Menu
Blog Banner Image

The Franchise Memorandum

Bathtub Manufacturer's Licensing Arrangement Created an Accidental Franchise, but Court Finds Limited Remedies

Meanwhile, the United States District Court for the Southern District of New York held that a license agreement between Safe Step Walk In Tub and CKH Industries created an accidental franchise, and therefore partially denied Safe Step's motion to dismiss CKH's claims. Safe Step Walk In Tub Co. v. CKH Indus., Inc., 2017 WL 1050126 (S.D.N.Y. Mar. 17, 2017). Under both the FTC's "Franchise Rule" and applicable state laws, the court found that the following three indicia of a franchise were readily met: (1) the franchisee obtained the right to operate a business or sell or offer goods or services that are associated with a trademark or other commercial symbol provided by the franchisor; (2) the franchisor promised to, or had the right to, exercise significant control or provide significant assistance in the operation of the business; and (3) the franchisee was required to pay the franchisor a fee. In considering those elements, the court noted that Safe Step had licensed CKH the use of its trademark; that Safe Step exerted control over CKH's business through minimum sales requirements, a marketing plan, training requirements, and reporting requirements; and that Safe Step charged CKH an initial fee of $5,000.

Nevertheless, the court further determined that franchise laws provided only a limited basis for recovery. It looked to the structure of the parties' contractual arrangement— which included numerous regional agreements—to determine which franchise laws should apply. The court acknowledged that because the federal Franchise Rule does not provide a private right of action, CKH could not bring a claim against Safe Step for violation of its disclosure obligations under federal law. CKH argued that the regional agreements also implicated state franchise laws, including those of New Jersey and Rhode Island, which contain "Little FTC Acts" that do grant a private right of action. The court concluded, however, that most of CKH's claims lacked merit. It observed that a threat of harm to consumers was necessary to trigger CKH's rights under the Little FTC Acts. Characterizing Safe Step's violation of its disclosure obligations under state and federal law as a private contractual matter between the parties, the court found no threat to consumers and therefore dismissed those claims. But the court allowed CKH's claims under state franchise relationship laws relating to wrongful termination or nonrenewal to proceed.

Email LinkedIn Twitter Facebook

The information contained in this post is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop GPM shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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. 

To subscribe to monthly emails for The Franchise Memorandum, please click here

Topics

Archives

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

Blog Authors