Thursday, November 02, 2006

Snap-on Tools' $125 Million Class Settlement with Franchisees Approved

This post was written by Peter Reap, editor of CCH Business Franchise Guide.

A settlement agreement valued at more than $125 million between franchisor Snap-on Tools Co. and a class of its current and former franchisees was approved by a federal district court in Newark, New Jersey, on October 27. The class consisted of more than 2,900 former Snap-on franchisees and almost 3,200 current franchisees.

The action alleged that Snap-on specifically targeted unsophisticated persons to become franchisees and that the franchisor’s deceptive business practices caused the franchisees' businesses to fail. In addition, the franchisees complained that they were contractually required to make minimum weekly purchases of product from the franchisor but could re-sell those products only to a limited number of end-users.

The agreement provided both monetary and non-monetary benefits to the class members. Approximately $61.5 million in debt owed by former franchisees was forgiven by the franchisor as a result of the agreement. Further, former and current franchisees would receive cash payments estimated to total $25 million.

The franchisor also agreed to make a number of modifications to its franchise distribution model and business practices, designed to benefit both current and prospective franchisees, according to the court. These modifications included: (1) a reduction of the required investment in initial inventory; (2) offers of financing to qualified franchisees; (3) a technology credit; (4) improved initial training for new franchisees; and (5) improvement of recruitment training practices. The modifications of business practices were valued at approximately $60 million.

The class had satisfied the Rule 23 criteria for certification, the court ruled. The numerosity requirement was met because the class had over 5,000 members. The plaintiffs’ claims arose from a common nucleus of operative fact and raised the same legal and equitable issues, satisfying the commonality requirement. The typicality requirement was met because the interests of the class and the named representatives were aligned, the court held. Moreover, there was adequacy of representation because such interests were aligned and the there was a strong showing that class counsel was qualified to handle the complex litigation. Finally, common questions of law or fact predominated because each class member’s claim depended on the resolution of the same questions regarding the franchisor’s alleged deceptive business practices.

The settlement agreement was fair, adequate, reasonable, and in the best interests of the class, the court determined. The “innovative hybrid settlement not only compensates class plaintiffs for past injuries but also provides non-monetary relief in the form of changes to Snap-on’s internal business that will benefit current and prospective franchisees in the future,” according to Judge Dennis M. Cavanaugh.

A requested award of attorney fees in the amount of $13 million was reasonable, the court decided. The amount was the equivalent of 10.4% of the settlement, a figure well below the norm, the court commented. The qualified and experienced attorneys spent a great deal of time preparing their case, arbitrating it, and negotiating a settlement—all with the risk of very contentious litigation looming with no guarantee of a successful result. Significantly, the class counsel achieved a very favorable and creative settlement that properly benefited all members of the class.

The not-for-publication opinion is DeSantis v. Snap-on Tools Co., LLC, U.S. District Court, District of New Jersey, Civil Action No. 06-cv-2231 (DMC), October 27, 2006.

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