WASHINGTON – Law firm DLA Piper presented its top 13 franchise cases for 2013 last week. They reported on a selection of important court cases and decisions that they feel are shaping the legal relationship between franchisors and franchisees. Presenters Barry Heller, John Hughes and John Dwyer stated that some court decisions were chosen solely because they represent a growing trend in the franchise sector.
Below are several of the selected top cases categorized on the legal question they address:
Mr. Barry Heller
Will a disclaimer clause in a franchise agreement protect a franchisor against a franchisee's fraud claim?
- Hanley, et al., v. Doctors Express Franchising, LLC – Doctors Express franchisee sued franchisor and a broker involved in the initial sale. Claims under Maryland Franchise Act and common law fraud. Based on FDD information: initial investment; operating capital required; physician credentialing; financial performance representation, FPR.
- Claims: Franchisor and broker filed motion to dismiss stating no misrepresentation of facts, labeled as estimates and projections. Unreasonable to rely on projects, representations outside of FDD. Based on disclaimers.
- Court Ruling: Denied motion regarding Maryland Franchise Act, common law fraud, stating inaccurate projection known to be unreliable when made. Franchisee argued later FDD had different projections which franchisor knew when provided earlier FDD.
- Analysis: Disclaimer did not bar Maryland Franchise Act or common law fraud claims—Item 19: no guaranty; Item 7: an estimate, no guaranty you will not have additional expenses; franchise agreement: integration clause.
- Court Concluded: 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.
- Broker argued: MD Act allows suit only against person “who sells or grants a franchise”. Broker did not “sell or grant” - only franchisor.
- Court: Rejected this interpretation- each person who “performs similar functions as a person liable.” 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.
Mr. John Hughes
Does the natural end of the franchise agreement qualify as the “termination” of the agreement?
- Hamden v. Total Car Franchising Corp. – Hamden operated Colors on Parade franchise in Virginia and West Virginia pursuant to franchise agreement and non-compete and confidentiality agreement. At end of 15-year term, Hamden continued operating as franchisee. He then decided to pursue his own business. District court held that restrictive covenants in agreements did not bind Hamden because ‘termination’ did not encompass an ‘expiration’ brought by natural end of term. Franchisor appealed.
- Court Ruling: Determined 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.
- Pointers for Franchisors: Say what you mean in franchise agreements. Review language in franchise agreements for what events trigger the restrictive covenants.
Can a franchisor breach a franchisee's confidentiality provision by disclosing a settlement in its Franchise Disclosure Document?
- Caudill v Keller Williams Realty, Inc. – Certain provisions of the contract 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 for giving tax advice, to insurance carriers, attorneys who represented parties in the lawsuit, mediators, and governmental agencies or regulators. And it could only be provided to the extent necessary and required to be disclosed by law.
- Claims: Franchisees claimed Keller breached provision in settlement by disclosing the facts in its franchise disclosure agreement, causing them to lose business from referrals, many who were recipients of FDD. Sought compensatory damages (and liquidated damages), injunctive relief.
- Court Ruling: Denied Keller’s motion to dismiss because of issues: Purported unintentional drafting error in settlement agreement; who received FDD; in which states those recipients resided; applicable state franchise laws.
- Pointer for Franchisors: Provide in confidentiality provisions in settlement agreement that terms can be disclosed to anyone when required by law, including any applicable franchise disclosure regulation.
Mr. John Dwyer
Does retaining the “right to control” make a franchisor vicariously liable for the acts of Its franchisees?
- People v. JTH Tax, Inc. – JTH (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 AG alleged that Liberty was vicariously liable for its franchisees’ advertising. trial court found Liberty liable for ads run by franchisees because they acted as Liberty’s agents.
- Trial Court found that Liberty’s controls went beyond those needed to protect its marks, focusing on its operations manual, strict requirements of using certain banks for loans and refund checks. It also mandated operating hours, computers, cleaning bathrooms, intervening in customer disputes, to name a few. Appeals Court concluded that the trial court applied the correct test in determining excessive control.
- Pointers for Franchisors: The Liberty Tax case demonstrates the difficulty franchisors face in balancing their sufficient controls to protect their marks and maintain uniformity and not having too much control over franchisees’ businesses. And retaining the right to control but not exercising it will not necessarily protect a franchisor from vicarious liability.
Other DLA Piper Top 13 Franchise Cases for 2013:
- Wyndham Hotels v. Northstar Mt Olive
- Friedman v. Massage Envy Franchising
- Oxford Health Plans v Sutter
- American Express v Italian Colors Restuarant
- Atlantic Marine Constr. v U.S. District Court, W Dist. of Texas
- Steak n Shake v Globex Company
- Victory Lane Quick Oil Change v Darwich
- Long John Silver’s v Nickleson
- Avon Hardware v Ace Hardware
Other issues addressed in the DLA Piper presentation:
- Do written disclaimers defeat fraud claims?
- Will a covenant not to compete be enforceable against a competing business owned by a nonsignatory?
- Will irreparable injury be presumed from a franchisee’s continued operation of a competing business post-termination?
- Is the convenience of the parties relevant to assessing whether to enforce a forum selection clause?
- Will franchisors’ class arbitration waiver provision be enforced even if the expense of individual arbitration would be prohibitive?
- Can franchisors overturn an arbitrator’s determination that a contract authorized class arbitration based on that determination being in error?
- Can franchisors be held liable on an agency theory if a franchisee violates the Telephone Consumer Protection Act?
- Is a franchisor’s prior breach of a franchise agreement a defense to the franchisor’s claims against a franchisee?
Related Article: Top 12 Cases of 2012 through DLA Piper Eyes