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The Franchise Memorandum

Posts from February 2009 - Issue 116.
Posted in Arbitration

In Doctor’s Associates, Inc. v. Nat, 2009 WL 162680 (Cal. App. 2 Dist. Jan. 26, 2009), the California Court of Appeals upheld a lower court ruling affirming an arbitrator’s decision that a franchisor breached its obligations to assist a Subway franchisee in the sale of his franchises. Franchisor Doctor’s Associates, Inc. (“DAI”) had originally filed an arbitration seeking to terminate the franchisee’s two locations in Southern California for underreporting of sales and other breaches of the franchise agreements. During the course of this initial arbitration, the ...

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Posted in Arbitration

In IJL Dominicana S.A. v. It’s Just Lunch Int’l, LLC, 2009 WL 305187 (C.D. Cal. Feb. 6, 2009), the United States District Court for the Central District of California this month enforced an arbitration clause in a franchise agreement and granted in part a franchisor’s motion to compel arbitration, but severed a significant portion of the clause on unconscionability grounds in accordance with the Ninth Circuit Nagrampa decision, which continues to have broad implications for franchisors.  

In the new case, the plaintiff franchisees filed suit against the ...

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Posted in Terminations

In Baskin-Robbins Franchising LLC v. Mihranian, No. 2:08-cv-07022 (C.D. Cal. Jan. 23, 2009), a California federal district court last month denied a motion by franchisees to dismiss their franchisor’s complaint and held that Baskin-Robbins’ immediate termination of the franchise did not violate the California Franchise Relations Act (“CFRA”). Gray Plant Mooty represented the franchisor in this case. Baskin-Robbins had immediately terminated after finding the franchisees were using and selling non-fat frozen yogurt at their ice cream shop, a product specifically ...

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Posted in Class Actions

A plaintiff alleging access violations at approximately 90 Burger King restaurants in California will be allowed to proceed with the case under a decision issued last week.  Castaneda v. Burger King Corp., 2009 WL 398489 (N.D. Cal. Feb. 18, 2009). The plaintiff’s legal standing and specificity of allegations survived the defendant’s motion to dismiss on the pleadings, according to the decision of the United States District Court for the Northern District of California. This is the first reported major case against a franchisor under the Americans with Disabilities Act ...

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The United States District Court District for the District of Utah has granted a franchisor’s preliminary injunction motion to enjoin a derogatory website, even though the actual website operator had not signed the franchise agreement enforced by the court.  Homeworx Franchising, LLC v. Meadows, 2009 WL 211918 (D. Utah Jan. 26, 2009). The franchise agreement involved in this case precluded any unauthorized use of the franchisor’s trademarks and any business or marketing practice injurious to the franchisor’s business and goodwill associated with franchisor’s marks.

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Posted in Terminations

In what will likely become one of the most quoted franchise opinions of the year, a Colorado federal district judge has ruled against Quizno’s in a case the franchisor brought against a terminated former franchisee for injunctive relief and breach of contract. Quizno’s Franchising II LLC v. Zig Zag Rest. Group, LLC, Case No. 06CV10765, Bus. Franchise Guide (CCH) ¶14,046 (D. Colo. Dec. 31, 2008).  The court found Quiznos’ “whole charade of ‘terminating’ and ‘defaulting’ franchisees who failed [a] field test was just that—a charade—driven not by Quiznos’ ...

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Posted in Class Actions

In Moua et al. v. Jani-King of Minnesota, Inc., 2009 WL 212425 (D. Minn. Jan. 27, 2009), the United States District Court for the District of Minnesota denied a group of class action plaintiffs’ motion to remand the case to state court, finding that federal jurisdiction was proper under the Class Action Fairness Act (CAFA). The plaintiffs, a group of franchisees of the Jani-King cleaning and janitorial system, initially brought suit in Minnesota state court against their franchisor, claiming Jani-King did not have enough cleaning and janitorial accounts to provide the minimum ...

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Posted in Arbitration

In Ahluwalia v. QFA Royalties, LLC, 2009 WL 262466 (Colo. App. Feb. 5, 2009), a franchisee appealed a district court decision affirming an arbitration award of over $600,000 against him in a dispute with Quizno’s. The franchisee claimed, first, that the arbitration award was invalid because two of the three franchise agreements in dispute did not contain arbitration provisions and, second, that the district court erred in applying the “manifest disregard” standard to the arbitrator’s decision. The franchisee lost on both counts.

The court found persuasive authority to ...

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In State of Nebraska v. Orr, 2009 WL 212966 (Neb. Jan. 30, 2009), the Nebraska Supreme Court affirmed a disciplinary finding that an attorney violated his oath of office because he failed to provide competent representation to a franchisor.

Orr was engaged to represent a Nebraska start-up franchisor. The lawyer drafted a franchise agreement and disclosure statement, but failed to draft a complete Uniform Franchise Offering Circular. After the franchisor already had sold 21 franchises, it received a request for a UFOC from a prospective franchisee. The attorney then told the ...

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Posted in Arbitration

In Awuah v. Coverall North Am., Inc., 2009 WL 159423 (1st Cir. Jan. 23, 2009), several franchisees filed a class action against the franchisor in Massachusetts federal district court alleging fraud, breach of contract, and violations of various minimum wage, overtime, and consumer protection laws. In response to the lawsuit, the franchisor moved to compel arbitration and stay the pending litigation, based upon arbitration provisions contained in three of the applicable franchise agreements. The franchisees responded that the arbitration clauses were unconscionable and that ...

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The United States District Court for the Eastern District of Louisiana recently issued an opinion in Matthews v. International House of Pancakes, Inc., 2009 WL 211788 (E.D. La. Jan. 23, 2009), that serves as a reminder that franchisors should take care not to establish or control their franchisees’ day-to-day employment policies, practices, or decisions. Two plaintiffs sued various International House of Pancakes franchisor entities, claiming racial discrimination, gender discrimination, and/or sexual harassment by a manager of a restaurant owned by an IHOP franchisee ...

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Posted in Procedure

In a putative class action suit, Bonanno v. Quizno’s Franchise Co., LLC, 2009 WL 137211 (D. Colo. Jan. 20, 2009), the plaintiffs recently brought a motion to compel the franchisor’s chairman and ex-CEO to answer deposition questions concerning his personal financial gain from a 2006 transaction in which an affiliate of JP Morgan acquired 49% of Quizno’s stock. The plaintiffs argued that the testimony would show the motive behind and the fruits of “Quizno’s fraudulent scheme to turn its owners . . . into billionaires by selling the company after inflating its value by ...

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Posted in Noncompetes

One year after issuing its original opinion, the Ninth Circuit has reaffirmed its order vacating that portion of an arbitrator’s award that enforced a broad covenant against competition in the franchise context. In Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277 (9th Cir. Jan. 29, 2009), the Ninth Circuit considered again its previous decision in light of an order from the United States Supreme Court vacating its prior opinion.

As previously reported in Issue 100 of The GPMemorandum, the arbitrator in this dispute enforced a broad in-term covenant against competition ...

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Posted in Terminations

In a case of first impression under Pennsylvania law, that state’s highest court has held that there are some situations in which a franchisor can terminate its franchisee without any right to cure even if a franchise agreement provides otherwise. LJL Transportation, Inc. v. Pilot Air Freight Corp., 2009 WL 144561 (Pa. Jan. 22, 2009). The egregious circumstances in this case were that the franchisee in bad faith was diverting business to a competitor of the franchisor. In that situation, the Pennsylvania court held, immediate termination was warranted because the breach “was ...

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In Guesthouse International Franchise Systems, Inc. v. British American Properties MacArthur Inn, LLC, 2009 WL 278214 (M.D. Tenn. Feb. 5, 2009), a hotel franchisor terminated its defaulting franchisee and then sued to collect past due royalties, reservation fees, and liquidated damages due as a result of the early termination. In response, the franchisee asserted affirmative defenses (doubling as counterclaims) that Guesthouse violated the Tennessee Consumer Protection Act (TCPA) and fraudulently induced the franchisee to sign franchise agreement. The franchisee ...

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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