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ABA Forum Picks Five Hottest Legal Cases

SAN DIEGO – Last week’s ABA Forum on Franchising, themed as Franchising: Some Like It HOT! drew a crowd of 751 to the Hotel Del Coronado for its 33rd annual event, mainly to talk about “hot” litigation that promises to set trends in franchising. 

This year’s publication of Franchise and Distribution Law Developments, noted to be the premier source of education for practitioners, was authored by Bethany L Appleby of Wiggin and Dana LLP and William K Whitner of Paul Hastings LLP, two franchisor attorneys. The book, given out to attendees, charters the rough seas of 271 legal cases for the period of August 1, 2009 through July 31, 2010. While the two authors also presented during the plenary session many of the most important cases, Blue MauMau asked them to narrow it down for its annual top five hottest legal decisions.

Whitner felt there were two cases that all attendees would agree on, namely Awuah, et al v. Coverall North America and  Mac's Shell Service, Inc. v. Shell Oil Products Co. Co-presenter Bethany Appleby agreed. Awuah shows the significance of the 2004 changes to Massachusetts law that effectively lowers the threshold in determining when an employee is being misclassified as an independent contractor. The case sent shock waves with franchisors in saying that certain franchisees are actually employees, not independent business operators.

The Mac’s Shell case also dealt with an interesting issue: Under what circumstances may a service station operator bring suit against an oil refiner or distributor for “constructive termination” under the Petroleum Marketing Practices Act? Although the Supreme Court rarely considers legal issues specific to franchising, in this case it did just that. It addressed a myriad of issues affecting the termination and renewal of franchise relationships governed by the Petroleum Marketing Practices Act. The opinion threatens to undercut the vast majority of constructive termination claims arising under PMPA and state laws. The court ruled that a gas station franchisee could not have a termination claim where the franchisor’s alleged wrongful conduct does not force a station owner to abandon its franchise.

Another case both presenters agreed on was Bucciarelli v. Nationwide Mutual Insurance Co. A Michigan insurance agent argued that under Michigan Franchise Investment Law he was a franchisee, rather than an independent contractor. The court refused to reject his MFIL claims on pleadings and concluded that a loan under an agreement with the putative franchisee was not a franchise fee, because he was not required to take out the loan. Bucciarelli also argued that he was required to pay a franchise fee for used furniture and old computers as a condition of entering his insurance agency agreement. Although the court acknowledged that the goods purchased did not amount to a franchise fee, it was not prepared to rule on the issues as a matter of law because they may present a factual question.

On the fourth case, both attorneys concurred that Stolt-Nielsen SA v. Animalfeeds International, “the biggest arbitration development this year, should be named. Although not actually in the franchise arena, the case is important in that it established that arbitrators cannot mandate class arbitrations where the arbitration agreement is silent on the issue. The paper states that with the Stolt decision franchisors with older franchise agreements lacking provisions who do not want to submit to class arbitration can now breathe easier.

While Appleby’s pick for the fifth hottest case was  Myers v. Garfield & Johnson Enterprises. Whitner did not agree. Myers, an employee of a Jackson Hewitt franchisee, alleged that her direct supervisor sexually harassed her. When she complained to her employer’s partner he allegedly started sexually harassing her as well. Legal action was then brought against the franchisor Jackson Hewitt under Title VII Civil Rights Act of 1964.  In the end, the court held that Jackson Hewitt was not directly liable for her injuries.

Whitner did pick as his fifth case the American Needle, Inc. v. National Football League, under the antitrust category. Although not a franchise case, it is a reminder that franchisors and distributors should review continuously and carefully their proposed and ongoing joint activities. The court affirmed that the activities of independent parties closely coordinated as part of a joint venture are not presumptively immune from antitrust liability as is often assumed.

In his presentation's closing remark, Whitner expressed that the very hottest case had to be Subway suing Cousin Vinny, which had been reported on an online news site (Blue MauMau). Because the franchisee wasn’t up to franchise standards, he was forced to close his shop. Cousin Vinny then got even by reopening a sub shop by day that advertised it had a special value-added service of having strippers in the basement by night.  A judge ordered him to stop using the trademarked goods in his skin scheme and forced him to pay the fast-food giant's corporate parent $90,000, plus another $7,900 for its legal fees.  Again, Appleby concurred.

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