GRAY PLANT MOOTY The GPMemorandum TO: OUR FRANCHISE CLIENTS AND FRIENDS FROM: GRAY PLANT MOOTY'S FRANCHISE AND DISTRIBUTION PRACTICE GROUP Quentin R. Wittrock, Editor of The GPMemorandum Iris F. Rosario, Assistant Editor DATE: October 9, 2009-No. 124 This section of The GPMemorandum addresses non-judicial developments, trends, and best practices of interest to franchisors. Reports of recent judicial developments begin on page 3. AMENDMENTS TO ILLINOIS' FRANCHISE DISCLOSURE ACT EFFECTIVEOCTOBER 1, 2009 On October 1, 2009, amendments to Illinois' Franchise Disclosure Act, signed by Governor Quinn in late August, went into effect. These amendments change several provisions of Illinois franchise law, and bring the Disclosure Act in greater harmony with the amended FTC Franchise Rule. The most notable changes are as follows: Franchise registrations in Illinois will now automatically expire 120 days after the franchisor's fiscal year end. This new expiration date will supersede dates previously given to franchisors. As a result, if a franchisor's current expiration date falls more than 120 days after the franchisor's fiscal year end, the franchisor must file within the 120 day time period. But if the franchisor's current expiration date falls before the 120 day deadline, the franchisor must meet that earlier deadline this year and, depending on the timing, may be required to file another renewal application within 120 days after its fiscal year end. Independent franchise sellers no longer have to register as franchise brokers in Illinois, but franchisors must file Franchise Seller Disclosure Forms for any franchise seller.
Franchise sales are automatically exempt and no filing is required in Illinois under any of the following circumstances: The franchisor has a net worth of at least $15 million. The franchisee has a net worth of at least $5 million and has been in business five years. Within 60 days of the sale, one or more purchasers of at least 50% ownership interest in the franchise has over 2 years experience as an officer, director, or general partner of the franchisor, or as an individual with management responsibility for the offer or sale of the franchisor s franchises; or was a 25% owner of the franchisor for over 2 years. Although these franchise sales are exempt from the filing requirements in Illinois, franchisors must still provide pre-sale disclosure to a prospective franchisee. The Illinois Franchise Bureau has clarified the process for filing a large franchisor exemption for franchisors with a net worth between $5 million and $15 million. Unlike other registration states with large franchisor exemptions, the Illinois Franchise Bureau will initially conduct a cursory review of the application, issue an approval if the application meets basic requirements, and later conduct substantive review of the application. The definition of subfranchise has been modified so that the definition of subfranchisor only applies to those individuals who sell or negotiate the sale of franchises, and no longer includes those individuals who only provide services to franchisees. This is a welcome change for development agents/area representatives, who will not be considered subfranchisors under the amended Disclosure Act unless they sell or negotiate the sale of franchises. Arguably, a development agent/area representative who simply refers leads to a franchisor is not selling or negotiating the sale of a franchise. Material change filings now must be made within 30 days after the end of each quarter of the franchisor s fiscal year, rather than within 90 days after the material change occurs. Franchisors in Illinois should carefully review their compliance with these amendments for all future registrations or renewals in the state. For more information, visit: http://www.illinoisattorneygeneral.gov/consumers/franchise.html. 2
CONTRACTS COURT ENFORCES RESTRICTIVE COVENANT A Florida federal court recently enjoined franchisor Panda Express from opening a restaurant adjoining a Chick-Fil-A restaurant location in Mount Dora, Florida. Chick-Fil-A, Inc. v. CFT Development, LLC, 2009 WL 2870617 (M.D. Fla. Sept. 3, 2009). When Panda Express acquired its property in 2007, it was aware that Chick-Fil-A enjoyed the benefit of a restrictive covenant prohibiting the property from being used as the site of a quick service restaurant deriving twenty-five percent (25%) or more of its gross sales from the sale of chicken. Panda Express resisted the enforcement of this covenant on the grounds that: (1) its stores are not quick service restaurants; (2) the covenant was unenforceable due to vagueness and uncertainty; (3) a typical Panda Express restaurant does not derive 25% or more of its gross sales from the sale of chicken; and (4) ChickFil-A had waived and/or should be estopped from enforcing the covenant. The court rejected Panda Express argument that its restaurants are part of the fast casual segment rather than quick service restaurants, noting that at the time of the events involved in this case, both parties were in the business of operating quick service restaurants as that term is understood. The court also found that the restrictive covenant was unambiguous as applied to the facts of this case and that by any reasonable measure, a typical Panda Express restaurant derives 25% or more of its gross sales from the sale of chicken. Although Chick-Fil-A had not enforced similar covenants against Panda Express in other locations, the court held that Chick-Fil-A had not waived its rights at this location and was not estopped from enforcing the restrictive covenant. Accordingly, the court awarded Chick-Fil-A a permanent injunction enjoining Panda Express from operating one of its restaurants on the property. ANTITRUST DISTRICT COURT DENIES WENDY S MOTION TO DISMISS FRANCHISEE S SHERMAN ACT 1 TYING LOCK-IN CLAIM An Ohio federal court recently denied Wendy s International Inc. s motion to dismiss a franchisee s claim that Wendy s violated Sherman Act 1 by requiring it to purchase food supplies from approved sellers in which Wendy s had a financial interest. Burda v. Wendy s Int l, Inc., 2009 U.S. Dist. LEXIS 86044 (E.D. Ohio Sept. 21, 2009). The court held that the franchisee sufficiently pled a tying claim under a Kodak lock-in theory. When Plaintiff Robert Burda acquired a Wendy s franchise in 1996, there were multiple Wendy s-approved food suppliers. In Burda s region, Sygma and Willow Foods competed to supply food and, each year, Burda requested that the two suppliers 3
submit competing bids. In addition, prior to 1997, Burda purchased hamburger buns from LePage Bakery. In 1997, Wendy s insisted, on threat of terminating Burda as a franchisee, that Burda purchase all of his buns from New Bakery Co. of Ohio, Inc., a subsidiary of Wendy s. In 2004, Wendy s granted Willow Run Foods exclusive rights to supply Burda s region and guaranteed Willow Run Foods a minimum profit by imposing a 4-cent-per-case surcharge on any purchases of food supplies that Burda made from any other approved suppliers. Burda alleged that he was a victim of an illegal tying arrangement whereby Wendy s used its control over franchise rights (the tying good) to compel him to accept New Bakery hamburger buns and food supplies from Willow Run Foods (the tied goods), thus increasing his operating costs. The court s reading of the approved supplier provision in the Wendy s franchise agreement was the critical element that led it to reject Wendy s motion to dismiss. The court acknowledged that a lock-in tying theory under Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992), would be unavailable to Burda if the terms of his franchise agreement put him on notice of the potential imposition of the exclusive purchasing restrictions; in that event, he would not have been locked in when he executed the franchise agreement and accepted the possibility of such restrictions. The Wendy s agreement required Burda to purchase all food items from suppliers whose goods met Wendy s specifications, who had sufficient quality controls, and who have been approved in writing by Franchisor. But the court found that this language raised a question of fact that could not properly be resolved on a motion to dismiss: There is no language in this Section that would put a potential franchisee on notice that Defendants would be able [to] eliminate all competition by naming an exclusive supplier.... Instead, the language suggests that supplier competition was welcome.... In contrast, the court noted that the Domino s Pizza franchise agreement at issue in Queen City Pizza, Inc. v. Domino s Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), provided that Domino s may in its sole discretion require that... [ingredients and supplies] be purchased exclusively from us or from approved suppliers or distributors. Thus, the Domino s franchisees were made aware of the possibility of exclusive purchasing requirements before they bought their franchises and became locked in. CLASS ACTIONS COURT CERTIFIES CLASS ACTION AGAINST FRANCHISOR In De Giovanni v. Jani-King Int l., Inc., 2009 WL 2993798 (D. Mass. Sept. 21, 2009), the court considered plaintiffs motion to certify a class composed of Jani-King franchisees operating in Massachusetts. Plaintiffs brought two claims against Jani-King. First, the 4
plaintiffs claimed that Jani-King had engaged in various unfair business practices, including breach of contract, misrepresentation, unjust enrichment, and violation of Massachusetts unfair and deceptive trade practices law. Second, the plaintiffs claimed that Jani-King had violated Massachusetts wage and employment laws by classifying its franchisees as independent contractors rather than employees. The court denied the plaintiffs motion to certify a class as to their first claim, but granted the motion as to the second. With respect to the unfair business practices claim, the court found that it presented intractable individualized evidentiary and legal issues that prohibited consideration of the claim on a class-wide basis. The court did find that claims brought under the unfair and deceptive trade practices law and based on the fees charged under the standard Jani-King franchise agreement were the type of claims that could be appropriately resolved through a class action. It held, however, that the two identified class representatives had not shown that they were typical of the franchisees affected by those provisions, as they had not demonstrated that they had personally been affected by application of those provisions of the franchise agreement that they challenged. The court thus denied without prejudice the plaintiffs motion to certify a class on those claims, granting the plaintiffs leave to amend their complaint to identify new class representatives. TERMINATIONS ELEVENTH CIRCUIT AFFIRMS FRANCHISOR S TERMINATION OF FRANCHISE AGREEMENT FOR NONPAYMENT In Valpak Direct Marketing System, Inc. v. Maschino, 2009 WL 2942716 (11th Cir. Sep. 15, 2009), the Eleventh Circuit affirmed a trial court s decision granting summary judgment to franchisor Valpak Direct Marketing Systems, finding that its former franchisees had failed to pay fees and were properly terminated. The franchisees, Mr. and Mrs. Maschino, had been issued a notice of default for nonpayment and were subsequently terminated when they failed to pay within the cure period set forth in the notice even though they had made the payment prior to the date Valpak issued the notice of termination. Valpak then sued the couple for breach of contract in federal district court. The franchisees filed a counterclaim for wrongful termination, but it was dismissed by the district court, which found that the franchisees had not timely cured their default. Shortly after the deadline to amend the pleadings, Mrs. Maschino was killed in a car accident. Several months later, her husband moved to amend his answer to add the affirmative defense of satisfaction of the debt and a counterclaim for breach of the covenant of good faith and fair dealing. The district court rejected the motion, finding that the franchisee had not shown good cause for the late filing and could not do so because all of the facts that formed the basis for the proposed answer and counterclaim could have been ascertained prior to the deadline. Valpak then filed a 5
motion for summary judgment on its breach of contract claim. In granting the motion, the court rejected the franchisee s argument that the franchisor had terminated the franchise agreement merely to prevent the sale of the franchise and had misappropriated $80,000 in profit from a mailing that the franchisee had prepared just prior to the termination on the grounds that these allegations were merely an attempted repackaging of the claims he had unsuccessfully sought to bring in an amended response to Valpak s complaint. The Eleventh Circuit affirmed the district court s ruling, rejecting the franchisee s contention that he should have been allowed to file an amended answer, affirmative defenses, and counterclaim over seven months after the deadline to amend due to his wife s death and his inability to communicate about the case with his attorney. The court noted that the facts underlying the proposed amendment were known or could have been discovered in advance of the amendment deadline. RENEWALS COURT FINDS DOMINO S HAD NO OBLIGATION TO RENEW A DEVELOPMENT AGREEMENT In Domino s Pizza, LLC v. Robert J. Deak, 2009 WL 2867744 (W.D. Pa. Sept. 4, 2009), a Pennsylvania federal court granted Domino s motion for judgment on the pleadings. Domino s filed a declaratory action asking that the court declare as expired an area development agreement entered into with franchisee, Deak. Domino s and Deak were parties to a development agreement that was set to expire on July 31, 2005. In early 2005, Domino s advised Deak that the development agreement would not be renewed under the same terms. In response, Deak claimed that Domino s had made representations regarding his ability to renew on the same terms as the original development agreement, which provided exclusive rights to the area, as long as Deak was operating stores in the territory. The district court agreed with Domino s interpretation that the agreement had expired and granted the motion for judgment on the pleadings. In particular, the court found that all evidence of statements made by Domino s before entering into the development agreement was inadmissible under the parole evidence rule since the agreement contained an integration clause. Therefore, if the parties intended to allow Deak to renew under the same terms indefinitely, those terms had to have been included in the agreement. 6
COURT DENIES QUIZNO S MOTION TO DISMISS CLAIM FOR BREACH OF AREA DIRECTOR MARKETING AGREEMENT In Casual Dining Dev., Inc v. QFA Royalties, LLC, 2009 WL 2869335 (D. Colo. Sept. 3, 2009), an aggrieved Quizno s development agent brought suit against QFA Royalties (the successor in interest to the Quizno s corporation) for failure to renew its area director marketing agreement in alleged violation of the Wisconsin Fair Dealership Law ( WFDL ). The development agent alleged that QFA sent a notice of nonrenewal without good cause, as required by the WFDL. The development agent also alleged that it had performed all conditions precedent to renewal that had not been waived or excused by defendant s action and that it stood ready and willing to renew. QFA moved to dismiss the complaint, arguing that the facts alleged in the complaint showed that the responsibility to renew the agreement lay with the development agent and that the agent, not QFA, had failed to renew the agreement. The Colorado federal court denied the motion to dismiss, finding that the ambiguity as to which party caused the non-renewal would require further factual development through discovery. The complaint also alleged, in the alternative, that the conditions QFA sought to impose upon renewal would have changed the competitive circumstances of the area director marketing agreement without good cause in violation of the WFDL. Specifically, the development agent alleged that QFA had effectively eliminated its area director marketing program and had failed to develop a small market strategy for territories such as the development agent s. QFA argued that a claim for change in competitive circumstances requires proof that the franchisor was seeking to change the nature of the parties relationship, rather than enforce preexisting terms of the parties agreement. Since neither party attached a copy of the agreement to any of the pleadings, the court stated that it was unable to assess QFA s claim that the agreement allowed QFA to impose the renewal conditions, so the motion to dismiss was denied. DAMAGES FRANCHISOR OBTAINS SUMMARY JUDGMENT AGAINST TERMINATED FRANCHISEE FOR LIQUIDATED DAMAGES WITH INTEREST In Super 8 Motels, Inc. v. Rahmatullah, 2007 WL 2905463 (S.D. Ind. Sept. 9, 2009), an Indiana federal court granted the franchisor s motion for summary judgment on the issue of liquidated damages against a former franchise owner of a Super 8 guest lodging facility. The franchisor sued the terminated franchisee to recoup its damages, including liquidated damages and interest in the amount of $407,811.20. The court enforced the liquidated damages provision contained in the Franchise Agreement, which went into effect if the Agreement was terminated for cause more that than two years prior to its expiration. 7
Minneapolis, MN Office John W. Fitzgerald, cochair (612.632.3064) Megan L. Anderson (612.632.3004) Wade T. Anderson (612.632.3005) Phillip W. Bohl (612.632.3019) Jennifer C. Debrow (612.632.3357) Elizabeth S. Dillon (612.632.3284) Collin B. Foulds (612.632.3388) Michael R. Gray (612.632.3078) Laura J. Hein (612.632.3097) Kelly W. Hoversten (612.632.3203) Franklin C. Jesse, Jr. (612.632.3205) Cheryl L. Johnson (612.632.3271) Jeremy L. Johnson (612.632.3035) Gaylen L. Knack (612.632.3217) Kirk W. Reilly, cochair (612.632.3305) Kate G. Nilan (612.632.3419) Craig P. Miller (612.632.3258) Bruce W. Mooty (612.632.3333) John W. Mooty (612.632.3200) Kevin J. Moran (612.632.3269) Max J. Schott II (612.632.3327) Daniel R. Shulman (612.632.3335) Jason J. Stover (612.632.3348) Michael P. Sullivan, Sr. (612.632.3351) Michael P. Sullivan, Jr. (612.632.3350) Henry Wang (612.632.3370) Lori L. Wiese-Parks (612.632.3375) Quentin R. Wittrock (612.632.3382) Washington, DC Office Robert Zisk, cochair (202.295.2202) Arthur I. Cantor (202.295.2227) Jimmy Chatsuthiphan (202.295.2217) Ashley M. Ewald (202.294.2221) Jeffrey L. Karlin (202.295.2207) Peter J. Klarfeld (202.295.2226) Iris F. Rosario (202.295.2204) Stephen J. Vaughan (202.295.2208) Katherine L. Wallman (202.295.2223) David E. Worthen (202.295.2203) Eric L. Yaffe (202.295.2222) Carl Zwisler (202.295.2225) Wrote or edited articles for this issue. For more information on our Franchise and Distribution practice and for recent back issues of this publication, visit the Franchise and Distribution practice group at www.gpmlaw.com/practices/franchise-and-distribution.aspx. GRAY PLANT MOOTY 500 IDS Center Suite 1111, The Watergate 80 South Eighth Street 2600 Virginia Avenue, N.W. Minneapolis, MN 55402-3796 Washington, DC 20037-1905 Phone: 612.632.3000 Phone: 202.295.2200 Fax: 612.632.4444 Fax: 202.295.2250 franchise@gpmlaw.com The GPMemorandum is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A., and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own franchise lawyer concerning your own situation and any specific legal questions you may have. 8