Coffee Beanery leader lands it in trouble by stealing cones, photo/iboydaniel

WASHINGTON, DC – In a webinar presentation on Tuesday, litigators from one of the world’s largest law firms, DLA Piper, discussed nine cases in 2009 of which franchisors should sit up and take notice. The criteria in selecting the top nine were that they were all either decided in 2009 or had a significant event in the case that year.  

Below are three of the nine, two of which have been reported on here in Blue MauMau. The entire presentation on all nine cases is attached.

DLA Piper introduces each case with an intriguing question, explains the claims in the litigation and offers suggestions to the franchisors:

Q: Can a franchisor require franchisees to buy its supplies?

A: No, not always.

In the first case cited, Burda v. Wendy’s International, Inc., plaintiff franchisees asserted five claims; two Sherman Act tying claims and three  breach of contract.

The lawsuit alleges that franchise owners who initially purchased hamburger buns from one supplier were threatened with termination by Wendy’s if they did not purchase buns from a Wendy's subsidiary vendor. A 4-cent-a-case surcharge was added on purchases from other approved suppliers.

The district court refused to dismiss the typing claims, particularly where plaintiffs had previously purchased from other suppliers.

Solution: Franchisors, in order to allow for maximum flexibility in structuring supply issues within the franchise system, should include broad reservations of rights in franchise agreements, covering areas such as the right to designate exclusive suppliers, including the franchisor and its affiliates; the right to earn fees on franchisee purchases from suppliers, and the right to include surcharges on purchases from approved suppliers.

Q: Does a franchisor need to disclose their officer’s grand larceny prank in its FDD?

A: Yes. Prank or not. Disclosure requirements for breaking the law must be literally complied with, whether the preparer thinks that knowing about a company officer stealing traffic cones is relevant to buying a franchise or not.

In Coffee Beanery, Ltd., et al. v. WW, LLC et al., a case reported on Blue MauMau, franchisees commenced arbitration against Coffee Beanery for, among other things, violation of the Maryland Franchise Act. They alleged the Uniform Franchise Disclosure Document failed to disclose felony conviction for grand larceny of an officer of the company.

The court agreed and rejected the arbitrator’s view that it was not the type of felony subject to disclosure. It also stated that the arbitrator’s award showed a “manifest disregard of the law, and that the franchisees were fraudulently induced, so not bound by arbitration clause. U.S. Supreme Court refused to hear the case.

Solution: Comply with disclosure requirements literally – even if seems not within purpose of statute.

• An arguably non-material omission in an FDD can have serious ramifications
• Uncertainty remains as to whether a “manifest disregard of the law” is a basis for vacating an arbitrator’s decision

(Writer’s note: Blue MauMau took issue with DLA Piper referring to the felony conviction by an officer of the company as a “college prank” when he was actually an adult who was working at Coffee Beanery corporate. The law firm responded with testimony given in Coffee Beanery’s petition to the Supreme Court.  Shaw states the following:

“When I was in college, I was out with a buddy of mine and we were driving down the road picking up construction cones and throwing them in the back seat of the car, and we continued to drive down the road until the police officer saw all the orange construction cones in the back of the car and he stopped us and asked what we were doing with them.  We were . . . it was a stupid college thing to do.”

Blue MauMau has a transcript of Shaw’s testimony stating he was not in college when he received the felony conviction.)

Q: Aren’t the standards for enforcing in-term covenants (while still in the system) more lenient than those applicable to post-term covenants (after franchisee has left the system)?

A: No. Georgia says franchisors can’t write loosey-goosey restrictions preventing franchise owners from competing with the franchisor and limiting his trade for years and years. That ain’t reasonable. Georgia has enough unemployed.

Atlanta Bread Co. Int’l Inc. v. Lupton-Smith, also reported on in BMM, answers that burning question. The trial court, the Court of Appeals of Georgia and the Supreme Court of Georgia all ruled the same way. The courts applied the strict scrutiny test to assess reasonableness of the in-term covenant and found in-term to be unenforceable. It also found post-term to be unenforceable.

Georgia legislative effort to overcome Atlanta Bread is HB 173. The law, if enacted, would allow courts to modify covenants to protect legitimate interests, and would prevent striking in-term covenants on the grounds that they lack specific limitations of activity, duration or geographic scope.  It would not apply retroactively.

Solutions:  Franchisors granting franchises in Georgia should consider tightening up in-term and post-term covenants and putting in a time limitation on non-disclosure of non-trade secrets. If they choose Georgia law to interpret the agreement, carve out covenants—but they are warned that they cannot count on enforcing covenants in the state.