Gasoline Franchisor’s Withdrawal from Market Did Not Violate PMPA

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

In Santiago-Sepúlveda v. Esso Standard Oil Co. (Puerto Rico), Inc., (CCH Business Franchise Guide ¶14,604) the U.S. Court of Appeals in Boston held that a gasoline station franchisor did not violate the PMPA in connection with its withdrawal from the Puerto Rico market because its successor did comply with the PMPA’s requirement, for the most part, to offer franchises to the franchisees of the withdrawing franchisor in "good faith."

The argument by the franchisees that any term violating a state law in any respect comprised a violation of the PMPA’s good faith requirement was rejected. Such a per se rule would put at risk a vast number of market withdrawals. The court noted that the offered franchise agreements, comprising interrelated contracts spanning about 100 pages, included hundreds of clauses, of which the lower court invalidated only five in part.

Dealer Terminated for Good Cause for Poor Sales Performance

In Ralph Gentile, Inc. v. Division of Hearings and Appeals, (CCH Business Franchise Guide ¶14,626), a Wisconsin state appellate court held that a motor vehicle dealer materially breached its dealership agreement with a franchisor by failing to achieve satisfactory sales performance.

Under the Wisconsin Fair Dealership Law, "just provocation" for termination had four elements:

(1) The terminated dealer materially breached the agreement;

(2) The breached provision was reasonable and necessary;

(3) The breach was caused by matters within the dealer’s control; and

(4) The dealer failed to cure the breach within a reasonable time after receiving written notice of the breach.

The sales-effectiveness rating used by the franchisor for determining the performance of the dealer was ruled proper, and the facts clearly showed that the dealer’s sales performance was well below the sales-effectiveness ratings earned by its predecessor.

Understating Start-Up Costs in UFOC Could Be Fraud

In Love of Food I, LLC v. Maoz Vegetarian USA, Inc., (D. Md., CCH Business Franchise Guide ¶14,633) allegations of common law fraud based on the franchisor’s understatements of start-up costs in a UFOC survived a motion to dismiss. The initial costs were allegedly understated by 85% or more. The franchisor argued that cost projections were statements of opinion and could not constitute fraud because they were not susceptible to exact knowledge at the time they were made. However, the court held that erroneous projections could supply a basis for fraud under Maryland law.

Nexus Questionnaires Sent to Firms Doing Business in Philadelphia Without “Physical Presence”

Practitioners should be aware that an alert was issued by the Philadelphia Department of Revenue to notify taxpayers that the department's audit unit is currently working to find businesses having tax nexus with Philadelphia but located outside of the city. Nexus questionnaires are being sent out explaining business nexus and asking those businesses to report any activity they have in Philadelphia.

If a taxpayer's business has nexus with Philadelphia and is not filing and paying Philadelphia business taxes, taxpayers are advised to contact the department to bring the company into tax compliance by entering into the Voluntary Disclosure Program. Taxpayers who meet the conditions of the program may be eligible for a waiver of all penalties owed (Amnesty Support Group and Nexus Project, Philadelphia Department of Revenue, May 13, 2011).

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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.

Many Franchisors Fail to Report Franchisees' Sales to New York State Tax Authority

This posting was written by John W. Arden.

Only 400 of the thousands of franchisors having franchisees within the State of New York have filed annual information returns with the New York Department of Tax and Finance as required by a 2009 statute, according to state officials speaking at a July 14 meeting of the New York State Bar Association Franchise Law Committee.

Last year, New York enacted legislation requiring all franchisors having franchisees within the state to file annual information returns, reporting the gross sales of each franchisee within the state, sales by the franchisor to the franchisee, and any franchisee income reported to the franchisor. The law also requires the franchisor to report such information to the relevant New York franchisees.

The first report was to be filed by September 20, 2009, with a 90-day automatic extension process making the filing deadline December 20, 2009.

The officials made it clear that the Department of Tax and Finance was using the information returns primarily as a means of auditing the sales tax returns of the franchisees, said Bruce S. Schaeffer of Franchise Valuations, Ltd.

“Franchisors should be aware that they are risking substantial audit fees, penalties, and the potential for offending the authorities with respect to back taxes that may be found to be due,” said Schaeffer.

Attendees suggested an amnesty program from franchisors determined to be “out of compliance” with the law. The suggestion was taken under advisement, according to Schaeffer.

Text of the New York statute (New York Tax Law, Article 28, Sections 1136(i) and 1145(i)) appears at CCH Business Franchise Guide ¶4321.

Further information regarding the CCH Business Franchise Guide appears here on the CCH Online Store.

Closing of GM, Chrysler Dealerships Raises Termination Issues for Bankruptcy Courts

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

With the noticed closings of so many GM and Chrysler dealerships, wrongful termination statutes have become a question before the bankruptcy courts.

Simply put: Does the right of a bankrupt undergoing reorganization to reject contracts supersede the wrongful termination statutes that afford protection to dealers under many state relationship laws?

Rather than face the issue head on, however, an accommodation was reached. On July 5, 2009, the attorneys general (AGs) of 30 states reached an agreement in principle with GM regarding protections afforded under state laws to dealers and consumers.

The agreement requires New GM, a newly formed entity created by the U.S. Treasury, to comply with state relationship laws. It was formally ratified by the U.S. Bankruptcy Court, and additional states are expected to participate.

The AGs had filed objections to GM’s plan to reduce the number of its dealerships by 2,641—from 6,246 to 3,605—by the end of 2010, contending that the plan would have permitted GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

Greater Statutory Protections

And in light of the current economic slump particularly affecting the automotive industry, state legislatures appear to be moving to provide greater protections for their in-state dealerships and distributorships.

For example, the new Alabama Heavy Equipment Dealer Act prohibits suppliers from unilaterally amending, terminating, or refusing to renew a dealer agreement without "good cause," which is limited to withdrawal by the supplier from the market and certain performance deficiencies. The law also requires suppliers to provide advance written notice and an opportunity to cure in most instances of an amendment, termination, or failure to renew a dealer agreement. (Senate Bill No. 308 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4105).

In another attempt to protect its auto dealers, Illinois went further, recently amending its statute to eliminate language in the motor vehicle dealer law that a manufacturer has good cause to cancel, terminate, or fail to extend or renew the franchise or selling agreement to all franchisees of a line make when the manufacturer permanently discontinues the manufacture or assembly of such line.

It also (1) makes it a violation for a manufacturer to require or coerce a motor vehicle dealer to underutilize their facilities by requiring them to cease operations for the selling or servicing of any vehicles with another manufacturer and (2) provides an itemized list of reasonable compensation for the value of a motor vehicle dealer's business and business premises. (Senate Bill No. 1417 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4135).

Maine too amended its motor vehicle dealer law by deleting language stating that good cause for termination exists when a manufacturer discontinues production or distribution of the franchise product. (Senate Bill No. 483 was approved and became effective June 11, 2009. See CCH Business Franchise Guide ¶4195).

Impairment Write-Downs and Loan Guarentee Ratios—A Problem?

Many venture capital firms and other buyers of franchise companies over the past decade used substantial leveraging in their acquisitions. Many of these loans have certain financial ratios that must be maintained often involving net worth. In some instances, there are also personal guarantees.

As we have written often, Financial Accounting Standards Board (FASB) 141 and 142 require purchasers of intangible property (IP)—as opposed to owners of self-created IP—to test their IP assets (including “goodwill”) at least annually for impairment. If, as in many cases, the value of purchased franchise agreements, distributorship, or dealership agreements has been reduced (“impaired”), such as Chrysler dealerships purchased within the past 10 years, prudent auditors will be asking whether franchise company management is honestly valuing their IP in light of potential loan problems that could affect them personally. Beware!

Lost Future Royalties: Must Expenses Be Proven? Is There a Mitigation Defense?

In a recent decision, a franchisor’s claim for lost future royalties was denied because it failed to submit any evidence as to its own operating expenses. (Rocky Mountain Chocolate Factory v. SDMS, DC Colo., CCH Business Franchise Guide ¶24,093)

Under Colorado law, future royalties, like all future damages, are subject to the “rule of certainty.” On that basis, a federal district court ruled that a franchisor’s claim for lost future royalties was basically a claim for lost profits and that without evidence of both revenues and expenses, the court was left to speculate about the amount.

Additionally, the court left open the possibility of a mitigation defense against a claim for lost profits based on imminent franchisee failure. The court noted that it was not clear that the franchisor would have been entitled to future damages even if it had provided evidence of expenses because the franchisee cast doubt at trial on its continued financial viability because of its persistent operating losses.
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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.