. 2d 1113 (D.N.M. 2013) Instrumentality test v. traditional control test. Traditional control test applied. But...

27 Estate of Anderson v. Denny s 987 F. Supp. 2d 1113 (D.N.M. 2013) Tests are so malleable and manipulative that they create confusion, litigation and uncertainty, and worse any result from the tests look to be result oriented. [T]he traditional control test and the instrumentality test are largely intellectually bankrupt. Either all franchisors should be vicariously liable or none should.

28 Joint Employer/Joint Enterprise

29 NLRB Office of the General Counsel Authorizes Complaints Against McDonald s Franchisees and Determines McDonald s, USA, LLC is a Joint Employer, 2014 WL (N.L.R.B. 2014) Named as a Joint Employer Respondent. Did McDonald s and franchisees violate employee rights?

30 Joint Employer/Joint Enterprise

31 Cordova v. SCCF, Inc., 2014 WL (N.D. Ga. 2014) Sufficient facts alleged as a joint employer. Functional control maintained over franchisee.

32 Joint Employer/Joint Enterprise

33 Wilson v. GoWaiter Franchise Holdings, LLC, 2014 WL (S.D.N.Y. 2014) Beyond formalistic corporate separation. Operational control considered. Sufficient facts alleged for joint enterprises.

34 Joint Employer/Joint Enterprise

35 Patterson v. Domino s Pizza, LLC 60 Cal.4th 474 (Cal. 2014). No right of control of personnel retained OR assumed. Control on system uniformity discounted. Personnel advice discounted. FA wording. No policies provided and no training.

36 Joint Employer/Joint Enterprise

37 Alexander v. FedEx Ground Package System, Inc WL (9th Cir. 2014) Right to control test. FedEx drivers were employees due to control over almost all work aspects.

38 Minimum Wage International Franchise Association, Inc. v. City of Seattle, 2014 WL (W.D. Wash. 2014)

39 Seattle Minimum Wage Large Employers => quicker and faster implementation. Definition of Large Employer => 500 or more employees including all employees in the same franchise system wherever located in U.S.

42 Millard Interest, Inc. v. J & A Leisure, Ltd WL (Tex. App. May 8, 2014) Transfer of massage franchise by asset purchase agreement. Individual owners each signed as a Limited Partner. Are the individual owners individually liable?

43 Patel v. Patel 2014 WL (Ga. Ct. App. June 24, 2014) Parties enter agreement during mediation that provided for a full and final settlement. Capacity of individual signing for hotel franchisee? Is the settlement agreement binding on the hotel franchisee?

44 Arbitration

45 Druco Restaurants, Inc. v. Steak n Shake Enterprises, Inc WL (S.D. Ind. Oct. 2013) Motion to compel arbitration denied. Right at any time to arbitrate. Illusionary provisions.

46 SPBR Holdings, Inc. v. KWAL-Howells, Inc WL (W.D. Mo. Dec. 2013) Who decides gate-way disputes? Clear and unmistakable intent if arbitrator.

47 In re A2P SMS Antitrust Litigation 2014 WL (S.D.N.Y. May 2014) Classwide arbitration not specifically disallowed in the FA. Pertains to procedures of arbitration. Decision of arbitrator.

48 Remedies Attorney s Fees

49 Best Practices on Attorney s Fee Requests Document effectively any division of time on non-recoverable tasks. Do not over redact fee statements for privilege. Thoroughly investigate prevailing market rates. Be conscious to staffing of cases in submitting fee requests.

50 EEOC

51 EEOC Actions EEOC Sues Merry Maids Franchise for Pregnancy Discrimination 2014 WL (E.E.O.C. Mar. 2014) EEOC Sues Massage Envy Spa Franchise for Pregnancy Discrimination 2014 WL (E.E.O.C. June 2014)

52 EEOC Settlements Batesville, Miss. Holiday Inn Franchisee Settles EEOC Pregnancy Discrimination Suite for $20, WL (E.E.O.C. Mar. 2014) Chick-Fil-A Franchisee at Concord Commons to Pay $10,000 to Settle EEOC Pregnancy Discrimination Suit 2014 WL (E.E.O.C. June 2014)

53 EEOC Pregnancy Discrimination EEOC: serious problem prevalent in workplace continue to work to eradicate. Recommendations: Operators: training on discrimination. Franchisors: beware joint employer.

54 Non-Compete Provisions

55 Non-compete provisions not enforced by courts Overbroad. Franchisor materially breached underlying agreement. Unenforceable under state law. Attempt to bind independent third parties. Termination v. expiration. Impermissibly limited ordinary competition.

57 Steak n Shake Enterprises, Inc. v. Globex Co. Bus. Franchise Guide (CCH) 15,124 (D. Colo. Sept. 3, 2013) Former franchisee operated locations in Denver. Enforcement at or near franchisee s former Denver locations? Enforcement elsewhere?

59 Lifestyle Improvement Centers, LLC v. East Bay Health, LLC 2013 WL (S.D. Ohio Oct. 7, 2013) Ohio choice of law provision. California nexus to parties dealings. Non-compete enforceable?

60 SmallBizPros, Inc. v. Terris Bus. Franchise Guide (CCH) 15,308 (M.D. Ga. June 10, 2014) Retiring franchisee. Successor s website. Efforts to address website. Franchisor s independent investigation.

61 Class Actions

62 Rodriguez v. It s Just Lunch, International 2014 WL (S.D.N.Y. May 2014) Allegations of fraud and violations of NY law. National class of customers and NY customer class. Multiple state fraud laws for evaluation but common elements and similar script. Commonality found and other elements met => class certified.

63 Saleem v. Corporate Transportation Group, Ltd WL (S.D.N.Y. Nov. 2013) Class action of black car franchisees. Evaluation of franchisor s degree of control for each driver. Fact specific and driver specific evaluation needed. No commonality => class not certified.

65 Automotive Leasing Corp. v. Mahindra & Mahindra, Ltd WL (N.D. Ga. 2014) 340 dealers in multiple states. Letter of Intent: Georgia law not clearly specified. Separate choice of law analysis and different letter of intent versions. No commonality => class not certified.

66 Opportunity to Cure

68 Giuffre Hyundai, Ltd v. Hyundai Motor America 2014 WL (2d Cir. June 25, 2014) Franchisee s prior litigation - Car Biz Slapped for Fraud. Should franchisee be provided an opportunity to cure breach? Requiring strict compliance with the contractual notice and cure provision was useless when the breach and party s misfeasance was incurable and the cure was unfeasible.

70 7-Eleven v. Kapoor Brothers, Inc. 977 F. Supp. 2d 1211 (M.D. Fla. 2013) Unreported sales + employment of undocumented persons + failure to report inventory. Should franchisee be offered an opportunity to cure breach? Compliance with notice and cure provision would have been a useless exercise.

71 Jurisdiction

72 Foreign entity: Daimler v. Bauman 134 S.Ct. 746 (2014) so systematic and continuous entity is at home. Due Process Clause: entity is at home in the state of its principal place of business or its state of formation.

73 Jurisdiction

74 Francounsel Group, LLC v. Dessange International SA 2013 WL (D. Mass. Sept. 2013) s into Mass., targeting Mass. company and Mass. acquisition. Not systematic enough => no jurisdiction over French entity.

75 Jurisdiction

76 Sanford v. Maid-Rite Corporation 2014 WL (D. Minn. Apr. 2014) Argued jurisdiction from violations and FDD registration. Need minimum contacts => no jurisdiction over FDD named officers.

77 Venue

78 Atlantic Marine Construction Company, Inc. v. United States District Court for the District of Texas 134 S.Ct. 568 (2013) Valid forum selection clause = transfer. Only extraordinary circumstances unrelated to the convenience of the parties. Result: public interest factors.

79 Venue State statute that out-of-state forum clause void and unenforceable Frango Grille USA, Inc. v. Pepe s Franchising Ltd., CV SDF (PLAx) (C.D. Cal. July 2014)

80 Ohio Beer Wars

81 Ohio Beer Wars Tri County Wholesaler Distributors, Inc. v. Labatt USA Operating Co. 978 F. Supp. 2d 860 (S.D. Ohio 2013) Esber Beverage Co. v. Labatt USA Operating Company 3 N.E.3d 1173 (Ohio 2013) Heineken USA, Inc. v. Esber Beverage Co. Bus. Franchise Guide (CCH) 15,214 (Ohio Ct. App. Jan. 27, 2014)

82 Esber Beverage Co. v. Labatt USA Operating Company 3 N.E.3d 1173 (Ohio 2013) Successor manufacturer termination provision only applies where no written franchise agreement existed? Ohio Supreme Court disagrees. Statute is unambiguous.

83 Manufacturer/Dealer Duty to Defend

84 Ferreira v. Chrysler Group, LLC 468 Mass. 336 (2014) Massachusetts vehicle law. No duty to defend or indemnify if conduct of both manufacturer and dealer was at issue. Potential application in other states.

86 Legacy Academy v. Mamilove, LLC 2014 WL (Ga. Ct. App. July 16, 2014) Did Mamilove waive its right to rescind? Mamilove s assertion of prior breach defense. Assertion of defense v. request for affirmative relief.

87 Earnings Claims

88 Legacy Academy v. Mamilove, LLC 2014 WL (Ga. Ct. App. July 20, 2014) Pro forma income and expense statements; no UFOC Item 19. Franchisees alleged fraudulent information. FA representation of no earnings claim not valid => no opportunity to review. Jury awarded $1.13 million dollars.

89 Avon Hardware Co. v. Ace Hardware Corp. 998 N.E.2d 1281 (Ill. App. Ct. 2013) Concept store but Item 19 information provided. Pro formas provided for financing. Allegations of misrepresentation, fraud and violation of state franchise laws. Projections were unactionable opinions. Item 19 historically accurate.

90 Bans Pasta, LLC v. Mirko Franchising, LLC 2014 WL (W.D. Va. Feb. 2014) Pro formas and verbal representations. No FDD disclosure. Multiple claims including Virginia Retail Franchise Act claims. No private right of action. No timely rescission. Negligence claim continues and permitted discovery on rescission issue.

92 New Canadian Anti-Spam Law Applies to text messages and social media such as Twitter, Facebook and LinkedIn. Applies where electronic message accessed by a Canadian resident on a computer in Canada. Significant penalties for violations.

93 NASAA Multi-Unit Commentary Adopted September 16, 2014.

94 NASAA Multi-Unit Commentary Standardized terms. Area Developers same FDD with units. Area Representatives and Subfranchises. Separate FDDs for each type of franchise. Item 20 and other revisions for separate FDDs. Increased costs to separate FDDs and have separate filings.

Franchising Disputes: Litigation Risks and Practice Tips. Jeffrey J. Jones and J. Todd Kennard. International Franchise Expo April 9, 2010

Franchising Disputes: Litigation Risks and Practice Tips Jeffrey J. Jones and J. Todd Kennard International Franchise Expo April 9, 2010 Franchisee Recruiting Oral or written statements made during the