Franchising (& Distribution) Currents

Franchising (& Distribution) Currents Gary Batenhorst, Jan Gilbert, Heather Carson Perkins ANTITRUST Matthew Enter., Inc. v. Chrysler Grp., LLC, Bus. Franchise Guide (CCH) 15,463 (N.D. Cal. Jan. 12, 2015) The U.S. District Court for the Northern District of California denied a Chrysler automotive dealer s Federal Rule of Civil Procedure 12(b)(6) motion, holding that the rent assistance that Chrysler Group, LLC provided to a recently opened competing dealership did not constitute price discrimination under the Robinson Patman Act. Mr. Batenhorst Mr. Gilbert Ms. Perkins Automotive dealer Matthew Enterprise, Inc. alleged that although subsidies provided by its manufacturer, Chrysler, to a competing dealership were labeled as rent assistance, they served to either decrease the competitor s vehicle purchase price or to compensate it for promotional services or facilities. Matthew claimed that this practice violated the Robinson Patman Act. However, the court observed that a rental agreement is not a commodity covered under the Act, and it may only fall within the scope of the Act if the dominant nature of the transaction actually relates to the sale of tangible products rather than the lease. The court held that Matthew failed to demonstrate that the payments dominant nature was to reduce vehicle prices because it offered no facts to show that the payments actually amounted to per-vehicle discounts. Further, the subsidies were not unlawful payments for services or facilities under the Act because Matthew failed to allege that any services or facilities were actually provided. Gary R. Batenhorst (gbatenhorst@clinewilliams.com) is a partner in the Omaha office of Cline Williams Wright Johnson & Oldfather, L.L.P. Jan S. Gilbert ( jgilbert@gpmlaw. com) is a partner in the Washington, D.C., office of Gray Plant Mooty. Heather Carson Perkins (heather.perkins@faegrebd.com) is a partner in the Denver office of Faegre Baker Daniels. 105

106 Franchise Law Journal Vol. 35, No. 1 Summer 2015 ARBITRATION Arbor Beverage Co., Inc. v. Phillips Farms, LLC, Bus. Franchise Guide (CCH) 15,456, No. 14-cv-12907, 2015 WL 470603 (E.D. Mich. Feb. 4, 2015) Arbor Beverage Company, a Michigan wine wholesaler, sued Phillips Farms, LLC, a wine supplier based in California that did business under the name Michael David Winery (MDW). Arbor alleged that MDW breached the parties 2004 exclusive distribution agreement and also sought a declaratory judgment regarding the arbitrability of Arbor s claim. MDW sought to dismiss the case or, in the alternative, have it transferred to California. The 2004 agreement granted Arbor exclusive distribution rights to the sale of MDW s wine in seven counties in Michigan. The 2004 agreement did not have an arbitration or a forum selection clause. From December 2007 until the time of the hearing in this case, Arbor placed forty-eight orders for MDW s products. During that time MDW s invoices contained certain terms and conditions (2007 terms and conditions). The 2007 terms and conditions stated that, except where there was a written agreement to the contrary between the parties or where any term was prohibited by an applicable state law, the terms and conditions would apply. The 2007 terms and conditions applied California law and stated that disputes on anything referred to in the terms and conditions, the performance or cessation of the distributorship, or the distributor s rights to continue distributing MDW s products would be resolved by arbitration in San Francisco. The parties also consented to the jurisdiction of the state and federal courts in San Francisco when judicial action was necessary. Several years after entering into the 2004 agreement, Arbor learned that another distributor, Imperial Beverage, was distributing MDW wines in Arbor s territory. MDW granted Imperial rights to sell its products in parts of Arbor s exclusive territory through a 2009 written agreement. Arbor was not notified of this agreement until 2014 and claimed Imperial led it to believe that Imperial had not received distribution rights from MDW. In July 2014, Arbor sued for breach of contract, seeking damages for loss of its exclusive distribution rights. Arbor argued that the action was governed by its 2004 agreement and not the 2007 terms and conditions, the validity of which Arbor challenged. MDW sought dismissal of Arbor s complaint, contending dismissal was proper under Federal Rules of Civil Procedure 12(b)(1), 12(b)(3), or 12(b)(6). In the alternative, MDW sought to transfer the case to the Northern District of California. The court first considered the motion to transfer on forum non conveniens grounds. MDW argued transfer was proper because the 2007 terms and conditions included arbitration and choice-of-law provisions. Arbor argued the 2007 terms and conditions were not valid and the 2004 agreement controlled. The court said that before it could send a case to arbitration it first had to determine if there was a valid agreement to arbitrate.

Franchising (& Distribution) Currents 107 In determining whether the 2004 or 2007 provisions controlled, the court relied heavily on a section of the Michigan Liquor Control Code, which prohibited a supplier from requiring a provision in an agreement that applied the laws of another state and also granted venue in Michigan for suppliers or wholesalers with disputes under agreements governed by the Liquor Control Code. The court noted that the statute did not preclude arbitration, but that the 2007 terms and conditions provided for arbitration in San Francisco. The court concluded the forum selection provision was barred by the statute and therefore was invalid. MDW argued that by continuing to do business with MDW after the inception of the 2007 terms and conditions, Arbor waived its rights under the applicable statute or that these terms and conditions were bargained for and replaced the 2004 agreement. The court dispatched these arguments, noting that it was MDW s responsibility in the first instance not to require the forum selection provision, so Arbor did not have the opportunity to waive its rights under the statute. The court said MDW in effect conceded the applicability of the statute, including a reference to it in its 2009 agreement with Imperial. The court finished by denying MDW s motion to dismiss, noting that it was based entirely on the validity of the forum selection clause that the court had invalidated. Arctic Circle Rests., Inc., v. Bell, Bus. Franchise Guide (CCH) 15,477, No. 4:14-CV-00337-REB, 2015 WL 807123 (D. Idaho Feb. 26, 2015) In this dispute between the franchisor of Arctic Circle Restaurants and Bell, one of its former franchisees, Bell moved to dismiss the action or alternatively stay the case pending arbitration. The franchisor resisted Bell s motion. A magistrate judge for the U.S. District Court for the District of Idaho granted Bell s motion to dismiss the case because the disputes were subject to determination under the arbitration clause in the franchise agreement. Arctic Circle brought claims based on breach of the franchise agreement, breach of a promissory note, federal trademark infringement, dilution, unfair competition, common law trademark infringement, state unfair competition law, and unjust enrichment. The court stated it was not concerned with the details of Arctic Circle s claims but rather with the issue of whether Arctic Circle s case should be stayed pending arbitration. The court examined the dispute resolution procedures in the franchise agreement, which included an arbitration clause providing that any dispute or disagreement arising under the franchise agreement or with respect to a breach of its terms was to be decided by arbitration following a procedure described in the franchise agreement. The next section of the franchise agreement stated that the arbitration provision was not to be construed as preventing either party from seeking preliminary equitable relief from a court. Bell argued that all of Arctic Circle s claims arose under or related to the franchise agreement so they should be resolved by arbitration.

108 Franchise Law Journal Vol. 35, No. 1 Summer 2015 The court began its discussion by noting that the Federal Arbitration Act (FAA) requires courts to direct parties to arbitrate issues for which there is an arbitration agreement. The court said its role was limited to determining whether there was a valid agreement to arbitrate and whether it encompassed the disputes at issue. The court said there was no dispute that the franchise agreement included a valid agreement to arbitrate in certain circumstances. The court quickly dismissed as without merit Arctic Circle s argument that the franchise agreement expressly permitted suits such as the one it filed seeking preliminary equitable relief. The court noted that Arctic Circle had previously notified the court that its request for a temporary restraining order or preliminary injunction had become moot following certain remedial actions by Bell. The court then reviewed Arctic Circle s breach of the franchise agreement claim, noting that it was inescapably a dispute under the franchise agreement that was subject to arbitration. The court also noted that Arctic Circle had cited various sections of the franchise agreement as the basis for this claim. In reviewing Arctic Circle s other claims, the court conceded there was a connection to the franchise agreement, albeit not as obvious. Arctic Circle had argued that its claim for breach of a promissory note signed by Bell for nearly $185,000 was unrelated to and not governed by the franchise agreement. The court rejected this argument, noting that the promissory note cross-referenced the franchise agreement and referred to the remedial provisions in the franchise agreement. Specifically, failure to pay under the promissory note constituted an event of default. Although most of Arctic Circle s remaining claims were grounded in state and federal trademark and unfair competition law, the court found that they did not arise outside of the franchise agreement in a manner that would allow them to be pursued outside of arbitration. The court said the franchise agreement spoke of the defendant s use of Arctic Circle s trademarks, Bell s noncompete obligations, and post-termination obligations not to use the trademarks. The court believed these terms of the franchise agreement logically coincide with Arctic Circle s trademark infringement, dilution, and unfair competition claims. Again noting that the arbitration language in the franchise agreement covered any dispute or disagreement with respect to a breach of its terms, the court found that these other claims of Arctic Circle were subject to the arbitration provisions of the franchise agreement. In a footnote, the court also determined that Arctic Circle s claim for unjust enrichment would not exist except for the parties relationship under the franchise agreement. Having found all of Arctic Circle s claims to be subject to arbitration, the court dismissed this case without prejudice. Estrada v. CleanNet U.S.A., Inc., Bus. Franchise Guide (CCH) 15,469, No. C 14-01785 JSW, 2015 WL 833701 (N.D. Cal. Feb. 24, 2015) The U.S. District Court for the Northern District of California granted the defendants motions to compel arbitration of sixteen claims brought by the

Franchising (& Distribution) Currents 109 plaintiffs who sought to represent a class of individuals allegedly injured by numerous corporate and individual defendants affiliated with the CleanNet franchise system. The complaints alleged that the defendants operated an integrated business under which CleanNet U.S.A. controlled area operators who, in turn, sold franchises to individuals. Each plaintiff signed a franchise agreement, each of which contained dispute resolution provisions and class action waivers. The franchise agreements also required the parties to resolve disputes through direct negotiation and, before a demand for arbitration could be made, to attempt to settle disputes through mediation. Failing resolution through informal means or mediation, the agreements provided that [a]ll disputes, controversies, and claims of any kind arising between the parties, including but not limited to claims arising out of or relating to this Agreement... shall be settled by arbitration. The franchise agreements all prohibited a franchisee from arbitrating or litigating as a representative of or on behalf of any person or entity. The court specifically noted that each of the plaintiffs not only signed their agreement, but also initialed each page. According to 9 U.S.C. 2, arbitration agreements shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for revocation of any contract. Citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 25 (1983), the court held that the FAA represents a liberal federal policy favoring arbitration agreements and that any doubt concerning the scope of arbitrable issues should be resolved in favor of arbitration. The court further noted that, notwithstanding the policy favoring enforcement of arbitration clauses, an arbitration agreement is a contract and therefore subject to all defenses to enforcement that apply to contracts generally. The plaintiffs argued that the arbitration provisions were both procedurally and substantively unconscionable, rendering the agreements as a whole unconscionable. The court rejected that argument. Procedural unconscionability concerns that manner in which the contract was negotiated and the parties circumstances at the time, with a focus on oppression arising from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice, and surprise, defined as the extent to which the supposedly agreed upon terms are hidden in a printed form drafted by the party seeking to enforce them. Citing Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006), the court rejected the plaintiffs contention that the agreements were procedurally unconscionable, holding that there was no more than a minimal amount of procedural unconscionability. In rejecting the plaintiffs argument, the court credited the defendants argument that the arbitration provisions were clearly labeled, with bold and capitalized section headings that should have alerted the plaintiffs to their presence, that the plaintiffs were given an opportunity to review the agreements, were encouraged to consult with a lawyer before signing, and

110 Franchise Law Journal Vol. 35, No. 1 Summer 2015 that the plaintiffs represented in their respective franchise agreements that they were capable of doing business in English without undue burden. Turning to substantive unconscionability, the court, citing Nagrampa, noted that substantive unconscionability relates to the actual terms of the arbitration agreement and whether the terms are overly harsh or one-sided. The court held that the dispute resolution provisions were not substantively unconscionable, rejecting the plaintiffs arguments that the provisions impermissibly shortened the limitations period, limited their ability to fully recover damages, or impermissibly burdened the plaintiffs financially. Accordingly, the court ordered the parties to resolve all disputes in accordance with the dispute resolution provisions of the franchise agreements. The court next took up the scope of the franchise agreements class action waivers. The plaintiffs conceded that, if they were required to arbitrate, the dispute resolution provisions waivers would bar them from pursing representative actions on most of their claims. The plaintiffs argued, however, that their claims under California s Private Attorneys General Act (PAGA), which permits individuals to bring representative claims for an employer s violation of the California Labor Code, were not subject to arbitration. The court, citing the numerous courts in the Ninth Circuit that have held that class action waivers that extend to representative PAGA actions are permissible, concluded that permitting the plaintiffs PAGA claims to go forward would contravene the FAA s purpose. Accordingly, the court held that the plaintiffs would be permitted to arbitrate their PAGA claims as individuals or, to the extent permitted by California law, as state agents, provided that their relief is limited to only what they could obtain as individuals. The court noted that the California Supreme Court had held that an employee s right to bring a representative PAGA action cannot be waived in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 383 84 (2014). Adopting the reasoning of district courts in the Ninth Circuit that had previously held that the FAA preempted this state-law rule, the court concluded that permitting the plaintiffs representative PAGA claims to go forward would contravene the FAA s purpose and, thus, concluded that the rule set forth in Iskanian was preempted. Med. Shoppe Int l, Inc. v. Prescription Shoppes, LLC, Bus. Franchise Guide (CCH) 15,464, No. 4:14cv1218 CDP, 2015 WL 901457 (E.D. Mo. Mar. 3, 2015) This case is discussed under the topic heading Attorney Fees. Renard v. Ameriprise Fin. Servs., Inc., Bus. Franchise Guide (CCH) 15,440, 778 F.3d 563 (7th Cir. 2015) This case is discussed under the topic heading Termination and Nonrenewal.

Franchising (& Distribution) Currents 111 Sanchez v. CleanNet U.S.A., Inc., Bus. Franchise Guide (CCH) 15,448, No. 14 C 2143, 2015 WL 231450 (N.D. Ill. Jan. 15, 2015) This case is discussed under the topic heading Class Actions. Torres v. CleanNet, U.S.A., Inc., Bus. Franchise Guide (CCH) 15,457, No. 14-2818, 2015 WL 500163 (E.D. Pa. Feb. 5, 2015) Eddy Torres brought a class action against CleanNet U.S.A., Inc., the franchisor of a commercial cleaning system (franchisor), MKH Services, Inc. (MKH), and CleanNet Systems of Pennsylvania, Inc. (CleanNet PA) in state court in Philadelphia. The defendants removed the case to federal court under the Class Action Fairness Act of 2005, and the court had previously determined that the case would remain in federal court. The defendants moved to stay the case pending arbitration. The franchisor operated in Pennsylvania under two sub-franchisors, MKH and CleanNet PA. Torres entered into a franchise agreement that contained a dispute resolution procedure that ultimately provided for arbitration with MKH in March 2012. The franchise agreement required MKH to provide Torres with $7,000 per month in gross billings for the cleaning services to be provided by Torres. MKH failed to provide Torres with the required gross billing; in August 2012, the parties amended the franchise agreement to reduce the gross billing requirements to $3,000 per month. The amendment provided that any action brought under the addendum would be subject to the dispute resolution procedure in the franchise agreement. From August 2012 to June 2013, MKH failed to provide Torres with $3,000 per month in gross monthly billings. Torres sought a refund of his initial franchise fee, which MKH refused to provide. Torres then sued on behalf of himself and all persons who provided cleaning services for the defendants during a specified time period. Torres alleged that the defendants acted as joint employers of the franchisees although the franchise agreement classified franchisees as independent contractors. Torres alleged that the franchisor controlled the means and manner of services and such areas as scheduling, rates of pay, billing, and the types of equipment to be used by franchisees. Torres noted that the franchisor allowed him to reject proposed assignments, but that such assignments counted toward fulfilling the franchisor s obligation to provide gross monthly billings. Torres complained that the franchisor routinely assigned work that class members would not be able to accept as a means of meeting the gross billing requirements. All of the claims Torres asserted arose under state law, including the Pennsylvania minimum wage, wage payment and collection, workers compensation, and unfair trade practices statutes. In reviewing the defendants motion to stay, the court said it could be decided under the standards used in deciding motions for summary judgment or motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). The court opted to use the Rule 12(b)(6) standard. The court said that before compelling arbitration, it had to determine that an enforceable agreement

112 Franchise Law Journal Vol. 35, No. 1 Summer 2015 to arbitrate existed and the dispute fell within the scope of that agreement. In arguing against arbitration, Torres contended that compelling him to arbitrate would effectively prevent him from asserting his state law claims. In addition, he argued that the court should not enforce the agreement to arbitrate for the franchisor and CleanNet PA because only MKH was a signatory to the franchise agreement. The court soundly rejected Torres contention that the arbitration agreement prevented him from effectively vindicating his state statutory rights by requiring him to pay certain fees and costs; precluding statutory recovery of attorney fees, costs, and all available statutory damages; and limiting discovery. The court said that the Supreme Court in AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), clarified that effectively vindicating state statutory rights cannot be the basis to invalidate an arbitration agreement. The court noted that the Supreme Court had discussed the effective vindication rule several times in dictum but in the context of effectively vindicating a federal statutory right. In determining whether the franchisor and CleanNet PA as nonsignatories to the franchise agreement could enforce its arbitration provisions, the court focused on whether this case satisfied the elements for equitable estoppel. The parties agreed that equitable estoppel is a theory that permits a nonsignatory to compel arbitration but disagreed on its elements. The court determined that a nonsignatory must show a close relationship between the parties and that the claims are intimately found in and intertwined with the underlying contractual obligations. Torres conceded the existence of a close relationship so the court considered the second element of this test. The court determined that claims are intertwined with an arbitration agreement when the claims rely on the terms of the agreement or assume the existence of, arise out of, or relate directly to, the written agreement. Torres argued his claim that the defendants misclassified employees as independent contractors was not intertwined with the franchise agreement. The court rejected this argument, pointing to the terms of the franchise agreement relied upon by Torres in arguing that the misclassification had occurred. The court went on to discuss how Torres claims for declaratory relief, rescission, unjust enrichment, and alleged violation of several statutes made repeated references to the franchise agreement. The court concluded that these claims stem from the relationship established by the Franchise Agreement and thus are intimately founded in and intertwined with the Franchise Agreement. The court concluded by disposing of Torres argument against enforcement of a class action waiver contained in the franchise agreement. Torres argued that the waiver should not be enforced because this was not a dispute arising out of or related to the franchise agreement. The court sided with the defendants, which had noted that the waiver also covered disputes over the

Franchising (& Distribution) Currents 113 rights and obligations of the parties. Thus, the court concluded there was no basis to conclude that the parties agreed to class arbitration. ATTORNEY FEES Med. Shoppe Int l, Inc. v. Prescription Shoppes, LLC, Bus. Franchise Guide (CCH) 15,464, No. 4:14cv1218 CDP, 2015 WL 901457 (E.D. Mo. Mar. 3, 2015) The U.S. District Court for the Eastern District of Missouri confirmed an arbitration award of attorney fees to a franchisor, dismissing the franchisee s allegations of partiality, misconduct, and manifest disregard of the law by the arbitrator. Prescription Shoppes, LLC, a franchisee of Medicine Shoppe International, Inc. (MSI), filed a claim against MSI with United States Arbitration and Mediation (USA&M), the contractually designated arbitrator. After two years of arbitration, Prescription Shoppes elected not to proceed with its claims. In accordance with USA&M s consolidated arbitration rules, MSI therefore moved for a default judgment and sought attorney fees. The arbitrator granted MSI attorney fees, observing that Prescription Shoppes decided not to proceed the day before depositions were to commence and less than thirty days before the start of the hearing, after the parties had invested considerable time and expense. The arbitrator calculated the attorney fees based on detailed attorney time entries, which he reviewed in camera to protect attorney client privilege. Prescription Shoppes filed a motion requesting that the district court vacate the award, and MSI sought to have the award confirmed. The FAA provides that a reviewing court may vacate an arbitration award under a finite list of circumstances, which do not include manifest disregard for the law; thus, Prescription Shoppes claim to that effect failed. Further, although a claim of partiality is a valid basis for vacatur, Prescription Shoppes waived this claim by failing to raise it with the arbitrator. The court also dismissed Prescription Shoppes claim that the arbitrator committed misconduct by failing to require MSI to produce detailed billing entries to all parties. When one party has defaulted, USA&M s consolidated arbitration rules provide that the arbitrator has discretion to enter a default judgment without any input from the parties. Production of the billing entries was not necessary. Moreover, there was no evidence the hearing was unfair because the arbitrator had a direct understanding of the extent of the parties effort relating to the dispute; he reviewed MSI s evidence of legal fees; he permitted the parties to submit letters explaining why they believed detailed attorney time entries should be produced, rather than reviewed in camera; and he reduced the final award based on his review. Thus, the arbitrator s conduct was within the scope of his authority and did not warrant vacating the award.

114 Franchise Law Journal Vol. 35, No. 1 Summer 2015 Meltzer/Austin Rest. Corp. v. Benihana Nat l Corp., Bus. Franchise Guide (CCH) 15,434, No. A-11-CV-542-AWA, 2014 WL 7157110 (W.D. Tex. Dec. 15, 2014) The U.S. District Court for the Western District of Texas held that a contractual provision entitling franchisor Benihana National Corp. to attorney fees to enforce a franchise agreement did not include legal fees spent defending against the franchisee s claims. Benihana brought breach of contract and intellectual property claims against franchisee Meltzer/Austin Restaurant Corp. for continuing to operate two franchised restaurants after Benihana terminated the franchise agreements. Meltzer also brought several claims. Only its breach of contract claim concerning one of the franchise units went to the jury, however, which found in favor of Benihana. Benihana sought recovery under a provision of the franchise agreement that authorized it to recover attorney fees in connection with the enforcement of certain articles of the agreement. The court held that defending against Meltzer s breach of contract claim did not constitute enforcing the agreement. Rather, enforcing an agreement meant proactive steps to ensure that the opposing party complied with it. Benihana could only recoup legal fees associated with Meltzer s failure to comply with its post-termination obligations under the agreement. The court observed that broader contract language permitting recovery associated with preparation, execution, administration, collection, enforcement, protection, waiver or amendment has been construed to include attorney fees for defending against an action. Thus, the parties must have purposefully chosen narrower language in the instant case. The court granted Benihana s motion for attorney fees in part and denied the motion in part. MPC Franchise, LLC v. Tarntino, Bus. Franchise Guide (CCH) 15,458, No. 11-CV-6310 CJS, 2015 WL 471355 (W.D.N.Y. Feb. 4, 2015) In what may be the final chapter of a family feud over the right to use and franchise the name Pudgie s for the sale of pizza, the U.S. District Court for the Western District of New York considered motions for attorney fees filed by both parties. The antagonists were two families of cousins who were descendants of the original owners of the rights to use the Pudgie s name. MPC Franchise had licensed the Pudgie s trademark from TruFoods, which the court characterized as the lawful owner of the mark. In 2011, MPC filed an action against Brent Tarntino, alleging that Tarntino had fraudulently registered the Pudgie s mark with the U.S. Patent and Trademark Office (USPTO). MPC sought a declaratory judgment that Tarntino had no ownership interest in the mark registered by TruFoods, seeking cancellation of Tarntino s mark for fraud, and seeking a declaration that Tarntino had engaged in trademark infringement and unfair competition. Tarntino answered and filed a five-part counterclaim, alleging (1) MPC s

Franchising (& Distribution) Currents 115 infringement on his registered mark, (2) unfair competition under 15 U.S.C. 1125(a), (3) common law infringement and unfair competition, (4) his entitlement to a declaratory judgment that he was not infringing on the trademark rights of TruFoods or MPC, and (5) a state statutory claim for injury to business reputation. Tarntino and MPC both filed motions for summary judgment, asserting various theories as to why they were the true owner of the Pudgie s trademark rights. The court noted that the primary issue was which party had the right to franchise under the Pudgie s name. The court granted the parties summary judgment motions in part and denied them in part. Significantly, the court determined that Tarntino as a matter of law had committed fraud on the USPTO and cancelled Tarntino s registration. As a result, Tarntino could no longer claim rights to franchise under the Pudgie s name. After the case settled before trial, both parties filed motions seeking attorney fees. MPC sought $109,779.23 in fees and costs, contending this amount was only in connection with its claim successfully cancelling Tarntino s trademark registration. Tarntino opposed this motion and argued he should be awarded attorney fees and costs. MPC argued it was entitled to fees under the Lanham Act because Tarntino acted fraudulently or in bad faith in registering the Pudgie s mark. Tarntino countered that fraudulent conduct alone does not warrant awarding attorney fees. Tarntino also said the hourly rate and number of hours in MPC s attorney fees application were unreasonable. The court had little trouble concluding that MPC was the prevailing party for attorney fees purposes and that this was an exceptional case as required for attorney fees awards under the Lanham Act because of Tarntino s fraud in attempting to seize MPC s franchise business. The court noted that MPC obtained summary judgment on the central issue in the case, Tarntino s registration was found to be invalid, the matters on which Tarntino prevailed were insignificant, and Tarntino failed to obtain summary judgment on any of his counterclaims. Turning to the amount of fees and costs to be awarded to MPC, the court noted that the time spent and amounts billed by the two sides were very similar. The attorney fees sought by MPC in its motion were billed by Fisher Zucker in Philadelphia, which the court noted specializes in franchise law. The court said that when attorney fees are sought for a firm from outside the district, the court must determine if the decision to retain this counsel was reasonable or whether the party should have retained less expensive counsel within the district. The court could award a higher out-of-district rate or a rate between the in-district and out-of-district rate, if it is clear that a reasonable, paying client would pay these rates. The court said there was a presumption that a reasonable paying client would opt for the lower rates in most cases, but this presumption could be rebutted. To do so, an applicant must show that a reasonable client would select out-ofdistrict counsel because doing so would be likely to produce a substantially

116 Franchise Law Journal Vol. 35, No. 1 Summer 2015 better net result. The court said it had to consider objective factors such as the chosen counsel s special expertise if the case is the type that could benefit from this expertise. The court said that MPC s initial attorney fees filing did not address why the court should award fees on a higher out-of-district rate and did not address whether Fisher Zucker s rates were higher than in-district rates. In its reply papers, MPC argued that Fisher Zucker s rates were comparable to those charged by Tarntino s counsel and awarded by courts in the district. The court concluded that MPC had not made the showing required for awarding higher out-of-district rates, so the Fisher Zucker rates would rise or fall on whether they were comparable to those charged in the district. The court concluded that across the board reductions of the Fisher Zucker rates were appropriate. The court applied a 25 percent reduction on hourly rates for lawyers with ten years or more experience, a 30 percent reduction for lawyers with less than ten years experience, and a 20 percent reduction for paralegals. The court said these rates would be in line with indistrict rates. In looking at whether the number of hours was reasonable, the court determined that it was reasonable although it decided that the 70.6 hours the lawyers spent on the fee application was excessive. The court reduced the number of hours submitted by 33 and then made its award. Scarsdale Cent. Serv. Inc. v. Cumberland Farms, Inc., Bus. Franchise Guide (CCH) 15,469, No. 13-cv-8730(NSR), 2015 WL 678761 (S.D.N.Y. Feb. 13, 2015) This case is discussed under the topic heading Petroleum Marketing Practices Act. BANKRUPTCY Meyers v. Heffernan, Bus. Franchise Guide (CCH) 15,429, No. 12-2434 (MLC), 2014 WL 7336792 (D.N.J. Dec. 19, 2014) The U.S. District Court for the District of New Jersey declined to certify for appellate review two legal questions: (1) the applicability of collateral estoppel to a bankruptcy court s decision and (2) the proper statute of limitations. Employees of a bankrupt mortgage banking company, Mortgage Lenders Network (MLN), filed a complaint seeking that unpaid commissions be paid personally by various defendants who worked for MLN. They alleged violations of the New Jersey Wage Payment Law and the Sales Representatives Rights Act. In a separate proceeding, a bankruptcy judge entered an order approving distributions to most of the plaintiffs. The district court issued an order finding that collateral estoppel did not apply to the bankruptcy decision because not all of the plaintiffs had received compensation and because their recovery had been capped. It also held that the case was subject to the six-year statute of limitations that applied to claims for breach of contract involving economic harm. The defendants

Franchising (& Distribution) Currents 117 sought to certify the order for appellate review and to stay the collateral estoppel and statute of limitations legal questions pending the review. To merit appellate certification under 28 U.S.C. 1292(b), the moving party must demonstrate (1) a controlling question of law, (2) as to which there is substantial ground for difference of opinion, and (3) an immediate appeal will materially advance the ultimate termination of litigation. The court held that the issues merited neither certification nor a stay because no substantial ground for a difference of opinion was present. Regarding the collateral estoppel question, the court also found that, because the damage calculation would not impact any finding of liability, it was not a controlling question of law. Further, because damages would be assessed at a later phase of litigation, addressing the issue would not materially advance termination of litigation. Because the defendants did not establish the three required elements for either legal issue to warrant appellate certification, the court denied their motion. BREAKAWAY FRANCHISEES H.H. Franchising Sys., Inc. v. Aronson, Bus. Franchise Guide (CCH) 15,445, No. 12-cv-708, 2015 WL 401343 (S.D. Ohio Jan. 28, 2015) In April 2007, the defendant, Dori Aronson, entered into two franchise agreements with H.H. Franchising Systems, Inc. (HHFS), which she assigned to the defendant Redi to Help LLC. One agreement was for a Home Helpers franchise, which provides home health care services for seniors, and the other for a Direct Link franchise, which provides emergency response and vital signs monitoring services. HHFS terminated both franchise agreements in January 2009 due to the franchisees failure to make the required royalty and branding fund payments. However, the parties negotiated a rescission of the termination in April 2009. As part of the rescission, the franchisees reaffirmed the franchise agreements and gave HHFS a full release for any claims against HHFS. Thereafter, the franchisees again failed to make the required payments and submit the necessary reports. They also failed to cure after several default notices, leading HHFS to terminate both agreements. After the second termination, the franchisees continued to operate the franchised businesses in violation of post-termination noncompete covenants contained in the franchise agreements. HHFS filed suit in the U.S. District Court for the Southern District of Ohio, and the franchisees answered and asserted counterclaims. Subsequently, the court granted a motion to withdraw by the franchisees counsel. HHFS moved for summary judgment on its two breach of contract claims: (1) breach of post-termination covenants and (2) breach of payment obligations. On both claims, the court found that HHFS had established the four elements for breach of contract.

118 Franchise Law Journal Vol. 35, No. 1 Summer 2015 To prove that the franchisees had failed to comply with the post-termination covenants, HHFS presented evidence that they were still using the telephone numbers associated with the franchised businesses, holding themselves out as Home Helpers and Direct Link franchisees, and operating the terminated franchised businesses. They also failed to pay the outstanding balance owed to HHFS. The franchisees did not present any evidence to contradict HHFS s evidence, and the court held that HHFS had been damaged in an amount to be determined. Similarly, to prove that the franchisees had failed to comply with their payment obligations under the franchise agreements, HHFS presented evidence that they had failed to make required royalty and branding payments and submit necessary reports. HHFS also presented evidence that the franchisees had failed to pay the required monitoring fees under the Direct Link franchise agreement, and they had also failed to pay the costs HHFS incurred as a result of the default, as required under the franchise agreements. Here again, the court found that HHFS had been damaged in an amount to be determined. The court went on to consider the four factors relevant to granting a permanent injunction: (1) the claimant has shown actual success on the merits, (2) the claimant would suffer irreparable injury without an injunction, (3) an injunction would not cause substantial harm to others, and (4) the public interest would be served by the injunction. HHFS sought an injunction to stop Aronson from providing the same services as Home Helpers and Direct Link, competing with Home Helpers and Direct Link, using Home Helpers and Direct Link s marks, and misrepresenting that the franchisees were still affiliated with Home Helpers and Direct Link. The court granted the permanent injunction after finding that the first two factors weighed heavily in favor of the injunction. In particular, the court emphasized that the franchisees unauthorized competition while using the resources of the franchise system would result in unquantifiable damages. CHOICE OF FORUM Arbor Beverage Co., Inc. v. Phillips Farms, LLC, Bus. Franchise Guide (CCH) 15,456, No. 14-cv-12907, 2015 WL 470603 (E.D. Mich. Feb. 4, 2015) This case is discussed under the topic heading Arbitration. Estep v. Yuen Yung, HDYR, LLC & Mekaddishkem-EBE, Bus. Franchise Guide (CCH) 15,452 (E.D. Cal. Jan. 13, 2015) The plaintiffs company, Mekaddishkem-EBE, entered into an area representative service agreement with HDYR to solicit franchisees to establish at least thirty of HDYR s How Do You Roll? sushi restaurants in Northern California. The plaintiffs sued HDYR for breach of contract and fraud in the U.S. District Court for the Eastern District of California. As the court

Franchising (& Distribution) Currents 119 noted in a footnote, the plaintiffs also inexplicably sued their own company, Mekaddishkem. The agreement contained a forum selection clause providing exclusive venue in the state or federal district courts in Austin, Texas, and HDYR sought to transfer the case to the U.S. District Court for the Western District of Texas. The court granted HDYR s motion. The court said that forum selection clauses are presumptively valid in the Ninth Circuit unless: (1) the clause resulted from fraud, undue influence or overweening bargaining power ; (2) the forum selected would be so gravely difficult and inconvenient that the plaintiff would effectively be denied a day in court; or (3) enforcement contravened a strong public policy. The court said there was no evidence of coercion or grave difficulty, so it focused its inquiry on the public policy exception. The court noted that the California Franchise Relations Act (CFRA) sought to protect California franchisees, typically small businesses. However, the court said the agreement was not a franchise agreement but an agreement between a small franchisor and a sophisticated area representative. Thus, the CFRA was not on point and did not outweigh California s policy favoring contractual forum selection clauses where freely and voluntarily entered into and where enforcement would not be unreasonable. The court also rejected the plaintiffs argument that HDYR had not timely filed its transfer motion. The court cited Federal Rule of Civil Procedure 81(f), which allows the filing of such motions within seven days after removal from state court if no answer was filed in state court. Finally, the court rejected the plaintiffs argument that their company was a party to this agreement but the individuals were not. The court said this argument failed for several reasons, including the personal guaranty signed by the individual plaintiffs. The court also noted that in the Ninth Circuit nonparties can be held to forum selection clauses where their conduct is closely related to the contractual relationship. The court said the plaintiffs cannot sue for breach of contract and then attempt to avoid a provision in a contract by arguing they are not parties to the contract. Family Fin. Ctrs. LLC v. Cox, Bus. Franchise Guide (CCH) 15,467, No. 14-5330, 2015 WL 790038 (E.D. Pa. Feb. 25, 2015) The U.S. District Court for the Eastern District of Pennsylvania granted a franchisee s motion to change venue, placing substantial weight on the location of the franchisee s alleged misconduct. Family Financial Centers, LLC, a franchisor of financial services businesses, brought suit against a franchisee that, after rejecting numerous sites suggested by the franchisor, failed to identify a location for its franchised business within the timeframe required under the franchise agreement. The franchisee sought to change venue to its home state of Massachusetts from Pennsylvania, where the franchisor was headquartered. Although the franchisor plaintiff s preference would normally receive significant deference, the court found that such deference was not appropriate here because the rejected potential franchise sites

120 Franchise Law Journal Vol. 35, No. 1 Summer 2015 were all in Massachusetts; most of the facts underlying the franchisor s claims, including the franchisee s conduct, occurred in Massachusetts; and Pennsylvania had little substantive connection to the case. Although entitled to substantially less weight, the franchisee defendant s preference also militated in favor of transferring venue to Massachusetts. The court observed that generally the most appropriate venue is where a majority of events giving rise to the claim arose. Although the franchisee visited the franchisor s headquarters in Pennsylvania and the franchise agreement subjected the franchisee to Pennsylvania law, the court maintained that the material and operative facts in the case primarily occurred in Massachusetts. That the franchisee had also filed a lawsuit in Massachusetts seeking return of its franchise fee also evidenced that the alleged breach occurred in Massachusetts. Further, the court was not persuaded by the franchisor s argument that the parties choice of Pennsylvania law to govern the agreement meant that Pennsylvania was the more convenient venue or its claim that Pennsylvania therefore had some interest in the case. The court distinguished between choice of law and choice of forum, observing that the parties had specifically contracted for arbitration to occur near the franchisor s headquarters, but they had included no such provision for litigation. The court also noted that the franchisor s routine business with out-of-state franchisees undermined its claim that litigating a case outside Pennsylvania was inconvenient. Additional factors such as logistics, the location of witnesses, and court congestion all further weighed in favor of transferring the case to Massachusetts. Ramada Worldwide Inc. v. SB Hotel Mgmt. Inc., Bus. Franchise Guide (CCH) 15,472, 2015 WL 758536, (D.N.J. Feb. 23, 2015) This case is discussed under the topic heading Venue. Rogovsky Enter., Inc. v. MasterBrand Cabinets, Inc., Bus. Franchise Guide (CCH) 15,471, No. 14-CV-188 (SRN/HB), 2015 WL 757360 (D. Minn. Feb. 23, 2015) This case is discussed under the topic heading Definition of Franchise. CHOICE OF LAW Show-Me s Franchises, Inc. v. Sullivan, Bus. Franchise Guide (CCH) 15,435, No. 13-cv-00409-JPG-SCW, 2014 WL 7005197 (S.D. Ill. Dec. 11, 2014) The U.S District Court for the Southern District of Illinois invalidated a franchise agreement s choice-of-law provision as inconsistent with Indiana public policy and the Indiana Deceptive Franchise Practices Act and therefore denied a franchisor s motion for summary judgment. Show-Me s Franchises, Inc., an Illinois corporation, sued its Indiana franchisee, claiming nu-

Franchising (& Distribution) Currents 121 merous breaches of its franchise agreement. The franchise agreement stated that it was governed by Illinois law. The franchisee argued that this term should be invalidated because Indiana s franchise statute prohibited the parties from removing a franchise agreement from the protections of Indiana law. The court observed, however, that Indiana law only permits voiding an agreement s choice-of-law provision when Indiana has a materially greater interest in the litigation than the state favored in the contract. It concluded that Indiana had a materially greater interest in this case because the franchise was incorporated in and located in Indiana, the witnesses and documents were in Indiana, and the contract was negotiated in and partially performed in Indiana. The court therefore set aside the Illinois choice-of-law provision. The franchise agreement further stated that if any provision was invalidated as inconsistent with governing law, all other portions of the agreement would remain as written. Consequently, after disregarding the Illinois choice-of-law provision, the court analyzed which law applied. Because it was sitting in Illinois, the court applied Illinois s choice-of-law rules. Illinois law dictated that Indiana law should apply because the contract was performed in Indiana. Turning to the substance of Show-Me s summary judgment motion, the court observed a factual disagreement about whether Show-Me s provided the training and support required under the franchise agreement and therefore denied its motion for summary judgment. CLASS ACTIONS Estrada v. CleanNet U.S.A., Inc., Bus. Franchise Guide (CCH) 15,469, No. C 14-01785 JSW, 2015 WL 833701 (N.D. Cal. Feb. 24, 2015) This case is discussed under the topic heading Arbitration. Sanchez v. CleanNet U.S.A., Inc., Bus. Franchise Guide (CCH) 15,448, No. 14 C 2143, 2015 WL 231450 (N.D. Ill. Jan. 15, 2015) In this putative class action, the plaintiff filed an eight-count complaint alleging that franchisor defendants CleanNet U.S.A., Inc. and CleanNet of Illinois, Inc. improperly classified him and other franchisees as independent contractors rather than employees, thereby depriving him of benefits under the Fair Labor Standards Act. The plaintiff also alleged that the defendants engaged in fraud in the inducement in order to entice him to enter the franchise agreement and that the defendants violated the Illinois Franchise Disclosure Act. The defendants moved to dismiss the complaint or to stay it under the FAA. The plaintiff was a Spanish speaker of limited education who, along with his brother-in-law, purchased a franchise package from CleanNet IL, an area operator for master franchisor CleanNet U.S.A. The plaintiff entered into a franchise agreement after a meeting at which a representative of CleanNet