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Franchise Law -- Franchise Discrimination 1:2 - Jeff Goldstein: Franchise Lawyer
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Jeff Goldstein GOLDSTEIN LAW GROUP Nat'l Franchise Law

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Franchise Discrimination - Video 1 of 2
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Franchise Law: Fraud and Good Faith in Franchise Law -- Jeff Goldstein: Franchise Lawyer
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Franchise Law -- Franchisees' Franchise Termination Damages -- Jeff Goldstein: Franchise Lawyer
Franchise Law -- Franchisees' Franchise Termination Damages
Franchisees Successfully Prevent Window Franchisor From Blacking Out Franchisee's Claims

Window World, Inc. v. Hampton, United States District Court, N.D. Illinois, Eastern Division. April 01, 2014 Not Reported in F.Supp.2d 2014 WL 1308349 12 C 4329

Window World entered into multiple license agreements with David Hampton from 2005 through 2009, allowing the Defendants to sell windows and related products under the "Window World" name. On October 28 2011, Window World advised the Defendants that their relationship with Window World was in fact a franchise, and that their license agreements violated franchise registration and disclosure laws. Window World gave the Defendants written notice to either agree to become a Window World franchisee in 35 days, or rescind the license agreements and cease operating under the Window World name.

Window World's letter noted that if the Defendants decided to convert from a licensee to a franchisee, the Defendants would continue to operate under their current licensing agreement until its expiration, and would then be asked to sign a franchise agreement. The Defendants elected to enter into a franchise agreement with Window World. Window World alleged in the case that on April 4, 2012, before any franchise agreements were executed, the Defendants abandoned their Window World business and were in default on the November 21 and December 11, 2008 license agreements that they had earlier entered into with Window World.

Defendants sued Window World, but thereafter the franchisees filed a notice of voluntary dismissal of the case. In turn, Window World sued Defendants in a second case, but due to a strange set of procedural and litigation circumstances, the Defendants failed to respond to the franchisor's Complaint. The franchisor proceeded to obtain a default judgment against the franchisees, which, again, the franchisees did not learn about. Defendants later moved to vacate the franchisor's default judgment and the Court granted the motion.

Under the governing standard, the Court was required in part to find that if it vacated the default judgment, the franchisees would have a meritorious defense in the litigation. In this regard, the Court found that certain claims of the franchisees could theoretically have merit. The Defendants pointed to 'missing' required language in the franchisor's October 28, 2011 rescission letter that Window World sent to the Defendants. The franchisees also argued that the language failed to comply with the state franchise statute, and the Court held that this assertion by the franchisees in their paperwork was sufficient to meet the Defendants' burden of showing a meritorious defense for purposes of vacating a default judgment.

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Skincare Spa Franchisee's Credibility Rejected By Court and Injunction Issued

Kalologie Franchising LLC v. Kalologie Skincare Medical Group of California, United States District Court, C.D. California. March 11, 2014 Not Reported in F.Supp.2d 2014 WL 953442

Kalologie, a franchisor of day spas, sought a preliminary injunction preventing Defendants, who formerly operated under a franchise agreement with Kalologie, from continuing to use Kalologie's registered trademark and unregistered trade dress. Kalologie had entered into a franchise agreement with Dr. David Hopp ("Hopp") in September 2009. Hopp and Dr. Julian Girod ("Girod"), who also had a franchise agreement with Kalologie, subsequently entered into a general partnership called Kalologie Skincare Medical Group of California ("KSMG").

In March 2013, Kalologie gave Hopp and Girod written notices of default in relation to the agreements. This led to third-party litigation between Girod and Hopp and an interim agreement between the franchisees was reached under which Hopp would take over management of a spa located at 317 Robertson Boulevard, Los Angeles, California 90048, while Girod would manage a separate location in the Studio City area of Los Angeles. On December 17, 2013, Kalologie gave notice to Hopp and Girod of termination of the franchise agreements. Kalologie claimed that Hopp and Girod had violated the agreements by preventing Kalologie from accessing the point-of-sale software used by the Robertson Boulevard facility; failing to pay royalties contractually owed to Kalologie; disseminating marketing communications without obtaining Kalologie's approval; and selling unauthorized products. The notice also instructed Hopp and Girod to immediately cease their use of the "Kalologie" trademark in connection with any business activity.

Kalologie claimed that thereafter the Defendants nonetheless continued to use Kalologie's trademark and trade dress at the Robertson Boulevard facility. Among other conduct, on December 31, 2013, the Defendants allegedly sent a mass email advertising the Robertson Blvd. spa as a "Kalologie Med Spa," which was copied from an advertisement used by an another franchise in the area. In response, Hopp acknowledged that the Robertson facility used Kalologie-branded items for an unspecified time following the December 17, 2013 termination of the franchise agreement, but without elaborating, stated: "[a]lthough I dispute Plaintiff's claims that I improperly used the Kalologie mark in advertising or voicemails, as alleged in the Complaint, if any such use occurred it was unintentional." This ambiguous statement by the franchisee did not stop the Court from concluding that "the Robertson Boulevard facility continued to use Kalologie's mark following the termination of the franchise agreement" and that accordingly "the court finds that Kalologie is likely to succeed on the merits of its trademark infringement claim."

Next, the court considered whether Kalologie had shown that it was likely to suffer irreparable harm if a preliminary injunction was not granted. In finding that Kalologie had borne this burden, the Court stated that "A plaintiff's loss of control over its business reputation resulting from a defendant's alleged unauthorized use of its protected mark during the pendency of an infringement action can constitute irreparable harm justifying injunctive relief." In this regard, Kalologie had contended that "it will suffer such loss of control over its business reputation, as well as loss of trade and good will due to Defendants' use of its mark."

Despite the above rulings, the Court was concerned about the question "whether such [imminent] harm had ceased, precluding a finding of irreparable harm absent injunctive relief." Defendants contended that they were no longer using Kalologie branded items or marks and do not intend to do so in the future. Further, the franchisees contended, without offering supporting evidence, that their use of the Kalologie mark through the point-of-service system has ended. And, the franchisees alleged that they had notified Kalologie of their intent to replace the sign Kalologie contended infringed its trade dress in violation of the franchising agreement with a new sign that had been pre-approved by Kalologie.

The Court rejected the franchisees' evidence, however, in favor of Kalologie's evidence that its mark continued to be used by Defendants' facility through the online point-of-sale system and associated website. In this regard, specifically, the franchisor, at the March 10, 2014 hearing, offered a current print-out of Defendants point of sale website showing the use of Kalologie four times. Balancing the evidence, the Court ruled that Kalologie was entitled to an injunction: "Kalologie has shown that injunctive relief is likely necessary to prevent irreparable harm going forward."

New Jersey Federal Court Quickly Wipes Out Every Claim by Urgent Care Franchisee

Surendra Pai, NEXDRX1 LLC, and Nexetra Corp., Plaintiffs v. DRX Urgent Care, LLC, American Family Care, CCH 15,240. U.S. District Court, D. New Jersey (March 4, 2014).

The United States District Court for the District of New Jersey held that two still-operating New Jersey urgent care center franchisees in the Doctor's Express system could not state valid claims for constructive termination against their franchisor in violation of the New Jersey Franchise Practices Act (NJFPA) because the franchisees had not yet been forced out of business. The franchisees alleged that the franchisor constructively terminated their franchise without good cause in violation of the NJFPA and sought to enjoin the terminations. The franchisees had also alleged that the franchisor had misrepresented costs and operating expenses of a franchise in its Franchise Disclosure Document (FDD), initiated material and system-wide changes after they entered into their franchise agreements, and breached their agreements when an employee of the franchisor, who had been investigated by the U.S. Department of Justice for fraudulent medical billing, became the CEO of the franchise system.

The district court pointed out that the Supreme Court recently made clear that a claim for constructive termination by a franchisee requires that a franchisee no longer be in operation. In the Supreme Court case, Mac's Shell Service v. Shell Oil Prods. Co., the Supreme Court found that a franchisee failed to state a claim for constructive termination under the Petroleum Marketing Practices Act (PMPA) when the franchisor's allegedly wrongful conduct did not compel the franchisee to abandon its franchise. The Court reasoned that requiring franchisees to abandon their franchise before claiming constructive termination was consistent with the general understanding of the doctrine of constructive termination, where a plaintiff must actually sever a particular legal relationship in order to state a claim.

The franchisees tried to overcome the problem that they were 'still operating' their franchises by arguing that Mac's Shell should not apply because it involved the PMPA rather than the NJFPA. The district court readily rejected this argument as the franchisees asserted no reason why the statutes should be interpreted or applied differently, particularly where both statutes shared the same purpose of protecting franchisees from termination without cause. Accordingly, the Court dismissed the constructive termination claim.

The district court also held that the two urgent care center franchisees were not entitled to rescission of their franchise agreements based on allegations that the franchisor grossly understated the original start-up investment and operating costs required to own and operate a DEF franchise location. The court rejected the franchisees' argument because the estimate of the initial investment was contained in the FDD, which the franchisees reviewed prior to executing a franchise contract, and the FDD unequivocally stated that the costs included within it were estimates, and were not to be considered a projection or promise of the actual costs of the franchise. The Court also refused to acknowledge the intentional misrepresentation argument because the FDD clearly stated that there were no currently operating franchised units, and that the estimates were based only upon the single Doctors Express center that was in existence at the time, which was owned by an affiliate of the franchisor. In addition, the franchisees' claims for misrepresentations were based upon the estimates made in the FDD of the future initial costs and working capital. According to the district court, such estimates were not actionable because they related to future events.

Finally, the franchisees attempted to state a claim for breach of the franchise agreement with their allegation that the franchisor wrongfully modified and changed certain third-party vendors and franchise system standards. Once again, the district court ruled in favor of the franchisor by concluding that the franchise agreement soundly established the right of the franchisor to change required vendors. Overall, the express terms of the franchise agreement were not breached by any of the franchisees' allegations.


Two Men And A Truck/International, Inc. V. HG Investments, LLC, April 18, 2014, MI U.S. DIST. CT. (Defendants violated the franchise agreement with plaintiff by hiring an employee that has been convicted of crimes).

Brentlinger Enterprises V. Volvo Cars Of North America, LLC, April 18, 2014, OH U.S. DIST. CT., SOUTH (Defendants breached the franchise agreement by introducing illegal and discriminatory incentive program for the sale of Volvo motor vehicles).

Interesting Points Regarding the Washington Franchise Practices Statute
  • The Washington Franchise Statute is comprised of two separate pieces of legislation, including (1) the FIPA, which deals mainly with registration and disclosure requirements, and (2) a "franchisee Bill of Rights," which is intended to "ameliorate the non-negotiable nature of the franchisor-franchisee relationship."
  • The Washington Franchise Statute does not specify a remedy for a violation of the bill of rights; instead, a franchisee must sue under an entirely different statute -- Washington's Consumer Protection Act. "The Legislature has provided [that] violations of the Franchise Investment Protection Act are per se unfair trade practices under the Consumer Protection Act.".
  • The Franchise Statute's Bill of Rights, unlike most states out of Washington, does not contain-indeed, has never contained-language limiting its application to the relation between a franchisor and franchisee "in this state [Washington]."

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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