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Archives: Franchising

Are Independent Insurance Agents Franchisees?

This article in the Insurance Journal examines a recent Connecticut case where a jury found that a Nationwide Insurance contract agent was a franchisee who could not be terminated according to the "with or without cause" clause in his contract. The article explains why the facts of that case will not lead to a wider impact in the independent insurance agent industry.

Forum Selection Clause Unpersuasive in Connecticut District Court

Despite a forum selection clause in its franchise agreement, Virginia-based Liberty Tax Service, Inc. failed to persuade a federal district judge to grant its motion to transfer a franchise dispute. The court acknowledged the existence of Liberty's forum selection clause, but held that it constituted just one of many important considerations in deciding whether to grant a transfer. Ultimately, the court held that other factors outweighed the clause and denied Liberty's motion.

Connecticut business Sherman Street Associates, LLC, sued JTH Tax, Inc. and Liberty Tax Service, Inc. (collectively "Liberty") for breach of their franchise agreement, Civil Action No. 3:03 CV 1875 (CFD), 2004 U.S. Dist. LEXIS 21102, 2004 WL 2377227 (D. Conn.) Sherman Street brought the action in Connecticut Superior Court, and Liberty successfully removed the case to the U.S. District Court for the District of Connecticut based on diversity of citizenship. In its attempt to then transfer the case to the U.S. District Court for the Eastern District of Virginia, Liberty relied on 28 U.S.C. § 1404 and Liberty's forum selection clause, stating that any suit brought the company must be brought in the U.S. District Court closest to Liberty's headquarters.

The Connecticut district court acknowledged that 28 U.S.C § 1404 authorizes transfer, but cited Stewart Organization, Inc. v. Ricoh Corporation, 487 U.S. 22, 101 L. Ed. 2d 22, 108 S. Ct. 2239 (1988), for the proposition that while a forum selection clause should be a "significant factor" in determining venue, it should not be the dispositive factor. "Section 1404(a) directs a district court to take account of factors other than those that bear solely on the parties' private ordering of their affairs. The district court must also weigh in the balance the convenience of the witnesses and those public-interest factors of systemic integrity and fairness that, in addition to private concerns, come under the heading of 'the interest of justice.'"

Sherman Street argued that the Connecticut Franchise Act's anti-waiver provision (Con. Gen. Stat. § 42-133f) voided the franchise agreement's forum selection clause. The court disposed of this argument by citing Stewart, where the Supreme Court held that § 1404(a) preempts state policy.

Instead, the court enumerated nine criteria to be considered for purposes of forum selection:
· The convenience of witnesses.
· The availability of process to compel attendance of unwilling witnesses.
· The locus of the relevant evidence.
· The convenience of the parties.
· The locus of operative facts.
· The relative means of the parties.
· A forum's familiarity with the governing law.
· The weight accorded to plaintiff's choice of forum.
· Trial efficiency and the interests of justice.
After analyzing each criterion in turn, the court held that the merits slightly favored Sherman Street and denied Liberty's motion to transfer the case to Virginia, and took the teeth out of Liberty's forum selection clause in this case.

Time To NOT Make The Donuts

The Massachusetts Supreme Court reviewed for the first time in that jurisdiction whether covenants not to compete are enforceable in franchise contexts. The court held that such covenants are enforceable, and the court further held that they would be reviewed with the less critical treatment accorded to covenants not to compete stemming from sales of businesses.

In Boulanger v. Dunkin' Donuts Inc., 442 Mass. 635, 815 N.E.2d 572 (2004), the plaintiff owned three Dunkin' Donuts franchises in the Syracuse, New York, area. As part of his agreement with Dunkin' Donuts, Boulanger signed a convenant not to compete whose terms stated that he would not "own, maintain, engage in, be employed by, or have any interest in any other business which sells or offers to sell the same or substantially similar products to the type offered by Dunkin' Donuts shops…" The covenant would last two years beyond the termination of the franchise agreement, and would have a territorial limitation whereby it only applied within a five mile radius of any Dunkin' Donuts shop.

In February 2002, Boulanger sold his three franchises. He then moved to New Hampshire in July, 2002. At that time, Boulanger contacted Honey Dew Donuts for either an employment or franchise opportunity. When Honey Dew learned about Boulanger's covenant with Dunkin' Donuts, Honey Dew stopped dealing with him. Boulanger then sought a declaratory judgment that the covenant was unenforceable under G.L. c. 93A, § 11, as an unfair trade practice and an unfair method of competing.

The court held that covenants to not compete do apply to franchise agreements, and that the scrutiny it would use in examining the covenants would be that level given to sales of businesses. The court stated that these covenants are typically used in two contexts, employment and sales of businesses. Additionally, the court recognized that these contexts are treated differently: in regard to the sale of businesses, courts look at the covenants "less critically". The court offered two reasons for disparate treatment: (1) sales of businesses do not "implicate an individual's right to employment to the same degree," and (2) courts are less concerned with equal bargaining power between the parties.

The Massachusetts court held that in this case the covenant in a franchise agreement more closely resembled the sale of a business model, and the court cited nine facts in support of its conclusion:

1. The plaintiff was not the Dunkin' Donuts' employee.


2. The plaintiff was an independent contractor.


3. Dunkin' Donuts maintained an advisory relationship with the plaintiff.


4. The plaintiff had to pay to obtain the franchises.


5. The plaintiff was represented by counsel when he purchased the franchises.


6. The plaintiff received the right to make profits from the franchises.


7. The plaintiff received long-term contracts of association with Dunkin' Donuts.


8. The plaintiff benefited from protection from competition from Dunkin' Donuts.


9. The plaintiff netted $72,000 from the sale of his franchises.

Having determined that it would apply the standard of review used for covenants not to compete in the sale of a business context, the court ultimately held that this covenant was enforceable. Interestingly, a factor given great consideration by the court was that Boulanger should not be able to escape a covenant not to compete from which he benefited while he was an active franchisee.

McDonalds Loses Trademark Claim in Singapore

As always, the Wiggin and Dana Franchise Blog offers the most timely franchise business news, including this September 21 piece on a Singaporean food distributor of such products as “MacNoodles,” “MacTea” and “MacChocolate.”

Economically, Franchising is a Big Deal

The International Franchise Association commissioned a study entitled "Economic Impact of Franchised Businesses" that provides a powerful testimony to the importance of franchising in the U.S. economy. Some particularly compelling numbers from the second page of Part II of the study: in the year 2001, 767,483 franchised establishments provided 9,797,117 jobs, generated $229.1 billion in payroll and $624.6 billion in output. "Hence, franchised businesses accounted for 7.4 percent of all private-sector jobs, 5.0 percent of all private sector payrolls, and 3.9 percent of all private-sector output."

Changes in California Franchise Investment Law

Read about the details at the International Franchise Association site.

Motivation Comes Late For Oregon Franchisee

Unhappy franchisees of motivational guru Anthony Robbins failed to convince a U.S. District Court that the Oregon Franchise Act's (the Act) three year statute of limitations should run from the time they discovered their alleged fraud. Towne v. Robbins, No. 02-1688-MO, 2004 WL 1987121, (D.Or., 2004). In a motion for partial summary judgment by the franchisor, the court held that the Act clearly bars claims beyond three years from the "sale" of a franchise, discovery of the basis of the claim notwithstanding.

The plaintiffs, Robert A. and Cynthia J. Towne, husband and wife, signed on as franchisees to sell Robbins' motivational books and tapes in 1991. They renewed their franchise agreement in 1996, then again in 2001. On August 30, 2002, the Townes claimed to have realized that Robbins had lured them into their franchise agreements by means of a number of falsehoods. Robbins contends that the claims are time-barred due to the limitations of the Oregon Franchise Act. OFA 650.020(6).

The court agreed with Robbins. The court compared the Act with other Oregon statutes that explicitly tolled their limitations from discovery of wrongdoing, and reasoned that because the Act did not include similar language, the Legislature did not intend for tolling to restart with discovery. Additionally, the court denied the Townes' equitable estoppel arguments, holding that any "exceptional" circumstances claimed by the Townes did not fall outside the purview of the Act.

Finally, the court denied partial summary judgment on the 2001 renewal claim, stating that neither side put forth enough evidence for the court to rule. The court placed the burden on the plaintiff to produce some evidence of their claim, giving them two weeks to do so and forestall a favorable ruling for Robbins.

Franchisor and Designated Supplier Attempt to Justify Payments

The U.S. District Court for Massachusetts reviewed a complaint alleging commercial bribery, unfair trade practices, and violation of the implied covenant of good faith and fair dealing stemming from an alleged kick back scheme between a franchisor and approved supplier for franchisees. In response to motions to dismiss, the court released an memorandum of decision in the case of Substantial Investments, Inc. v. D'Angelo Franchising Corp, No. Civ.A. 03-11202-RWZ, 2004 U.S. Dist. LEXIS 17300, 2004 WL 1932749 (D. Mass. Aug. 30, 2004). The opinion is interesting because of the variety strategies employed by the defense and how the court ultimately dealt with each strategy.

The plaintiffs are a group of New England-area franchisees of D'Angelo Sandwich Shops, the defendants are D'Angelo Franchising Corporation (D'Angelo) and U.S. Foodservice, Inc., and its wholly owned subsidiary J.P. Foodservice Distributors (U.S. Food). The suit stems from the D'Angelo franchise agreement which required franchisees to purchase all perishables, meats, dairy, poultry, seafood, and janitorial and paper products from suppliers designated by D'Angelo. U.S. Food was a designated supplier. U.S. Food made weekly deliveries to the plaintiffs, for which it charged the price of goods delivered as well as a delivery fee.

The delivery fees charged by U.S. Food followed two pricing structures. From April 1999 to March 2001, U.S. Food charged $284 plus tax for each delivery. U.S. Food then changed their delivery fee to 10% of the price of the delivered goods, plus tax. This second structure was in place from April 2001 until mid-January 2002.

The plaintiffs allege that U.S. Food kicked back first $157 of their delivery fee, then 40% of the delivery fee in each period respectively. Plaintiffs claim that the total amounts of the kick backs exceeded $887,000. In their complaint, the plaintiffs contend: Count I, that the commission payments constituted commercial bribery that violated section 2(c) of the Robinson-Patman Act (15 U.S.C. § 13(c)); Counts II – V, the defendants violated unfair trade practice statutes in Massachusetts, Connecticut, Rhode Island, and Maine; Count VI, the defendants violated the Massachusetts antitrust act (Mass. Gen. L. ch 93, §§ 1-14A); and finally, Count VII, the defendants violated the implied covenant of good faith and fair dealing.

The defendants filed motions to dismiss for failure to state a claim for which relief can be granted. The defendants' motions rely on four alternative theories, none of which the court accepted.

The defendants first argued that section 2(c) the Robinson-Patman Act does not apply to commercial bribery. The defendants claimed that because the applicability had not yet been resolved in the First Circuit, the court should dismiss Count I. Nevertheless, the court declined this option, instead choosing to follow the five circuits that have held that section 2(c) does apply to commercial bribery.

Second, the defendants claimed that commercial bribery requires a fiduciary relationship the parties that is lacking in the franchising relationship. The court disagreed, stating that commercial bribery is based on whether a buyer has the option to forgo purchasing. Accordingly, a fiduciary relationship test was held to be immaterial.

Third, the defendants claimed the plaintiffs had constructive notice because D'Angelo's year 2000 Uniform Franchising Offering Circular (UFOC) note that "we and our parent, or persons affiliated with us, may derive revenue as a result of your purchases of approved supplies or from approved suppliers…" The court acknowledged the existence of the language, but stated that the UFOC was provided to prospective and not existing franchisees, and that it was too early in the case to determine whether the plaintiffs knew or should have known about the statement.

Finally, the defendants claimed that the plaintiffs failed to allege an "antitrust injury". The court disagreed here as well, holding that the allegation that the kick back scheme forced the plaintiffs to operate at a competitive disadvantage to the franchisor-run shops as well as other competitors, with an estimated loss in sales and profits to the plaintiffs of over $1.5 million, was sufficient to preserve Count I.

Regarding the other counts, the court found that section 2(c) claims are sufficient to state claims for unfair trade practices under state statutes for Counts II and III, but since the plaintiffs conceded they had no standing in Rhode Island or Maine, Counts IV and V were dismissed.

The court also preserved Count VII, the allegation that the kick back scheme violated the implied covenant of good faith and fair dealing. While it recognized that the plaintiffs alleged no express violation of the franchise agreement, the court held that defendant D'Angelo could have violated the spirit of the agreement by exercising its discretionary right to choose suppliers for the purpose of extracting even more money from the franchisees.

Comparative Franchise Disputes

In the August 24, 2004 edition of Australian magazine Business Week Review (BRW) [subscription required], journalist Jacqui Walker reports the on the state of franchising in Australia in her article "Franchising: Boom Rolls On". While the article's main emphasis is to describe how Australian franchises are parlaying domestic success into international expansion, the article also mentions some interesting facts relating to frachisee/franchisor disputes.

Citing a survey by Griffith University, called Franchising Australia 2004, the article states that 39% of franchisors experienced disputes serious enough to require outside advise in the past year. Disputes resulting in litigation affected 18% of franchisors, and the number of franchisees involved in disputes rose from 1% in 2001 to just under 2% in 2004.

More details on FTC Staff Report on Proposed Franchise Rule Changes

Piper Rudnick attorney John M. Tifford has written an article describing some of the more important proposed changes to the Franchise Rule.