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What is the Cost of Use Someone's Trademark?

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

https://cases.justia.com/federal/appellate-courts/ca4/17-1503/17-1503-2018-04-24.pdf?ts=1524594691

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]


[i] http://business.cch.com/ipld/walmart-02132019-14-217DOC570.pdf


[i] Variety Stores, Inc. v. Wal-Mart Stores, Inc., E.D.N.C. No. 5:14-CV-217

What Can be Released by a Franchise General Release of Claims?

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.

The 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).

Id.

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 disclosure documents. 

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.


[i] Trident 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

What Do You Think About the FTC Franchise Disclosure Rule?

The Federal Trade Commission (FTC) drafter of the Franchise Disclosure Rule, which requires the delivery of the Franchise Disclosure Document to prospective franchisee is looking for comments.  The comment requires part of the FTC periodic review of the cost and benefits of the regulations.  Specifically, the FTC is looking for comments on the following questions: 

1.                              Is there a continuing need for the [Franchise Disclosure] Rule? Why or why not?

2.            What benefits, if any, has the Rule provided to prospective franchisees, including small businesses? What evidence supports the asserted benefits?

3.            What modifications, if any, should be made to the Rule to increase its benefits to prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers, including small businesses?

c.             How would these modifications affect the benefits to prospective franchisees?

4.            What impact has the Rule had on the flow of truthful information and on the flow of deceptive information to prospective franchisees?

5.            What significant costs, if any, has the Rule imposed on prospective franchisees, including small businesses? What evidence supports the asserted costs?

6.            What modifications, if any, should be made to the Rule to reduce any costs on prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the benefits provided by the Rule?

7.            What benefits, if any, has the Rule provided to franchisors and franchise sellers, including small businesses? What evidence supports the asserted benefits?

8.            What modifications, if any, should be made to the Rule to increase its benefits to franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

9.            What significant costs, if any, including costs of compliance, has the Rule imposed on franchisors and franchise sellers, including small businesses? What evidence supports the asserted costs?

10.          What modifications, if any, should be made to the Rule to reduce the costs imposed on franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

11.          What evidence is available concerning the degree of industry compliance with the Rule?

12.          What modifications, if any, should be made to the Rule to account for changes in relevant technology or economic conditions? What evidence supports the proposed modifications?

13.          Provide comment on any overlap or conflict with other federal, state, or local laws, or regulations.

a.            What evidence supports any asserted conflicts?

b.            With reference to asserted conflicts, should the Rule be modified? If so, why or why not?

The questions posed by the FTC provide a chance for introspective of the Franchise Disclosure Rule and perhaps more particularly the Franchise Disclosure Document.  I would gander to say the Franchise Disclosure Rule and Franchise Disclosure Document (FDD) will not be abandon or eliminated by the FTC.  And, if the FTC did abandon the Rule, many states have enacted like statutes and regulations that mirror or greater than the federal FTC Franchise Disclosure Rule, and therefore, such abandonment will cause minor alteration the regulatory nature of franchising. 

How Much Can Franchisees Be Charged?

It shall be an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful and a violation of this chapter for any person to sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.  


RCW 19.100.180(2)(d)

One long hot button issue in franchising is charges, profits, and rebates that franchisors receive from franchisee purchases.  In addition to being the brand owner, franchisors may also be the supplier of goods or services to franchisees.  Franchisors have the right to be paid for service and value tendered.  But on the flip side, exorbitant charges can render the franchisee unprofitable and uncompetitive in the market place. 

Within ever contract, including franchise agreements and supplier agreements, there is implied a duty of good faith and fair dealing.   This can translate into to not charging unreasonable fees.  The obligation of good faith and fair dealing is not written in the agreement, but rather is an implied obligation in every agreement.  It is assumed. 

Washington state’s franchise law has codified into law the obligation of good faith and fair dealing.  In pertinent part, the codification is quoted above.  The Washington law says it is  “unfair or deceptive act or practice or an unfair method of competition……to sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.

A test of what is a fair and reasonable price was challenged in the case of Brewer v. Money Mailer, LLC.  The court declined to state a bright line rule about what is an unreasonable price.  But did say:



Selling printing services to a franchisee at more than twice what those services cost violates this provision.


ORDER GRANTING IN PART BREWER’S MOTION FOR SUMMARY JUDGMENT – 5

The court’s in its order granting summary judgment solely looked at the franchisor’s actual cost of services and the fee charged franchisees.  The court did not, and it is unknown if the parties present evidence regarding of fair market valve or competitor pricing for like services.  The court, in hand, disregarded per se the franchisor’s argument that it provided considerable benefit for the fees charged franchisees.


As a matter of law, huge markups in the price of a product or service that a franchisee is required to purchase from the franchisor are simply not permitted.

Id.

The take away is when determining fees charged franchisee.  Look at the cost.  Irrespective of the benefits bestowed or competitor pricing, the fees charged franchisee must be reasonable something less than twice the actual cost. 

Is Your Franchise Claim Subject to Arbitration?

Back in 1925, Congress passed a law allowing for the enforceability of arbitration clause in contracts.  

A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.  9 U. S. C. §2.

Throughout the almost a hundred years later since enactment, the enforceability of arbitration clauses has repeatedly been upheld.  In a case argued before the United Supreme Court on October 29, 2019[i], the high court has again reinforced the bounds of arbitration.  The question at issue before the high court was:

Who decides if a dispute is subject to arbitration pursuant to a contractual arbitration clause- an arbitrator or a judge in a court of law?

The Supreme Court says, if the contract clause such, it is an arbitrator’s place to determine if a dispute is required to resolved by arbitrated.

When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

HENRY SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29, 2018—Decided January 8, 2019.

Here are a few quick statements regarding arbitration in general and franchising. 

  • Yes, arbitration offers a quicker resolution than litigation. On average, US District Court cases take more than twelve months longer to get to trial than cases adjudicated by arbitration (24.2 months vs. 11.6 months)[i].
  • Your right to challenge an arbitration decision is considerably more limited than in litigation. 
  • Arbitration decisions, unlike litigation, are not public; however, both must be disclosed in the Franchise Disclosure Document congruently.

[i] A New AAA Study Confirms That Arbitration Is Faster To Resolution Than Court – And The Difference Can Be Assessed Monetarily. Posted by John P. Ahlers  https://www.acslawyers.com/a-new-aaa-study-confirms-that-arbitration-is-faster-to-resolution-than-court-and-the-difference-can-bassessed-monetarily/

[i] HENRY SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29, 2018—Decided January 8, 2019

What is the Recourse for the Filing of a Franchisee Bankruptcy?

Almost universally, franchise agreements expressly state that the filing of a claim in bankruptcy is grounds for immediate termination of the franchise agreement.  But, in reality, bankruptcy laws, prohibit the franchisor from terminating the franchise agreement based on the franchisee’s filing in bankruptcy.  This is referred to as a stay in bankruptcy. 


A debtor [franchisee] in bankruptcy is shielded by the automatic stay under Sec. 362 of the Bankruptcy Code [11 U.S.C. 362] from debt-related proceedings brought by creditors [franchisor] based on pre-petition events.

A bankruptcy stay means the franchisor is not permitted to terminate or default a franchisee because of the filing of bankruptcy, delinquent royalties, or any other deficiencies that are pre-date the bankruptcy filing. 

So what recourse does a franchisor have against a franchisee in bankruptcy?  Two options include moving to dismiss the bankruptcy and seeking to lift the automatic bankruptcy stay, may be available.  Either way, the franchisor must file a petition with the bankruptcy court.  This is not a matter that can be handled by simply sending a notice to the franchisee or the franchisee’s attorney. 

These two options were pursued by GNC in the case of In re: Meena, Inc[i]. While GNC was not successful in getting the franchisees’ bankruptcy dismissed or the automatic stay lifted,[ii] the court provided a nice outline of what is required for dismissal of bankruptcy claim and was is required to the lift the automatic bankruptcy stay.

The bankruptcy may be dismissed if:

  1. the continuing loss to or diminution of the estate [franchised business] and absence of a reasonable likelihood of rehabilitation;
  2. inability to effectuate a plan;
  3. unreasonable delay by the debtor [franchisee] that is prejudicial to creditors [franchisor]; [or]
  4. failure to propose a plan under section 1121 of this title [the federal bankruptcy law] within any time period fixed by the court.4[iii]

To the lift the automatic bankruptcy stay, the franchisor must show:

  1. the debor [franchisee] lack of adequate protection of an interest in property [franchise agreement or franchised business assets] of such party in interest; or
  2. the debtor [franchisee] does not have an equity in such property [franchise agreement or franchised business assets], and such property is not necessary for an effective reorganization.

[i] In re: Meena, Inc., Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc., Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S. Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg, 8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.

[ii] GNC was not successful in getting the franchisees’ bankruptcy dismissed or the automatic stay lifted in part due to issues non-conveyance of the franchise agreement and money security agreement from the individual franchisees to the business entity franchisee.  See are previous blog https://gettinslaw.com/franchising/2018/12/20/who-owns-this-franchise/

[iii] In re C-TC 9 th Avenue Partnership , 113 F.3d. 1304, at 1311 (2d Cir. 1997).

Is There an Anti-Poaching Clause in Your Franchise Agreement?

Poaching in the employment realm is the act of scouting, soliciting, recruiting, and hiring employees already employed by another entity.  The consequence of having a key employee poached can be a great hardship on the business, and it can create hard feelings between poacher and poached companies. 

The rationale of anti-poaching clauses are to avoid discord among and promote harmony between franchisees.  Anti-poaching clauses are common in franchise agreements.  Often the anti-poaching clause is cushioned within the non-solicitation provision.  A non-solicitation clause goes something like this:

You covenant that you will not, during the Term and for a period of one year after expiration or termination of the Franchise, employ or seek to employ any person who is employed by us, our Affiliates or by any of our franchisees, or otherwise directly or indirectly solicit, entice or induce any such person to leave their employment

Greer v. Papa John’s, S.D.N.Y., Case No. 1:18-cv-11312, December 4, 2018

The non-solicitation clause prohibits the franchisees from during and post the term of the franchise agreement from deriving Franchised Business customers and employees from another. 

Recent claims by employees are claims are challenging the premise the rationale of anti-poaching clauses is to promote harmony and avoid discord amount franchisees. In two recent cases involving Papa Johns[i] and Jiffy Lube[ii], employees are asserting that anti-poaching clauses unfairly suppress competition and suppress wages. 

Employees are to the only one to challenge anti-poaching provisions in franchise agreements.  The Papa Johns’ employee class action case, follows a settlement between Papa Johns and the Washington Attorney General, in which the Washington Attorney General asserted the Papa Johns’ anti-poaching clause

restricts worker mobility and decrease[s] competition for labor by preventing workers from moving among the chain[]’s franchise locations


[1] http://www.wkcheetah.com/?cpid=WKUS-Legal-Cheetah#/read/8ffbf8ce7d2f1000ba3d90b11c2ac4f101!csh-da-filter!WKUS-TAL-DOCS-PHC-%7BFEE144B1-5FC2-4E25-99A6-968163C6D1D7%7D–WKUS_TAL_1852%23teid-0?searchItemId=&da=WKUS_TAL_1852#8ffbf8ce7d2f1000ba3d90b11c2ac4f101-8ffbf8ec7d2f1000892990b11c2ac4f108

Papa Johns’ settled with the Washington Attorney General, and as part of the settlement, Papa Johns agreed to remove the anti-poaching clause from its franchise agreement. 

Does your franchise agreement include an anti-poaching provision?  What can you do?  What should you do? How can you preeminent any potential governmental or employee claims?


[i] Greer v. Papa John’s, S.D.N.Y., Case No. 1:18-cv-11312, December 4, 2018

[ii] Fuentes v. Royal Dutch Shell PLC, E.D. Pa., Case No. 2:18-cv-05174-AB, November 29, 2018 priority52

Franchise Disclosure Document Update: Do I Need an Audit?

Yes, it is that time of year.  Every year 120 days post the close of the franchisor’s fiscal year, the franchisor disclosure document must be updated with the previous year’s data.  The update is required by the federal FTC Franchise Disclosure Laws.  For must franchisor’s the deadline to update the franchise disclosure document is April 30th.

It does not matter if you sold any franchises, if you tried to sell franchises last year, you will need an audit.

In the first year of franchising, startup franchisors may have been able to evade getting an audit.  However, post the first year of franchising and every year thereafter, all franchisors must have an auditor completed of the franchisor entity incident to the annual franchise disclosure update[i].

If you offered franchises in last year, you will need an audit.  It does not matter if you only offered franchises for 1 month, 3 months, or 12 months-you will need an audit.

The audit must be prepared in accordance with GAAP, and the audit must be done by an independent auditor.  The audit cannot be completed your in-house accountant or the accountant that you use to complete your taxes.  


[i] In leu of a franchisor audit, an audit may be completed “…of any of its affiliates if the affiliate’s financial statements satisfy paragraphs (u)(1)(i) and (ii) of this section and the affiliate absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor under the franchise agreement. The affiliate’s guarantee must cover all of the franchisor’s obligations to the franchisee but need not extend to third parties. If this alternative is used, attach a copy of the guarantee to the disclosure document

Who owns this Franchise?

It is not uncommon for a prospective franchisee to purchase and sign a franchise agreement before forming a limited liability company or corporations.

Again, not uncommon and it is not a big deal.  However, it is important to make sure to transfer the rights and obligations under the Franchise Agreement [and to the preserve the non-compete and guaranty by individual franchisees] to the newly formed franchisee business entity.  A consent to transfer agreement between the individual franchisee, newly formed business entity and the franchisor should be signed when the business entity is formed.

Yes, even though it is a transfer from a franchisee individual to a business entity that the franchisee owns, the franchisor needs to consent to the transfer.  The consent to transfer conveys the rights under the franchise agreement to the business entity.  Without the consent, the franchisee business entity never becomes obligated under the franchise agreement.  Without the consent to transfer, the franchisee business is not obligated to pay royalties, to follow system standards, or follow any other obligations under the franchise agreement. 


Yes, even though it is a transfer from a franchisee individual to a business entity that the franchisee owns, the franchisor needs to consent to the transfer.

The potential outcomes are not good.  Hence the case of the In re: Meena, Inc.[i], In this case, two individuals purchased 3 franchises from GNC.  The individuals later formed a corporation.  A consent to transfer was never signed.  The franchise agreements remained under the names of the individual franchisees.  In purchasing the franchises, the individuals signed money security agreements collateralizing the franchised business assets. 

The money security agreement went delinquent and unpaid after the issuance of termination notices, extensions by the franchisor, the franchisees individually and the franchisee business entities filed bankruptcy.  The franchisor was in a pickle.  There was a money security agreement signed by individual franchisees, but the franchisee business entity owned the assets.  The franchisee business collateral was not attachable; the assets were not owned by the individual persons that signed the money security agreement.   The assets were owned by the franchisee business entity.


[i] Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc., Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S. Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg, 8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.

What Franchisors Need to Do Before Advertising


You have your Franchise Disclosure Document [FDD] updated, and you are ready to sell franchises.  Before advertising, there may be one other step that you need to take.  The following states require that your franchise advertisements be submitted for review before publication or distribution.

·      California ·      Indiana ·      Maryland
·      Minnesota ·      New York ·      North Dakota
·      Rhode Island

·      South Dakota

·      Washington

The word advertisement in this context is used loosely.  For purposes of state review of advertisements, an “advertisement” includes virtually any document or letter given or sent to a prospective franchisee before or during the sale of the franchise, including, but not limited to, any

  • Brochures;
  • Photographs;
  • e-mails or letters sent or given to prospective franchisees;
  • newspaper, magazine, radio or television ads;
  • leaflets, photographs or brochures left in the company’s office;
  • signs or pictures in the office directed at selling franchises; and even
  • recorded telephone messages.

Advertisements in newspapers or other publications of general, regular and paid circulation which have had more than ⅔ of their circulation outside the state during the past 12 months, and radio or television programs originating outside the state, are NOT required to be submitted for pre-publication approval.
However, a newspaper or magazine article about the company that was originally published in another state or in a newspaper or magazine with more than ⅔ of its circulation outside the state must be submitted for approval if you mail copies to prospective franchisees in a state that does require pre-publication approval.