WELCOME TO OUR WEBINAR THE TOP 10 CASES IN 10 Thursday, January 27, 2011 2:00 p.m. EST *This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter.
FRANCHISE LITIGATION PRESENTERS Barry Heller Scott McIntosh 2
CRITERIA FOR SELECTING CASES Cases decided in 2010 Sought cases that provide guidance as to business considerations for franchisors No order of priority 3
CURRENTLY SPEAKING Barry Heller 1 Can You Require Your Franchisees To Charge The Same Price For A Particular Item? 4
NATIONAL FRANCHISEE ASSOCIATION, ET AL. v. BURGER KING CORPORATION, 2010 WL 4811912 (S.D. Florida, Nov. 19, 2010) 5
FACTS AND FRANCHISEES CLAIMS Franchisee association sued Burger King over its decision to set a $1.00 maximum price for the double-cheeseburger as part of its $1.00 Value Meal menu. Franchisees advanced two claims: 1. that BKC did not have the right under its franchise agreement to unilaterally impose maximum prices to be charged by franchisees 2. in any event, that decision violated BKC s duty to exercise its pricing judgment in good faith BKC moved to dismiss these claims. 6
COURT DECISION Court, relying upon earlier decisions in the case, held that the franchise agreements expressly granted BKC the discretion to set maximum prices. No express statement in the franchise agreement that BKC could determine price for franchisees or that franchisees were free to set their own prices. Section 5 of the franchise agreement authorized BKC to make changes to the standards and specifications which BKC in the good faith exercise of its judgment believes to be desirable and reasonably necessary. Court found that the franchisees allegations did not rise to the level of bad faith. 7
Court relied on fact that even if the $1.00 price was below cost, was only on one product. No allegation by franchisees of the kind of serious injury to their entire business that would support an inference of bad faith. Noted the implausibility of why it would be in BKC s interest to substantially harm its franchisees. Franchisees have appealed. 8
PRACTICE POINTERS Before implementing any maximum prices, check the language of the franchise agreements and the disclosure documents of the existing franchisees. If nothing in them expressly grants you the right to set, or prohibits you from setting, the franchisees prices, look for provisions that allow you to make changes to the system, to standards or specifications, etc. Whether or not there is an express good faith requirement in the agreements for these changes, make sure that your motive of setting the maximum price is a legitimate one e.g., to better compete in the marketplace. Consider the economic effect on franchisees and set the maximum price bearing in mind that potential effect. Adhere to that maximum price in any company-owned units. Add language to your current franchise agreement to indicate that setting the maximum and minimum prices is part of the rights you have and is included within your right to change standards and the system. 9
CURRENTLY SPEAKING Barry Heller 2 Can A Franchise Statute in One State, Which Applies To Franchises Operating In That State, Be Found To Be Applicable To A Franchise In Another State? 10
1-800-Got Junk? LLC v. Superior Court of Los Angeles County, 116 Cal. Rptr. 3d 923 (Ct. App. 2010) 11
FACTS AND ISSUE Franchisee (Millenium Asset Recovery), based in California, sued franchisor, based in Vancouver, Canada, for wrongful termination. Franchise agreement required application of Washington State law. Franchisee argued for enforcement of that provision while Franchisor argued it was unenforceable because no reasonable basis for application of Washington law. 12
Franchisor had terminated the franchise agreement without opportunity to cure for allegedly falsifying royalty reports. Franchisee brought claim for, among other things, violation of the Washington Franchise Act, which did not list this ground as one for which termination could be without opportunity to cure. The burden was on the Franchisee to show that either (a) Washington has a substantial relationship to the parties or the transaction or (b) a reasonable basis existed for selecting Washington law. 13
COURT S DECISION The Court found no relationship between the parties/ transaction and State of Washington. But Court found that a reasonable basis existed for selecting Washington law because: it is reasonable for a franchisor to designate a single state s law to apply to all its franchise agreements Washington is the closest US jurisdiction to Got Junk s Vancouver headquarters Found that the public policy of California, as embodied in the CFRA, is not offended by applying another state s statute that provides greater protection to a franchisee 14
Got Junk argued that the Washington Franchise Act should not apply here because nowhere in it did the legislature express the intent that it apply to disputes outside the state. Court rejected this: Irrespective of whether WFIPA otherwise contains territorial restrictions on its application, the parties were free to agree that their franchise relations would be governed by Washington substantive law and they did precisely that, by way of a valid choice of law clause. COL Clause 15
OTHER 2010 DECISION Similar result on application of another franchise statute was reached by the Court of Appeals of Ontario in 405341 Ontario Limited v. Midas Canada, Inc., 2010 ONCA 478 (July 6, 2010) Court allowed application of Ontario Wishart Franchise Act to a franchisee not in Ontario as a result of the choice of law clause selecting Ontario law even though the Ontario act by its terms did not apply to franchises unless they were operated in Ontario 16
PRACTICE POINTERS These decisions overlook the fact that the choice of law clause merely means one should apply the law of that state -- does not mean that jurisdictional provisions of statutes in that state should be ignored. In making decisions with respect to a franchisee (such as termination), be sure to check and comply with the law of any state that might be applicable. Consider the state law chosen by the contract In drafting choice of law clauses, consider adding a clause stating that it is not intended to make applicable any franchise statute or law that would not otherwise be applicable. As is clear from the Got Junk case, it is very difficult for a franchisor that drafted the franchise agreement to convince a court that a provision of that agreement is not enforceable. 17
CURRENTLY SPEAKING Barry Heller 3 Can A State Assess An Income Tax Against A Franchisor, Which Has No Physical Presence In The State, Merely Because It Receives Royalties From Franchisees In That State? 18
KFC CORP. v. IOWA DEPT. OF REVENUE, 2010 WL 5393506 (Iowa 2010) 19
FACTS KFC has its principal place of business in Kentucky. All KFC restaurants in Iowa are owned by franchisees. KFC owns no restaurant properties, nor does it have any employees, in Iowa. Iowa Dept. of Revenue issued an assessment of $284,658 for unpaid corporate income taxes, penalties and interest for three years. 20
ARGUMENTS KFC challenged the assessment claiming insufficient nexus KFC argued that the state could not constitutionally impose the income tax on it because it had no physical presence in the state Relied on U.S. Supreme Court case of Quill, which held that a use tax could not be imposed on a foreign corporation that had no physical contact with the state KFC also argued that under an Iowa statute, it was not subject to tax because it lacked property located or having a situs in this state. IDOR argued that physical presence in Iowa was not required as long as KFC licensed intellectual property that was used in Iowa IOWA which generated income for KFC 21
DECISIONS The ALJ, the Director of IDOR and the district court concluded that KFC was subject to the income tax, finding that a physical presence was not required. The case was appealed to the Supreme Court of Iowa The Court posed the question it was deciding as how the United States Supreme Court would decide this case. The Court extensively reviewed the history of the U.S. Supreme Court s rulings (and state appellate rulings) under the dormant Commerce Clause with respect to the imposition of use and sales taxes, as well as income taxes, on out-of-state corporations. 22
In holding that Iowa could impose an income tax on KFC, the Court concluded that: the Supreme Court would not extend the physical presence requirement outside the sales and use tax context taxation of income derived from intangibles in a state is consistent with the now prevailing substance-over-form approach embraced in most of the modern cases decided by the Supreme Court under the dormant Commerce Clause The Court held that a physical presence is not required under the dormant Commerce Clause in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located within the State of Iowa. 23
PRACTICE POINTERS Beware of the potential (unless the decision is reversed by the U.S. Supreme Court) of paying income taxes based on royalties received from franchisees in Iowa. Our understanding is that the IDOR intends to continue to identify outof-state franchisors who have not filed in Iowa and to send notices. Iowa s policy in the past has been to assess tax retroactively for 10 years with interest (but exercising discretion not to seek penalties). Iowa has a voluntary disclosure program allowing taxpayers to report corporate income tax liability for the past 5 years with a waiver of penalties. May not be available to a taxpayer once it has been contacted by IDOR. If decide to participate, consider whether there was any overpayment of taxes to any other states as a result. 24
CURRENTLY SPEAKING 4 Scott McIntosh Must You Provide An FDD To A Franchisee Whose Territory You Are Modifying? 25
McKINNIS v. FITNESS TOGETHER FRANCHISE CORP., 2010 WL 5056666 (D. Colo., Dec. 6, 2010) 26
FACTS On May 10, 2005, Paul McKinnis and Fitness for Life entered into two Master Franchise Agreements, one for the territory of the State of Maryland and one for the territory of Washington, D.C. On March 10, 2009, McKinnis assigned his rights under the two Master Franchise Agreements, as amended, to Dalriada Enterprises LLC, a Georgia limited liability company owned by McKinnis and his son. Also on March 10, 2009, the franchisor sold the Master Franchise for the State of Georgia to Dalriada, and the terms and conditions of that purchase and sale were documented as an addendum to the DC Agreement. The franchisor did not furnish an FDD in connection with the March 2009 addendum granting Dalriada the Master Franchise for the State of Georgia. 27
PLAINTIFFS CLAIMS McKinnis and Dalriada sought rescission of the March 2009 addendum to the DC Master Franchise Agreement, alleging fraud in the inducement. Plaintiffs allege that the franchisor committed fraud in connection with the sale of the Georgia Master Franchise by: Misrepresenting that it was not necessary to furnish a written FDD and that it would be easier to reference the Georgia sale as a modification of the DC Agreement; Withholding information material to Dalriada s investment decision; Misrepresenting the number of open and operating locations in the Georgia territory; Failing to inform the plaintiffs that defendant did not have a current FDD. Plaintiffs alleged other claims relating to a right of first refusal, which were dismissed and are not relevant to the March 2009 addendum. 28
DEFENDANT S MOTION TO DISMISS Section 19.3 of the DC Agreement contained a one-year contractual limitations provision. The Georgia addendum did not contain a one-year contract limitations provision. Defendant moved to dismiss on the grounds that plaintiffs fraud claims were barred by the one-year contractual limitation provision. Defendant alternatively moved to dismiss the fraud claim on the grounds that plaintiffs allegations did not meet the pleading-with-particularity requirements of Fed. R. Civ. P. 9(b). Master Franchise Agreement 29
HOLDINGS The one-year contractual limitation provision was not contained in the March 2009 addendum. If plaintiffs succeed on their fraudulent inducement claim, the March 2009 addendum may be rescinded, making the oneyear contractual limitation provision inapplicable to the purchase of the Georgia territory. The Court considered a declaration submitted by plaintiffs, together with the allegations in the Complaint, in finding that plaintiffs had a factual basis for their allegations of fraud. 30
PRACTICE POINTERS When selling additional territory to an existing franchisee, whether in the form of a separate agreement or an addendum, provide a copy of a current FDD (or document any applicable exemptions). Consider incorporating by reference key provisions of underlying agreements where separate issues may arise with respect to addenda or collateral agreements. Franchise Disclosure Document 31
CURRENTLY SPEAKING Scott McIntosh 5 Should You Always Require Guarantees From The Spouses Of Individual Franchisees And The Spouses Of Owners Of Corporate Entity Franchisees? 32
CITGO PETROLEUM CORP. v. BULK PETROLEUM CORP., 2010 WL 3931496 (N.D. Okla., Oct. 5, 2010) 33
FACTS Mr. and Mrs. Dhaliwal married in 1976. Sometime later, Mr. Dhaliwal became the sole owner of Bulk Petroleum Corp., a gasoline distribution business. In the mid-1990s, Bulk entered a contractual relationship with Citgo Petroleum Corp. Citgo maintained an open account with Bulk, and product sales to Bulk were on trade credit. On or about June 13, 1995, Bulk transmitted an Application for Credit to Citgo seeking monthly credit from Citgo in the amount of $300,000 relating to the purchase of an estimated 675,000 gallons of gasoline per month. On July 14, 1995, Mr. and Mrs. Dhaliwal executed a Guaranty on behalf of Bulk in favor of Citgo. 34
FACTS On or about March 18, 1996, an accounting firm prepared a personal financial statement for Mr. Dhaliwal, showing a net worth of over $11 million, including assets owned by Bulk, assets owned jointly by Mr. and Mrs. Dhaliwal, and assets owned separately by Mr. Dhaliwal. Sometime after December 31, 2005, a Personal Financial Statement for the year 2005 was prepared on behalf of Mr. and Mrs. Dhaliwal. Citgo entered several Marketer Franchise Agreements with Bulk. Pursuant to the MFAs, Citgo issued invoices to Bulk for the gasoline it purchased in or around September and October 2008. Bulk failed to pay for these purchases. 35
PLAINTIFF S CLAIMS Plaintiff s claims: Six counts against Bulk, including breach of contract claims seeking: (1) amounts due and owing under the MFAs; (2) interest in the amount of 1.5% per month, as set forth in the MFAs; and (3) damages caused by Bulk s breach. Contract claim against Mr. Dhaliwal pursuant to the Guaranty. Contract claim against Mrs. Dhaliwal pursuant to the Guaranty. Guaranty 36
DEFENDANTS COUNTERCLAIMS Defendants counterclaims: Mrs. Dhaliwal filed a counterclaim for violation of the Equal Credit Opportunity Act and Regulation B based upon her allegation that Citgo required her to sign the Guaranty based upon her status as the spouse of Mr. Dhaliwal and for no other reason. Mrs. Dhaliwal sought the following relief: (1) a declaration that Citgo violated Regulation B; (2) a declaration that the Guaranty is unenforceable against her; (3) recoupment in the amount of all damages sought by Citgo for the alleged breach of the Guaranty; and (4) attorneys fees and costs. 37
PROCEDURAL HISTORY Bulk filed Chapter 11 bankruptcy, and the claims against it were stayed. Mr. Dhaliwal informed the Court that an involuntary bankruptcy had been filed against him, and the claims against him were stayed. The Court denied Citgo s motion to dismiss Mrs. Dhaliwal s counterclaims, following those circuits holding that a party may assert an ECOA violation defensively under the doctrine of recoupment after expiration of ECOA s statute of limitations. Citgo and Mrs. Dhaliwal subsequently filed cross-motions for summary judgment on the Guaranty claim against Mrs. Dhaliwal. 38
BACKGROUND ON ECOA AND REGULATION B ECOA contains a non-discrimination provision that prohibits creditors from discriminating against any applicant, with respect to any aspect of a credit transaction... on the basis of... sex or marital status. One of the purposes of ECOA was to prevent loans from being conditioned automatically on the securing of the signature of the non-borrowing spouse. In furtherance of ECOA, the Federal Reserve Board promulgated Regulation B. Under Regulation B, a creditor shall not require the signature of an applicant s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor s standards of creditworthiness for the amount and terms of the credit requested. 39
BACKGROUND ON ECOA AND REGULATION B However, if a married applicant resides in a community property state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if applicable state law denies the applicant power to control sufficient community property to qualify and the applicant does not have sufficient separate property to qualify for the credit requested without regard to community property. According to Regulation B, these rules apply to personal guaranties executed in connection with a credit transaction. 40
HOLDINGS Mrs. Dhaliwal had standing to assert an ECOA violation. Mrs. Dhaliwal s counterclaim is not barred by the statute of limitations for the same reasons the Court denied Citgo s motion to dismiss. While the Dhaliwals resided in a community property state, Citgo was not entitled to summary judgment based upon the community-property exception because: Citgo failed to present evidence regarding the community property relied upon by the Dhaliwals at the time Citgo obtained Mrs. Dhaliwal s signature on the Guaranty. Citgo did not support its reasonable belief argument with any evidence regarding how it formed such a belief or whether it considered Wisconsin s community property laws. Neither was Mrs. Dhaliwal entitled to summary judgment because there was no evidence on the issue of whether Citgo had required her to sign the Guaranty in connection with Bulk s credit application. 41
PRACTICE POINTERS Franchisors that provide financing for equipment, fees, startup costs or other expenses should ensure compliance with Regulation B. All franchisors should consider the possibility that their franchise relationships may be considered credit transactions covered by ECOA; while there is no clear guidance regarding franchise relationships, franchise agreements could be considered analogous to leases, and courts that have considered the issue are split regarding whether ECOA applies to leases. In developing policies to comply with ECOA, franchisors should: review applications and other documents to eliminate any mandatory requirements for spousal information and guaranties; ensure guidelines are in place regarding credit requirements for applicants, including when additional collateral or guarantors are necessary; retain application materials; document permissible grounds for any spousal guaranty. 42
CURRENTLY SPEAKING Scott McIntosh 6 Should You Rely On A Franchisee s Certificate Of Insurance Identifying The Franchisor As An Additional Insured? 43
DTG OPERATIONS, INC. v. MANHEIM REMARKETING, INC., 2010 WL 3259697 (M.D. Fla., Aug. 18, 2010) 44
FACTS DTG Operations, Inc., a subsidiary of Dollar Thrifty Automotive Group, Inc., entered into a Consignment Agreement with Manheim Auctions pursuant to which Manheim Auctions agreed to sell certain of DTG s vehicles at auction. The Consignment Agreement contained an indemnification provision and an insurance provision that required Manheim Auctions to maintain certain types and levels of insurance, to name DTG as an additional insured, and to provide a certificate of insurance to DTG evidencing the required coverage and providing that the policies may not be canceled or materially altered without 30 days prior written notice to DTG. DTG obtained a Certificate of Liability Insurance consistent with the Consignment Agreement. DTG was not named specifically as an additional insured under the insurance policy obtained by Manheim Auctions, but an Endorsement did refer to coverage for joint ventures entered by Manheim Auctions where such liability is derivative of Manheim Auctions liability. 45
FACTS A tire on one of DTG s consigned vehicles blew out while being driven by an employee of Manheim Orlando, an affiliate of Manheim Auctions, and the vehicle collided with another vehicle. The occupants of the other vehicle brought suit against, among others, DTG and Manheim Orlando. DTG demanded that Manheim Orlando (or Manheim Auctions) and American Home Assurance Company defend and indemnify DTG. Those entities initially refused to indemnify and defend DTG. Nearly two years later, after DTG had allegedly incurred more than $96,000 in defense costs, one of the Manheim entities agreed to defend DTG. 46
PLAINTIFF S CLAIMS DTG brought an action against Manheim Auctions, Manheim Orlando and American Home, seeking to recoup its defense costs in the underlying action prior to Manheim Orlando s assumption of its defense. DTG asserted claims for contractual and common law indemnity against Manheim Orlando and Manheim Auctions. DTG asserted claims for breach of a contract of insurance and bad faith against American Home, relying upon the Certificate of Liability Insurance and an Endorsement to the Insurance Policy. 47
AMERICAN HOME S MOTION TO DISMISS American Home moved to dismiss the claim for breach of insurance contract on the grounds that DTG was not an insured under the Insurance Policy. In opposing the motion, DTG relied upon the Certificate of Liability Insurance and an Endorsement to the policy regarding joint ventures to establish that it is an insured. 48
HOLDINGS The Certificate of Liability Insurance does not establish that DTG is an insured because the certificate is not part of the insurance policy and disclaims that it does not confer any rights upon the certificate holder or otherwise amend, extend or alter the coverage provided by the policy. The Endorsement does not establish that DTG is an insured because DTG and Manheim Auctions are not alleged to have participated in any form of joint venture. 49
HOLDINGS Finally, even if the Consignment Agreement were assumed to have created a form of joint venture, the Endorsement would only apply if DTG s liability was derivative of Manheim Auction s liability in the underlying action, but the claims in the underlying action against DTG were alleged on the basis of DTG s own negligence not on the basis of vicarious liability. Accordingly, the Court dismissed DTG s claim against American Home for breach of an insurance contract. Because DTG failed to plausibly establish that it is an insured under the policy, the bad faith claim also failed to state a claim and was dismissed. 50
PRACTICE POINTERS In most instances, certificates of insurance are insufficient to establish coverage for a party seeking to establish it is an insured under a particular insurance policy. Franchisors wanting to ensure that the applicable coverage will be there when needed should obtain a copy of the insurance policy and the endorsement actually adding the entity onto the policy. 51
CURRENTLY SPEAKING 7 Barry Heller Are Your Franchisees Really Employees? 52
AWUAH, ET AL. v. COVERALL NORTH AMERICA, INC., Civil Action No. 07-10287 WGY, Memorandum and Order (D. Mass. March 23, 2010) 53
FACTS AND ISSUE Franchisees of Coverall sued claiming that Coverall had misclassified them as independent contractors when they in fact should be considered employees under the Mass. statute. Under Mass. General Laws, Chapter 149, section 148B, an individual performing service is considered an employee unless: 1. the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and 2. the service is performed outside the usual course of the business of the employer; and 3. the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. Burden was on Coverall to establish all three elements 54
COURT DECISION Addressing only the second element, the District Court concluded that Coverall and the franchisees were in the same business. The Court rejected Coverall s argument that it was in the business of franchising and not in the commercial cleaning business.???? EMPLOYEE????? 55
The Court stated: [F]ranchising is not in itself a business, rather a company is in the business of selling goods or services and uses the franchise model as a means of distributing the goods or services to the final end user without acquiring significant distribution costs. Describing franchising as a business in itself sounds vaguely like a description for a modified Ponzi scheme a company that does not earn money from the sale of goods and services, but from taking in more money from unwitting franchisees to make payments to previous franchisees. (Emphasis added.) PONZI 56
Court cited the following facts: Coverall contracted directly with customers and bills them for the cleaning services performed Coverall receives revenue from customers, deducts its fees and remits payment to the franchisees Coverall developed the System used by franchisees to perform cleaning services Coverall trains its franchisees and provides them uniforms and ID badges 57
ULTIMATE OUTCOME Coverall subsequently won a 3-week trial against the plaintifffranchisees. Coverall prevailed on the claims of 4 other plaintiffs in an arbitration before the same judge who had issued the earlier decision. In a follow-up decision, the judge rejected almost all of the plaintiffs damage claims, limiting them substantially to interest on late payments and some insurance premiums. 58
PRACTICE POINTERS Be aware of some unusual state statutes defining employees Consider whether to restructure your billing procedure to allow revenue from customers to flow initially to the franchisees Consider whether to include language in the franchise agreement recognizing that the franchisor is not in the line of business being franchised Consider having company-operated units owned by an entity other than the franchisor Because some state statutes indicate that only individuals can be employees, consider requiring franchisees to incorporate. (May not help in Massachusetts.) 59
CURRENTLY SPEAKING Barry Heller 8 Could You Be Responsible For Providing Workers Compensation To Employees Of Your Franchisees? 60
UNINSURED EMPLOYERS FUND v. DOCTOR S ASSOCIATES, INC., ET AL., No. 2010-CA-000283-WC (Ky., September 3, 2010) 61
FACTS Employee of Subway franchisee sustained work-related injuries at franchisee s shop in Kentucky Franchisee had no workers compensation insurance Medical expenses and disability benefits paid to employee by Uninsured Employees Fund 62
Fund sought indemnity from Doctors Associates, Inc. ( DAI ), the franchisor, pursuant to KRS 342.610(2)(b). DAI owns and operates only 2 shops the rest are franchised. 63
THE STATUTE The Kentucky statute makes liable for payment of workers compensation: 1. employers and 2. a contractor who subcontracts all or part of a contract unless the subcontractor has secured the payment of compensation A contractor is a person who contracts with another [t]o have work performed of a kind which is a regular or recurrent part of the work of the trade, business, occupation, or profession of such person. (Emphasis added.) Kentucky 64
ADMINISTRATIVE DECISIONS ALJ and Workers Compensation Board concluded that KRS 342.610 did not impose liability on DAI because: 1. No language in statute indicating that legislature intended it to apply to franchisor/franchisee arrangement; 2. Contractor-subcontractor relationship requires that contractor pay subcontractor here, franchisee pays royalty to DAI. 65
COURT S DECISION Kentucky Court of Appeals reversed Issue is not whether franchisee or its employee is also an employee of DAI Issue is whether DAI and franchisee are in a contractorsubcontractor arrangement 66
Court of Appeals rejected arguments that: 1. DAI is not liable because relationship is a franchise No per se exemption for franchises 2. Direction of flow of money not determinative as to whether relationship is a contractor-subcontractor 3. Labels on relationship are not dispositive??? Franchisor = Contractor????? 67
Must look to the nature of the relationship to see if DAI contracted with the franchisee to perform a function that is a regular and recurrent part of DAI s business Test: is selling Subway sandwiches to the public a regular and recurrent part of DAI s business? Remanded for further findings of fact On appeal to the Kentucky Supreme Court IFA recently filed amicus brief. 68
PRACTICE POINTERS Consider including language in your franchise agreements that: 1. you are in the business of franchising/licensing rights, not in the business of providing the underlying service or selling the product being offered 2. franchisee is operating the business for itself not for franchisor and franchisee performs services for its customers not for franchisor 3. requires franchisee to obtain workers compensation insurance Monitor and enforce the requirement that franchisees obtain workers compensation insurance. May help to have company-owned units owned by different corporate entity 69
CURRENTLY SPEAKING 9 Scott McIntosh Can You Be Liable For Terminating A Franchisee Who Is Still Operating? 70
MAC S SHELL SERVICE, INC. v. SHELL OIL PRODUCTS CO., LLC, U.S., 130 S. Ct. 1251 (2010) 71
FACTS Litigation involved a dispute between Shell Oil Company, a petroleum franchisor, and several Shell franchisees located in Massachusetts. Pursuant to their franchise agreements, the franchisees were required to pay monthly rent for use of the service-station premises. For many years, Shell offered franchisees a rent subsidy that reduced the monthly rent by a set amount for every gallon of motor fuel a franchisee sold above a specified threshold. Shell renewed the subsidy annually through notices that expressly allowed Shell to cancel such rent subsidies on thirty days notice. Shell representatives made various oral representations to the franchisees that the rent subsidy or something like it would always exist. 72
ADDITIONAL FACTS In 1998, Shell entered a joint venture with two other oil companies to create Motiva Enterprises LLC. Shell assigned its rights under the relevant franchise agreements to Motiva. Effective January 1, 2000, Motiva ended the volume-based rent subsidy, thus increasing the franchisees rent. As each franchise agreement expired, Motiva offered the franchisees new agreements that contained a different formula for calculating rent. 73
PLAINTIFFS CLAIMS Franchisees alleged that Motiva s discontinuation of the rent subsidy constituted a breach of contract under state law. Franchisees alleged a claim against Shell and Motiva under the Petroleum Marketing Practices Act, arguing that elimination of the rent subsidy constituted a constructive termination of their franchises in violation of the PMPA. Franchisees also alleged another claim under the PMPA, arguing that Motiva s offer of new franchise agreements that calculated rent using a different formula amounted to a constructive nonrenewal of the franchise relationships in violation of the PMPA. 74
PROCEDURAL HISTORY After a two-week jury trial, the jury found against Shell and Motiva on all of the franchisees claims. Shell and Motiva appealed. The First Circuit affirmed the judgment on the franchisees constructive termination claims, holding that a franchisee is not required to abandon its franchise to recover for constructive termination under the PMPA and that a constructive termination may exist when a franchisee continues under its agreement if the franchisor has committed a breach that results in such a material change that it effectively ends the agreement. The First Circuit reversed the judgment on the franchisees constructive nonrenewal claims, holding that a franchisee cannot maintain a claim for unlawful nonrenewal where the franchisee has signed a renewal agreement and commenced operations thereunder. The U.S. Supreme Court granted certiorari. 75
HOLDINGS A cessation of one of the three elements of a franchise under the PMPA (trademark, purchase of the franchisor s fuel, or occupation of the franchisor s service station) is a necessary element of any constructive termination claim under the PMPA, and a franchisee may not assert a claim for constructive termination when all three elements continue to exist. A franchisee who is offered and signs a renewed franchise agreement cannot maintain a claim for unlawful nonrenewal under the PMPA. 76
PRACTICE POINTERS While specific holdings were under the PMPA, analogous reasoning may apply to claims for constructive termination or constructive nonrenewal under state franchise statutes. While not specifically invoking the economic loss rule, the Supreme Court s holdings reflect a concern about broadly interpreting a statute with a mandatory attorneys fee provision and a provision for punitive damages here the PMPA thus turning run-of-the-mill franchise disputes into high-stakes affairs. 77
CURRENTLY SPEAKING 10 Scott McIntosh Will You Be Faced With A Class Action In Arbitration? 78
STOLT-NIELSEN S.A. v. ANIMALFEEDS INTERNATIONAL CORP., U.S., 130 S. Ct. 1758 (2010) 79
THE ISSUE The United States Supreme Court granted certiorari in this case to decide whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act. It held that imposing class arbitration in those circumstances is not consistent with the FAA. Silence =? 80
PROCEDURAL HISTORY The parties selected a panel of arbitrators and stipulated that their arbitration agreement was silent on the issue of class arbitration. The arbitration panel found that class arbitration was permissible under their agreement, which did not preclude class arbitration. The arbitration panel stayed the proceeding to allow the parties to seek judicial review. The U.S. District Court for the Southern District of New York vacated the arbitration panel s award, finding that the arbitrators decision was made in manifest disregard of the law in light of their failure to conduct a choice-oflaw analysis. The U.S. Court of Appeals for the Second Circuit reversed and reinstated the arbitration panel s decision, finding that none of the potentially applicable bodies of law (maritime law or New York law) established a rule against class arbitration. RULE 23 81
HOLDINGS The Court acknowledges apparent confusion created by its decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted under a parties arbitration agreement. A party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so. Class arbitration changes the nature of arbitration to such a degree that it cannot be presumed that parties agreed to consent to class arbitration by agreeing to submit their dispute to an arbitrator. Where parties stipulated there was no agreement on the issue of class arbitration, the parties cannot be compelled to submit their dispute to class arbitration. 82
THE DISSENT Dissent observes that majority does not require express consent to class arbitration, only a contractual basis for concluding that the parties agreed to class arbitration. Dissent observes that this case was between sophisticated business entities and that the affirmative authorization of class arbitration requirement may not apply to adhesion contracts. 83
PRACTICE POINTERS Include a no class action clause But may not be enforceable under laws of all states AT&T Mobility LLC v. Concepcion, 584 F.3d 849 (9th Cir. 2009), 09-893, argued November 9, 2010. Question Presented: Whether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures here, class-wide arbitration when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. Factor in possibility of class arbitration when deciding whether to include arbitration provisions in agreements. Consider including clause: if class arbitration allowed, then litigate case in court. 84
QUESTIONS & ANSWERS 85