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Franchise, Antitrust, Distribution and Dealer Newsletter

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Spring 2014

ATTORNEYS' CONDUCT CAN ESTOP PLAINTIFF FROM PURSUING STATUTORY FRANCHISE CLAIMS

In U-Bake Rochester, LLC, Charles A. Baker, and Dianna L. Baker vs. Todd Utecht and Utecht Bakeries, LLC., Civ. No. 12-1738 (ADM/SER), 2014 WL 223439 (D. Minn., January 21, 2014), a federal district court in Minnesota held that the conduct of a plaintiff’s attorney prior to signing what is later determined to have been a franchise agreement can estop plaintiff from obtaining rescission based on claims asserted under statutory franchise laws. Specifically, the Court in U-Bake granted summary judgment for the Defendants, dismissing Plaintiffs’ claims of failure to register and failure to disclose under the Minnesota Franchise Act (MFA) and the Wisconsin Franchise Investment Law (WFIL).  The Court held that when Plaintiffs’ attorney reviewed, revised and then recommended that his client sign the contract, knowing that no franchise disclosure document (FDD) existed, and then twenty months later asserted that the License Agreement “undoubtedly was a franchise”, the defense of equitable estoppel precluded Plaintiffs from obtaining rescission based on the alleged failure of the Defendants to register and/or disclose as required by the MFA and the WFIL.

Plaintiffs and Defendants entered into a Trademark License Agreement for use of the U-Bake trademark, which is associated with stores selling frozen dough and bulk foods. In late 2009, Plaintiffs while investigating food related franchise opportunities, visited a store operating under the U Bake trademark, liked the product and concept, and decided to approach Defendant about opening a store. Plaintiffs initiated contact with Defendants, and met in late December 2009 in Wausau, Wisconsin. At this initial meeting, Defendants stated that the opportunity “was not a franchise”, and encouraged Plaintiffs to provide the draft Trademark License Agreement (TLA) to their attorney to review. Plaintiff provided a copy of the TLA to their attorney, who reviewed the draft, suggested changes and made revisions. All of the changes and revisions were incorporated in the final TLA, which Plaintiffs’ attorney recommended the Plaintiffs sign.  Plaintiffs’ counsel did not alter the provision that stated “the relationship between [Plaintiffs and Defendants] is not a franchise relationship”.

Before signing the agreement, Plaintiffs’ banker, who was involved with obtaining an SBA loan for Plaintiffs, requested a copy of the FDD. Defendant responded to Plaintiffs that there was no FDD because this was not a franchise. In Plaintiffs’ Business Plan submitted to the SBA in support of their loan application, Plaintiffs touted the benefits of this business not being a franchise.

Plaintiffs’ store grossed over $415,000 in its first year of operation, exceeding the amount of revenue that Plaintiffs alleged was represented by Defendants during the initial meetings. Sales then declined sharply.  After the store had been operating for 18 months, Defendant informed Plaintiffs that it had been sued by another store owner for, among other things, violations of the MFA and the WFIL for failure to register and disclose. Upon receiving this information, Plaintiffs met with the same attorney who had reviewed, revised, and advised them to sign the TLA.  Shortly thereafter, that same attorney sent Defendant a letter stating “your arrangement with our client undoubtedly constitutes a franchise under Minnesota law.”

Plaintiffs instituted suit seeking rescission of the TLA under the MFA and the WFIL for violation of the statutory registration and disclosure requirements. Their lawsuit was filed and prosecuted by the same law firm that had advised Plaintiffs prior to their executing the TLA. Plaintiffs also sought damages under both state franchise laws, and common law fraud and negligent misrepresentation, for alleged earnings claims.  Cross motions for summary judgment were filed, briefed and argued on November 21, 2013. On January 21, 2014, the District Court granted Defendants’ motion and entered judgment for Defendants.

The District Court held that “the words, conduct, and silence of Plaintiffs and their attorney equitably estop Plaintiffs from now asserting violations of the MFA and WFIL’s registration and disclosure requirements.” The Court focused on the following undisputed facts in reaching this decision: 1) Plaintiffs’ attorney contributed to the contract by recommending changes and revisions which were incorporated into the final version; 2) that all of the factors on which Plaintiffs based their claim that the TLA was a franchise were know to Plaintiffs’ counsel prior to execution of the Agreement; 3) that Plaintiffs’ counsel expressed his knowledge of the type of business arrangement that constitutes a franchise; 4) that Plaintiffs’ counsel recommended and advised that Plaintiffs sign the TLA; and 5) Plaintiff prepared a Business Plan that expressly stated the business was not a franchise, touted the benefits of it not being a franchise in that plan, and submitted the Business Plan as a required element of obtaining an SBA loan. The District Court held that the attorney’s knowledge concerning whether the TLA constituted a franchise should be imputed to Plaintiffs. Based upon this conduct, the Court concluded that “Defendants will be materially harmed if Plaintiffs are now allowed to assert claims that are entirely inconsistent with their earlier representation and conduct” and “should not now be allowed to use the franchise laws as an escape hatch to undo a business decision they now regret.”

The decision in U-Bake provides support to defendants who face franchise claims from plaintiffs represented by counsel who did not object to the lack of franchise disclosure information when they entered into the arrangement. The decision also provides a warning or a word of caution to plaintiffs that they cannot “sit in the weeds” and wait to allege a franchise claim until they see if the business relationship is successful or not.

MINNESOTA COURT ALLOWS WAIVER OF CLAIM UNDER MOTOR VEHICLE DEALER ACT

In April 2013, the Minnesota Court of Appeals held that a motor vehicle dealer can waive claims under the Minnesota Motor Vehicle Sale and Distribution Act (MVSDA). North Star International Trucks, Inc. v. Navistar, Inc., Co., No. A12-0732, 2013 WL 1392939 (Minn. Ct. App., April 8, 2013). Despite the fact that the MVSDA contains language suggesting that a dealer cannot waive claims under the act, the Court found that the dealer’s conduct and its failure to object to the manufacturer’s actions over the course of about a year’s time constituted a common-law waiver of the dealer’s claims under the MVSDA.

Plaintiff North Star International Trucks, Inc. (North Star), asserted that Navistar, Inc. (Navistar) had violated §80E.13(k) of the MVSDA by removing 51 ZIP codes from its assigned territory and assigning those ZIP codes to a new dealer. North Star argued that this was an improper modification of the franchise and that it substantially impaired the sales, service obligations and/or investments of North Star in violation of the MVSDA.  The jury agreed.  Nevertheless, the jury found that North Star’s claim was barred because North Star had waived the claim.

On appeal North Star argued that §80E.17 of the MVSDA precluded a waiver of the claim. It provides:

Notwithstanding the terms of any franchise agreement or waiver to the contrary, any person whose business or property is injured by a violation of sections.

The Court of Appeals held that the waiver language set forth in §80E.17 only applied to waiver agreements. The Court stated that a common-law waiver is based on the unilateral conduct of one party and, thus, cannot be considered an “agreement” as contemplated by the legislature when enacting §80E.17. As such, the Court concluded that §80E.17 did not bar or preclude an argument that the claim had been waived based on common law.  

The Court then went on to analyze the sufficiency of the evidence to support a finding of a common law waiver. Beginning in 2007, Navistar had expressed concerns regarding North Star’s performance and attempted to arrange meetings with North Star to discuss the issues, but for various reasons the parties never met. In January 2009, Navistar sent a letter to North Star regarding Navistar’s intent to remove 51 ZIP codes from North Star’s area of responsibility. North Star did not respond to the letter. In April 2009, Navistar sent an email to North Star indicating that a new dealer had been established and had been assigned the 51 ZIP codes. The email also indicated that Navistar was willing to come meet and talk with North Star about this issue. Again, North Star did not respond. Several additional attempts were made by Navistar to communicate with North Star on this topic, however, North Star remained silent. Navistar received two (2) letters from North Star during this period, neither of which objected to or raised any issue as to the removal of the 51 ZIP codes. North Star simply continued to operate the dealership. In November 2009, Navistar sent North Star a letter indicating an intent to terminate the dealership in April 2010. Upon receipt of the letter, North Star filed the lawsuit.

On appeal, North Star argued that mere inaction or silence was not sufficient to constitute a waiver of its claim. The Court of Appeals held that the facts showed more than mere inaction or silence by North Star and affirmed the decision of the jury that North Star had waived its claim under the dealer act. The Court of Appeals held North Star’s intent to waive its claim under §80E.13(k) could be inferred from: (1) North Star’s continued operation of the dealership without objection to the modified area of responsibility; (2) North Star’s failure to respond to the letter notifying it of Navistar’s intent to remove the 51 ZIP codes; (3) North Star’s general failure to communicate with Navistar during the relevant period (approximately 11 months); and (4) North Star’s failure to object to the removal of the ZIP codes in the two subsequent letters in which North Star asserted demands regarding other alleged violations. Absent from the Court’s decision was any discussion regarding the need for, or a showing of, reliance by the manufacturer.

The North Star decision provides helpful ammunition to a manufacturer to be able to argue that under the right circumstances a dealer or franchisee can waive a claim established by a dealer statute even if the statute contains an anti-waiver provision. It also serves a reminder to dealers that they cannot simply sit on their hands or stick their head in the sand upon receiving a notice that may negatively impact their dealership. The dealer must preserve its rights by affirmatively objecting to any such action.

LEGISLATIVE UPDATES

Arbitration Fairness Act of 2013

Minnesota Senator Al Franken recently introduced a new bill in the U.S. Senate which seeks to pass a law which would restrict the use/enforcement of arbitration agreements under certain circumstances. (S. 878) His counterpart, Henry C. Johnson, Jr. from Georgia, introduced the identical bill in the House (H.R. 1844) The intent of the proposed new law is to preclude the enforcement of mandatory pre-dispute arbitration clauses in matters involving employment, consumer, antitrust and civil rights issues. The proposed bill provides that a party asserting or opposing claims in these areas will only be required to arbitrate the dispute if after the dispute arises all parties agree to arbitrate the dispute.  Any pre-dispute arbitration provision contained in an agreement between the parties would be unenforceable as a matter of law. One of the driving forces behind the introduction of the bill was the relatively recent decision by the U.S. Supreme Court in AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011). In that case the U.S. Supreme Court held that the pre-dispute, mandatory arbitration provision contained in AT&T’s mobile phone contract was valid and enforceable and precluded consumers from pursuing a class action.  

Colorado Amends Automobile Dealer Act. 

The Colorado legislature has passed Senate Bill 265, which applies Colorado’s current Automobile Dealers’ Act retroactively to all dealer agreements, regardless of when they were adopted. The current Act contains many “pro-dealer” provisions, all added in recent years and thought to be a direct result of the automaker bailout saga of 2008-2010, which saw numerous Colorado dealerships being forced, seemingly arbitrarily, to close their doors by Chrysler and General Motors.

New Hampshire Amends Dealer Bill of Rights.

Senate Bill 126, passed by the New Hampshire legislature in 2013, expanded the state’s Motor Vehicle Dealer Law to unprecedented levels. The bill repealed existing law governing the relationship between utility, construction and farm equipment manufacturers and dealers, and defined “motor vehicle” to include such products. Further, the Motor Vehicle Franchise Law now applies retroactively to the existing contracts that equipment manufacturers had with their dealers, effectively negating any previous business negotiations made between the parties while also adding numerous restrictions and prohibitions on manufacturers. Affected manufacturers have filed lawsuits challenging the act.

RECENT CASE LAW

Minnesota Based Franchisees Are Not Entitled to Have All Disputes Litigated in Minnesota.

The anti-waiver provision of Minnesota Franchise Act (MFA) does not require that all cases and controversies relating to franchises operated in Minnesota be litigated only in Minnesota. The MFA (and the related rules) provides that a franchisee cannot be prevented from filing a lawsuit in Minnesota and that this right cannot be contractually waived. The MFA does not prevent a franchisor from filing a lawsuit against a Minnesota franchisee outside of Minnesota. Ramada Worldwide, Inc. v. Grand Rios Investments, LLC, Civ. No. 13-3878 (KM), 2013 WL 5773085 (D.N.J. October 23, 2013).

District Court Finds Arbitration Provision Was Not Unconscionable. 

The plaintiff dealer argued that the arbitration provision in the dealer agreement was unenforceable because it was unconscionable. The court held that simply because the agreement was a contract of adhesion it did not render the arbitration provision unconscionable.  The court held that the arbitration provision did not favor one side or the other, contained mutual obligations and was conspicuously displayed in the agreement, Moreover, while there may have been a disparity in the bargaining power and the dealer may have been the “weaker” party, the court noted that there are very few situations in which there is perfectly equal bargaining power between corporate entities, that in the manufacture/dealer context the dealer is often the “weaker” party and such “industry-wide disparity” does not support a finding of unconscionability. Elk Mountain Motor Sports, Inc. v. Arctic Cat Sales, Inc., No. CV 13-7-H-CCL, 2013 WL 5492960 (D. Mont., Oct. 1, 2013).

Third Circuit Overturns $29 Million Jury Verdict for Dealers. 

The district court granted summary judgment to a class action group of Ford heavy truck dealers. The court held that the terms of the dealer agreement obligated Ford to manufacture and sell “Company Products” to dealers. The court held Ford had breached that obligation by discontinuing or ceasing production of all heavy trucks.  After summary judgment in favor of the dealers was entered the jury awarded damages to the dealers in the amount of $29 million.  On appeal, the Third Circuit reversed the district court’s grant of summary judgment in favor of the dealers, vacated the jury award and ordered entry of judgment in favor of Ford. The Third Circuit held that the district court improperly limited the term “Company Products” to heavy trucks. The appellate court concluded that the term “Company Products” included parts and accessories.  As such, because Ford continued to manufacture and distribute parts and accessories to dealers, Ford had satisfied its obligations under the terms of the dealer agreement. Bayshore Ford Truck Sales, Inc. v. Ford Motor Co., No. 12-4342, 2013 WL 4504796 (3rd Cir., Aug. 26, 2013)

Eighth Circuit Upholds Refusal to Enforce Non-Compete Provision.  

After terminating its franchisee for non-payment of royalties, the franchisor sought to obtain a preliminary injunction to enforce the non-compete provision set forth in the franchise agreement. The district court enjoined the franchisee from using the franchisor’s trademark, but refused to enforce the non-compete provision. On appeal the Eighth Circuit held that the long delay between when the franchisee stopped paying royalties and the time when the franchisor sought injunctive relief (a period of 17 months) supported a finding that irreparable harm did not exist. Furthermore, the Eighth Circuit questioned whether or not the alleged injuries (loss of customers or customer goodwill) were truly “irreparable” and suggested that it may be possible to address them through money damages at trial.  Ultimately, the circuit court noted, its decision was primarily driven by the standard of review – abuse of discretion. The court said this standard gives the district court a significant amount of leeway and the decision of the district court to deny the injunction based on these factors did not fall outside of the range of permissible choices. Novus Franchising, Inc. v. Dawson, 725 F.3d 885 (8th Cir. 2013).

Minnesota District Court Permits Franchisor to Sell Products Online. 

When Party America Corporation was sold to Party City Corporation the plaintiff franchisee was asked to sign a new franchise agreement.  While the new franchise agreement granted the franchisee the exclusive right to operate Party City retail stores in a specific geographic area, the franchisor expressly reserved its right to sell products through other distribution channels, including the Internet.  When the franchisor opened up an online store, a dispute arose. As a settlement of that dispute, the parties agreed to an addendum to the franchise agreement which affirmed the franchisor’s right to sell products over the Internet, but gave the franchisee a share of the revenue from certain sales over the Internet made within a three-mile radius of the franchisee’s store. Three years later, the franchisee filed a lawsuit asserting that the franchisor had breached the exclusivity clause of the franchise agreement. The Minnesota District Court dismissed the breach of contract claim holding that the agreement and the addendum clearly and unambiguously granted the franchisor the right sell products through it online store. However, the District Court refused to dismiss the franchisee’s claim that the franchisor had breached the duty of good faith and fair dealing by using the Internet store to under price its franchisees which arguably could be denying the franchisee the benefit of its bargain under the franchise agreement. Newspaper, LLC v. Party City Corp., No. 13-1735 (ADM/LIB), 2013 WL 5406722 (D. Minn. Sept. 25, 2013).