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Looking back, 2010 was a year of significant changes in franchise law, and surprising results in litigation. In our view, here are the most important cases.
The Home of The Price Fixer.
The courts gave a whopping 1-2 blow to franchisee price independence in two decisions in the case of National Franchisee Association v. Burger King Corp. At issue was whether the burger franchisor could require franchisees to offer double cheeseburgers for a dollar—a price that the franchisees contended was below their cost. In the first decision, the court held that as a matter of antitrust law and as a matter of contract, BKC had the power to dictate the price. It left open the question of whether BKC had actually set that price in good faith. A second decision in November closed that gap and found that the dollar double cheeseburger was a good faith exercise of BKC’s discretion to set prices.
While the decision certainly goes a long way toward confirming the Supreme Court’s rulings over the last decade with respect to a franchisor’s ability to set prices of franchisees, it is not a definitive death knell for all systems. Plenty of franchise agreements have provisions allowing franchisees to set their own prices.
What to look for: As franchisors roll out new agreements in light of these decisions, look for provisions allowing franchisors to set maximum and minimum prices that franchisees can charge.
Who Wants To Be A Millionaire?
Quizno’s Corporation ended three years of litigation with a class of franchisees with a settlement worth between tens of millions of dollars and huge overhauls in the franchisor’s operations affecting pricing, disclosure, franchisee transfers, supplier requests and training. The settlement even called for the franchisor to assist in creating an independent franchisee association. The settlement disposed of the franchisees’ claims in three separate suits alleging fraud, RICO, unfair trade practice violations, breach of contract and of the implied covenant of good faith and fair dealing. The settlement is remarkable because courts rarely find that franchisees can proceed as a class because of the differences between franchisees in one state and another.
What to look for: More class actions.
Where’s The Termination?
The Supreme Court ended the debate on whether a cause of action for constructive termination could exist under the Petroleum Marketing Practices Act in Mac’s Shell Service Inc. v. Shell Oil Products Co. At the heart of the court’s decision was the fact that under the PMPA, a “franchise” is specifically defined, and, in this case, that definition was not met. The decision, in our view, was badly reasoned and poorly written. There is no question that franchisors push franchisees out of business without sending them a letter that announces they are being terminated. No less a jurist that Richard Posner, a legendary Court of Appeals Judge in Chicago, observed only a few weeks after the Mac Shell decision that “without a doctrine of constructive termination, there would be . . . a big loophole in the Petroleum Marketing Practices Act.”
What to look for: Already, commentators and pundits are saying that Mac Shell will be followed in other arenas, and undoubtedly there will be plenty of arguments that constructive termination should not exist. But Mac Shell’s holding was limited to the PMPA, and there are plenty of reasons why its reasoning has no application elsewhere.
No, The Girl Scouts Do Not Quack Like A Duck.
In an exhaustingly long opinion, the federal district court in Wisconsin ruled that, after all, the Girl Scouts of the United States were not subject to the Wisconsin Fair Dealership Law. Last year, the court had held that the national organization could not reduce the size of a local Girl Scout Council without violating the Council’s rights under the WFDL. While the court, in this more recent decision, had plenty to say about the Girl Scouts national organization, it ultimately held that it had a first amendment right to express its viewpoints and that the constraints of the dealership law interfered with the right of free association and expression.
What to look for: Keep your eyes peeled for further signs of common sense in judicial opinions.
Looming Employment Law.
The world of franchise law got shaken up in a March decision by the federal court in Massachusetts dealing with franchisees of Coverall North America. Describing a franchise relationship as a “marriage of convenience” and comparing it to a “modified Ponzi scheme” the court held that Massachusetts franchisees of that system were misclassified as independent contractors and that they were in fact employees of the franchisor under the Massachusetts Independent Contractor Statute. Despite the court’s strong language, the holding was later vacated for most of the franchisee plaintiffs because they failed to prove damages. In short, if the franchisee makes as much money as he otherwise would have as an employee, there is nothing to be gained in claiming employment.
What to look for: Despite the pyrrhic nature of the victory, franchisors can count on franchisees in the cleaning business to be scrutinizing their relationships with franchisors.
Franchisor efforts to change the terms of franchise agreements got a severe drumming when the federal court in South Dakota held that Super 8 motels breached the franchise agreement by increasing fees for a loyalty program from 2 to 7 percent. Super 8 had contracted with the franchisees for a rewards program under which the franchisees paid 2 percent, and the agreements stated that “there are no other royalties or fees.” After Super 8 was later acquired by HFS, which then became Cendant Corporation. Cendant launched a rewards program for all of its different franchise programs. That program charged 7 percent. The unhappy franchisee plaintiff brought a class action to recover the additional fees, and the court agreed. It held that the agreement’s terms “clearly do not permit Super 8 to impose upon its franchisees an additional 5 percent on gross room sales.” The court left open the amount of damages that the plaintiffs could recover.
What to look for: Keep an eye out for franchisor efforts to change agreements when merging or being acquired.
Search For The Lost Future Profits.
Two cases decided this year went opposite directions on whether franchisors could recover lost future profits from franchisees. In Medicine Shoppe International v. TLC Pharmacy, the federal court in St. Louis decided that the franchise agreement did not contemplate that upon termination a franchisee would pay future profits and held that the franchisor was not entitled to them. In another case, however, Moran Industries Inc. v. Mr. Transmission of Chattanooga, Inc., the federal court in Tennessee held that a franchisor could possibly recover lost future profits and could proceed with its complaint.
What to look for: Franchisors may likely begin including more liquidated damages clauses in their franchise agreements.