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Jeff Goldstein GOLDSTEIN LAW GROUP Nat'l Franchise Law 

Jeff Goldstein GOLDSTEIN LAW GROUP Nat'l Franchise Law

Franchisor Unable to Show That Franchisee's Termination Caused the Franchisor Any Future Damages


Meineke Care Care Centers, Inc. v. RLB Holdings, LLC, et al.

U.S. District Court, Western District of North Carolina (2011).

A franchisor of motor vehicle repair shops was not entitled to damages for the loss of prospective fees it sustained as a result of the franchisor's termination of the multi-unit franchisee before the end of the franchise term. Thus, the franchisee and its guarantors were entitled to dismissal of the franchisor's claim for prospective damages - royalties that would have been paid by them over the future term of their franchise agreements had they not been terminated.

Although the agreements established that the franchisee was required to make payments of royalties and advertising fund contributions under the agreements so long as the franchise agreements were in force, the contracts made no provision for the franchisor to recover amounts from the franchisee subsequent to the termination of the agreements.

Further, although the franchisor presented a formula for calculating such lost profits, it failed to show that the franchises would have been profitable during the future period for which the franchisor sought damages. The franchisor used a generic calculation for lost profits based on the franchisor's claim that it usually took three years to re-franchise a location. But, the rejected calculation did not take account of the store's specific location, viability, or profitability. Thus, the franchisor's claim for lost profits was rejected as the franchisor's alleged lost profits could not be measured and ascertained with reasonable certainty.

With regard to the alleged breaches of the franchise agreements by the franchisor, the court rejected the franchisee's allegations. In sum, the court held that the franchisor did not breach its franchise agreements with the franchisee by allegedly: (1) failing to perform its obligations in a timely manner; (2) misusing advertising funds; or (3) failing to provide local representatives to support the franchisee.

According to the court, the first claim of alleged breach was merely a generalized, non-specific grievance and therefore it could not support a breach of contract claim. As to the alleged misuse of advertising fees, the court also rejected this claim relying upon the franchise agreements' language vesting sole discretion with the franchisor over the use of such funds. The third claim, which alleged failure to provide support, was also rejected by the court because the franchisee's claim failed to cite to specific terms or provisions of the agreements. Further, on this issue, the franchise agreements merely required the franchisor to maintain an adequately staffed advertising department to provide the services.

Last, the court rejected the franchisee's claim that the franchisor had violated the covenant of good faith and fair dealing. Its rejection was based on the conclusion that such a claim could not be separated from the franchisor's breach of contract claims in the absence of a special relationship between the parties. According to the court, the franchisee's and the franchisor's franchise relationship did not create the requisite special relationship that could justify a separate cause of action for breach of the implied covenant of good faith and fair dealing.   

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Franchise Discrimination - Video 1 of 2 

Franchise Discrimination - Video 1 of 2

Two Plus Two Doesn't Equal Four - Franchisor's Notice of Termination Isn't a Real Termination


Diesel Machinery, Inc. v. The Manitowoc Crane Group, et al.

District Court, D. South Dakota. March 31, 2011.

A manufacturer of cranes did not "cancel" its agreement with a dealer under the meaning of the South Dakota Vehicles, Implements, and Industrial Equipment Dealer Law when it sent a letter to the dealer expressly providing 90 days notice of termination. Thus, the manufacturer could not have violated the dealer law by canceling the parties' agreement without "just provocation."

Before the end of the 90-day notice period, the manufacturer withdrew the notice of termination and told the dealer that it was rescinding its previous decision to terminate the dealer. The dealer nevertheless argued that the conduct of the manufacturer met the dealer law's definition of "cancel." In contrast, the manufacturer argued that its notice of cancelation cannot be equated with the word 'termination' under the statute.

The court agreed with the franchisor and held that the words "cancel" and "terminate" were synonyms. This also meant that the franchisor's "notice of termination" was not synonymous with a "termination or cancellation of a dealership." The franchisor's letter providing merely 'notice' made clear that the cancellation of the franchisees' dealership agreement was not immediate, and that the termination or cancelation was to occur only at the end of the 90 day notice period. As such, the franchisor's letter could not be construed as a 'wrongful termination' - the very claim that the franchisee had made against the franchisor in this case.   


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Franchise Discrimination - Video 2 of 2

Franchise Discrimination - Video 2 of 2


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Franchisee's Expert on Termination Damages Given 'The Boot'  

R& R International, Inc. v. Manzen, LLC,

U.S. District Court, S.D. Florida.Dated September 12, 2010.

The report of a beverage distributor's (franchisee's) expert witness in the distributor's dispute with a manufacturer (franchisor) was stricken at trial as the expert's analysis of the franchisee's alleged future lost profits was neither sufficiently reliable nor helpful to the jury to be admissible. Significantly, the expert was unable to attest to the reliability of his own lost profit analysis and could not opine regarding whether a client should invest in the distributor or whether he would personally do so.

In essence, according to the court, the franchisee's expert failed to use scientific or otherwise reliable methods to prepare the report showing the distributor's future lost profits. The expert's "sampling" methods, his reliance on what appeared to be arbitrarily selected numbers, and his research methods destroyed the reliability of his report and analysis. For example, the expert admitted during cross-examination that he simply speculated with regard to fundamental theoretical aspects of his lost profits projections.    

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Franchisor Again Able to Sidestep Fraud Allegations because It's Representations Were 'Merely' Promises to Carry Out Conduct in the Future    

Superior Care Pharmacy Inc. v. Medicine Shoppe Int'l, Inc.

DC Ohio 2011

A trial court rejected three pharmacy franchisees' claims of fraud against two related franchisors for committing fraud by making false statements in connection with offers to the franchisees to purchase franchisees. The offer required the franchisees to choose between three options. Two consisted of buyouts of the existing agreements and the signing of a new franchise agreement. The third option was simply continuing to operate under the existing agreement.

Allegedly fraudulent statements made by the franchisors included that the offer "will require the overwhelming participation of our eligible franchisees" and that "[i]f there is not sufficient participation, this new agreement will be withdrawn." The language in the franchise agreements stated that the franchisors themselves had the legal discretion to determine what constituted "overwhelming participation."

Because the franchisors retained the sole discretion to determine, based on future franchisee responses to the franchisor's offering, what constituted "overwhelming participation," the plaintiff franchisees were not justified in relying on that phrase as a predictor of the franchisors' future actions regarding how the franchisor would exercise the discretion to measure such "overwhelming participation."

The court also specifically rejected the remaining fraud allegations of the franchisees relying explicitly on the law's distinction between representations of present facts or promises of future conduct and representations of future events. In this case, according to the court, the allegedly fraudulent statements made by the franchisor were merely representations concerning a future event, expressions of opinion, or predictions about the future of the new franchise system that the franchisors were attempting to implement - the statements were not present facts. Accordingly, the court dismissed the franchisees' claims of fraud.  

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Franchisees at the Mercy of Franchisors That Sell Their Franchise Systems  

Santiago-Sepulveda, et al. v. Esso Standard Oil Company (Puerto Rico) and Total Petroleum Puerto Rico, et al.

United States Court of Appeals, First Circuit. April 26, 2011

Plaintiffs, franchisees, operated gas stations as franchisees of Esso Standard Oil Co. ("Esso") in Puerto Rico. Esso operated as a supplier of gasoline for 100 years to 161 independent dealers in PR, and in many cases, in addition to providing franchise services, leased the stations to the franchisees. The franchisees sued the franchisor under the Petroleum Marketing Practices Act ("PMPA"). PMPA is one of the very few federal dealer-protection statutes limiting the circumstances in which a motor fuel franchisor can terminate or choose not to renew a franchise relationship.

In response to having suffered losses in the market for the five preceding years, Esso in 2006 began to consider totally leaving the Puerto Rico market. In March 2008 Esso decided to sell its operations and assets to Total Petroleum Puerto Rico Corp. ("Total"), a gasoline refiner and distributor that operated about 90 gas stations in Puerto Rico. On March 17, 2008, Esso notified its gasoline franchisees of its planned withdrawal from the Puerto Rican market. As part of the sale, Esso also informed the franchisees that as of September 30, 2008 it was terminating all of its franchise agreements with the franchisees.

In the summer of 2008, Total, the purchaser of the Esso system, began to offer Esso's franchisees franchise agreements to become franchisees of Total. Total used a standard prototypical franchise model contract offered to potential new franchisees and to existing franchisees whose contracts are renewed. Total offered the then-current standard franchise agreement to Esso franchisees.

In the late summer of 2008, five groups of Esso franchisees, unhappy with the terms Total offered in its franchise agreements, filed separate lawsuits in the federal district court in Puerto Rico against Esso. In essence, the franchisees claimed wrongful termination and violations of the PMPA.

The trial court ruled in favor of Esso and the other franchisor defendants, and denied the injunction and damages sought by the franchisees. The franchisees appealed the trial court judgment to the United States Circuit Court for the First Circuit, which under the reasoning below, agreed with the trial court's decision in favor of the franchisors.

First, the franchisees argued that the PMPA was violated because Total did not offer the

former Esso dealers "franchise[s] ... on terms and conditions which are not discriminatory to the franchisee as compared to franchises then currently being offered by [Total] or franchises then in effect and with respect to which [Total] is the franchisor." Such alleged discrimination included, but was not limited to, Total's requiring some franchisees to operate a convenience store, while not requiring this of others. Similarly, franchisees contended that some franchisees had to sign non-compete agreements, while others did not.

The appeals court rejected the discrimination claims on two grounds. First, the court pointed out that "Congress did not intend 'not discriminatory' in the PMPA to mean that each service station operator must be offered a franchise with identical terms. A franchisor must be free to offer different terms at different franchise locations, depending on the economic conditions and forecast for that area." Thus, to employ additional terms for franchisees with convenience stores on the premises could well be legitimate under the PMPA so long as all of Total's franchisees in this situation were offered similar terms.

And, second, the court ruled that the franchisee plaintiffs had failed to make this type of discrimination argument in the court below, and, therefore they were barred from making it on the appeal. Although plaintiffs made a discrimination claim at trial, it was different from that they made on appeal. In this regard, the argument made by the franchisees at trial was that the franchises offered to them were different than the ones Total offered to its preexisting franchisees, not that the terms offered to former Esso dealers differed from each other.

Plaintiffs' second major claim was that Total's offer to sell its franchises to existing franchisees of Esso was not "in good faith" based on the fact that the trial court had found that a few limited terms and provisions in the franchise agreements violated state law.

The court addressed directly the "good faith" argument, beginning by pointing out that 'good faith' usually refers to a subjective intent or motive that is legitimate rather than consciously evil or dishonest. In so doing, the court concluded that Congress could have meant one of two different things. First, Congress in enacting the "good faith" requirement could have intended that courts should not examine or "second guess" the reasoning behind the franchisor's business judgments. Second, in contrast, according to the court, Congress could have intended the "good faith" requirement to afford further franchisee protection by banning offers that might be non-discriminatory but were structured to be unacceptable and intended to provoke refusal.

With regard to the second formulation of 'good faith' above, the court did explicitly recognize it might be 'hard on the departing franchisor' because under this interpretation of the PMPA the 'selling franchisor' would be the only one who could be sued, and the 'selling' franchisor would as well have no easy way to judge the subjective good faith of its successor, the purchasing franchisor.

At the end of the day, the reviewing appeals court accepted the trial court's view that there was no evidence indicating that "the Total franchise agreements [were intended] to force any franchisee to reject the proposal." In sum, the court stated that it found "no basis for suggesting that Total intended that its offer be rejected."  

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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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