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The Franchise Memorandum

Posts from May 2010 - Issue 130.
Posted in Arbitration

After juggling three separate federal and state statutes, the Arkansas Supreme Court determined last month that a statutory franchise claim is subject to arbitration.  In Gruma Corp. v. Morrison, 2010 Ark. LEXIS 182 (Ark. April 1, 2010), the parties had entered into a distribution agreement that contained a clause requiring the arbitration of all claims relating to the agreement.  After Gruma terminated the agreement, Morrison sued in Arkansas state court alleging various tort claims and violations of the Arkansas Franchise Practices Act (AFPA). In response, Gruma moved to compel ...

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Posted in Encroachment

In Black Angus Holdings, LLC v. Back Yard Burgers, Inc. (In re Black Angus Holdings, LLC), 2010 Bankr. LEXIS 995 (Bankr. D. Kan. Mar. 24, 2010), a Kansas federal bankruptcy court declined to dismiss a franchisee’s breach of contract claim arising out of the opening of a restaurant in an area that overlapped with the franchisee’s protected area.  The franchise agreement between the parties prevented the franchisor from establishing another restaurant within an “exclusive radius” of two miles from the franchisee’s restaurant. After the franchisor established a new ...

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Posted in Class Actions

In Moua v. Jani-King of Minnesota, Inc, 08-4942 (D. Minn. Mar. 12, 2010), a Minnesota federal court denied a motion for class certification filed by franchisees who alleged that Jani-King falsely promised them a certain amount of monthly business while knowing that the promised amount was unattainable. The franchisees further alleged that the business accounts Jani-King offered to them were unprofitable and that Jani-King took accounts away from them.  The court found that the claims required individualized determinations of Jani-King's conduct vis-a-vis each franchisee.

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In Qdoba Rest. Corp. v. Taylors, LLC, 2010 U.S. Dist. LEXIS 27394 (D. Colo. Mar. 23, 2010), a Colorado federal court granted summary judgment to Qdoba on a multi-unit franchisee’s allegations of fraud in the inducement. The fraud allegations were made in connection with affirmative defenses and counterclaims to Qdoba’s breach of contract suit for the closure of several restaurants. The franchisee alleged that Qdoba committed fraud when: (a) an agent of Qdoba provided the franchisee with a map of projected sales, which showed potential sales ranges based on site ...

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Posted in Arbitration

 In Reid v. SuperShuttle Int’l Inc., 2010 U.S. Dist. LEXIS 26831 (E.D.N.Y.  Mar. 22, 2010), a New York federal court granted a franchisor’s motion to compel arbitration and, in doing so, upheld a waiver in the arbitration clause of the affected plaintiffs’ rights to bring class action claims. A group of SuperShuttle franchisees had brought a class action suit, claiming that they were employees of SuperShuttle rather than franchisees and that they were owed wages and employee benefits under various federal and New York state laws. SuperShuttle filed a motion to compel individual ...

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A Connecticut federal court granted a franchisor’s motion to strike a jury demand in Sherman Street Associates, LLC, et al. v. JTH Tax, Inc., et al.  2010 LEXIS 29402 (D. Conn. Mar. 22, 2010).  Although the franchise agreements contained a jury waiver provision, the franchisee demanded a jury trial on its claims under the Connecticut Franchise Act and for tortious interference. 

The franchisor moved to strike the jury demand, pointing to the jury waiver provisions in the franchise agreements, which the franchisee contended were not enforceable under the CFA. 

The court found that ...

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Posted in Choice of Law

In Red Lion Hotels Franchising, Inc. v. MAK LLC, 2010 U.S. Dist. LEXIS 23633 (E.D. Wash. Mar. 15, 2010), the court held that the Washington Franchise Investment Protection Act (“FIPA”) did not apply to a Washington-based franchisor in its dispute with a California franchisee, even though the franchise agreement contained a Washington choice of law provision. Franchisor Red Lion sued the franchisee for breaching the franchise agreement by failing to comply with a mandatory property improvement plan. The franchisee argued that the termination was improper and ...

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Posted in Trademarks

The United States Court of Appeals for the Eighth Circuit has affirmed the rejection of a franchisee’s claims for breach of contract and violation of the South Dakota Franchise Act in an interesting case involving trademark rights.  Pinnacle Pizza Co., Inc. v. Little Caesar Enterprises, Inc., 2010 U.S. App. Lexis 5801 (8th Cir. Mar. 22, 2010).  A Little Caesar franchisee had brought suit over use of the HOT-N-READY trademark.  The franchisee alleged that it originated the phrase “Hot-N-Ready” in advertising ready-to-pick-up pizzas, and that the later adoption of the phrase by ...

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A Missouri federal court denied a motion to dismiss for improper venue filed by a group of franchisees , finding the franchisor had properly filed in Missouri, where its home offices are based.  The case is Hardee’s Food Systems, Inc. v. Hallbeck, et al., No. 4:09-cv-664 (E.D. Mo. Mar. 22, 2010).  Gray Plant Mooty assisted Hardee’s in opposing the motion. Hardee’s sued for breach of contract and of personal guarantees after the franchisees, all residents of Wisconsin, closed one of their restaurants in Ottawa, Illinois, before the expiration of its term.  The franchisees filed a ...

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In Braucher v. Swagat Group, LLC, 2010 U.S. Dist. LEXIS 26294 (C.D. Ill. Mar. 19, 2010), the court granted summary judgment to Choice Hotels on a claim brought by a guest of one of its franchised hotels.  The plaintiffs had visited a franchised hotel at which they contracted Legionnaires disease from the pool, which proved fatal to one of the named plaintiffs.  The plaintiffs brought suit against both the franchisee and the franchisor, claiming that the franchisor was negligent and was liable under the doctrine of res ipsa loquitur, and that the franchisee acted as the franchisor’s ...

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Posted in Discrimination

In Halloum v. DFO, Inc., 2010 Cal. App. Unpub. Lexis 2558 (Cal. Ct. App. Apr. 8, 2010), a California Court of Appeal considered various claims by a franchise applicant against DFO, Inc., the franchisor for Denny’s restaurants, including claims of unlawful race and national origin discrimination. The plaintiff, a Palestinian Arab, claimed Denny’s was motivated to deny his franchise application by his race and ethnicity following the events of September 11, 2001.  The court first affirmed the trial court’s dismissal of claims for breach of an oral contract, promissory ...

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Posted in Bankruptcy

In In re All American Properties, Inc., 2010 Bankr. LEXIS 687 (Bankr. M.D. Pa. Mar. 10, 2010), a franchisor sought to annul the automatic stay following a former franchisee’s bankruptcy filing. Franchisor Petro Franchise Systems had sued its franchisee for trademark infringement.  Petro obtained an injunction prohibiting the franchisee from using Petro’s trademarks and brands.  The franchisee ignored the injunction order and continued to operate the infringing business. 

After a hearing on an order to show cause for the franchisee’s non-compliance with its orders, the ...

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In a ruling that already has sent shock waves through the franchisor community, a Massachusetts federal judge ruled in March that Coverall, a janitorial services franchisor, could not classify its franchisees as independent contractors.  Awuah v. Coverall North America, 2010 U.S. Dist. LEXIS (D. Mass. Mar. 23, 2010). Instead, in granting the franchisees’ motion for partial summary judgment, the court found Coverall’s franchisees must be classified as employees.  The opinion hinged on a single prong of Massachusetts’s employee classification test—whether or not the ...

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Posted in Arbitration

The United States Supreme Court likely ignited an intense battle in state and federal courts around the country with its decision last week that a class action arbitration may not be imposed on a party who has not agreed to it.  In Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (U.S. April 27, 2010), a 5-3 majority reversed the Second Circuit’s decision that had upheld an arbitration panel decision to allow a price-fixing case to proceed on a class basis in arbitration.  (Justice Sotomayor, a former judge on the Second Circuit, did not participate)  The specific issue addressed ...

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Posted in Arbitration

In Bapu Corp. v. Choice Hotels Int’l, Inc., 2010 U.S. App. LEXIS 5540 (3d Cir. Mar. 16, 2010), Choice Hotels terminated its franchisee after it failed to renovate. Early in arbitration proceedings the franchisee contended that the termination was time-barred under Maryland law and the limitations period in the franchise agreement. The arbitrator addressed this issue preliminarily, ruling that the issue was premature, and allowed the franchisee to renew its defense later. The franchisee stopped participating in the arbitration and, instead, tried to challenge the ...

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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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