Dickey’s Barbecue Restaurants, Inc. ran a national promotion
using a pitch that infringed on the Boise Idaho BBQ 4 LIFE restaurant.
BBQ 4 LIFE demanded disgorgement
of Dickey’s Barbecue Restaurants, Inc.’s national profits[i].
Disgorgement is defined by Black’s Law Dictionary as “the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.”
Dickey’s Barbecue Restaurants, Inc. pushed back. BBQ 4 LIFE only has restaurants in Boise, Idaho. Why should Dickey’s Barbecue Restaurants, Inc. be disgorged of national profits and pay BBQ 4 LIFE all of its profits earned nationally.
The court said they should.
Dickey’s Barbecue Restaurants, Inc.
willfully infringed on BBQ 4 LIFE’s
trademark. Dickey’s Barbecue
Restaurants, Inc., need a disincentive.
Besides, the BBQ 4 LIFE infringement
increased sales nationally; therefore, national sales should be disgorged.
After all, Dickey’s has willfully infringed plaintiffs’ trademark and used it nation-wide for a reason – to increase sales throughout its operations, not just in areas where it competes with plaintiffs. Such an award would, according to Maier, remove the motive for infringements, deter future infringements, and protect the intangible value associated with trade-marks.
BBQ Id. citing Maier, 390 F.2d at 122.
The takeaway, infringement is expensive. Infringe of even a small local brand can result in national disgorgement of profits.
4 Life, LLC, et al. v. Dickey’s Barbecue Restaurants, Inc., Business Franchise
Guide – Explanations, Laws, cases, rulings, new developments Issued Apr 23,
2019 Case No. 1:18-cv-140-BLW
The liability for the wrongful termination of a franchise
agreement can be considerable, lost profit for the remainder of the franchise
term and perhaps other damages.
Here is the facts Franchisor requests licensee to remodel
the franchise location to conform to current standards. Licensee does not. Franchisor sends franchisee a default notice
for failing to update the location. Licensee
still does not update. Franchisor sends the
licensee a notice of termination, files a complaint in court staying the
termination. Licensee de-brands and continues
to operate under a new name.
Can the Franchisor be held liable for wrongful
The case is Buffalo Wild Wings, Inc., v. BW-3 of Akron, Inc., et al.[i] No, said the court. Since the Licensee closed the business, de-branded, and opened under a different name, the Licensee abandoned the business. The Franchisor never terminated the license. The Franchisor is not liable for wrongful termination.
Interesting case, but would the come be different if the
franchisor had not stayed the termination?
Within the franchise world, there has been a lot of buzz about joint employment. Being held accountable as an employer creates exposure to wage, discrimination, and other employee claims.
The legal determination of who is an employer can be swishy. The US Department of Labor has put out for comment new regulations that would clear the issue up, to some extent. Under the purposed regulations set forth a 4 prong test. Under the test an employer:
hires or fires the employee;
supervises and controls the employee’s work
schedules or conditions of employment;
determines the employee’s rate and method of
maintains the employee’s employment records.
As part of the purposed regulations, the US Department of Labor posted hypotheticals under the test. Can you determinate if an employer relationship is present?
(National Restaurant Franchise)
An individual works
30 hours per week as a cook at one restaurant establishment, and 15 hours per
week as a cook at a different restaurant establishment affiliated with the same
nationwide franchise. These establishments are locally owned and managed by
different franchisees that do not coordinate in any way with respect to the
employee. Are they joint employers of the cook? [i]
(2) Example (Same Owner, Multiple Restaurants)
An individual works
30 hours per week as a cook at one restaurant establishment, and 15 hours per
week as a cook at a different restaurant establishment owned by the same
person. Each week, the restaurants coordinate and set the cook’s schedule of
hours at each location, and the cook works interchangeably at both restaurants.
The restaurants decided together to pay the cook the same hourly rate. Are they
joint employers of the cook? [ii]
(3) Example (Janitorial Services)
An office park
company hires a janitorial services company to clean the office park building
after-hours. According to a contractual agreement with the office park and the
janitorial company, the office park agrees to pay the janitorial company a
fixed fee for these services and reserves the right to supervise the janitorial
employees in their performance of those cleaning services. However, office park
personnel do not set the janitorial employees’ pay rates or individual
schedules and do not in fact supervise the workers’ performance of their work
in any way. Is the office park a joint employer of the janitorial employees? [iii]
(5) Example (Hotel Industry Franchise)
Franchisor A is a
global organization representing a hospitality brand with several thousand
hotels under franchise agreements. Franchisee B owns one of these hotels and is
a licensee of A’s brand. In addition, A provides B with a sample employment
application, a sample employee handbook, and other forms and documents for use
in operating the franchise. The licensing agreement is an industry-standard
document explaining that B is solely responsible for all day-to-day operations,
including hiring and firing of employees, setting the rate and method of pay,
maintaining records, and supervising and controlling conditions of employment.
Is A a joint employer of B’s employees? [iv]
[i]Application [the answer]: Under these
facts, the restaurant establishments are not joint employers of the cook
because they are not associated in any meaningful way with respect to the
cook’s employment. The similarity of the cook’s work at each restaurant, and
the fact that both restaurants are part of the same nationwide franchise, are
not relevant to the joint employer analysis, because those facts have no
bearing on the question whether the restaurants are acting directly or
indirectly in each other’s interest in relation to the cook.
[ii]Application [the answer]: Under these
facts, the restaurant establishments are joint employers of the cook because
they share common ownership, coordinate the cook’s schedule of hours at the
restaurants, and jointly decide the cook’s terms and conditions of employment,
such as the pay rate. Because the restaurants are sufficiently associated with
respect to the cook’s employment, they must aggregate the cook’s hours worked
across the two restaurants for purposes of complying with the act.
[iii]Application [the answer]: Under these
facts, the office park is not a joint employer of the janitorial employees
because it does not hire or fire the employees, determine their rate or method
of payment, or exercise control over their conditions of employment. The office
park’s reserved contractual right to control the employee’s conditions of
employment does not demonstrate that it is a joint employer.
[iv]Application : Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.
When signing the franchise agreement, prospective franchisees usually form a business entity to own and operate the franchise. But, who can sign the franchise agreement on behalf of the franchise business entity?
The recent case of Extremely Clean Cleaning Services, LLC,
Alisia Burks v. CAAT, Inc.[i]
ponders this question. In this case, co-plaintiff Alisia Burk (“Ms. Burk”),
a prospective franchise formed the business entity Extremely Clean Cleaning
Services, LLC to be the franchisee business entity. Defendant CAAT, Inc. was
the franchisor. Burk’s mother Kearl Ash
(“Ms. Ash”) signed the franchise agreement on behalf of business entity
Extremely Clean Cleaning Services, LLC; however, Ms. Ash, Ms. Burk’s mother did
not have any ownership interest in the franchise.
Immediately post the signing of the franchise agreement, Ms. Burk registered a complaint about her mother Ms. Ash signing the franchise agreement saying Ms. Ash did not have authority to the sign the franchise agreement on the franchisee’s behalf. Irrespective of the complaint about the signing, Ms. Burk opened and operated the franchise. After three years of business, Ms. Burk abandons the franchise asserting that the franchise agreement was not properly signed.
Ratification means the adoption of that which was done for and in the name of another without authority. It is in the nature of a cure for [lack of] authorization. When ratification takes place, the act stands as an authorized one, and makes the whole act, transaction, or contract well from the beginning. Ratification is a question of fact, and ordinarily may be inferred from the conduct of the parties. The acts, words, silence, dealings, and knowledge of the principal, as well as many other facts and circumstances, may be shown as evidence tending to warrant the inference or finding of the ultimate fact of ratification. Knowingly accepting benefits of unauthorized employment amounts to a ratification of such contract of employment and is in the nature of estoppel to deny the authority to make such contract. Ratification by a corporation may be shown by conduct, without any formal action of its board of directors.
Was there a binding franchise agreement, even though Ms. Ash
did not have authority to sign the franchise agreement on the franchisee’s
behalf. Does the subsequent three years
operation of the franchise business ratify or translate to affirmation and enforceability
of the franchise agreement?
The court remanded the case for the more factual determinations. It is possible that irrespective of the
improper signing of the franchise agreement, the franchisee’s act of operating the
franchise business resulted in a binding franchise agreement. The inverse may also be true.
[i] Business Franchise Guide – Explanations, Laws, cases, rulings, new developments, Extremely Clean Cleaning Services, LLC, Alisia Burks, Plaintiffs v. CAAT, Inc., an Ohio Corporation, Anago Cleaning Systems, Inc., a Florida Corporation, Anago Franchising, Inc., a Florida Corporation, Albertson Family Janitorial Holdings, Inc., an Ohio Corporation, Curt Albertson, an individual, Corey Albertson, an individual, Teresa Albertson, an individual, David R. Povlitz, Defendants., U.S. District Court, S.D. Indiana, ¶16,372, (Feb. 25, 2019)
A prospective franchisee raises a concern regarding a specific provision in the franchise agreement. Can the franchisee modify the franchise agreement base on the prospective franchisee’s concern? e
The franchise agreement is an exhibit included in the franchise disclosure document (FDD). The franchisor must offer prospective franchisees the franchise agreement as it appears in the FDD. The franchisor may not offer franchise agreements different than it appears in the FDD. However, a prospective franchisee requests a change to the franchise agreement, the franchisor may agree to the requested change. This is referred to as franchise agreement negotiated changes.
The prospective franchisee is a great candidate. The prospective franchisee would be a great franchisee. Can the franchise agreement be modified to entice the prospective franchisee?
There are several best practices to follow:
offer the franchise agreement as it appears in the Franchise Disclosure Document
the prospective franchisees to put a requested change in writing (it can an
changes to the franchise agreement should be made in an addendum. The franchise
agreement should not be changed.
If the franchisor agrees to waive the initial franchise fee or
other fees charged by the Franchisor, a notation of fee non-uniformity must be
made in the FDD.
And for franchisees sold to California residents or business
operating in California, a negotiated form must be filed.
The enforceability of a non-competition covenant is based on state law. Generally, and perhaps uniformly, non-competitions are disfavored under the law. Hence they are very narrowly construed.
Restrictive covenants on employment may not be used to bar individuals from entire fields of work simply to limit the employer’s competition.
e.g., RLM Commc’ns, Inc. v. Tuschen, 831 F.3d 190, 196–97 (4th Cir. 2016)
A case out of Maryland involving Senior Helpers provides a real-life example[i]. Franchisee signs a Senior Helpers franchise agreement barring the use of Senior Helpers confidential information and engaging in a competitive business post the termination of the franchise agreement. Competitive business under the franchise agreement is defined as Any home health care or in-home care agency or business that offers or provides non-medical care, companionship services, personal assistant services.
Franchisee sales its Senior Helpers
franchise to another franchisee and
starts a business offering dementia care training and consultation to
senior care facilities and family members of individuals with dementia.
[A} a non-compete provision restricting a former employee from working directly with similar businesses was overbroad and thereby unenforceable because the restriction was not tethered to actual work the employee had performed for the employer)
Seneca One Finance, Inc. v. Bloshuk, 214 F. Supp. 3d 457, 461-62 (D. Md. 2016)
Senior Helpers sues for the breach of the non-competition. In promoting its
services and preparing treatment plans,
Senior Helpers includes information and education about dementia. Hence, dementia
care training and consultation to senior care facilities and family members of
individuals with dementia is a violation
of the non-competition.
The court rejected this deduction. Senior Helpers franchises offer companionship services and assistance. Senior Helpers offers dementia education free to promote its services, and incorporated dementia education into their treatment plans without charging. Senior Helpers does not charge for dementia education. Senior Helpers cannot bar others from selling and competing based on a service they do not charge.
[i] SH Franchising, LLC d/b/a, Senior Helpers v. Newlands Homecare, LLC, et at. Civil Action No. CCB-18-2104 Business Franchise Guide – Explanations, Laws, cases,
rulings, new developments ¶16,353
The Federal FTC Franchise Disclosure Rule prohibits franchisors from sharing, discussing, giving, or showing prospective franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD).
What about after the franchise agreement is signed? All rules are off. The FTC Franchise Disclosure Rule applies to the prospective franchisees. Once the franchisee signs the franchise agreement, the franchisee is no longer a prospect. The upshot is the FTC Franchise Disclosure Rule does not apply to the disclosing, sharing, discussing, giving, or showing franchisees financials information. Franchisors are free to share financials information post the signing of the franchise agreement.
Because they were no longer “prospective franchisees” when Haines showed them the profit and loss statements, showing them the statements did not violate the Franchise Rule. See 16 C.F.R. §§436.1(e) and 436.5(s).
Relo Franchise Services, Inc., Plaintiff v. Connor Gilman, et al., Defendants. Case No. 1:18-cv-578 Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,350
One caution should be rendered. Commonly, franchisors will negotiate with existing franchisees about the purchase of new or additional franchises or opportunities. In this case, the existing franchisee may be considered a prospective franchisee in regards to the new or additional franchise and to wit, the franchisor should not share, discuss, give, or show prospective existing franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD).
State laws very as to when the franchise registration
expire. Some states only require a one-time
filings or exemptions. Other state franchise
registrations and exemptions must be renewed yearly.
Annual Filing Required
One Time Filing Required
Carolina and North Carolina allow for an exemption if franchisor has a
federally registered trademark and franchisee do not purchase products from
franchisor for re-sale.
Federal law requires that all franchisors update their
franchise disclosure document (FDD) 120 days from the close of their fiscal
year. For franchisors with a fiscal year
that follow a calendar year ending December 31st, the FDD must be
updated by April 30th.
Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30th date.
Not all states, if fact most states registrations and exemptions
don’t follow the Federal April 30th date.
There are only 7 state: California, Hawaii, Illinois, New York, Minnesota, North Dakota and South Dakota follow the federal rule and expire 120 days from the close of the fiscal year (April 30th).
Expiration 120 Days from Close of Fiscal
Year (April 30th)
Calendar Expiration (365 days)
California registration action Expires April 20th (10 days early)
Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30th date.
There are 9 state that follow a calendar year expiration: Florida, Indiana, Maryland, Michigan, Utah, Rhode Island, Virginia, Washington, Wisconsin.
The quandary becomes post April 30th, Federal Law
requires an update of the FDD. However,
what if the state registration has not expired.
The state prohibits giving prospective franchisees the updated FDD until
it has been register with the state.
But, giving prospective franchisees last year’s FDD that is registered
with the state is violation of Federal law.
If you ask Walmart what the cost of using someone else Trademark, the answer is $9.5 million. Pursuant to the case of Variety Stores, Inc. v. Wal-Mart Stores, Inc.[i] Walmart was sued for the use of the Variety Store’s trademark Backyard in connection with the sale of grills and grilling supplies.
Variety has USPTO trademark registration for Backyard in the category of the lawn and gardening supplies. Variety has been using the trademark Background in the sale of grills and grilling supplies since 1983.
Before the Court is a case in which a larger company with deeper pockets for litigation selected a product name with the same dominant word as a smaller company by which to sell the same and similar items as that smaller company. The larger company knew of the smaller company’s use — and trademark — when it decided to use the name, but the larger company used it anyway
Walmart knowingly violated Variety’s trademark. The jury awarded Variety $45,536,846.71 as a royalty for Walmart’s use of the trademark Backyard. The jury also award Variety $50,000,000 in disgorgement of profits Walmart earned in the sell of the Backyard products[i].
Franchisee as commonly asked
to sign a general release of claims when entering to a franchise agreement when
to transfer a franchise, when renewing a franchise, and when entering to a settlement
agreement. Under a general
release of claims, franchisees give up their right to sue the franchisor.
However, not always does the release of claims effective
operate to release or prevent claims against a franchisor. Hence the case involving Charlie Grainger hot
dog franchises.[i] It this case a class of franchisees and area
representative sued the franchisor making claims of (1) rescission; (2) fraud, intentional
misrepresentation, and concealment; (3) negligent misrepresentation; (4) breach
good faith and fair dealing; (5) breach of fiduciary duty; (6) violation of
North Carolina’s Unfair and Deceptive Trade Practices Act; (7) racketeering
activity, in violation of 11 U.S.C. §1962(b); (8) a pattern of racketeering activity, in
violation of 11 U.S.C. §1962(c); (9) conspiring to violate the RICO Act; and
(10) breach of contract.
franchisor sought dismissal of the claims based on release claims signed by each
of franchisees and area representatives incident to the signing of their franchise agreements. Under the release of the claims, franchisees
and area representative waived their right to sue the franchisor.
Plaintiffs [Franchisees] argue that the General Release is void because it violates federal law. In particular, they argue that the release violates the Federal Trade Commission’s Franchise Rule, which provides in pertinent part that it is “an unfair or deceptive act or practice” to “[d]isclaim or requires a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” 16 C.F.R. 436.9(h).
Not so fast, the court rejected the release of claims. In agreement with the franchisees and area representatives,
the court held that the release of claims was in violation of the federal law;
more particularly the FTC Franchise Disclosure Rule. The FTC Franchise Disclosure Rule prohibits disclaiming
or waiver of any disclosures made in the franchise
For other reasons the court dismissed RICO and Racketeering,
but allow claims of (2) fraud, intentional misrepresentation, and concealment;
(3) negligent misrepresentation; 5) breach of fiduciary duty; and (6) violation
of North Carolina’s Unfair and Deceptive Trade Practices Act to proceed.
Atlanta, LLC, Dual Energy, LLC, Cynergetic AR, LLC, Ms. Marcie Bindes d/b/a KS
Enterprises, LLC, Mr. Dale Atkinson & Mrs. Rose Atkinson d/b/a Rosedale
Three, LLC, and Mr. Trent Moore d/b/a LindsTan, Inc., Plaintiffs v. Charlie
Graingers Franchising, LLC, Charlie Graingers Franchising, Inc., Louis Craig
North, Gregory Bruce George, and Jason Matthew Nista, Defendants. No.
7:18-CV-10-BO Business Franchise Guide – Explanations, Laws, cases, rulings,
new developments ¶16,354