A Whopper of a Decision: Burger King Franchisee Association Has Standing

Eric H. Karp

David J. Meretta

From time time DDIFO is pleased to present Guest Commentary from valued contributors. The following is an Analysis of  a recent 11th District Court Decisions regarding Burger King written and submitted by Eric Karp and David J. Meretta of 

Witmer, Karp, Warner & Ryan LLP  

22 Batterymarch Street,  Boston, MA 02109 Tel: 617-423-7250

Following the Supreme Court’s holding in State Oil Co. v. Khan, 522 U.S. 3 (1997) that maximum price fixing was no longer a per se antitrust violation, some franchisors have imposed deep discounting on their  franchisees through resale price caps.  Among the better known examples of this are the “value menu” pricing systems adopted by many fast food franchisors in which all designated  ”value” items must be sold at or below a specified price.

In certain instances, franchisees have embraced such maximum pricing caps, particularly where those schemes have maintained or actually increased the franchisees’ bottom line profitability.  Where pricing restrictions are viewed by franchisees as harmful to their profitability, however, substantial system discord and even litigation can ensue.

A fascinating recent example of the latter scenario can be found in National Franchisee Association v. Burger King Corp., 2010 WL 2102993 (S.D.Fla. 2010), which concerns Burger King’s system-wide $1 double-cheeseburger (DCB) promotion.  This case epitomizes the collision between the divergent interests of franchisors, for which the top-line revenue of the franchisees is paramount, and franchisees, who live off the bottom line.

The DCB promotion has long been the subject of heated debate between Burger King and its franchisees, which maintain that because it costs more than $1 to produce the DCB – something that is not true of any other item previously placed on the Value Menu – the promotion requires them to sell the DCB at a loss and could lead to bankruptcy of some franchisees.  The franchisees were also mindful that Burger King’s marketing of the DCB promotion was being funded by the franchisees’ advertising contributions.  Burger King’s decision to implement the promotion in the fall of 2009 marked the first time that it had imposed a maximum price on its franchisees without obtaining their majority consent, the franchise community having twice voted against it. 

In November 2009 the National Franchisee Association (NFA), which consists of approximately 83% of all Burger King franchisees in the United States and Canada, filed suit against Burger King in federal court in Florida.  The NFA alleges that (1) Burger King does not have the right to set maximum prices under the franchise agreement, and (2) the DCB promotion violates Burger King’s duty of good faith under both the express terms of the franchise agreement and the implied covenant of good faith and fair dealing under Florida law.

In response, Burger King moved to dismiss the complaint, challenging the NFA’s standing to sue on behalf of individual Burger King franchisees, and arguing that the Eleventh Circuit had previously confirmed Burger King’s authority to set maximum prices under the franchise agreement.

While the court agreed that it was bound to follow the previous Eleventh Circuit determination that Burger King does have the right to set maximum prices under the franchise agreement, the court declined to deny the NFA standing to bring its action at the current stage of the litigation, and it ordered that the case proceed with respect to the NFA’s claim that Burger King’s decision to impose the DCB promotion violated its contractual or implied duty of good faith.  Both aspects of the court’s decision are significant.

In reaching its decision, the court noted the longstanding principle that an association has standing to sue on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.  In this case, Burger King challenged the NFA’s associational standing with respect to the first and third elements.

The court rejected Burger King’s arguments that the NFA’s standing is contingent upon (i) all Burger King franchisees being members of the NFA, and (ii) the identification of an individual franchisee that has standing.  Observing that the NFA brought the action “on behalf of its members and on behalf of a class comprised of all the Franchisees”, the court found that, at the current stage, the action is only on behalf of NFA’s franchisee members and would only be extended to all Burger King franchisees should the NFA succeed in certifying a class.  The court likewise found that the allegation that “at least one” NFA member would be harmed by the DCB promotion satisfied the first element of associational standing.

With respect to the third element of associational standing, the NFA maintained that the participation of individual franchisees in the lawsuit is unnecessary, because the NFA could prove bad faith through Burger King’s own internal documents and data, and through expert testimony.  The court agreed and concluded that the NFA had sufficiently alleged associational standing at this early stage of the litigation.  The court cautioned, however, that because of the nature of the NFA’s claims, it must prove, on a franchisee-wide basis, that Burger King imposed the DCB promotion in bad faith, and “it remains to be seen” whether the NFA can prove such bad faith “without resort to individual determinations”.

Burger King’s duty of good faith to its franchisees is both contractual and implied by law.  The franchise agreement provides that Burger King can only make changes and additions to its operating system which Burger King “in the good faith exercise of its judgment believes to be desirable and reasonably necessary . . .”  Toward this end, under Florida law, the implied covenant of good faith and fair dealing prevents a party from capriciously exercising discretion accorded it under the contract “so as to thwart the contracting parties’ reasonable expectations.”

Addressing the NFA’s claim for breach of the duty of good faith and fair dealing, the court found that, construed in a light most favorable to the NFA, its allegations plausibly state a claim that Burger King breached its duty of good faith by setting the maximum price at $1, forcing the franchisees to sell the DCB at a loss. The court also noted the NFA’s allegation that Burger King has admitted that the sale of the DCB at $1 could lead to bankruptcy of its franchisees.

In our view, in addition to demonstrating the perils of implementing key system changes in the absence of franchisee buy-in, this case should serve as a lesson to franchisors that this kind of overreaching rarely survives legal challenge.  Can it really be good faith to require that franchisees sell a key product at a loss?  Would Burger King, if it was a chain comprised solely of company owned outlets, impose this promotion on itself?  Toward this end, we note that in April 2010 Burger King removed the DCB from its $1 value menu and re-priced it at $1.29.  This step has not eliminated the controversy, however, as Burger King now requires the sale for $1 of the “Buck Double” – which differs from the DCB only in that it has a single slice of cheese instead of two – a product that, according to the franchisees, still costs more than $1 to produce.

The case also serves as validation of franchisee associations in general and confirms, contrary to the statements of some franchisor advocates, that the implied covenant of good faith and fair dealing is very much alive and well.

Snow Removal Required

SJC KILLS LOOPHOLE IN CLEANUP LAW

Denise Lavoie of THE ASSOCIATED PRESS reports in the Worcester Telegram that property owners may be held liable for snow-related injuries whether the accumulations are caused by Mother Nature or by snowplows, the state’s highest court ruled yesterday in a far-reaching decision that lawyers said could result in a wave of personal injury lawsuits.

In its ruling, the Supreme Judicial Court eliminated a long-held distinction in state law between “natural” and “unnatural” accumulations of snow and ice.

For more than a century, case law in Massachusetts held that property owners who failed to remove natural accumulations could not be held liable. But the court found that owners have a duty to keep property reasonably safe.

“The biggest effect is that people who have suffered injuries as a result of the negligence of the landowner will be able to seek compensation, even in cases where the snow or ice accumulated naturally,” said David White, a Boston personal injury lawyer.

“The other effect is that landowners will probably be more cautious now and treat their ice and snow,” White said.

The court ruled in the case of Emanuel Papadopoulos of Peabody, who broke his pelvis in 2002 when he slipped and fell on a patch of ice in the parking lot of the Liberty Tree Mall in Danvers in front of a Target department store.

The parking lot had been cleared, but a pile of snow had been plowed onto a median strip.

After leaving the store to return to his car, Papadopoulos slipped on ice on the pavement.

A judge found that whether it was a chunk of ice that had fallen from the median or a patch of refrozen runoff from the snow pile, the ice that caused his fall was a “natural accumulation.”

The judge granted a motion by Target and Weiss Landscaping Co. Inc., the snow removal contractor, to dismiss the lawsuit, citing Massachusetts case law that found that a property owner cannot be held liable for failing to remove natural accumulations.

The Supreme Judicial Court rejected the rationale behind those earlier court rulings — that a natural accumulation of snow or ice is not a defect that a property owner has a duty to repair.

“We now will apply to hazards arising from snow and ice the same obligation that a property owner owes to lawful visitors as to all other hazards: a duty to ‘act as a reasonable person under all of the circumstances including the likelihood of injury to others, the probable seriousness of such injuries, and the burden of reducing or avoiding the risk,’ ” Justice Ralph Gants wrote in the unanimous ruling.

The court said the new rule will apply retroactively to pending lawsuits. It sent the Papadopoulos case back to the lower court to reconsider its ruling dismissing his lawsuit.

Papadopoulos’ lawyer, Emmanuel Papanickolas, praised the ruling, saying it imposes a responsibility on property owners “to make a reasonable effort to remove the snow and the hazards of freezing snow and ice.”

“The jury decides what’s reasonable,” he said. “It’s a great decision for the state of Massachusetts. It’s in the interest of public safety.”

Read more: Worcester Telegram

Krispy Kreme Wins Trademark Claims Against Franchisee

Mark Hamblett reports in the New York Law Journal and published at Law.com that the franchisor Krispy Kreme Doughnut Corp. has won an injunction blocking a delinquent franchisee from operating in New York’s Pennsylvania Station and another location.

A federal judge granted the preliminary injunction to the doughnut maker on the grounds that franchisee Satellite Donuts was behind on its obligations under its agreements with Krispy Kreme and is in violation of the Lanham Act.

Judge Lewis A. Kaplan made that ruling after considering allegations by Krispy Kreme that Satellite was infringing its marks by continuing to operate without authorization and diluting the marks by making substandard doughnuts in Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC, 10 Civ. 4272. Satellite Donuts filed for Chapter 11 bankruptcy and had an automatic stay under §362(a), but the bankruptcy court modified the stay to allow Krispy Kreme to pursue its injunction before Kaplan.

Satellite Donuts entered into a franchise agreement for Penn Station in 2008 and a second agreement for a commissary facility in Baldwin, N.Y., where the Penn Station doughnuts are made, in 2009.

But in a May 12, 2010 letter to Satellite, Krispy Kreme said Satellite had failed to make payments of $310,046. When Satellite principal Alexander McCourt, one of two people who had personally guaranteed the company’s performance, said he had a third party willing to invest in Satellite, he was told by a Krispy Kreme employee that it was “too late in the game.”

Krispy Kreme filed a letter on May 23 telling Satellite to cease and desist, and it terminated the franchise agreements.

Krispy Kreme then sued in the Southern District of New York, where, on May 28, Kaplan granted a temporary restraining order that allowed Krispy Kreme “to have a quality control manager on site” at the franchises at Penn Station and in Baldwin.

Kaplan also ordered the defendants to “comply with all quality control standards set forth in the franchise agreements.”

In his opinion Thursday, Kaplan rejected Satellite’s argument that Krispy Kreme denied it the opportunity to cure the defaults, overstated the amount of the debt and refused to allow it to bring in a new investor.

The judge also called “entirely conclusory and unavailing” Satellite’s claims that the doctrine of unclean hands bars Krispy Kreme from obtaining relief and that the agreements’ noncompetition covenant is void as a matter of “strong public policy against enjoining a person from engaging in one’s chosen profession.”

Kaplan found that Krispy Kreme had easily shown it would suffer irreparable harm if an injunction was not granted.

He noted that Krispy Kreme’s quality control manager had stated that the Penn Station and Baldwin operations were failing to meet “the most basic quality control standards” for Krispy Kreme franchises.

Read more at: Law.com

Pieces of the Puzzle: A Guide to Successful Asset Protection

It’s estimated that 70% of family businesses in the U.S. fail after ownership is transferred from one generation to the next. Historically, Dunkin’ Donuts has attracted operators whose aim is always to pass the business down to their children—and beyond. The challenge of completing that transfer successfully and protecting the family’s assets is complicated by the language written into the Dunkin’ Donuts Franchise Agreement.

 “Dunkin’ owners face a tremendous hurdle,” says Seth Ellis, managing partner of Ellis & Goldberg, P.L. trusts and estate planning firm and a featured speaker at the recent DDIFO members’ meeting in Newark, NJ. “Understanding the intricacies of the Franchise Agreement is the linchpin to ensuring a successful transfer.”

Ellis, along with business colleague Gary Joyal, managing partner of Joyal Capital Management, L.L.C., offered a snapshot of the challenges Dunkin’ franchise owners face protecting their assets particularly in the face of a life event like death, marriage or divorce.

“The majority of Dunkin’ franchise owners have a substantial portion of their wealth tied up in their stores and corresponding real estate, so we have to be sure those assets are protected in a way that won’t trigger a default in the Franchise Agreement” says Joyal who has been working with Dunkin’ Donuts franchise owners for 20 years.”

According to Joyal and Ellis, one of the most common challenges a franchise owner and his family face when establishing an estate plan is ensuring their team of lawyers, bankers, accountants and insurance brokers are in synch and recognize how their plans will integrate with the Franchise Agreement.

During their 45 minute presentation at the Newark Sheraton, titled, “Pieces of the Puzzle: Plan Integration”, Ellis and Joyal offered the example of two brothers who partnered to buy and run three Dunkin’ shops. Each has children; one of the brothers is in his second marriage. The situation becomes acrimonious when one brother dies and a squabble over ownership ensues among the surviving family members. It’s then further complicated by the terms set forth in the Franchise Agreement.

The moral of the story, according to Ellis and Joyal is that without proper planning from a team that is intimately familiar with Dunkin’ Donuts franchising, families face the possibility of lost assets, damaged family relationships and exorbitant legal bills—as well as potentially losing the right to continue operating any Dunkin’ Donuts shop.

“The typical response we get when we first meet with a Dunkin’ family is that they are all set—they have their documents ready and their team in place. But, after closer examination, we often see that their team is fragmented and the family has tremendous exposure to risk,” says Joyal.

Ellis says families should have their estate documents reviewed often because small changes can impact how the plans will operate in the event of a life change.

“I haven’t met a franchise owner whose shops and holdings remain stagnant. As a result they all need constant review and analysis.”

Over the last 15 years Ellis and Joyal have worked with close to 500 Dunkin’ families to create individually crafted plans. Often times, they work closely with the law firm of Lisa and Sousa, which has represented a majority of New England-based franchise owners. Many of these clients are Dunkin’ pioneers, who have been in the system for 40 years and have successfully engineered succession plans that not only protect assets, but also protect family relationships.

“We got great feedback on our Newark presentation,” Joyal says. “I think it was eye opening for those owners who haven’t thought about how to integrate the team that’s working on their behalf.”

Judge Grants Fraud Trial Against Dunkin’, Kainos

Janet Sparks writes at Blue MauMau that after Patrick LaFontaine, professional hockey player and inductee in the Hockey Hall of Fame, filed a lawsuit against Dunkin’ Brands and the principals of its bankrupted franchisee Kainos Partners Holding Company, a Nassau judge ruled last week that fraud claims can now move forward against the defendants.

Although not named in the lawsuit, Dunkin’ executive chairman of the board Jon L. Luther is at the center of the litigation as LaFontaine’s former neighbor and friend, and board member of his Companions In Courage non-profit charitable foundation for children.

The lawsuit filed under LaFontaine’s company High Tides, LLC, alleges Kainos board members used fraudulent  misrepresentations, omissions and concealment of facts to induce his company to invest in their franchise operation. Kainos was formed in November 2006 to create a long-term business alliance with Dunkin’ Brands. It was initially capitalized by its founding members for $6 million. The company purchased the rights to develop Dunkin’ Donut/Baskin-Robbins combo retail shops in the greater Buffalo, New York area and elsewhere.

LaFontaine’s relationship with the Kainos principals began at a golf tournament in 2005, where Luther first introduced him. At that time, and in the context of discussing a possible equity investment by the hockey player, LaFontaine learned that Kainos was working with Luther to develop Dunkin’ shops, and that the Dunkin’ CEO believed that LaFontaine’s status as a former Buffalo Sabres hockey icon would assist Kainos in developing and growing the Buffalo market.

In 2006, Thomas H. Lee Partners LP, Bain Capital Partners and the Carlyle Group purchased Dunkin’ Donuts for $2.43 billion. According to the lawsuit, as part of this purchase, and through a complicated securitized structure, “Dunkin’ Brands burdened itself with secured debt estimated to be in excess of one billion dollars—a debt that needs to be retired.” It further states that “on information and belief, Dunkin’ is also preparing an initial public offering, whereby it hopes to offer common stock to the general public for the first time, for the benefit of itself and its investors.”

After consulting with Luther again in 2007, LaFontaine claims he was induced to invest in Kainos through an initial investment of $500,000, thereby becoming the owner of 500 shares. Later that year, the equity holders of Kainos, including High Tides, invested an additional $25 million. LaFontaine asserts that he relied on Luther’s advice, which earned his trust in Luther and Dunkin’ Brands. In press releases, Luther was quoted recognizing Kainos as “Dunkin’ Brands Rising Star” at an awards banquet at John F. Kennedy Presidential Library and Museum in Boston.

Read more at:  Blue MauMau

Court: Burger King Can Set Prices

Burger King Holdings Inc. won dismissal of part of a lawsuit brought by franchisees over the $1 double cheeseburger promotion, but a Miami court will hear arguments on whether the company acted inappropriately in implementing the deal.

On Thursday, U.S. District Judge K. Michael Moore ruled that Burger King can set maximum prices that franchisees must follow, a victory for the parent company.

But the franchisees said they scored some wins as well.

The court will now hear arguments on the franchisees’ claim that Burger King acted in bad faith in implementing the $1 double cheeseburger promotion, which many franchisees said forced them to sell the double cheeseburger at a loss.

Related reading at DDIFO.org: Have It Whose Way: Franchisees or Franchisor?  Burger King franchisees fight to have it their way

Employment Law Updates

This Employment Law Update was furnished by Masterman, Culbert & Tully LLP, One Lewis Wharf, Boston 02110, (617) 722-8100, www.mctlaw.com and addresses a range of issues from statutory amendments to recent cases to help keep you informed of relevant changes in the employment law field and to assist you in managing your workforce.

Statutory amendments

• Nursing Mothers Entitled to Reasonable Break Time.  The federal health care reform legislation enacted by President Obama on March 23, 2010 contains an amendment to the federal Fair Labor Standards Act requiring employers to provide nursing mothers with reasonable break time, as needed, to express breast milk during the first year after her child’s birth.  Covered employers are also required to provide their employees with a private place, other than a bathroom, in which to take these breaks.  Employers are exempt from these requirements if they have fewer than 50 employees and if providing the breaks would constitute an undue hardship by causing significant difficulty or expense.  Pursuant to this amendment, employees need not be compensated during this break time; however, employers should note that the Fair Labor Standards Act regulations provide that short breaks between 5 and 20 minutes must be counted as time worked (and paid), but based on the language of the amendment, it appears that Congress intended that these breaks be an exception to these general regulations and that the time need not be counted as time worked or paid.  In addition, with respect to the exemption based on undue hardship, the amendment does not state who is to make the determination whether providing the breaks would constitute an undue hardship.  Regardless of this particular amendment, in light of a 2007 Massachusetts Appeals Court decision in which the Court acknowledged that “any condition premised on a pregnancy-related condition constitutes sex discrimination,” and identified breastfeeding as a “post-pregnancy condition,” employers should carefully consider any request for accommodation by breastfeeding employees because failure to comply with the amendment my trigger a claim of gender discrimination.

• COBRA Premium Reduction Period Extended.  On April 15, 2010, President Obama signed into law a further extension of the COBRA premium subsidy legislation to extend the time period for a qualifying event through May 31, 2010 (e.g. an involuntary termination occurring up through May 31, 2010).  As a result, employees who are otherwise eligible for COBRA continuation coverage as a result of their losing their group health insurance coverage as a result of an involuntary termination between March 2, 2010 and May 31, 2010, will be eligible to elect COBRA continuation coverage and  pay just 35% of the COBRA premium for up to 15 months.  This extension does not affect the maximum periods of COBRA continuation coverage nor does it extend beyond the 15-month maximum period for the premium subsidy.  President Obama has urged lawmakers to pass legislation to extend the COBRA premium subsidies to employees laid off through the end of the year, which is currently pending.

• Updated Identity Theft Regulations Tailored to Small Employers.  In response to the concerns of small businesses regarding the Massachusetts identity theft regulations, the Office of Consumer Affairs and Business Regulation has released updated regulations that took effect March 1, 2010.  The regulations make clear that the approach to data security is a risk-based approach.  Under this risk-based approach, a business, in developing a written security program, should take into account its size, nature of its business, the kinds of records it maintains, and the risk of identity theft posed by its operations.

• Misclassification is on the federal DOL radar screen.  As we in Massachusetts are aware, misclassification of workers as independent contractors can have a significant and potentially expensive impact upon employers and their officers and managers.  This is because of the Massachusetts statute creating a presumption that workers are employees and setting out strict factors to be proven by the employer where it seeks to classify a worker as an independent contractor.  In addition, liability for misclassification includes mandatory triple damages and mandatory attorney’s fees, as well as individual exposure with respect to the employer’s officers and managers, even where the employer is a corporation (as a result of which, typically, its officers and managers have no personal liability for acts of the corporate entity).  The federal Department of Labor (“DOL”) is now focused on the misclassification issue, emphasizing it as an important item in its ongoing 2010 enforcement strategy.  Among other things, the DOL strongly supports legislation recently introduced at the federal level regarding the issue of misclassification.  In a recent statement, the DOL’s Secretary of Labor identified that one of her goals in supporting the misclassification legislation is to secure minimum and overtime wages and to help middle class families remain in the middle class, with the issue of misclassification being key to attaining those goals because misclassification of employees as independent contractors deprives employees of critical workplace protections and employment benefits to which they are legally entitled.  Now, more than ever, employers must analyze their workforce and the classifications of their workers to insure compliance with the Massachusetts law and protect against potentially costly, personal liability.

Case Law Updates

• Suit for Failure to Hire Based on Applicant’s Nicotine Use Dismissed.  Last summer, the District Court of Massachusetts granted summary judgment for an employer dismissing the claim of an applicant who was not hired after he tested positive for nicotine.  Rodrigues v. EG Systems raises two important issues.  Firstly, where an employer makes the job offer contingent upon a satisfactory drug screening, even if the individual begins work, he or she will not necessarily be considered an employee.  Rodrigues’s ERISA claim failed because the employer’s health plan included carefully defined eligibility requirements which excluded those to whom only a conditional job offer had been made.  The second issue raised by this case was whether the employer’s discovery of nicotine in the applicant’s system constitutes an invasion of privacy.  Here, Rodrigues smoked in public and made his use of nicotine known to his employer by having a pack of cigarettes visible in his car, thereby defeating his invasion of privacy claim.  Remarkably, Rodrigues did not challenge the test itself as being an invasion of privacy so there was no determination as to whether the testing for nicotine use (lawful, off-the-job behavior which arguably does not affect job performance) constitutes an invasion of privacy.  This case demonstrates that employers conducting drug screening should (1) carefully review their benefit plans to ensure that the eligibility criteria are clearly defined and (2) be mindful that the circumstances under which Massachusetts courts have found that drug testing constitutes an invasion of privacy is very fact specific and still developing.

• Maximum Age Restriction Deemed Unconstitutional.  The Montana Supreme Court held that a statute requiring that firefighters not be more than 34 years of age at the time of their initial appointment was unconstitutional.  Although this decision is not controlling in Massachusetts, it is interesting as generally age claims are brought under federal and/or state anti-discrimination laws which, under the Massachusetts age discrimination statute and the federal Age Discrimination in Employment Act, protect only those age 40 and older.  In finding that the age requirement was wholly arbitrary because there was no factual or empirical basis, the Montana Supreme Court ruled that the state had violated the Montana equal protection clause.  The Massachusetts Constitution’s equal protection clause is not drafted identically to that of Montana; however, employers should carefully consider whether an age restriction is a bona fide occupational qualification with a rational basis.

• Employee Manual Deemed an Implied Contract.  The Appellate Division of the Massachusetts District Court recently upheld a decision that serves to remind employers that an employee manual will, in certain circumstances, be treated as an implied contract between the employer and the employees.  In Buttrick v. Intercity Alarms, LLC, the lengthy employee manual included a progressive discipline policy which Intercity Alarms failed to follow when terminating Buttrick’s employment (resulting in a $41,888 award to Buttrick).  During the trial, Buttrick testified that he was required to sign the non-competition agreement in the manual, and he believed he was bound by the manual.  Before issuing or amending an employee manual, employers should consult with employment counsel to minimize the risk that it will be deemed to be an implied contract.

If you have any questions about these topics, please do not hesitate to contact Mary E. O’Neal at meo@mctlaw.com, Patricia A. Granger at pag@mctlaw.com or Angela L. Rapko at alr@mctlaw.com.  You may also reach us by telephone at (617) 722-8100.  We also welcome your inquiries regarding other employment-related issues you may be facing in your business.

Concern grows over Arizona immigration law

The Case for More, Not Less, Franchisee Protection

Current franchise laws and regulations do not go far enough to protect the interests of franchisees against often times overreaching franchisors according to an article published in Franchise Law Journal, Volume 29, Number 3, Winter 2010.

Lagarias & Boulter replied to a franchisor lawyer’s call to arms to rein in regulations because modern franchisees are sophisticated and powerful enough to fend for themselves vis a vis franchisors.
 
Several key points emphasize the continuing need for franchise regulations.

Here is an excerpt from the Lagarias & Boulter Legal Blog:

Several key points emphasize the continuing need for franchise regulations.  First, franchise agreements are drafted by a franchisor’s lawyers to benefit the franchisor in every possible way and are usually presented to franchisees on a take-it-or-leave-it basis.  Regrettably, franchisees usually fail to hire an experienced franchise lawyer in advance of the purchase despite the fact that hundreds of thousands of dollars may be at stake.   Second, franchisees have no idea where the “bones are buried” in franchise systems whereas the franchisors have all the critical information and often conceal it.    Third, many franchisors “sell” franchises via commissioned sales representatives or brokers whose livelihoods depend on making sales.  They will often embellish the likelihood of success and downplay the risks.  Fourth, once in a system, the franchisee may often become stuck because of his sunk costs and continuing obligations like leases.  This franchisee may end up working for free just to pay the bills. 

Franchise laws help to diffuse some of the risks noted above.  But franchise disclosure statutes exist in only thirteen states and even in those states, the documents are not generally reviewed for truthfulness. The federal FTC rule requires franchise disclosure in all states, but no generally recognized private right of action exists under the rule meaning, in most cases, no lawsuit can be filed under it by a franchisee.  Reliance on overtaxed federal or state agencies to bring actions is not realistic.  Further, franchisors have convinced some courts that fine print in their agreements can serve to insulate them from misrepresentation or other similar claims.  For these reasons, the limited state statutes providing protection for franchisees should be expanded and consideration given to a more effective federal scheme that offers a private right of action.

Riding the Circuit Courts

Riding the Circuit Courts is a new column at www.ddifo.org that summarizes recent court cases and their relevance to Dunkin’ Donuts franchise owners. The following summaries were prepared by Attorney Jeffrey M. Goldstein, of Goldstein Counselors at Law, Leesburg, VA.

Dunkin’ Donuts v. Shetal Shah

Next Page »