Fraud, Breach and Wrongful Termination

Just after Labor Day, franchisees around the country filed suits against their franchisors for fraud, breach of contract and wrongful termination.

Refusal to Honor Right of Refusal

In Paul D. McKinnis v. Fitness Together Franchise Corporation, master franchisees sued their franchisor in federal district court in Colorado, alleging that Fitness Together had refused to honor a right of first refusal in bad faith.  The plaintiff also alleged that Fitness Together breached the contract and negligently misrepresented the terms of the contract regarding the number of franchises that could be opened in Washington D.C.  Finally, the plaintiff alleged that Fitness Together unlawfully and fraudulently sold the plaintiffs a master franchise territory in Georgia when, during the sale, it failed to provide McKinnis with a Franchise Disclosure Document.

When is a Termination a Termination?

In Royal Petro, Inc. v. SMO, Inc., Royal Petro filed a claim against SMO in Virginia state court on September 20, 2010 for claims related to discriminatory pricing and unfair rent charges in connection with Royal Petro’s gasoline stations.  The case was removed to federal court.  The plaintiff complains that SMO and one of its executives engaged in discriminatory and predatory practices under which they induced unsophisticated, foreign-born franchisees to pay significant franchise and other fees, and then ultimately drove them out of business.  Significantly, the plaintiff claims that it was constructively terminated—that is, the franchisor drove it out of business without actually serving a termination notice.  Under the recent Supreme Court case of Mac’s Shell Service Inc. v. Shell Oil Products Company LLC, constructive termination under the Petroleum Marketing Practices Act requires that the franchise relationship actually be terminated.  Royal Petro did not allege any violations of the PMPA; whether this was an effort to avoid the Mac’s Shell holding or mere inadvertence is not clear.

Constructive termination is a difficult issue.  As noted, a claim of constructive termination under the PMPA requires an actual end to a franchise relationship even though there are many strong arguments against this requirement.  In particular, franchisees should not have to wait until the end of the relationship to defend themselves from predatory practices by a franchisor.  Franchisees will often have other possible claims or defenses available to them before the end of the relationship.  If a franchisee is threatened by its franchisor, the franchisee should seek help from a knowledgeable franchise lawyer in order to better understand its possible legal claims, rights, and obligations.

Dunkin’s Continuing Termination Campaign

Dunkin’ Donuts has been busy.  In federal court in Florida, in Dunkin Donuts Franchising LLC v. Park Blvd. Donuts, Inc., Dunkin’ Donuts filed a complaint against a franchisee for claims including breach of contract, trademark infringement, and trade dress infringement as well as unfair competition.  Dunkin’ Donuts and Baskin Robbins together filed a similar claim against a franchisee in Dunkin Donuts Franchising LLC v. Oza Brothers Inc. in federal court in Michigan.

Collecting the Dues

In Precision Franchising LLC v. Calvin Poisson, the franchisor filed a claim against Poisson and others in federal district court in Virginia on October 1, 2010 for breach of contract.  Precision Franchising is the licensor of the Precision Tune Auto Care system.  The claim alleges breach of contract for the defendants’ failure to pay operating fees and advertising fees, and repayment of a promissory note.  This is a relatively straightforward claim brought against the licensee, but the defendants may have defenses or counterclaims against Precision Franchising.  It is important to go over one’s options with an experienced franchise lawyer in responding to a lawsuit.

Failure to Give an Opportunity to Cure

In Envision Foods Corp. v. Cosi, Inc., the plaintiff sued Cosi in federal court in Illinois for breach of contract.  In December of 2006, Envision Foods and the defendant entered into an Area Development Agreement (“ADA”).  In September of 2008, Cosi sent a notice of termination to Envision Foods purporting to terminate the ADA immediately upon receipt of the notice.  The plaintiff alleges that under the ADA, the defendant is prohibited from terminating the agreement without first providing written notice of default and an opportunity to cure.  Envision Foods claims that it was not provided with either.  This case illustrates that while a franchisor may have many contractual provisions allowing it to terminate an agreement, it must do so in a systematic way that does not run afoul of the contract or the law.  If a franchisee/dealer/distributor/developer feels termination was undertaken unlawfully, it must remember that it may have legal protections both within and outside of the agreement.

Appealing the Jury Verdict

In Warren Distributing Co. v. InBev USA, LLC and Anheuser-Busch, Inc., a case on appeal at the Third Circuit, Warren Distributing Company and others are suing InBev USA and Anheuser-Busch for violation of New Jersey’s Malt Alcoholic Beverages Practices Act, as well as for other contract and common law claims.  The plaintiffs allege that Anheuser-Busch failed to pay them the fair market value of their business with respect to the InBev brands prior to their terminations, as required by the Malt Alcoholic Beverages Practices Act.  The jury returned a verdict in the plaintiffs’ favor, finding that Anheuser-Busch underpaid the plaintiffs by $390,000.  The jury also returned a verdict in favor of Anheuser-Busch with respect to its counterclaim, holding that the plaintiffs were unjustly enriched by the profits they earned with respect to the post-termination sales of the InBev brands and awarded Anheuser-Busch $638,000.  The issues on appeal focus on whether the lower court wrongly gave Anheuser-Busch summary judgment on certain issues as well as certain evidentiary points.

In Tecnimed SRL v. Kidz-Med, Inc., Tecnimed sued Kidz-Med in federal court in New York on September 21, 2010 for claims including breach of contract, and trademark and trade dress infringement.  Tecnimed is the manufacturer of a non-contact thermometer.  Kidz-Med, Inc. had the exclusive right to distribute this non-contact thermometer.  The complaint alleges that the defendants are now marketing and selling a competing non-contact thermometer despite the distribution agreement which prohibits the defendants from marketing and selling a competing non-contact thermometer.  The plaintiff also alleges that the defendants are marketing their new product under a confusingly similar name with confusingly similar trade dress to the plaintiff’s product.  The complaint alleges specific instances of confusion among consumers and cites a review on Amazon.com as evidence of such confusion.  In trademark infringement cases, illustrations of actual consumer confusion are very important.  Termination of a distribution agreement with a manufacturer can often be complicated.  It is important to see a good franchise attorney prior to the termination.  It is also important to have counsel help a party navigate through the gradual end of a distribution agreement if it is going to continue in some capacity.