First Circuit Decision Precedent-Setting in Favor of Franchisees

BOSTON (Blue MauMau) - Regarding a judgment and decision handed down June 12 by the United States Court of Appeals for the First Circuit in a case involving franchisor Honey Dew Donuts and Manual Carneiro, a one-shop owner, Kevin R. McCarthy, attorney for the franchisee said, "This is significant because it is the only time in the franchise context that I know of, where the First Circuit has addressed the issue of whether or not the franchisor can automatically get all its fees if it prevails in a contract=violation case. The answer is no."  McCarthy said it's a precedent-setting decision throughout the United States because it comes from such a high court. He said it also represents a victory on all issues for the franchisee, adding that the decision will be a protective benefit for franchisees.

Franchisor Must Show Significant Success

When the Honey Dew Donuts franchisor sued Manual Carneiro for breach of his agreement, as well as for trademark infringement, the franchisee counterclaimed, asserting breach of contract, fraud and violation of Massachusetts laws. As a result of a jury trial, the franchisor prevailed and Carneiro was unsuccessful on all counter claims. Honey Dew Donuts was awarded $11,944.26 on the breach of contract claim and $1 on the trademark infringement. But the case did not end there.  

After prevailing,the franchisor moved for an award of attorney's fees pursuant to a provision in the parties' franchise agreement which stated that the breaching party would be responsible for costs incurred in enforcing the agreement.  But the district court denied the motion because Honey Dew was only "marginally victorious," in light of the small amount of the award. But six months after the district court entered a final judgment against Carneiro and his franchise company, Honey Dew moved to correct the judgment to have the franchisee added as jointly and severally liable for damages on the contract claim.  But when the district court once again denied the franchisor motion, stating that the franchisee had been intentionally omitted, Honey Dew challenged that decision by filing what it considered a timely motion claiming he had been accidentally omitted.

Franchisor Wants It Both Ways

But franchisee countered and in the end the decision was made on the fact that during the jury trial Honey Dew had stressed their desire to avoid having Carneiro receive damages if he prevailed on the contract counterclaims. Because his franchisee company was defunct and would not be able to pay on the judgment, Honey Dew wanted him to be held liable on the contract claim. When the district court gave Honey Dew the choice, Is Carneiro going to be in for everything or out of everything, and asking Which is your request?" the franchisor counsel replied "Out." At that point the Court said there was no further question. The U.S. Court of Appeals concluded that the district court did not abuse its discretion in denying the plaintiffs'  motion.

 As to the claims that the district court abused its discretion in denying attorney fees,  Honey Dew stated it was not "marginally victorious" in litigation, but "completely victorious." But contrary to its argument, the award, according to the appeals court, was far less than it was asking. In closing argument in the district court, the franchisor's counsel's sought a sum of $120,000, which he said was only a partial amount of damages.  But the U.S. Court of Appeals ruled, "We have approved the denial of a fee award entirely when the prevailing party enjoys only limited success, such as when the damages requested far exceed the damages actually awarded.  

McCarthy said when franchise parties go into court, as in this case, on contract issues, the franchisees are very concerned that they will end up paying high amounts for franchisor fees. He said it's not so hard for the franchisor because they are the dominant player in the relationship to show evidence of contract violations, that franchisors can control the environment.  With this ruling, he said franchisees will be more protected.

Jack J. Mikels, attorney for Honey Dew Associates, Inc., declined to comment on the First Circuit decision.