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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.

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