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MINNESOTA DECISION PROVIDES HELPFUL LANGUAGE AND VALUABLE LESSON TO FRANCHISORS
A recent decision from the U.S. District Court in Minnesota provides some beneficial language/dicta for franchisors facing lawsuits brought by multiple franchisees. Sanford v. Maid-Rite Corporation, No. 13-CV-2250 (MJD/LIB) (D. Minn. Dec. 22, 2014) [Docket No. 110]. The decision also provides a cautionary message for franchisors to avoid delay in asserting defenses and requests for relief/dismissal. While the Court ultimately denied the franchisor’s Motion to Sever because the franchisor waited too long to bring the motion, the Court’s discussion regarding when franchisees can join together to assert claims against a franchisor under Rule 20 of the Federal Rules of Civil Procedure (FRCP) is insightful.
In the Maid-Rite case, seven independent sets of Plaintiffs asserted various claims against Maid-Rite Corporation (Maid-Rite) and two executives from Maid-Rite. The Plaintiffs were from four different states – three from Minnesota, two from Wisconsin, one from Colorado and one from North Carolina. The Plaintiffs asserted claims of fraud, breach of contract, violation of state franchise and consumer protection laws and negligent misrepresentation. The claims for statutory violations were unique as to each Plaintiff based on the state in which they resided, including claims for violations of franchise statutes in Minnesota and Wisconsin, the dealership statute in Wisconsin, the Consumer Protection Act in Colorado and the Unfair and Deceptive Trade Practices Act in North Carolina. One of the key claims alleged by the Plaintiffs was that the Defendants had provided a business plan to each Plaintiff which contained misrepresentations regarding the projected financial performance of a Maid-Rite franchise restaurant. While the alleged misrepresentations were in the same general form, each business plan was specific as to each franchise location.
The initial Complaint was filed on August 16, 2013, and had only five (5) Plaintiffs. Two sets of new Plaintiffs were added in the Second Amended Complaint. Defendants stipulated to the filing of the Second Amended Complaint – a decision which ultimately was a key factor in the Court’s decision to deny the Motion to Sever. The factual allegations in the Complaint span for over a five year period — from mid-September 2008 to November 2013. However, each Plaintiff interacted with the Defendants during a different period of time. For example, one set of Plaintiffs closed their Maid-Rite restaurant in June 2010 and, thus, had no involvement in any allegations/events occurring after that date. Another set of Plaintiffs only became involved with Maid-Rite in early 2012 and, thus, everything occurring between 2008 and early 2012 had no real relevance to their claims. As noted in the decision, the Second Amended Complaint “reads like seven complaints cobbled together.”
After the case had been pending for over a year, the Defendants filed a Motion to Sever requesting that the Court sever the three Minnesota franchisees into three separate actions in Minnesota and that the Plaintiffs from other states all be severed and their cases be transferred to the state/district in which the franchisee was located. Defendants argued that under FRCP 21 the Court should sever the claims/parties because the Plaintiffs had not satisfied the joinder requirements set forth in FRCP 20.
Most of the analysis done by the Court as set forth in the decision focused on whether it was proper for the Plaintiffs to be joined in a single lawsuit. Pursuant to Rule 20, multiple parties may be joined as plaintiffs in a single action if: (1) the plaintiffs assert a right to relief relating to or arising out of the same transaction or occurrence or same series of transactions or occurrences; and (2) some question of law or fact is common to all parties. The rule is intended to promote trial convenience and avoid multiple lawsuits. The Court stated that joinder of claims and parties is strongly encouraged and should be broadly construed/applied. However, the Court expressly noted that the rule permits joinder when the right to relief arises from the same transaction, but does not permit joinder when the right to relief arises from similar transactions. FRCP 21 grants the court broad discretion to sever any claim or party for convenience, to avoid prejudice, to expedite relief and/or to avoid delay and expense.
The Court stated that courts around the country have gone both ways in deciding similar joinder issues and provided a footnote referencing some of those cases. Andersen v. Griswold International, LLC, No. 14-cv-2560 (EDL) (N.D. Cal. Dec. 16, 2014) (Order [Docket No. 55], at 13) (denying motion to sever in franchise case where complaint was premised on six specific misrepresentations made to each franchisee); Burgo v. Lady of America Franchise Corp., No. SA CV 05-518 (C.D. Cal. April 19, 2006) [Docket No. 105-10] (court denied motion to sever 22 plaintiffs/franchisees because the alleged misrepresentations were based on a single uniform document); Lindy v. Jim Ray, Inc., No. 05-cv-2171, 2006 WL 1805963, at *2 (W.D. Ark. June 29, 2006) (court granted motion to sever holding that claims were not part of the same series of transactions and were only connected because they all related to the type of business being conducted by the defendants); Strandlund v. Hawley, No. 05-cv-468 (JMR/RLE), 2007 WL 984268, (D. Minn. Mar. 30, 2007), vacated in part on other grounds, 532 F.3d 741 (8th Cir. 2008) (court granted motion to sever concluding there was no logical relationship between the three separate and independent events alleged in the complaint).
In looking at the particular facts of this case, the Court concluded that while the Plaintiffs had alleged some common misrepresentations, that on the whole the Plaintiffs’ claims did not arise from the same transaction or occurrence or series of transactions or occurrences. Critical to the Court’s conclusion was that the Plaintiffs had not alleged uniform misrepresentations by the franchisor, but rather had alleged misrepresentations with respect to the execution of each of “its respective, unrelated, independent franchise relationship with” the Defendants. The Court cited the decision in McLernon v. Source Intern., Inc., 701 F. Supp. 1422, 1425-26 (E.D. Wis. 1988) in support of this conclusion, noting that the McLernon court had concluded that joinder was improper when the alleged misrepresentations were made during separate conversations with the defendant. The Court also relied on the decision in DIRECTV v. Loussaert, 218 F.R.D. 639, 642 (S.D. Iowa 2003) in concluding that even though the factual allegations as to each plaintiff may be “strikingly similar,” that alone is insufficient to meet the first requirement of FRCP 20 absent a transactional connection between the separate actions. The Court concluded that based on the Complaint, the Plaintiffs had alleged “particularized” misrepresentations by the Defendants as opposed to “common” misrepresentations and had alleged that Defendants acted against each set of Plaintiffs “independently, at different times, from different places and via unique representations.” As a result, the Court concluded that the Plaintiffs had not met the joinder requirements of FRCP 20.
Nevertheless, despite the determination by the Court that joinder was not proper under FRCP 20, the Court denied the Motion to Sever holding that the Defendants had waived the right to seek severance and had been “less than diligent” in bringing the motion and raising the severance concerns. The Court noted that the case had been pending for over a year, that the Defendants had consented to the Second Amended Complaint which incorporate two additional sets of Plaintiffs and had attended and participated in the Rule 16 conference. The Court concluded that the Defendants’ lack of diligence and apparent consent to the joinder allowed the Court to exercise its discretion and deny the motion. The Court reserved the right to re-address the issue as to potentially severing the trial of the claims after the completion of discovery. The ultimate decision by the Court serves as a good lesson to franchisors to make sure that you do not sit on claims for relief or delay in bringing your concerns to the Court’s attention. The decision was issued by Magistrate Judge Leo I. Brisbois pursuant to a general assignment made pursuant to 28 U.S.C. §636 ((b)(1)(A)). The Defendants have filed objections to Magistrate Judge Brisbois' decision.
MINNESOTA FEDERAL COURT DENIES PRELIMINARY INJUNCTION IN PART BASED UPON SERIOUS QUESTIONS AS TO WHETHER THE MINNESOTA FRANCHISE ACT APPLIED
In Wave Form Systems, Inc. v AMS Sales Corporation and American Medical Systems, Inc., USDC District of Minnesota, Civ No 14-3976 ADM/TNL [Docket No. 27] (December 22, 2014 Montgomery, J), Plaintiff, Wave Form Systems, Inc. (Wave Form) sought a preliminary injunction enjoining the threatened termination of Wave Form’s right to purchase and distribute Defendants’ (jointly referred to as AMS) Green Light laser equipment, based upon its claim that the termination violated the Minnesota Franchise Act (MFA). Wave Form supplies health care providers with laser equipment and services for medical procedures in over 30 states. Wave Form has purchased GreenLight lasers since 2003 and GreenLight accounts for roughly 20% of the laser therapy procedures it provides. In 2012 Wave Form and AMS entered into a Mobile Provide Agreement (MPA), which set forth the terms and conditions of the parties relationship. Disputes arose between Wave Form and AMS, and Wave Form heard rumors that it would be terminated by AMS. Wave Form brought suit, alleging that its relationship with AMS was a franchise under the MFA and that AMS would violate the MFA if the MPA is terminated or non-renewed prior to or at the end of 2014.
The District Court denied the motion for preliminary injunction on two grounds. First, it held that there was not the required showing of irreparable harm, because money damages would adequately compensate Wave Form if the termination was unlawful. From a franchise/distribution law standpoint, however, the more interesting aspect of the opinion is the conclusion that Wave Form did not establish a likelihood of success on the merits because: 1) it was unclear whether the MFA applied when the alleged franchise was not located in Minnesota; and 2) that serious questions existed as to whether this was a “franchise” as defined under the MFA. Both of these determinations are of issues for which there is no clear, established precedent under the MFA.
AMS argued that the MFA is intended to protect franchisees located in Minnesota and that because Wave Form is an Oregon corporation that does not conduct any business in Minnesota, the MFA does not apply. Wave Form responded that the offer to sell originated in Minnesota and that the acceptance of that offer was received in Minnesota. The MFA states that it applies to sales and offers to sell when made in this state or when an offer to purchase is made and accepted in this state. Minn.Stat. § 80C.19 Subd 1. The Court held that “Wave Form’s position, while it is seemingly a fair construction of the statutory language, fails to account for the MFA’s territorial application that was intended by the legislature.” The Court cited cases that the legislative intent of the MFA is “to protect Minnesota franchisees located within Minnesota.” The Court then analyzed case law on this issue, finding very little precedent on the MFA and conflicting precedents in other jurisdictions. The Court concluded that “While a construction of the language of the statue does support Wave Form’s position, the Minnesota nexus with the factual predicate is very minimal…To construe the MFA broadly enough to apply here given the facts currently of record in this case is a stretch.”
The Court found equally uncertain whether the relationship between Wave Form and AMS constituted a franchise under the MFA. The issue centered on whether a mandatory service plan imposed by AMS on Wave Form constitutes the required element of a franchise fee as defined by the MFA. The statutory definition of a franchise fee is very broad, covering “[a]ny fee or charge that a franchisee…is required to pay or agrees to pay for the right to enter into a business..” AMS argued that the Service Plan does not constitute a franchise fee because it has “a reasonable business purpose.” The Court cited two opinions that applied this reasonableness test to the determination of whether a payment constituted a franchise fee and then concluded that no authority has “directly addressed whether required service plans or product warranties can avoid being franchise fees if they have a reasonable business purpose.” The Court concluded that “the franchise fee question is …murky,” and thus did not find a substantial likelihood of success.
The importance of this decision is that it highlights two issues of whether the MFA applies to certain fact patterns, but does not finally resolve them. If the Court ultimately holds that: 1) the MFA does not apply to a franchisee located outside of Minnesota; and/or 2) the reasonableness test should be widely applied to fees that otherwise fit the statutory definition of franchise fee, it will provide defendants in franchise cases with stronger defenses on these issue than are presently available. Franchisors and franchisees will want to pay close attention to how this case is resolved and whether or not the Court ultimately addresses these two issues.
Michigan Amends Its Motor Vehicle Franchise Act
The Michigan Motor Vehicle Franchise Act (Mich. Comp. Laws §§ 445.1501 – 445.1545) was amended to prohibit manufacturers from preventing dealers from charging consumers any documentary preparation fee which is allowed to be charged by the dealer under state law. In addition, the amendment clarifies the state’s prohibition on manufacturers selling directly to consumers in Michigan. As was true under the statute prior to the amendment, manufacturers are still required to sell through a franchised dealer and not directly to consumers. However, this amendment allows manufacturers who do not have their own franchised dealers to sell through another manufacturer’s network of franchised dealers. The amendments became effective on October 21, 2014.
Oklahoma Amends Its Motor Vehicle Manufacturer and Dealer Law
The Oklahoma legislature enacted several changes to its motor vehicle manufacturer and dealer law (47 Okla. Stat. §§565 -565.3). The law was amended to establish a new warranty reimbursement formula for parts and labor and the procedures a manufacturer must follow in order to audit warranty claims and impose charge-backs as a result of any such audit. In addition, the law was amended to prohibit a manufacturer from requiring a dealer to: (1) sell extended service or maintenance contracts; (2) not associate with other dealers; (3) purchase goods or services for construction, renovation or improvement of a facility from a vendor specified by the manufacturer if substantially similar goods/services are available from another vendor; (4) establish an exclusive facility, unless certain conditions are met; (5) enter into site-control agreements; (6) participate monetarily in an advertising campaign or purchase promotional or showroom materials at the expense of the dealer; or (7) construct a new or substantially renovated facility, unless certain conditions are met. The amendment also addressed in more detail the fair and reasonable compensation the manufacturer must pay to a dealer for vehicle inventory and parts upon termination. Finally, the current law was also amended to set forth more fully the circumstances under which a manufacturer may withhold its approval of a request by a dealer to transfer the franchise and the process through which that must be handled, including the right of the dealer to protest within 30 days of receipt of the refusal and the burden on the manufacturer to establish a proper basis for the refusal under the terms of the statute. The amendments became effective on November 1, 2014.
RECENT CASE LAW
Court Confirms That Selling to End Users Precludes Application of Minnesota Sales Representative Act
A federal court in Minnesota recently granted summary judgment dismissing a claim under the Minnesota Termination of Sales Representative Act (MTSRA), Minn.Stat. § 325.37, finding that counter-plaintiff was not a “sales representative” as defined by the Act. Defendant BTC-USA Inc. (BTC) claimed it had been terminated by the West Linn Paper Co. (West Linn) without the notice and good cause as required by the MTSRA. For a period of years, BTC supplied West Linn paper to two third parties who used that paper to print coupon books and sales circulars which the third parties sold to their customers. It was undisputed that West Linn billed BTC for the paper, that BTC then billed the end users for the paper, received payment from the third parties and then paid its bill to West Linn. BTC retained a fixed percentage of the payments it received as its profit. The court held that BTC was not a sales representative covered by the act on at least one, and possibly two grounds. First, the court held that BTC sold to “end users.” The statute provides that an entity that “distributes, sells or offers the goods to end users, not for resale” is not a sales representative under the act. Minn. Stat. § 325.37, subd. 1(d)(4). Although BTC argued that its customers resold the paper, the court held that the customer’s “subsequent use of the paper to make an entirely new product…does not mean that [the customer] is not the end user…” The court held that if a customer makes a new product out of the product it buys and then resells that new product, it is an end user under the MTSRA and, thus, the entity that facilitated that sale is not a “sales representative.” West Linn also argued that BTC was not a sales representative because it was not compensated by commission but rather placed orders or purchases for its own account for resale, thereby expressly excluded from the statutory definition of sales representative in the MTSRA. It is unclear whether this argument was a second basis for this decision. BTC responded that in its initial pleading, West Linn stated that it sold paper “through paper brokers, who act as middlemen,” that BTC “acted as West Linn’s broker,” and that the parties referred to BTC’s profit on the sales as a “commission.” The court appears to accept West Linn’s argument, writing “BTC itself placed orders for West Linn paper and BTC . . . paid West Linn directly . . . West Linn did not pay BTC any money, commissions or otherwise.” But the court concludes “there is at best conflicting evidence . . . as to whether BTC fits within the Act’s definition of sales representative.” Thus, the court appears not to be basing its decision on this ground. If that is a correct interpretation, this decision raises some doubt as to whether agreed use between the parties of the terms “broker” and “commission” can transform a relationship into one that fits the Act’s definition of “sales representative” despite the undisputed facts that the form of the transaction is that the manufacturer sells the product to the alleged sales representative who then sells it to a third party. West Linn Paper Co. v BTC-USA Inc., No. 13-1678, 2014 WL 6473430 (D.Minn. November 18, 2014).
Court Dismisses Claims Attempting to Hold Franchisor Liable for Actions of Franchisee
A federal court in Maryland granted a franchisor’s motion to dismiss, finding that the plaintiff had failed to allege sufficient facts to state a plausible theory against the franchisor under any theory of vicarious liability for the actions of employees of the franchisee. In this case, the plaintiff had stayed several nights at the Clarion Inn Hotel in Pocatello, Idaho and claimed that the housekeeping staff had taken photographs of her property including a copyrighted document. The plaintiff sued the franchisor, Choice Hotels International (Choice Hotels), for copyright infringement and unfair competition. Choice Hotels moved to dismiss. The court noted that the franchise agreement provided that Choice Hotels does not own or operate the Clarion Inn Hotel and does not employ or control the employees working at the hotel. In dismissing the complaint the court held that the plaintiff had attempted to establish liability by Choice Hotels by alleging only conclusory allegations and had failed to allege any specific facts by which Choice Hotels could be held vicariously liable under either a direct or apparent agency theory. Funderburk v. Choice Hotels International, Inc., No. RWT 13-CV-1078, 2014 WL 5781831 (D. Md. Nov. 5, 2014).
Court Holds That Non-Signatory to Franchise Agreement is Subject to Arbitration Clause
The 7th Circuit Court of Appeals reversed and remanded a decision by the federal court in Wisconsin, holding that the wife of a franchisee was subject to the arbitration provision in the franchise agreement, even though she had not signed the franchise agreement. Defendant Paul Davis Restoration, Inc. (PDRI) entered into a franchise agreement with Matthew Everett and EA Green Bay, LLC (EAGB) pursuant to which EAGB operated a PDRI franchise. The court found that the evidence clearly showed that EAGB was owned, controlled and operated by Matthew Everett. However, the court determined that Plaintiff Renee Everett also actively owned, controlled and operated EAGB with Mr. Everett. Mr. Everett signed the franchise agreement as the 100% principal owner of EAGB, however, the evidence showed that Ms. Everett had a 50% ownership of the business and held herself out as the Executive Vice President of the franchise, including attending PDRI franchise meetings as a representative of EAGB. When the franchise was terminated for cause, Mr. Everett transferred his ownership in EAGB to Ms. Everett who proceeded to operate the same business, in the same location, under a different name. PDRI filed an arbitration and obtained an award against Ms. Everett. PDRI moved to confirm the award, while Ms. Everett moved to vacate the award. The United States District Court for the Eastern District of Wisconsin held that Ms. Everett did not directly benefit from the franchise (court concluded her benefit was indirect because it flowed through her ownership in EAGB), that she was not bound by the arbitration agreement and, therefore, vacated the arbitration award. In reversing the decision, the 7th Circuit noted that there are several theories pursuant to which non-signatories can be bound to an arbitration provision, including the doctrine of direct benefits estoppel. Under that doctrine, a party is estopped from avoiding arbitration if they “knowingly seek the benefits of the contract containing the arbitration clause.” The 7th Circuit held that the district court’s conclusion that Ms. Everett’s benefits were indirect because they were derived through her husband and EAGB was too narrow and that Ms. Everett received the same benefits as her husband including trading upon the contractual benefits of the franchise agreement. The court also noted that the facts clearly showed that Mr. and Ms. Everett colluded to avoid application of the terms of the franchise agreement to Ms. Everett, while both received the benefits of the agreement. As such, the 7th Circuit concluded that Ms. Everett was subject to the arbitration provision in the franchise agreement under the direct benefits doctrine and reversed the decision of the district court vacating the arbitration award. Everett v. Paul Davis Restoration, Inc., 771 F.3d 380 (7th Cir. 2014).
Washington Court Confirms Limited Application of the Federal Automobile Dealer Act
A federal court in Washington has confirmed that the Automobile Dealer Suits Against Manufacturers Act, 15 U.S.C. §1221 et. seq. (Federal Dealer Act) is limited in application to dealers of passenger cars, truck and station wagons. The case involved the termination of a construction equipment dealer, the defendant, by the plaintiff, Volvo Construction Equipment North America, LLC (Volvo). Defendant argued that Volvo’s termination violated the Federal Dealer Act because Volvo failed to act in good faith in terminating the dealer franchise. The court noted that the Federal Dealer Act was limited to entities engaged in the manufacturing of “passenger cars, trucks and station wagons” and that federal courts had previously consistently held that the use of those terms excluded application of the act to mobile homes, snowmobiles and motorcycles. Defendant argued that construction equipment should be considered a “truck” and that Volvo’s marketing materials referred to an articulated hauler as a “dump truck.” The court held that the words used in the Federal Dealer Act must be given their “plain, natural, ordinary and commonly understood meanings” and that as used in that context, the word “truck” would refer to vehicles that transfer limited number of persons and/or small amounts of cargo over established roadways. The court stated that while articulated haulers can be driven on the roadways they are typically used to haul large amounts of cargo at off-road construction sites, are much larger, heavier and more expensive than typical passenger trucks and are only driven on the roadways to get from one construction site to another. As such, the court concluded that Volvo’s heavy construction equipment sold by the dealer did not fall within the scope of the Federal Dealer Act. Volvo Construction Equipment North America, LLC v. Clyde/West, Inc., No. C14-0534JLR, 2014 WL 6886679 (W.D. Wash., Dec. 3, 2014).
Court Grants Injunction Preventing Termination of Franchise
A Wisconsin federal court granted a motion for preliminary injunction which prevented the Defendant, Winmark Corporation (Winmark), from terminating its Once Upon a Child (OUAC) franchise owned by the plaintiffs. In this case, Greg Gering, a plaintiff and one of the individual franchisee owners, was convicted of three counts of misdemeanor theft by fraud. An article had appeared in the local paper setting forth an account of the conviction. Winmark immediately sent notice of its intent to terminate the franchise agreement stating that under the Wisconsin Fair Dealership Law (WFDL) it was providing 90 days written notice. In the termination letter, Winmark stated that because the default was uncurable the franchise agreement would terminate effective on October 22, 2014 (90 days) without further notice. Plaintiffs filed a lawsuit and sought a preliminary injunction to prevent the termination. In granting the motion, the court held that the plaintiffs would suffer irreparable harm if the termination occurred. Plaintiffs had no other income and termination would make it difficult, if not impossible, to fund the lawsuit. Moreover, the court concluded, plaintiffs’ damages in the form of lost profits, if they were to ultimately prevail, would be difficult and inexact, and there would likely be immeasurable loss of goodwill and harm to reputation if they had to shut down and later reopen. The court noted that the WFDL also creates a rebuttable presumption that any violation of the act will result in irreparable harm. In looking at the likelihood of success the court stated that there was no dispute that the WFDL applied. While Winmark argued that the conviction of the franchisee impaired OUAC’s goodwill, the evidence did not support that assertion and, in fact, showed that business at the store had actually increased since the newspaper account. Moreover, there was no suggestion in the newspaper that Mr. Gering had used his OUAC business to commit his crime and while Mr. Gering’s individual reputation had been harmed it was not clear from the record that the franchise business had been adversely impacted in any meaningful way. In addition, the court rejected Winmark’s argument that the default was uncurable, noting that Mr. Gering could have transferred his interest to his wife or another family member which arguably may have “cured” the default. Balancing the preliminary injunction factors, the court concluded that the injunction should be granted and that plaintiffs should be allowed to continue to operate as an OUAC franchise (assuming they continued to comply with the terms of the franchise agreement, including making the required payments), until there was a determination on the merits. Romper Room Inc. v. Winmark Corporation, No. 14-C-1217, 2014 WL 5106887 (E.D. Wis. Oct. 10, 2014).
Court Denies Franchisor’s Motion for Injunctive Relief to Enforce Non-Compete Provision
A federal court in Massachusetts granted Plaintiff 7-Eleven, Inc.’s motion for a preliminary injunction to require ex-franchisees to cease usage of 7-Eleven’s trademarks, but denied 7-Eleven’s motion for a preliminary injunction to enforce a post-term non-compete provision against the same franchisees. In this case, 7-Eleven had terminated the franchisees due to the franchisees’ scheme to defraud 7-Eleven of royalties/profits due under the terms of the franchise agreement. However, following the termination, the franchisees continued to operate the store using 7-Eleven’s trademarks. 7-Eleven filed a lawsuit and brought a motion for preliminary injunction. The court divided its analysis into two parts. In addressing the request for an injunction to require the franchisees to cease using 7-Eleven’s trademarks, the court concluded that 7-Eleven had clearly shown that it was likely to prevail on the merits, that it would suffer significant irreparable harm if the franchisees were allowed to continue to use its marks and that the balance of harms favored 7-Eleven. The court noted that the confusion caused by the franchisees’ continued use of the marks and 7-Eleven’s need/right to protect the quality of its brand and its marks were a well recognized basis for establishing irreparable harm. As such, the court granted the motion for injunctive relief prohibiting the franchisees from continued use of 7-Eleven’s marks. As to the non-compete clause, the court once again concluded that 7-Eleven had shown that it was likely to succeed on the merits. However, the court concluded that 7-Eleven had not shown that it had or will suffer irreparable harm if the injunction was not granted and that the balance of harms favored the denial of the motion. The court noted that the lost profits from one store for a relatively short period of time until there was a decision on the merits would be miniscule when viewed in proportion to 7-Eleven’s total profits from its 50,000 stores worldwide and it would have little, if any, impact on 7-Eleven’s competitive position in the market. In balancing that limited harm to 7-Eleven with the significant harm to the franchisees based on the money they had invested in the store and the fact it was their only source of income, the court concluded that the balance of harms favored denial of the injunction. While recognizing that other courts have issued injunctions enforcing non-compete provisions in similar situations, the court concluded that its decision was not unique and that the limited harm that 7-Eleven would suffer if the franchisees continued to operate the store on an independent basis until a decision on the merits did not justify an injunction enforcing the non-compete provision. 7-Eleven, Inc. v. Grewel, No. 14-12676-MGM, 2014 WL 6604717 (D. Mass., Nov. 20, 2014).
California Court Addresses Numerous Franchise Issues
Several franchisees in the Griswold International, Inc. (Griswold) franchise system filed a lawsuit in the Northern District of California asserting claims that included fraud, negligent misrepresentation, violations of the California Franchise Investment Law (CFIL) and the California Franchise Relations Act (CFRA), fraudulent concealment and breach of contract. The Defendants, Griswold and several officers of the company, filed a motion to dismiss which raised various issues in the franchise context. The court first decided whether or not it had personal jurisdiction over the individual defendants. The court noted that simply because the corporate entity is subject to jurisdiction, it does not mean the non-resident officers are also subject to personal jurisdiction. The court granted the motion to dismiss as to the individual defendants (with leave to amend) concluding that the Complaint lacked any specific allegations which tied the individual defendants to activities or actions in California or which showed that the claims arose from the individual defendant’s forum-related activities. Defendants’ argued that Plaintiffs’ CFIL claims were subject to a one year limitation after a reasonably prudent person would be suspicious of fraud and that Plaintiffs failed to file their complaint within that one year period. The CFIL provides that claims must be brought two years after the violation upon which it is based or one year after discovery of facts constituting the violation, whichever occurs first. The court held that the CFIL does not contain “reasonably prudent person” language and strict statutory construction does not allow the court to read such a requirement into the statute. In denying the motion to dismiss, the court held that the CFIL’s one year limitations period is triggered by actual discovery of the fraud by the plaintiff and constructive notice or implied notice will not suffice. In addressing Defendants’ preemption argument, the court held that the plain language of the CFIL clearly preserves the right of a plaintiff to assert preexisting common law claims and, thus, the Plaintiffs’ common law fraud claims were not preempted by the statute. Similarly, the court rejected Defendants’ arguments that the fraud claims should be dismissed because the allegations pertained to future events, were non-actionable puffery and/or that Plaintiffs could not rely on the alleged misrepresentations/concealment because information regarding the topic was public knowledge. Finally, Defendants argued that Plaintiffs had not satisfied the joinder requirements of Fed. R. Civ. P. 20 and, thus, each Plaintiff should be severed pursuant to Fed. R. Civ. P. 21. The court held that the case was similar to the decision in Burgo v. Lady of America Franchise Corp., 05-cv-518, [Docket No. 54] (C.D. Cal. April 19, 2006) in that the Complaint was premised on six specific misrepresentations made by the Defendants to each Plaintiff, that the alleged misrepresentations were made at “Discovery Days” that the Plaintiff groups attended and that there were two documents that each Plaintiff received that contained the misrepresentations. The court concluded that Plaintiffs had satisfied the “same transaction, occurrence or series of transactions or occurrences” required by FRCP 20. The motion to sever was denied, without prejudice, noting that the analysis may be different if the Complaint is amended and the individual defendants are properly added back into the case. Andersen v. Griswold International, LLC, No. 14-cv-2560 (EDL) [Docket No. 55] (N.D. Cal. Dec. 16, 2014).