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FRANCHISE TRENDS

Procedural Federal Rule Preliminarily Bars Franchisees' Fraud Claims

Various procedural rules in federal courts have historically been a potent bar to the ability of plaintiff franchisees to prosecute their fraud claims. In this case, which is a class action, plaintiffs appeared in their complaint to describe a detailed scheme, whereby Jani-King promised its prospective franchisees a guaranteed monthly income; promised franchisees that they would make $3,000 per month; and promised to provide the prospective franchisees with sufficient work to meet these income targets; and, further, to refund a portion of the money that the franchisees paid if insufficient work was provided. The Court, however, ruled that these fraud claims had not been plead with "particularity" and therefore dismissed the complaint. In this case, however, the court did permit the plaintiffs another opportunity to supplement these claims with many more specifics of the alleged fraud.

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Wife Found Jointly Liable Under Franchise Termination For Unlawful Conduct of Husband

Under Florida law, the wife in a husband-and-wife home inspection business franchisee partnership was bound by the actions of her husband because individual partners in a partnership are liable jointly and severally for all obligations of the partnership. Both the husband and the wife signed the same franchise agreement as "the Franchisee". Only one franchise, not two, was granted in the franchise agreement. And, under partnership law, individual partners of a partnership are liable jointly and severally for defaults and the wrongful conduct of another partner. Thus, husband's wrongful conduct supported franchise termination caused only by husband's conduct.

Franchisor's Termination of Franchisee Results in Franchisor Liability to Landlord of Premises

A Texas court of appeals found that sufficient evidence supported a Texas state court jury's finding that a franchisor of transmission repair shops was bound by a lease rider to a lease for the premises on which a terminated franchisee previously conducted business. The landlord brought suit against the franchisor for several causes of action after the franchisor terminated the franchisee and then both paid one month's rent to the landlord, and sent one of its corporate agents to manage the transmission shop. Thereafter, when the franchisor moved out of the premises, the landlord brought suit, alleging that the franchisor had exercised its option under the lease rider to assume the lease upon either its termination or expiration. Thus, the franchisor was itself held liable for the remaining lease payments on the franchisee's underlying lease for the transmission shop.

Franchisee's Claims that Franchisor Tied Supplies Could Violate the Antitrust Laws

The franchisee alleged that its the franchisor used its market power over franchise rights unlawfully to compel the franchisee to purchase hamburger buns from a lone approved bun vendor.

The franchisee adequately plead market power in a relevant market under the Antitrust laws because the franchise agreement did not put potential franchisees on notice that the franchisor would be able to eliminate all competition after the franchise agreement was signed by naming an exclusive supplier or that it could impose a surcharge on approved suppliers. The court refused to accept the franchisor's assertion that the violation would be only contractual, not statutory.

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Thanks for your interest in our Newsletter, and we look forward to answering any questions you might have either on the cases discussed in this issue of Franchise Trends, or on general trends in franchise law.

Jeff Goldstein
Goldstein Law Group

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