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DLA Piper’s Top 10 Franchise Cases of 2015, Part 2

In this second segment of the DLA Piper Top 10 Franchise Cases of 2015, John Dwyer, of counsel at the firm, (pictured below) introduces the next important topic: Can a franchisee be terminated for failing to follow the franchisor's pricing?

5. Steak n Shake Enterprises, Inc. v. Globex Company, LLC (Colorado, 2015)

Franchisees operated two Steak n Shake restaurants in Colorado. The franchisor offered $4 menu meals at $3.99/meal. Steak n Shake ran a summer promotion that expanded the meals on the $4 meal menu, and franchisees were provided with menu inserts to be inserted into the regular menu. Rather than charge the discounted meal price for the $4 meals that they felt would lose significant money for their business, franchisees in Colorado charged a la carte prices for the meal items, which increased the price from $3.99 to $5.08. For drive-through customers, franchisees charged the price for a large-size drink but gave a regular-size drink, which increased the price for combo meals by $.50. Franchisees did not use the menu inserts and printed new menus, modifying the prices for the $4 menu meals from $3.99 to $5.08.

The franchise agreement mandates:

Franchisee acknowledges that maintaining uniformity in every component of the operation of the System is essential to the entire chain of Steak n Shake Restaurants, including a designated menu (including maximum, minimum, or other prices the Franchisor specifies for menu items and mandatory promotions).

Franchisee agrees to serve [and] sell all of the (and only the) food and beverage products listed in the then-current standard menu and not to deviate from the Franchisor's standards for serving and selling the same (including, to the fullest extent the law allows, the maximum, minimum, or other prices for products sold by Steak n Shake restaurants and mandatory promotions.

Franchisor shall have the sole exclusive right to print menus to be used in the Restaurant.

Steak n Shake sent franchisees a notice of default for failure to offer the $4 menu; printing menus without consent; altering marketing material; charging prices higher than the published price. Franchse Agreement gave right to terminate, without opportunity to cure, for knowingly selling products in excess of maximum prices or failing to offer mandatory promotions. While franchisor allowed right to cure, failed to cure. Steak n Shake terminated franchisees.

As franchisees continued to operate, Steak n Shake sought injunctive relief and damages. Court granted in part, and Steak n Shake took over the restaurants. Franchisee brought counterclaim, alleging breach of contract and implied covenant and fraud. Court granted summary judgment on franchisor's breach of contract, holding franchisees knowingly and materially breached franchise agreement by not complying with offering $4 menu items, and overcharging. Court rejected franchisees' claims.

Takeaways

Franchise Agreement should include explicit provisions requiring compliance with mandatory pricing (including maximum and minimum pricing) and promotions (including promotion pricing) to the extent permitted by law. Franchise Agreement should include a default provision giving the franchisor the right to terminate for failure to comply with pricing or to offer mandatory promotions.

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Attorney Dwyer introduced the next topic: What obligation does a franchisor have to protect and enhance its brand for its franchisees?

6. Bertico Inc. v Dunkin' Brands Canada Ltd. (Quebec Court of Appeals 2015)

After Dunkin' had been leading coffee and donut chain in Quebec in 1990s, Tim Horton aggressively entered market and took away significant market share. Franchisees requested assistance from Dunkin'. Dunkin' plans were not successful. Group of franchisees sued Dunkin', claiming negligence and breach of contract. Sought damages and right to terminate. Trial court ruled in favor of franchisees, stating franchisor did not take reasonable steps to protect and enhance value of brand. Awarded $16 million (Canada). Dunkin' appealed. Court upheld trial court decision, but reduced damages to $10.9 million (Canada), taking into account unpaid royalties.

DLA Piper explains significant factors in the appeals court decision.

Takeaways

Because the decision was based on Quebec Civil Code, it is not clear what impact it will have outside of Quebec. The decision is not binding outside of Quebec. The decision may prompt franchisees in disputes with franchisors to make similar arguments about an implied basic franchisor duty, both in Canada and the United States. Remains to be seen whether such arguments will be successful outside Quebec. The court also stated that a franchisor can exclude implied obligations of support to franchisees with express contractual language. Franchisors should craft language in franchise agreements that exclude any and all franchisor obligations outside of what it explicitly wants to declare in the contract and is obligated to carry out for its franchisees.

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Attorney Barry Heller (pictured at the right) introduced the next case asking, What should a franchisor do if a state franchise regulator, in an effort to protect its state's franchisees, requires a provision in the franchise agreement that the franchisor regards as inconsistent with federal law?

7. Chorley Enterprises, Inc. v. Dickey's Barbeque Restaurants, Inc. (4th Circuit 2015)

Texas-based Dickey's Barbeque registered to offer franchises in Maryland. Maryland Franchise Law Regulations provide that a franchisor violates law if it requires franchisee to "waive the franchisee's right to file a lawsuit alleging a cause of action arising under Maryland Franchise Law in any court of competent jurisdiction in the state.

Dickey's franchise agreement provided that all claims arising out of or relating to agreement must be arbitrated. Because of the Maryland regulation, Dickey's included the following in its agreement: "The provisions of this agreement shall not require you to waive your right to file a lawsuit alleging a cause of action arising under Maryland Franchise Law in any court of competent jurisdiction in State of Maryland."

After disputes arose between Dickey's and several franchisees, Dickey's filed arbitration in Texas, seeking, among other things, declarations that the franchisees had breached their franchise agreements. The franchisees then filed in the court in Maryland to enjoin the arbitration, to declare the arbitration provisions unenforceable, and to obtain relief for alleged violations by Dickey's of the Maryland Franchise Law.

The issue: What claims had to be arbitrated, what claims had to be in court. District court held that the provisions created an ambiguity which only a jury could resolve. Both sides appealed. Franchisees argued that Dickey's failed to mediate first; Maryland clause trumps arbitration clause; franchisees will be forced to raise Maryland Franchise Law claims as affirmative defense in arbitration.

Court held that Maryland clause required Maryland Franchise Law claims to be litigated in court. Dickey's argued that if Maryland clause prohibited arbitration of Maryland Franchise Law claims, clause was preempted by FAA. Court rejected, clause not "state law." Clause is contractual provision. Dickey's: "Maryland law and Maryland Commissioner of Securities "forced" Dickey's to include clause as condition to do business in state." Dickey's filed cert. petition with U.S. Supreme Court.

On behalf of the International Franchise Association, DLA Piper filed an amicus brief in support of franchisor Dickey's.

Takeways

If the state franchise regulator insists on inclusion in franchise agreements of an invalid provision, the franchisor should include with the provision a statement that the company does not believe it is enforceable.

As long as the Dickey's ruling remains the law, the franchisor should file declaratory judgment action to challenge the state's position. This type of issue can arise with respect to an arbitration issue in several other states, and with respect to any provision the state requires which is contrary to law.

 


Related Article:

DLA Piper's Top 10 Franchise Cases of 2015- Part 1

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