Franchise Trends - April 14, 2010

This is a special edition of Franchise Trends focusing solely on restaurant and food franchises. The next two special editions of Franchise Trends will highlight hotels and real estate franchises.

FRANCHISE TRENDS

Quizno's Franchisee's Fraud Claims Run Afoul of Release in Franchise Agreement

Westerfield v. The Quizno's Franchise Co., LLC (2008)

The court had found that the franchisees' fraud and RICO claims were precluded by disclosures, disclaimers, and non-reliance clauses contained in an offering circular and the franchise agreement. The franchisees claimed to have newly discovered evidence that the franchisor had a corporate policy of telling franchisees to write "none" on a form where they were asked to list representations on which they relied other than those contained in the circular, but the court held that the evidence was not newly discovered and did not undermine the prior analysis of the franchisees' claims.

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Wendy's Agreement to Forbearance Agreement Did Not Limit its Subsequent Demand For Termination of Franchisee

Wendy's International v. Saverin (2009)

Under Ohio law, fast-food restaurant franchisor did not breach its implied duty of good faith and fair dealing under forbearance agreement when it failed to oppose a receivership for franchisee, upon franchisee's default on its loan payment obligations, which triggered franchisor's right to terminate franchise agreements under forbearance agreement. Franchisor did what it was explicitly permitted to do under the forbearance agreement, so that its actions could not constitute breach of implied covenant of good faith and fair dealing, and there was no showing that franchisor's conduct in not opposing the receivership could not have been contemplated at the time the parties negotiated the forbearance agreement.

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Former Papa John's Franchisee's Operations Shut Down For Violating Post-Term Covenant Not To Compete

Papa John's v. Rezko (2006)

While it was unclear whether the individual franchisee signed an owner agreement in his personal or corporate capacity, there were reasons to believe he signed in his personal capacity. Thus, the court allowed the claims against him to proceed. The court granted the franchisor's motion for preliminary injunction given that the businesses being operated by the former franchisee were at the same locations as the franchised restaurants, and were virtually identical in concept (pizza delivery and carry-out), and were being operated under a name that was confusingly similar to and/or evocative of the famous marks held by the franchisor.

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Wendy's Supply Restrictions Could Violate the Antitrust Laws

Burda v. Wendy's Intern., Inc. (2009)

Fast food restaurant franchisee, asserting that franchisor imposed illegal tying arrangement by requiring it to purchase buns and food supplies from particular vendors, sufficiently alleged market power in "tying product." The franchise agreement did not contain language putting a potential franchisee on notice that franchisor would be able eliminate all competition by naming an exclusive bun supplier or that it could impose a surcharge on approved suppliers, especially in light of the allegations that the market for these supplies was competitive prior to the alleged tie. Sherman Act.

Editor's Note:Although franchisors historically been immune from antitrust claims, the Burda case above, as well as the United States Supreme Court case of Kodak upon which it was based, have provided franchisees with a small window of opportunity in cases where a franchisor requires that its franchisees obtain supplies only either directly from them or from approved suppliers, and the prices of the supplies thereafter increase. In so noting, it is important to understand that this exception applies only in very narrow and complicated circumstances. However, if you are now experiencing issues or concerns regarding purchase of supplies or services it is worth having a franchise attorney examine whether your circumstances might afford you an opportunity to be compensated for supply price increases that you believe have been unreasonable or unwarranted.

GOLDSTEIN LAW GROUP, PC
JEFFREY M. GOLDSTEIN, ESQ.
www.goldlawgroup.com
202-293-3947

Dunkin' Donuts' Alleged Failure to Cooperate With Franchisee's Sale Could Be Unlawful

Barkan v Dunkin' Donuts, Inc. (2009)

In an effort to resolve its resulting financial difficulties, Plaintiff franchisee tried to sell its existing donut shops. No sale took place and the parties sued each other. The franchisee argued that Dunkin' did not comply with its obligations under a settlement agreement to "work with" CIT to assist the franchisee in attempting to refinance its debt. In rejecting Dunkin's request to dismiss the case before trial, the court held that the franchisee would be given the opportunity at trial to show that Dunkin' failed to request financing from CIT, failed to give "recourse" letters to CIT, and that it entered into the settlement agreement even though Dunkin' had no intention of helping Plaintiff obtain refinancing.

Atlanta Bread Franchisee Breaks Post-Term Covenant Not To Compete

Atlanta Bread Co. Int., Inc. v. Lupton-Smith (2008)

The court declined to enforce a restrictive covenant in a franchise agreement, even an in-term covenant, restraining trade unless that restrictive covenant met the reasonableness standards promulgated in Georgia. Here, the restriction in question contained no territorial limitation, prevented the franchisee from engaging in any capacity within the deli/bakery business, and failed to specify the restricted activities with sufficient particularity.

Franchisor's Use of Franchisee's Marketing Fees To Fund Franchisor's Competing Restaurants Held Permissible

Sunshine Restaurant Partners v. Shivshakti One, Inc. (2008)

A franchisee of a pancake restaurant franchisor adequately alleged that the sub-franchisor breached its franchise agreement by initiating a cooperative advertising campaign in the franchisee's geographic territory, and then using the fees collected from the franchisee to promote the sub-franchisor's own restaurants in that market instead of the franchisee's restaurant. The court rejected the sub-franchisor's argument that it could not have breached the franchise agreement because the agreement gave to the sub-franchisor sole discretion over the use of advertising funds. The court concluded that although the agreement did grant discretion to the sub-franchisor over the use of advertising funds, the grant of such authority, if interpreted as broadly as franchisor argued, would be in conflict with the purpose and intent of the agreement. Further, the court held that the franchisor could not be held to have violated the covenant of good faith and fair dealing by opening a franchisor-owned restaurant in competition with the franchisee since the franchise agreement banned such competition only if within two miles of the franchisee's location.

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.

www.goldlawgroup.com
Jeff Goldstein
Goldstein Law Group

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