Attempt to Enforce California Post-Term Covenants Not to Compete Can Be Malicious Prosecution

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

In an unusual action for malicious prosecution, the Court of Appeal of California, First District, in a not-for-publication opinion, has held that U-Haul’s actions in bringing a lawsuit in California to enforce a covenant not to compete violated California Business and Professions Code §16600. This holding basically makes such covenants unenforceable in California.

The fact that U-Haul had brought such actions in the past, which had been dismissed, was sufficient to establish probable cause and malice, allowing the terminated franchisee’s case to go forward for malicious prosecution and as a class action. The mere presence of such unenforceable language in the franchise agreement was considered grounds for pursuing the class action.

The decision is Robinson v. U-Haul Co. of California, CCH Business Franchise Guide ¶14,481.

Franchisor’s “Physical Presence” Not Needed for Income Taxation in Iowa

The essence of the much-discussed recent decision in KFC Corporation v. Iowa Department of Revenue, CCH Business Franchise Guide ¶14,518, is the court’s holding that “a physical presence is not required under the dormant Commerce Clause of the United States Constitution in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located within the State of Iowa.”

The court reasoned, “[B]y licensing franchises within Iowa, KFC has received the benefit of an orderly society within the state and, as a result is subject to the payment of income taxes.”

Colorado Barred from Enforcing Requirement That Mail-Order Sellers Provide Information About Buyers

In a strange procedural case that specifically ignored the issue of standing, the Direct Marketing Association has obtained an injunction from a federal district court in Colorado, barring the state’s taxing authority from enforcing a requirement that mail order sellers provide buyers and the state’s tax authorities with information returns about Colorado purchases subject to the use tax. (The Direct Marketing Association v. Huber, (D. Colo. January 28, 2011), CCH Colorado State Tax Reporter ¶201-018)

“Successful” Beer Law Litigants Awarded $0 in Attorney Fees

Beer distributors who were “successful” in their suit against a brewer and a successor brewer under the New Jersey Malt Alcoholic Beverages Act were nonetheless awarded zero dollars in legal fees by the federal district court in New Jersey. (Warren Distributing Co. v. Inbev USA, LLC, (D. N.J., February 28, 2011), CCH Business Franchise Guide ¶14,564)

The three beer wholesalers were deemed “successful” litigants under the meaning of the Act because a jury determined that the defending brewers did not pay them the fair market value of their distribution rights. However, even a cursory assessment of the litigation indicated that the wholesalers’ success was, at best, “pyrrhic” and, therefore, unworthy of an award of any attorney fees, according to the court.

The court went on to note that, in truth, the wholesalers were not the prevailing party in the litigation because the brewers recovered a significantly larger damages award on their unjust enrichment counterclaim than the wholesalers recovered on their beer law claims.

That fact alone merited a significant reduction in an award of attorney fees to the wholesalers, the court determined. Further, the jury award of $390,007 to the wholesalers was nugatory when compared to the $41 million the wholesalers had requested.

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.