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The Franchise Memorandum

Posts from June 2010 - Issue 131.

In Native New Yorker Franchising, Inc. v. Shabaz, Inc., 2010 U.S. Dist. LEXIS 50065 (D. Ariz. April 29, 2010), the franchisor of Native New Yorker restaurants filed a preliminary injunction motion against a former franchisee for its continued operation of the restaurant and refusal to transfer the restaurant’s telephone number back to the franchisor. By the time the motion was heard, the former franchisee claimed that the motion was moot because it had ceased operating and was on the brink of bankruptcy. Injunctions, however, are only moot to the extent that it can be shown “that ...

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Posted in International

On June 3, 2010, the Australian federal government released new amendments to the Franchising Code of Conduct. The changes will take effect July 1, 2010. Some significant changes that franchisors need to be aware of include the requirement to:  (1) inform franchisees, at least six months prior to the end of the franchise agreement, of the franchisor's decision regarding the renewal of the franchise agreement; (2) disclose all payments that a franchisee may be required to make to third parties, where the expenditure is within the knowledge or control of, or is reasonably foreseeable ...

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Taking a broad view of the scope of the California Franchise Relations Act (CFRA), the California Court of Appeal in T-Bird Nevada LLC, et. al. v. Outback Steakhouse, Inc., et al., 2010 Cal. App. Unpub. LEXIS 3610 (Cal. Ct. App. May 17, 2010), voided a Florida forum selection clause in a borrower agreement between Outback Steakhouse and a California developer. The parties had entered into an arrangement under which T-Bird signed off on a multi-million dollar loan to fund Outback’s expansion into California. T-Bird’s owner set up separate companies to act as franchisees for each ...

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In Passport Health, Inc. v. Travel Med, Inc., et. al., 2010 U.S. Dist. LEXIS 46210 (E.D. Cal., May 11, 2010), a California federal court granted a franchisor’s motion to dismiss the franchisee’s claims for breach of the franchise agreement, but refused to dismiss its claims for the franchisor’s breach of the covenant of good faith and fair dealing. The franchisee claimed that the franchisor breached the franchise agreement, in part, by failing to provide “training, marketing, management methods, procedures, and materials,” by providing “flawed and defective ...

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Posted in Trademarks

A federal bankruptcy court has held that continued use of a franchisor’s trademark as part of a domain name after termination was trademark infringement. In re Gharbi, 21 Real Estate LLC v. Gharbi, 2010 Bankr. LEXIS 1247 (Bankr. W.D. Tex. April 19, 2010). The defendant, a former franchisee of the Century 21 real estate franchise system, continued to use domain names that included the mark CENTURY 21 on various Web sites after termination and featured the mark itself prominently on the home page of another Web site. The court granted summary judgment to the franchisor on the issue of ...

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A Florida federal court has dismissed the claim of the National Franchisee Association that Burger King Corporation lacks contractual power to set maximum prices for its franchisees, but has allowed the association to pursue its alternative claim that the exercise of that power to put the double cheeseburger on the chain’s dollar menu violates the duty of good faith and fair dealing. National Franchisee Association v. Burger King Corp., 2010 U.S. Dist. LEXIS 50721 (S.D. Fla. May 20, 2010). The NFA had sought a declaratory judgment that the franchisor does not have authority under ...

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Posted in Terminations

In Luxottica Retail North America, Inc. v. Stonybrook Ventures, Inc., 2010 U.S. Dist. LEXIS 46265 (M.D. Fla. May 11, 2010), Luxottica was unsuccessful in seeking summary judgment on a collection action against a terminated franchisee. Luxottica, which previously owned Lens Crafters stores, had acquired the Pearle Vision franchise system shortly after the defendants entered into a franchise agreement to open a Pearle Vision store. In response to Luxottica’s motion for summary judgment on its damages claims under the franchise agreement, the defendants argued that they had ...

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Posted in Terminations

A Georgia federal court issued its opinion last month in Dunkin’ Donuts Restaurants LLC v. Sandip, Inc., 2010 LEXIS 43484 (N.D. Ga. May 3, 2010), granting franchisor Dunkin’ summary judgment. (Gray Plant Mooty represented Dunkin’ in the case.) In the decision, the court held that defendants had breached their two franchise agreements by failing to remodel their shops, participate in mandatory programs, attend required training, and prepare immigration forms for new employees. While the court found that defendants had alleged that they attended all required training ...

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Posted in RICO

An Ohio federal court ruled June 4 that a franchisee’s claims under federal racketeering law must be dismissed for failure to plead the existence of an illegal “enterprise.”  The case is Arnold v. Petland, Inc., 2010 U.S. Dist. LEXIS (S.D. Ohio June 4, 2010). Federal RICO claims, to be viable, must include the presence of an enterprise separate and distinct from the defendant itself. The complaint in this case did not define a separate enterprise, but in opposition to the motion to dismiss, the plaintiff argued that the franchisees in the system may serve as the requisite ...

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In Coriatt-Gaubil et al. v. Roche Bobois Int’l, S.A. et al., 2010 U.S. Dist. LEXIS 48880 (D. Mass. May 18, 2010), a Massachusetts federal court denied a motion of the plaintiff, who was a 50 percent shareholder of several corporate franchisees, for a preliminary injunction to enjoin the franchisor, who was the other shareholder via an affiliate, from terminating the parties’ franchise agreements. The court found that the plaintiff and corporate franchisees had not established a likelihood of success on the merits on their claim for breach of the implied covenant of good faith and ...

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Posted in Bankruptcy

In In re Tornado Pizza, LLC, 2010 Bankr. LEXIS 1108 (Bankr. D. Kan. Apr. 9, 2010), and companion case In re Team KC, Inc., 2010 Bankr. LEXIS 1107 (Bankr. D. Kan., Apr. 9, 2010), a Kansas federal bankruptcy court granted franchisor Domino’s Pizza Franchising, LLC relief from the automatic stay to enforce the post-termination obligations of the former franchisee in bankruptcy. The bankruptcy court ruled that the franchise agreements, which were validly terminated pre-bankruptcy, were not executory contracts that could be assumed and assigned in the bankruptcy case. The ...

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The summary judgment in Awuah v. Coverall North America (summarized in Issue 130 of The GPMemorandum) did not result in a victory at trial for the plaintiffs. That much-discussed March ruling by a Massachusetts federal court judge was that Coverall, a janitorial services franchisor, could not classify its franchisees as independent contractors instead of employees. Less than two months later, however, on the eve of trial, the same judge dismissed the claims of the “franchisee/employees” for lack of evidence of damages suffered as a result of any misclassification. The case ...

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Posted in Noncompetes

A Texas-based franchisor of building cleaning and maintenance services and supplies  won a temporary restraining order to prevent its Minnesota master franchisee—and related persons and entities—from operating a competing business. Bonus of America, Inc. v. Angel Falls Services, L.L.C., et al., No. 0:10-cv-02111-DSD-FLN (D. Minn. May 28, 2010). The defendants had also formed and been conducting business in Minnesota through another entity, which led the franchisor to file suit in federal court in Minnesota. (Gray Plant Mooty represents the franchisor in this action.)

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Posted in Arbitration

In Jewelry Repair Enterprises, Inc. v. Ajani, 2010 LEXIS 61651 (Fla. Ct. App. May 5, 2010), the Florida Court of Appeals upheld a clause in a franchise agreement excepting noncompetition issues from binding arbitration. The case supports the proposition that contracts will be interpreted according to their plain meaning and that exceptions to binding arbitration provisions will be upheld. In this case, the franchisor terminated the franchisees and sued them for breach of contract after learning the franchisees were operating competing businesses. The franchisees moved to ...

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Posted in Identity Theft

As we previously discussed in Issue Nos. 115 and 122 of The GPMemorandum, the new federal “Red Flags Rule” requires certain businesses to establish written programs to detect, identify, and respond to signs of possible identity theft. The rule is aimed at reducing identity theft by making it more difficult for thieves to use stolen identity information to purchase goods or services. Enforcement was originally set to begin in 2008, but has now been delayed until December 31, 2010, although enforcement may begin earlier depending on the effective date of ...

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In LaQuinta Corp. v. Heartland Properties, LLC, 2010 U.S. App. LEXIS 8757 (6th Cir. Apr. 28, 2010), the Sixth Circuit affirmed a grant of summary judgment in favor of the franchisor in connection with the refusal by a franchisee of the Baymont Inns franchise system to implement a new reservation system. (Plaintiff La Quinta is the corporate parent of Baymont). Under the franchise agreement, the defendant franchisee was required to participate in, and bear the costs of, whatever reservation system Baymont established in “its sole discretion.”  Two years before the franchise ...

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In an interesting decision in a case brought against a franchisor and its subfranchisor, the Washington Court of Appeals ruled last week that Washington’s franchise disclosure law does not require a subfranchisor to register its offering documents if the franchisor itself has already registered those same documents. Something Sweet, LLC v. Nick-N-Willy’s Franchise Co., 2010 Wash. App. LEXIS 1135 (Wash App. June 1, 2010). While the Washington Franchise Investment Protection Act does apply to disclosure documents registered by a subfranchisor, the court held that the ...

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Posted in Antitrust

Late last month, the United States Supreme Court issued its decision in American Needle, Inc. v. National Football League, et al., 2010 LEXIS 4166 (U.S. May 24, 2010), which was previewed in Issue 127 of The GPMemorandum. In a unanimous opinion authored by the retiring Justice Stevens, the court rejected the argument of the National Football League and its 32 teams that they are categorically immune from Sherman Act Section 1 liability because they operate as a single economic unit. The Supreme Court held that the teams function separately, with “independent centers of ...

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Posted in Noncompetes

In Doyle v. Nutrilawn U.S., Inc., 2010 U.S. Dist. LEXIS 48613 (W.D. Wash. May 17, 2010), a Washington federal court concluded that language in a noncompete clause making it applicable “following the termination of this Agreement for any reason whatsoever” applied upon the agreement’s expiration. The franchisee argued that the covenant only applied if the agreement was terminated, and that termination and expiration should be treated differently. After reviewing “the franchise agreement as a whole” and “giving its terms their ordinary meaning,” the court ...

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About this Publication

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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