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Top 5 Landmark Lawsuits Affecting Franchisees of 2007

Franchisor versus Franchisee. In These Legal Cases, Franchise Owners Are Freed from Arbitration Clauses, Retaliatory Franchisor Litigation and More

Franchise attorney David Sager of Day Pitney in Florham, New Jersey and Jonathan Solish of Bryan Cave in Santa Monica compiled hundreds of franchise cases for 2007 in a book and presented highlights at the annual meetingimage of the American Bar Association's Forum on Franchising. Blue MauMau asked these two top attorneys to whittle down their list even more to cases with the greatest impact on franchise owners.

Here are Sager and Solish's top five picks of lawsuits in 2007 that may have the biggest impact on franchise owners.

1. Randall v Lady of America – Federal judge rules that written disclaimers in the disclosure document cannot defeat a franchisor's false promises. Franchisees claimed that they had been deceived on expected earnings in the buying process by company representatives and hand-outs during Discovery Day. Even though such misrepresentations were disclaimed in the offering circular, the franchisees sought to have their agreement obligations to the franchisor rescinded. The franchisor filed a counter-suit for damages from future unpaid royalties that resulted from the franchisees leaving. Solish observes, "This case may prove to be influential because it is thoroughly reasoned, even if those of us on the franchisor side believe the reasoning to be incorrect. The exact opposite position was taken in several cases from other parts of the country last year."

Winner - franchisees.

2. Nagrampa v MailCoups Arbitration clauses governing franchisees may be unenforceable. Franchisor MailCoups’ arbitration clause was so one-sided that the 9th Circuit voided it. Solish concludes, "This decision will receive no respect at all from courts in many other parts of the country, further leading to inconsistent results in different jurisdictions."

Winner - franchisee.

3. Bray vs QFA RoyaltiesA benchmark of reasonableness was added to a franchisor's retaliatory litigation against a franchisee. Quiznos became so upset at the head of its independent franchisee association for posting a suicide note on the web that it terminated the association's president and franchisee, Chris Bray. Although the franchise agreement permitted Quiznos to terminate for conduct which "in the sole judgment of Franchisor, materially impairs the goodwill associated with the Marks ....", the court found that Quiznos did not exercise any judgment and that its actions were purely punitive.

Winner - franchisee.

4. Radisson v Majestic TowersBanner case for liquidated damages. Franchisee Majestic Towers agreed in its franchise contract to award liquidated damages to franchisor Radisson Hotels totaling two times the previous year's royalty fees upon termination because it would need to forgo two years fees in searching for a replacement franchisee. "There's no basis that finding a buyer will take two years," says the franchisee. "Immaterial", says the court. Solish summarizes, "the court rules that agreement provisions are enforceable and gives insights into a reasoned analysis of liquidated damages provision." He continues, "The Radisson decision rejected the controversial California state court decision of PIP v. Sealy (which held that where an agreement is terminated by the franchisor, there might not be any damages), concluding that it did not apply to liquidated damages."

Winner - franchisor.

5. Century Pacific v HiltonFranchisors have the right to sell the franchise. Century Pacific Inc. franchisee claimed that business was hurt by an inferior reservation service system after franchisor Hilton Hotels sold the chain. The franchisee felt Hilton falsely reassured it before buying the hotel that the franchisor had no intention of selling the chain, all the while they were actually preparing to sell the chain. The court ruled in summary judgment that the franchisee could not prove fraud and that the agreement held. Solish says, "Franchise agreements allow franchisors the right to sell the system. Franchisees should take this into account when buying a franchise. This case upholds the franchisor's contractual right to sell the system without being hindered by claims of purported fraud."

Winner - franchisor.

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