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IFA Amicus Supports Cold Stone Against Franchisee

Claims Judge Embraced 'Naive-Franchisee View'; Shows Hostility to Arbitration

WASHINGTON D.C. (Blue MauMau) - For the second time this year, the International Franchise Association has filed a "friend of the court" brief (amicus curiae, filed by third party to protect its own interest) in support of a franchisor, after a lower court ruled against it. IFA, the world's oldest and largest trade association in franchising, represents franchisors, franchisees and suppliers. Its membership consists of approximately 1,000 franchisors and 10,000 franchisees, and encompasses 75 different industries. Although IFA, founded in 1960, did not open its membership to franchisees until 1993, some have taken on leadership roles on IFA's Board of Directors and Executive Committee.

The IFA Amicus(pdf, 42 pgs) states that there are two reasons for submitting the brief, which was filed on February 6, in the Court of Appeals in California: First, is that Judge Paul Gutman's decision in the lower court case reflects a fundamental misunderstanding of franchising as a method of doing business. And second, his decision is characteristic of a new hostility to arbitration that is in conflict with policies of the Federal Arbitration Act. IFA argues, "It assumes that franchisees, like consumers and employees, need special protection. . . from franchisors that supposedly present them with "one-sided, take-it-or-leave-it contracts that they have little alternative but to sign 'as is.'" And the association feels his ruling takes for granted that arbitration is not an acceptable method for resolving franchise disputes, that courts alone can vindicate the rights of franchisees.

Because IFA's mission is to protect and safeguard the business environment for franchising worldwide, and because it is the only trade association that acts as a voice for franchisors and franchisees, it feels its amicus is important on these issues. IFA states that the analysis and policy considerations accompanying its brief will govern the appropriate decision in this case.

Franchisee Alleges Franchisor Falsely Mislead Her in Purchase

The original case, Lesa Meyers, et al. v. Conehead Investments, filed in Superior Court in California, Los Angeles, alleged that the franchisee's area developer mislead her in in buying an existing franchise. Later, the lawsuit was revised to include Cold Stone Creamery and its other entities, as well as corporate officers and directors. Added to the charges was negligent misrepresentation, fraudulent suppression of fact, unfair business practices and breach of contract. She alleges that the misrepresentations made by the company and its officials were a factor in making her decision to buy the franchise. Issues in Meyers lawsuit are reflective of why IFA is fighting to have the decision overruled by the appeals court.

Meyers seeks in excess of $2 million in damages. Cold Stone and other defendants vigorously defended the claims against them.

Concerns of Judge Gutman's Decision

IFA's brief also attempts to show that Judge Gutman's decision is based on assumptions that are not supported by any convincing economic analysis or practical data. On the contrary, it says available data shows franchisors today are as a whole independent businessmen, businesswomen and companies perfectly capable of watching out for their own best interest. But when the judge used the phrase, "As with most paternalistic endeavors," IFA took issue with his view of franchisees needing special judicial protection, saying it carries with it the "seed of great irony," (referring to the Nagrampa v. MailCoups, Inc. case).

IFA states that it is ironic that the same standard form of franchise agreement, the supposedly "take-it-or-leave-it" type, is what the judge used as a springboard to his finding of procedural unconscionable. But in fact, according to IFA, it actually assures that smaller, supposedly weaker franchisees with less bargaining power will enjoy the same protection as the more powerful franchisee. So, IFA determines that depriving franchisors and their franchisees of the economies attendant to arbitration, "flirts with killing the proverbial goose that laid the golden egg."

IFA's History Lesson, Regulation and the Franchise Relationship

In presenting its case to the Court of Appeals, IFA explains that for the past 50-plus years, business format franchising has established itself as a proven method of doing business, and tells how it was formed and became regulated in the U.S. As a short history lesson, it states, "Not until April 13, 1955, however, that modern-day business format franchising was born. On that day, Ray Kroc opened his first McDonald's hamburger stand in Des Plaines, Illinois . . . McDonald's built a central organization to develop standards of operation, train franchisees, and enforce compliance with standards."

Given that the brief is based on a decision made in a California Cold Stone Creamery lawsuit, the association highlights that state and franchisor, saying that prospective franchisees in California have had over 30-years of ready access to disclosure information. It uses Cold Stone as an example of a franchise company providing a wide variety of necessary disclosure information to prospects in buying their franchises.

But again, IFA hits hard on the point that Judge Gutman's ruling reflects a basic misunderstanding of modern business format franchising. "The judge's opinion embraces what one study describes as the "naive-franchisee view," one, according to IFA, that courts typically embrace "at the invitation of franchisee advocates."

Referring to the Cold Stone franchisee's brief as a "classic example" of showing how franchisors have had "vastly superior bargain power" over franchisees, IFA shows the court how this "naive franchisee" view is fundamentally flawed and is simply at odds with the present-day realities of franchising.

In closing, IFA states that the regulation of franchising at state and federal levels first began in the 1970s and now, 30 years later, it has had its effect. "Franchisees today have a wealth of information, as required by law, to allow them to make an informed decision before entering the franchise relationship."

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IFA Amicus on Cold Stone.pdf1.31 MB
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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.