Mary Beth Gettins – Page 4

How Far Does a Franchise Non-Compete Reach?

Perhaps without exception, franchise agreements include post-termination non-competes and non-solicitation.

A non-compete prevents the franchisee from owning or working for a business that competes with the franchise.

A non-solicitation prevents the franchisee from contacting the customers of the franchise business to offer products or service that are offered by the franchise business.

There are non-competes and non-solicitations that span during the franchise agreement and post the termination, expiration, or transfer of the franchise. The enforceability of the franchise agreement’s non-compete and non-solicitation is dependent on state law. Except for the case of California, non-competes and non-solicitation are enforceable if the duration of the non-compete is reasonable as to time and duration.
The general rule is that a non-compete and non-solicitation is only enforceable against the signers of the non-compete and non-solicitation. However, this case provides an all too common exception. The case is The Maids Int’l, Inc. v. Maids on Call, LLC.
In this case, Plaintiff franchisor and Defendant franchisee entered into franchise agreements for the operation of the a The Maid franchises. Franchisor terminates the franchise agreements for under-reporting gross revenues and failure to pay royalties.
Post the termination of the franchise agreement, franchisee’s daughter opened a business called Two Sisters that offers maid services at the same location and used the same Facebook page email as the former franchise business. The location which the Two Sisters operated continued to bear the signage of the former franchise business. Two Sister used the same vehicles that were registered to the former franchise. The form franchisee sent a retirement letter to its customers that said:

SARA, STACEY and MILLIE are ready to take over. (They really have been running the business for many years)………..most everything will remain the same,”

No. 8:17CV208 Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,047 http://www.wkcheetah.com/?window=document&cpid=WKUS-Legal-Cheetah#/read/2f4740387cda1000ac1c90b11c18cbab017!csh-da-filter!WKUS-TAL-DOCS-PHC-%7B4A1F7BEF-FFD4-4348-9D22-81311C5BA95F%7D–WKUS_TAL_11587%23wkusa59bc1eda5dc7d31154eda7cfd249493?searchItemId=&da=WKUS_TAL_11587

The court found privity and connectivity between the franchisee and Two Sisters. Therefore, despite Two Sisters being a separate corporation with different owners, the non-competition and non-solicitation under the franchise agreement were enforceable again Two Sisters. The court ordered Two Sister [in addition to the Franchisee and franchisee owners] to:

Stop using the franchise marks- i.e., remove the signage
Stop offering offer and providing service in violation of the non-compete
Stop soliciting the franchise business customers

An extraordinary outcome. Would there have been the same outcome if Two Sister had not been owned in part by the franchisee’s daughter?

How a Franchise Mediation Can Precludes Injunction

There is no set way franchise disputes must be settled. Sure, there are some state laws that require the laws where the franchise business is located to prevails and the alike. But, there is no per se way that franchise disputes must be resolved. The franchisor in drafting the agreement can require mediation, arbitration, litigation and any combination thereof.
However, once decided, the language in the franchise will dictate [except for the state law limitations]; therefore, it behooves one to read and re-read to ensure proper steps are followed. Failing to do so, will result in one spinning his/her wheels.
Hence is the case of World of Beer Franchising, Inc. v. MWB Development I, LLC, et al. Under the franchise agreement entered into between the parties’ disputes were to be resolved via non-binding mediation and arbitration, except in disrupts regarding the trademark and in which case a junction through the court may be sought so long as a petition for non-binding mediation was petitioned contemporaneously.

NOTHING IN THIS AGREEMENT WILL PREVENT YOU OR WE FROM OBTAINING TEMPORARY RESTRAINING ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT JURISDICTION. HOWEVER, YOU AND WE MUST CONTEMPORANEOUSLY SUBMIT A DISPUTE FOR ARBITRATION ON THE MERITS.

A dispute regarding the trademark and other issues ensued. Franchisee was buying services and products from unapproved suppliers. The franchisor and franchisee agreed to a mutual termination, but franchisee continued business under the trademark after the mutual termination of the franchise agreement.
The franchisor filed a petition for an injunction in court. The court denied the injunction on the basis that no petition for non-binding mediation was filed. This case is a reminder that once in writing alternative dispute resolution [mediation and arbitration clauses], even post the termination of the franchise agreement, shall be enforced to the fullest extent permitted by law.

What is Amazon Doing [or Not Doing] About Counterfeits?

What do think? Are counterfeits on Amazon a problem? Is Amazon doing enough to prevent counterfeits?

Counterfeits are made in imitation of something else with intent to deceive https://www.merriam-webster.com/dictionary/counterfeit

Daimler say ‘yes’ and no Amazon is not doing enough to prevent counterfeits from being sold on Amazon. In fact, Daimler has filed a court complaint against Amazon assuring just that.

Daimler argues that Amazon ‘facilitates the sale of an exorbitant number of counterfeit and infringing goods’ through its platform, counterfeit activity which has increased since 2015 when the company began inducing Chinese manufacturers to list on its U.S. and European e-commerce platforms. http://www.ipwatchdog.com/2017/11/15/daimler-trademark-lawsuit-amazon-infringement-counterfeits/id=90101/

To exemplify this point in its complaint, Daimler republished in its compliant the finding of a consumer advocacy organization that sent over 32,000 notice of infringing item to Amazon. http://www.ipwatchdog.com/wp-content/uploads/2017/11/CACD-2-17-cv-07674-1.pdf
Amazon has an anti-counterfeit policy. It is a rather simple no tolerance policy. Here it is:

Amazon Anti-Counterfeiting Policy
Customers trust that they can always buy with confidence on Amazon.com. Products offered for sale on Amazon.com must be authentic. The sale of counterfeit products, including any products that have been illegally replicated, reproduced, or manufactured, is strictly prohibited.
We take product authenticity very seriously. It is each seller’s responsibility to source and sell only authentic products. If you sell counterfeit goods, we may immediately suspend or terminate your selling privileges and destroy inventory in our fulfillment centers without reimbursement. In addition, we do not pay sellers until we are confident our customers have received the products they ordered, and if we determine that a seller account has been used to engage in fraud or other illegal activity, remittances and payments may be withheld or forfeited. The sale of counterfeit goods can also lead to legal action by rights holders and civil and criminal penalties.
We are constantly innovating on behalf of our customers and working with manufacturers, content owners, vendors, and sellers to improve the ways we detect and prevent counterfeit products from reaching our marketplace. We work hard on this issue every day because we know that our customers trust that they are buying authentic products when they shop on Amazon.com. This is why we stand behind the products sold on our site with our A-to-z Guarantee. We also encourage anyone who has a product authenticity concern to notify us, and we will investigate it thoroughly and take any appropriate actions.

Amazon has an online complain process for filing a complaint of trademark infringement, counterfeiting, and copyright infringement. However, Daimler reports that in following Amazon’s online complaint process

Amazon has done little to address these issues, despite having the knowledge, opportunity, and means to do so.

Anecdotally, we concur we have followed the Amazon online process with no result but frustration without proper outcome.
Daimler is asserting claims of:

Trademark Infringement under Sections 32, 34, and 35 of the Lanham Act
Trademark Dilution under Section 43(c) of the Lanham Act
Unfair Competition under Section 43(a) of the Lanham Act
Common Law Unfair Competition/Trademark Infringement
Trademark Infringement under California Trademark Law
Violation of California Consumer Protection Act

Daimler is seeking a judgment against Amazon for monetary statutory damages Amazon’s wrongful use of the Marks, including reasonable attorneys’ fees and costs; and treble [3 times] damages upon a finding of willfulness in Amazon’s unlawful acts.
Awesome case. Surely import to all trademark owners of product markers and sellers. We will keep you posted as this case progresses.

Who Owns the Franchise Business Post a Notice of Termination and Termination?

Under numerous state laws, franchisees are entitled to notice prior to termination. The amount of the time varies by states. It could be 30, 60, or even 180 days.
Who owns the franchise business between when the franchisee is given notice, and the franchise business is terminated. That question was posed in the case of Charter Practices Int’l, LLC, and Med. Mgmt. Int’l, Inc. [Banfield] v. John M. Robb [Franchisee].
Banfield gave Franchisee notice of termination. Pursuant to Connecticut law, a 60-day notice was required and given. The Termination Notice stated that Banfield would assume the daily operations of the franchise business until the termination date. When questioned by the press, Banfield instructed personnel to state:

Dr. Robb no longer owns a Banfield hospital.

But, is that true? Who owns the franchise business post a notice of the termination, but prior to termination. The court’s decision turned on the expressed language in the franchise agreement.
The franchise agreement gave Banfield the right to step in and operate the franchise business in the event of default. However, this provision deemed that the franchise business would still be owned by the franchisee and the revenues derived from the franchise business during the franchisor’s operation accrued to the franchisee.
This deem of ownership is important. Franchisee, citing Connecticut’s Law requiring a 60-day notice of franchise termination, argued that Banfield’s takeover of the operation of the franchise business violated the Connecticut Law. Franchisee’s argument was rejected. Banfield gave Franchisee a 60-day notice of termination and Banfield’s exercising of step-in rights did not violate the Connecticut Law because the Franchisee still owned the franchise business during the step-in period. Banfield’s personnel press response was a misstatement and inaccurate.

What a Moose of Trademark Case?

When it comes to trademarks, it not just about words. Trademark protections extends to words, images and, sounds.
Have you heard of Moosehead beer? Well, they are hopping mad about Hop’N Moose Brewing Company. Moosehead beer has been in existence since 1931. Hop’N Moose Brewing Company began using an image of moose in connection with its beer in 2014. After several cease and desist letters, Moosehead sued Hop’N Moose Brewing Company.

To prove its case, Moosehead must show that Hop’N Moose Brewing Company’s use of the moose will lead to customer confusion as to who is the make or manufacture of the beer.

The founder of Hop’N Moose Brewing Company reports ‘he chose the animal for the brewery’s logo because growing up in Quebec his family often went moose hunting.’ https://vtdigger.org/2017/11/05/canadian-beer-maker-hopping-mad-over-rutland-brewpubs-moose/#.WgBm52hSyUk
However, the reason for choosing the moose is immaterial. Trademarks [unlike copyright and patents] is not about protecting the trademark owner. It is about protecting consumers.

What? You Can Use Competitor’s Names for SEO Purposes?

That is the decision of the FTC Initial Law Judge Decision in the case of 1-800 Contacts, Inc, In the Matter of. 1-800 Contacts entered into at least 14 agreements with contact lenses competitors. Pursuant to these agreements 1-800 Contacts’ competitors promised and agreed not to use the word 1-800 contacts for search engine optimization [SEO] purposes. As a result of these agreements, customers paid higher prices for contact lenses.

The Challenged Agreements restricted advertisements for the sale of contact lenses on the internet by prohibiting competitors from presenting paid advertisements on the search engine results page in response to searches for 1-800 Contacts’ trademarks.” Chief Administrative Law Judge D. Michael Chappell

We have all experienced this. You enter a brand name into Google, and the search engine results yield a stream of the competitor websites. Why is that? One reason is brands commonly use the names of their competitors for search engine optimization or SEO purposes.
1-800 Contacts and others have historically and successfully argued that this practice is a trademark infringement. Now the FTC is arguing it is a bidding agreement that

eliminated competition in auctions to place advertisements on the search results page generated by online search engines such as Google and Bing. The complaint alleges that these bidding agreements constituted an unfair method of competition in violation of federal law, by unreasonably suppressing price competition in certain online search advertising auctions, and restricting truthful and non-misleading advertising to consumers. As a result, some consumers paid higher retail prices for contact lenses, the complaint stated.

It is an interesting proposition that could turn SEO sideways. Trademark owners may no longer be able to prohibit others from using their trademarks for SEO purposes. Asserting SEO trademark infringement is misleading advertising?
To buttress its argument, the FTC reports having evidence that consumers paid higher prices because 1-800 Contracts entered into an agreement with competitors to prevent SEO trademark infringement. It is a head-on conflict between trademark protection and advertising laws, two laws designed to protect the consumer. Trademark protection is designed to protect consumers by ensuring that consumers know whom they are buying products and services from. Which consumer protection law will win?
1-800 Contacts has a right to appeal the FTC Initial Law Judge Decision to the full Federal Trade Commission. If no appeal is filed, the Initial Judge’s decision will become effective.
It is not recommended that you change your SEO search terms just yet. Wait 30 days to see what happens. If the FTC Initial Law Judge Decision becomes final, it may open the floodgates open to SEO competition. But, will evidence of actual higher prices be required?

What, is the SBA Franchise Registry Back?

Yes. It is back. The Small Business Administration franchise registry is back. Franchisors must be on it in order for your prospective franchisee to get funding. Wait, I miss spoke. It is an SBA franchise directory, not the registry, the Directory.
The Directory is not optional. Unlike in the past, where franchises could be approved as part of the franchisee loan process, franchises must be pre-registered.

Under these changes, Lenders and CDCs will no longer have to review franchise or other brand documentation for affiliation or eligibility.

The criteria for being in the Directory is very straightforward. To be in the Directory, Franchises must meet the FTC definition of a franchise. The Directory does not replace the need for the standard of SBA Addendum. Franchisors will still be asked to the sign the Standard SBA Addendum.
The Directory will contain the following information:

Whether the brand meets the FTC definition of a franchise;
An SBA Franchise Identifier Code, if applicable;
Whether an addendum to the franchise agreement is needed; and
Whether there are additional issues the SBA Lender must consider with respect to the brand.

The Directory will be administered by FRANdata and found on the SBA website at www.sba.gov/for-lenders. Franchisors will be required to register on the Directory annually. The Directory requirement won’t go into effect until January 1, 2018, but franchisors can register now.
SBA notice regarding the directory can be found at http://www.frandata.com/wp-content/uploads/2017/10/5000-17009.pdf.

Why White Collar Exemptions Concerns May Be for Not.

Remember all the fuss around the rise of salary thresholds for white-collar exemptions? The fuss may have been for not. The current Labor Secretary is pointing to a lower salary threshold.

Background: In order, not to pay an employees overtime, the employee must be paid a minimum salary threshold and perform exempt job duties.   
The previous Department of Labor [DOL] Secretary proposed to increase the white-collar salary threshold requirement to $47,000.

A new Fifth Circuit Appeal Court has agreed to stay its decision challenging increase of the salary threshold. Read the article on Bloomberg BNA: https://www.bna.com/labor-department-continue-n73014471445/

When is a Franchise Non-competition Reasonable?

Just because there are words in a franchise agreement signed by a franchisor and franchisee, does not make the words enforceable. In the case of non-competes, it is a matter of the Rule of Reason.
As stated by a Michigan court in the case of LITTLE CAESAR ENTERPRISES, INC. et al. v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] whether a noncompetition [the franchisee’s promises not to operate a like business post-termination, nonrenewal, transfer, or expiration of the franchise agreement] depend on if the noncompete clause is reasonable under the Rule of Reason.

Generally, federal courts assess commercial noncompete agreements under the rule of reason[i]. A contract clause “violates the rule of reason if it `may suppress or even destroy competition,’ rather than promote competition[ii].

The key concern is possible suppression or destroying of competition. No actual suppression or destruction is required. The Rule of Reason uses the word ‘may.’ There is also a special focus on the geographic area were non-compete sought to be enforced and the market for the product or service of the competing business.

To survive under the rule of reason, a party challenging a contract must allege that the contract ‘produced adverse anticompetitive effects within relevant product and geographic markets.’[iii]

For a non-compete to be found unreasonable and therefore unenforceable, a franchisee must show that the non-competition covenant ‘produces[d] adverse anticompetitive effects within relevant product and geographic markets[iii].

[i] LITTLE CAESAR ENTERPRISES, INC. et al. v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] citing Innovation Ventures, 499 Mich. at 514 (compiling cases).
[ii] Id quoting United States v. Blue Cross Blue Shield of Mich., 809 F. Supp. 2d 665, 671 (E.D. Mich. 2011) (quoting American Needle, Inc v. National Football League, 560 U.S. 183, 203 n.10 (2010)); see also Perceptron, Inc. v. Sensor Adaptive Machs., Inc., 221 F.3d 913, 919 (6th Cir. 2000)
[iii] Id

Possible New Limits for Franchisors in Florida

The Florida senate is putting forth a bill to limit franchisor ability to renew, terminate, or refuse franchisee transfer. The bill written by Senator Latvala purposes, per the bill, to create laws, unless under good cause and/or certain circumstances and notice, prohibiting franchisors from:

terminating a franchise
refusing to renew a franchise
denying ownership of a franchise after the death of the franchisee
preventing a franchisee from selling or transferring a franchise, assets of the franchise business, or an interest in the franchisee
intentionally misrepresenting or failing to disclose specified information;

The bill being considered in for Florida is not unique. Many states have laws regarding the termination, renewal, and transfer of the franchise.
The law carries some teeth providing that violations constitute a misdemeanor of the second degree; providing penalties; providing that a person may be awarded certain damages, attorney fees, and other costs under specified circumstances; providing that certain actions are deemed unfair and deceptive; authorizing the Department of Legal Affairs by itself or jointly with the Department of Agriculture and Consumer Services to sue a franchisor on behalf of certain persons for specified violations.
The bill also provides remedies for a franchisee or an aggrieved or injured person under certain circumstances; authorizes punitive damages under certain circumstances; authorizes the Department of Legal Affairs or the state attorney to bring an action for injunctive relief or other civil relief under certain circumstances; and clarifies that specified remedies are in addition to existing remedies.
This bill is not law and will not be law until and unless enacted. However, this highlights the need to review state laws prior to not renewing, terminating, or denying franchisee transfers. As mentioned, many states already have laws regarding renewal, termination, and franchisee transfers.