Criminal Conviction of Franchisee President Was Not Good Cause for Termination

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A pancake restaurant franchisor violated the New Jersey Franchise Practices Act (NJFPA) by terminating a franchise on the basis of the conviction of the president and majority owner of the franchise for endangering the welfare of a child, the federal district court in Newark, New Jersey, has decided.

The conviction was not "directly related to the business conducted pursuant to the franchise" under the meaning of the NJFPA.

The franchisor was not likely to succeed on the merits of its claims that the franchisee’s continued use of the franchisor’s trademarks was unauthorized because, as long as the parties’ agreement remained valid, the franchisee had a license to use those marks. Thus, the franchisor’s motion for a preliminary injunction barring the franchisee from continuing to use its marks was denied.

The franchisor notified the franchisee that it was terminating their agreement pursuant to a provision which granted the franchisor the right to terminate immediately, without notice, upon the conviction of the franchisee or any of its principal shareholders, "of a felony or any other criminal misconduct which is relevant to the operation of the franchise." However, the franchisee continued to operate the restaurant as if it was a franchise and claimed that the termination violated the NJFPA.

The parties’ agreement stipulated that, in order for a termination to be valid, it must be lawful under the NJFPA, the court noted. Under the statute, immediate termination was warranted only when "the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise."

There was nothing in the record suggesting that the crime occurred at the restaurant or that any other direct factual nexus existed between the conviction and the business of the franchise, the court observed. The court was unwilling to accept that potential damage to the franchisor’s brand, standing alone, was sufficient to satisfy the "directly related" standard of the NJFPA.

The decision is Int’l House of Pancakes v. Parsippany Pancake, CCH Business Franchise Guide ¶14,856.

Amendments to California Franchise Laws Proposed

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

California has recently introduced legislation that would make numerous modifications and additions to both the Franchise Relations Act and the Franchise Investment Law.

Franchise Relations Act

The "Level Playing Field for Small Businesses Act of 2012" would amend the Franchise Relations Act to provide that good cause in a termination case consists of a substantial and material breach of the franchise agreement after the franchisee is given written notice and 60 days to cure the failure.

The bill would would be require terminations to be in accordance with the current terms and standards equally applicable to all franchisees, with limited exceptions. Exempted would be situations in which immediate termination of a franchisee was reasonable where the franchisee establishes that the event was caused in substantial manner by conduct of the franchisor.

Under the measure, immediate termination would not be permitted unless the franchisee’s noncompliance was substantial and material. The proposal would delete existing provisions regarding nonrenewals by a franchisor and instead require a franchisor to renew a franchise unless the franchisee has substantially and materially breached the franchise agreement, and would require the renewal to be under the same terms as the existing agreement, or if the franchisee elects, under the franchise terms then being offered to new franchisees.

The bill would also prohibit a franchisor, upon termination or expiration of a franchise, from enforcing against the franchisee any covenant not to compete and require the parties to a franchise agreement to deal with each other in good faith.

Franchise Investment Law

The measure would amend the Franchise Investment Law by making it unlawful for a person offering or selling a franchise to intentionally misrepresent, among other things, the prospects or chances for success of a franchise, the known required total investment for a franchise, and efforts to sell or establish more franchises than a market or market area can sustain.

Under the proposal, it would be unlawful for a franchisor to refuse to recognize and deal fairly and in good faith with an independent franchisee association. In addition, civil liability for damages would be extended to any violation of the Franchise Investment Law.

The proposal, Assembly Bill No. 2305, was introduced February 24, read the first time on February 27, and referred to Committees on the Judiciary on March 26. Text of the bill appears here on the California Legislative Information website.

Payroll Tax Violations Constituted Good Cause for Termination of Franchises

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Donut shop franchisees’ failure to comply with payroll tax laws violated their contractual obligation to obey all laws and constituted good cause for termination of three franchises under the meaning of the New Jersey Franchise Practices Act, the federal district court in Newark has ruled.

The franchisees breached the franchise agreements’ “obey all laws” clause by failing to comply with payroll tax laws and did so in a non-curable manner. The payroll violations were not inadvertent or isolated mistakes, but were part of a calculated effort to disguise the true nature of the payments.

Evidence overwhelmingly showed that the franchisees inappropriately failed to treat various payments made on behalf of their employees (for things such as rent, travel, and tuition) as wages, according to the court.

The “obey all laws” clause authorized the franchisor to terminate the agreement without cure if it had “proof” that the franchisee had committed a felony. Nothing in the agreement, however, suggested that the proof must rise to a level to support a criminal conviction, the court noted. Thus, for the purpose of this civil proceeding, it was sufficient for the franchisor to show at trial that it had proof sufficient to establish a criminal conviction by a preponderance of the evidence.

The franchisor presented proof demonstrating by the preponderance of the evidence that the franchisees committed all three elements of tax evasion:

(1) A tax deficiency,

(2) The affirmative act of attempted evasion of payment of taxes, and

(3) Willfulness.

The tax violations clearly fell within the purview of the “obey all laws” clause because compensation of the franchise employees pertained to the operation and maintenance of the franchises, the court determined.

Furthermore, the fact that the franchisor did not prove damages was not relevant. The franchisor did not seek damages, but merely declaratory relief. The franchisees’ attempt to argue that the franchisor had unclean hands in terminating the franchises and in bringing suit was rejected.

The decision in Dunkin’ Donuts Franchised Restaurants LLC v. Strategic Venture Group, Inc. will appear at CCH Business Franchise Guide ¶14,494.

Franchisee’s Solicitation of Minor over Internet Warranted Immediate Termination

This posting was written by John W. Arden.

A franchisee’s arrest for soliciting a minor over the Internet warranted immediate termination of a franchise, without an opportunity to cure, under a “Damage to Goodwill” provision of the franchise agreement, according to a Florida circuit court.

A breach of contract claim brought by the franchisee’s wife and partner—arguing that she should not be bound by the actions of the franchisee—was rejected by the court.

In 1999, the husband and wife purchased an AmeriSpec franchise, with territory in Rhode Island and Massachusetts. In late 2004, the couple sold the franchise and purchased another existing AmeriSpec franchise in Sarasota, Florida, taking assignment of the franchise agreement.

Notice of Immediate Termination

On January 26, 2006, the husband was arrested and charged with transmitting harmful material to a minor by use of a computer and with using a computer for child exploitation. After learning of the arrest and negative publicity, the franchisor terminated the agreement immediately by letter dated February 6, 2006.

The termination letter cited a provision of the franchise agreement permitting termination of the franchise agreement upon receipt of notice for the franchisee’s engaging “in conduct which reflects materially and unfavorably upon the operation and reputation of the Franchised Business or the AmeriSpec system.”

Subsequently, the franchisee was convicted and/or pled guilty to multiple violations of Florida Statutes 847.0138. He currently is registered with the Florida Department of Law Enforcement as a sexual offender.

Liability for Acts of Partner

The franchisee’s wife and partner then brought an action against the franchisor for breach of contract and unjust enrichment, among other claims. The franchisor moved for summary judgment on the contract and unjust enrichment claims. The court framed the issue as whether the wife and partner “is bound by the actions of her partner and husband under the terms of the franchise agreement and Florida law.”

Initially, the court noted that both the husband and wife signed the franchise agreement as the franchisee. “Only one ‘franchise’ was granted, and there is no indication in the agreement that the rights of [the husband and wife] were divisible or separate.”

Florida law holds that individual partners are liable jointly and severally for all obligations of the partnership and that a partnership is liable for a partner’s actionable conduct. Florida Statutes 620.8305. Thus, the husband and wife were liable for the actions of the other.

The decision is Cleveland v. AmeriSpec, Inc., Circuit Court of the 12th Judicial Circuit, Case No. 2007 CA 008747 NC, November 16, 2009. Full text of the decision will appear at CCH Business Franchise Guide ¶14,267.

Franchisor’s Eviction Was “Expiration” of Lease Under the Federal Gasoline Dealer Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

An oil company’s eviction for nonpayment of rent from the premises on which it franchised a gasoline station qualified as a "loss of the franchisor’s right to grant possession of the leased marketing premises through expiration of an underlying lease" under the meaning of the Petroleum Marketing Practices Act (PMPA), according to a federal district court in San Juan, Puerto Rico. Thus, the franchisor’s termination of the gasoline dealer’s franchise following the eviction did not violate the PMPA.

Nonpayment of Rent

The dealer’s primary argument was that an eviction for nonpayment of rent was not an "expiration of the underlying lease" for purposes of the Act. The court was unaware of any precedent in the First Circuit addressing whether a franchisor’s eviction was an appropriate "loss of the right to grant possession" of the leased premises under the PMPA, it observed. However, the First Circuit interpreted the term "expiration" broadly to encompass losses of the lease that were voluntary or involuntary.

Neither the PMPA nor the cases interpreting it placed any importance on the actual cause of the underlying lease’s expiration, the court noted. Instead, courts evaluated the nature of the lessor and lessee’s relationship and the franchisor’s intent in terminating the franchise.

There was no evidence that the relationship between the franchisor and the landlord was anything but at arm’s length. It was not a situation in which the franchisor lost the lease only to be rid of the franchisee and to take the property for itself. Indeed, the dealer never left the premises after the franchise termination and eventually bought the property from the landlord.

Strategic Breach

The franchisor’s strategic breach of its lease with the landlord was just the sort of reasonable business decision that could justify a franchise termination under the PMPA, the court decided.

The decision is Rivera v. Caribbean Petroleum Corp., CCH Business Franchise Guide ¶14,245.

New Jersey Dealership Was Constructively Terminated Without Good Cause

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A forklift manufacturer’s actions—geared towards forcing a dealer out of its role as an authorized dealer of the manufacturer’s forklifts—amounted to constructive termination without good cause, in violation of the New Jersey Franchise Practices Act (NJFPA), according to a New Jersey appellate court.

A trial court’s ruling and award of compensatory damages for lost profits in the amount of $679,414 were affirmed. An award of $3,533,642 in attorneys’ fees was also upheld, but an award of $477,611 in expert witness fees was reversed.

Effective Termination

The manufacturer argued that the NJFPA prohibited only actual terminations and, because the dealer was never terminated, there was no violation. However, the manufacturer’s conduct was geared to terminating the dealer as a franchisee, the court determined. That conduct included breaching the parties’ agreement by the appointment of a competing dealer in the dealer’s exclusive territory.

Indeed, a letter from one of the manufacturer’s officers to the dealer included the statements: (1) "it's my intent to ask our people to begin a search for another dealer to represent [the manufacturer’s] products in Northern New Jersey;" and (2) "I'm prepared to continue selling [the manufacturer’s] parts to [the dealer] for a year after any new [authorized] dealer is appointed," the court noted. Effectively, it was a termination letter, the court determined.

The record established that the manufacturer’s officers were well aware that the NJFPA prohibited them from terminating the dealer unless they could establish "good cause." The manufacturer's efforts to create the appearance of substantially deficient performance by the dealer, and its assertion that the dealer breached a best efforts provision in the parties' agreement failed, the court ruled. The manufacturer’s effort to force out the dealer was thwarted only by virtue of the dealer’s filing of the instant action.

Requirement of Good Cause

The NJFPA was remedial legislation designed to protect franchisees from the superior bargaining power of franchisors, the court reasoned. In the absence of a substantial failure of franchisee compliance, the statutory requirement of good cause prohibited a franchisor from terminating for other reasons, even if they reflected a sound and nondiscriminatory business strategy.

The legislature’s decision not to recognize a valid business reason as constituting "good cause" for termination in the NJFPA distinguished the Act from the less-protective franchise statutes in other states, the court remarked. Further, the manufacturer provided no persuasive authority to support its argument against liability for constructive termination.

The manufacturer’s assertion that the letter from its officer was merely a suggestion to the dealer to end its relationship with the manufacturer was an obvious revision of history and its claim that it did not constructively terminate the dealer was disingenuous, according to the court.

In addition to the letter, the manufacturer’s decision to stop providing annual business plans to the dealer was further evidence that it expected to abandon the dealer in favor of another dealer. The court rejected the manufacturer’s position that if the dealer wanted to claim damages under the NJFPA for termination, it was required to withdraw from the agreement and thus allow itself to be terminated. Such a requirement would fly in the face of the Act's purposes of leveling the playing field between the typically more powerful franchisor and less powerful franchisee, the court held.

Loss of Exclusivity

The dealer's loss of the exclusivity of its territory, in and of itself, could qualify as such a change in the agreement's terms that constituted constructive termination, the court held. In the instant case, the "change" that the manufacturer proposed for the dealer upon appointing a competing dealer to the dealer’s territory would have gone even further than a mere loss of exclusivity; instead of simply establishing the competing dealer as a second dealer in the franchise territory, the manufacturer would have eliminated the dealer as an authorized dealer by ending its ability to purchase new forklifts and parts.

The manufacturer’s conduct proved its intent for the cessation of exclusivity to undermine the dealer’s franchise, according to the court. It appointed the competing dealer and blanketed the dealer's territory with the message that the competing dealer was its favored dealer in the territory in all regards, without informing the complaining dealer. It also provided discounts, rebates, and other subsidies to the competing dealer that let it undercut the complaining dealer’s prices.

Attorney Fees, Expert Witness Fees

The trial court's awarding of $3,533,642 in attorney fees to the dealer under the NJFPA's attorney fee provision was not an abuse of discretion, the court held. The trial court found that the work, expenses, and fee requests were reasonably required to establish the dealer’s NJFPA claim and to refute the counterclaim that the manufacturer asserted.

The Act’s authorization of an award of “costs of the action" did not encompass the award of expert witness fees, the court decided. Thus, the trial court’s award of costs to the dealer was reduced from $724,817 to $247,206 to reflect the deletion of $477,611 that the trial court had awarded for expert witness fees.

The decision is Maintainco, Inc. v. Mitsubishi Caterpillar Forklift, CCH Business Franchise Guide ¶14,195.

Good Cause Not Required for Franchise Termination

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A heating and air conditioning business franchisee failed to demonstrate that a manufacturer was required to have good cause before it terminated the parties’ agreement, the U.S. Court of Appeals in Denver has decided. Thus, a federal district court did not err in granting the manufacturer judgment on the claim as a matter of law.

The dispute arose when the manufacturer discovered that the franchisee had been abusing a rebate program that reduced prices charged to dealers, enabling them to meet the prices offered by competitors.

The manufacturer terminated the franchise, the dealer brought a breach of contract action, and the manufacturer counterclaimed based on the dealer’s abuse of the rebate program.

Termination at Will

As written, the agreement entitled either party to terminate at will on 30 days’ notice, the court noted. However, the franchisee argued that the agreement had been modified by the manufacturer’s statements and conduct so that the manufacturer could not terminate it without good cause.

At best, the evidence presented by the franchisee showed that the manufacturer had consistently provided cause when terminating franchises in the past, the court observed. However, a pattern of terminating with cause was not unequivocally inconsistent with the retention of the power to terminate without cause, according to the court.

Unclean Hands

The court agreed with the franchisor’s contention that the franchisee had unclean hands, based on the phony invoices the franchisee's employees had prepared in preparation for the franchisor’s audit of the rebate program.

Although a jury had found that the franchisee should have been equitably estopped from denying that the parties’ agreement required good cause for termination, the district court properly refused to apply the equitable doctrine for the franchisee’s benefit.

Damages

The district court erred by appointing a special master for an equitable accounting on the fraud claim, the court held. The district court found that having a jury “tediously slog through” the individual invoices that the franchisee had fraudulently submitted to the franchisor would prolong the trial.

Because the jury’s general verdict in favor of the franchisor on the fraud claim did not fix the scope of the franchisor’s liability, a new jury could not calculate the franchisor’s damages without resolving the specifics of that liability. Accordingly, the entire fraud claim—not simply the question of the amount of the franchisor’s damages—was required to be retried, the court held.

The decision is Haynes Trane Service Agency, Inc. v. American Standard, Inc., CCH Business Franchise Guide ¶14,125

Product Discontinuation Was "Good Cause" for Dealership Termination

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A manufacturer of construction equipment (Volvo) had "good cause" under the meaning of the Maine power equipment, machinery, and appliances dealer law to terminate a dealership after it discontinued production of Samsung branded construction equipment, the U.S. Court of Appeals in Chicago has determined.

Thus, a federal district court's award of $2.1 million in damages to the dealer on a jury's verdict for wrongful termination (CCH Business Franchise Guide ¶13,488) was reversed and the dispute remanded for entry of judgment in favor of Volvo.


Acquisition of Manufacturer

The parties' relationship began when Volvo acquired Samsung's construction equipment manufacturing business and assumed its obligations to its dealers. Volvo did not acquire the Samsung trademark, only the right to continue to manufacturer Samsung branded excavators for a three-year period, the court noted.

Volvo then began what it called the "Volvoization" of the Samsung excavator line; making changes to the excavator's design and rebranding them with the Volvo trademark. In the course of the transition, Volvo eventually terminated many of the Samsung dealerships, including the dealer at issue, whose territory included a portion of Maine.

After extensive litigation, the Seventh Circuit court eventually remanded the dispute to the district court after concluding that there was a genuine factual dispute over whether Volvo had good cause to terminate the dealer.

The Maine dealer law provided that "[t]here is good cause when the manufacturer discontinues production or distribution of the franchise goods." Whether Volvo had good cause under this subsection of the definition was the subject of the court's earlier remand to the district court.

Rebranding as Discontinuation

In the district court, Volvo argued that the "franchise goods" under this provision, meant Samsung-brand construction equipment. Thus, it contended, its rebranding of the excavators under the Volvo name constituted a discontinuation of the franchise goods. The district court erred in ruling that the Seventh Circuit had implicitly rejected this argument in the earlier appeal and that Volvo was thus prohibited from raising it under the law of the case doctrine, according to the court. Rather, the Seventh Circuit had merely concluded that there were facts in dispute on whether Volvo had violated the statute.

Because the dealer law stated that good cause to terminate a franchise existed "when the manufacturer discontinues production or distribution of the franchise goods," the key to the analysis was to pinpoint which goods were the "franchise goods." That, in turn, depended on the statutory definition of "franchise" and the language of the dealer agreement.

Franchise as Trademark License

The statute's definition of "franchise" centered on the grant of a license to use the franchisor's trademark or trade name in the marketing of goods and services. Further, the Samsung dealership agreement appointed the dealer as "a nonexclusive dealer in the Territory for the sale of the Products" upon the terms and conditions set forth in the agreement. "The Products" were defined as "All Samsung Construction Equipment for sale in North America," “including their later improved or superseding models."

The main issue then became the meaning of the second quoted phrase, "including their later improved or superseding Models," the court reasoned. The Volvo excavators were a design descendent of the Samsung line, and from that fact the district court erred by concluding that the new Volvo-brand excavators could qualify as a "later improved or superseding model" of the Samsung-brand excavators.

The district court's reading did not account for the word "including." When a contractual text specified one thing "including" another, the ejusdem generis canon generally required that the latter item must be a kind of the former item. Thus, in the instant case, "the Products" covered by the agreement were Samsung-brand construction equipment "including their later improved or superseding models"—meaning later-improved or superseding models of Samsung-brand equipment, the court held. Accordingly, "franchise goods" for purposes of the dealer law included only Samsung branded equipment.

Because the statute defined "franchise" in terms of a trademark license and the agreement authorized the dealer to use only the Samsung trademark, discontinuation of the Samsung-brand line of excavators was a discontinuation of the "franchise goods" under the statute. The dealer never had a Volvo franchise and nothing in the statute protected it from termination of a franchise it never had, the court decided.

The March 4 decision is FMS, Inc. v. Volvo Construction Equipment North America, Inc., CCH Business Franchise Guide ¶14,092.

Market Withdrawal Not “Good Cause” for Termination of Arkansas Franchise

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The market withdrawal of a product or a trademark and trade name for the product did not constitute “good cause” to terminate a franchise under the Arkansas Franchise Practices Act, the Arkansas Supreme Court has ruled.

The issue was the first of three questions certified to the state supreme court by a federal district court in a dispute between a farm equipment manufacturer and an Arkansas dealer.

The dispute began after the manufacturer started dual-branding of its products—selling identical products in different colored paint and under a different brand to a competitor of the complaining dealer. Eventually, the manufacturer informed the complaining dealer that it was withdrawing from the market for the brand of equipment sold by the dealer. The dealer subsequently filed the instant suit against the manufacturer, alleging several common law and statutory claims.

List of Causes for Termination

The Arkansas Franchise Practices Act contains a list of eight occurrences constituting good cause for termination or cancellation of a franchise. Market withdrawal is not among them, the court noted. Had the legislature intended to include market withdrawal as good cause for termination, it could have done so.

The reasoning of the Fourth Circuit in the case of Volvo Trademark Holding Aktiebolaget v. Clark Machinery Co. (CCH Business Franchise Guide ¶13,786) was persuasive on the issue, according to the court. In Volvo, the Fourth Circuit held that the eight enumerated occurrences causes for termination in the Arkansas franchise law were the exclusive means by which a franchisor could properly terminate a franchise.

As noted by the Fourth Circuit, Arkansas subscribed to the legal principle of expression unius est exclusion alterius, meaning that the express designation of one thing could be properly construed to exclude another. In this case, the plain language of the franchise law prohibited an interpretation of good cause for termination that included a circumstance not specifically listed, such as market withdrawal.

Equipment Dealer Law

However, no liability is created under the Arkansas farm equipment dealer law by a manufacturer’s termination, cancellation, nonrenewal, or substantial change in competitive circumstances of the dealership agreement based on the rebranding of a product or the ceasing to use a particular trademark or trade name for a product while selling it under a different trademark or trade name, the state supreme court ruled on the second of the certified questions.

The particular section of the dealer law at issue prohibited a manufacturer’s attempt or threat “to terminate, cancel, failure to renew, or substantially change the dealership agreement based on the result of a natural disaster, including a sustained drought in the dealership market area, labor dispute, or other circumstances beyond the dealer’s control.”

The section proscribed only attempts or threats to terminate, cancel, fail to renew, or substantially change the circumstances of a dealership agreement, the court held. Actual termination, cancellation, failure to renew, or substantial change in the circumstances of a dealership was not addressed in that section.

The decision is Larry Hobbs Farm Equipment, Inc. v. CNH America LLC, CCH Business Franchise Guide ¶14,075.