Franchise Agreement Terminated-Without Notice

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When can a franchisor terminate a franchise? It says it right in the franchise agreement. Probably, toward the back of the franchise agreement, it says the franchise agreement may be terminated if….. These reasons for terminations in legal vernacular are called defaults. There are defaults that can warrant the franchise agreement being terminated immediately. And, there are defaults that allow a time for correction or a cure period. If a correction or cure period is stipulated, then the franchise may not be terminated until the cure period or correction period has lapsed and there is no correction. All this is laid out in the franchise agreement.
 Is there ever a case where, a franchise agreement may be terminated contrary to wording of the franchise agreement? Yes. That is the case of 7-Eleven, Inc., v. Upadhyaya et. al. The franchise agreement between 7-Eleven and Upadhyaya said, for the first event, the franchise agreement shall not be terminated without notice and opportunity to cure. 7-Eleven terminated its franchisee Upadhyaya. 7-Eleven did not follow the words of the franchise agreement. It did not allow Upadhyaya notice or time to cure. The termination notice said ‘your franchise agreement is terminated immediately.’
How can that be? The franchise agreement between 7-Eleven and Upadhyaya said that the franchisee would be entitled to a period of notice and opportunity to cure prior to the termination of the franchise agreement. Is that permissible? The court said: 7-Eleven had the right to terminate the franchise agreement per New Jersey law without following the prescribed notice and time to cure period because:
A contract may be terminated without notice and opportunity to cure in specific circumstances, even where contractual provisions require such notice. LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa. 546 [2009]. Notice and opportunity to cure provisions are not enforceable where a breach goes “directly to the essence of the contract, which is so exceedingly grave as to irreparably damage the trust between the contracting parties.” Id. at 567.
In essence the conduct of Upadhyaya was so heinous and grave that it damaged the trust of 7-Eleven and caused 7-Eleven irreparable harm. Upadhyaya was not ringing sales through the franchise POS system thereby reducing monies owed to 7-Eleven. This was not a minor issue. And, 7-Eleven had plenty of the evidence. 7-Eleven sent secret shoppers into the store. Of the 18 secret shops sent, it found 13 where the product purchased was not recorded properly by the store. Inventory reports showed that “reported purchases of cigarettes in the store exceeded reported sales of cigarettes by over $115,000.” In other words, the store was buying far more cigarettes than it reported selling to customers. …. [R]reported sales of candy, non-carbonated beverages, tobacco [not cigarettes], and grill items exceeded reported purchases by approximately $112,000.
The act of terminating a franchise agreement is lenient with legal consequences. Termination of a franchise agreement should be done only after a careful review of the agreement, the law, and facts.  If done improperly, without cause and contrary to the franchise agreement or state laws, the legal ramifications can be huge. The franchisor could be forced to pay large sums for damages and lost profits to the franchisee.   In this case, 7-Eleven had a copious amount of evidence, reports, videos, and compute readouts.
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It is that time of year again! FAQ About Franchise Sells, Disclosure, and Annual FDD Updates [A SlideShare]

As the advent of the FTC rule’s deadline for updating the franchise disclosure document approaches, questions abound about proper disclosure, sells, and re-disclosures. Watch the slide share to get the facts and answers to frequently asked questions.
Still have more questions or need more information? Give us a call!

Attention All Franchisors!

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Are you a franchisor? Do you have any franchisee locations in New York? If you answered,” yes,” to both of these questions, you need to file an annual information return. Do not delay. The deadline is March 20th .
To prepare for the filing you will need information about the revenues and royalties reported to you by your New York franchisees broken down by franchisee. The information return is by the New York Tax Department to verify the accuracy of income and sales tax returns filed by franchisees. This is New York’s way of auditing franchisees to see if they are paying proper taxes.
New York law allows for up to a $2,000 penalty for each information return that is not submitted.
Need more information about the information return, give us a call or drop us an email.
 

Can a bankruptcy render a franchisee’s non-compete void?

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The answer is ‘yes’ in at least one case. The case is Allegra Network, LLC v. In re Michael G. Ruth. Michael G. Ruth and Elnoria J. Ruth, collectively the “Ruths” entered into a franchise agreement initially in 1984. The franchise agreement was renewed in 2006. The franchise agreement stated that the laws of the state of Michigan governed the franchise agreement.

 In 2008, the then franchisor, Allegra Network, LLC, terminated the Ruths’ franchise agreement for failure to pay royalties. Allegra Network sued the Ruths for payment of unpaid royalties and enforcement of the post franchise agreement non-compete. The Ruths filed for bankruptcy.

 This is where it gets complicated. The court goes on a tangent. Under Michigan law, if a non-compete is violated, the remedy is monetary damages. The violator of the non-compete agreement must pay money damages. Now remember we are in bankruptcy. Under Chapter 13 bankruptcy all monetary obligations are discharged or erased. So, it only follows that the money damages for violation of the non-compete are erased. A little bit of circular reasoning.

 In essence, the former franchisee can compete against the franchisor.-without any liability. The obligation to pay damages for violations of the non-compete are erased by the bankruptcy. The franchisor has no remedy.

 In a side note, the court makes an interesting statement. This decision is not the outcome in all jurisdictions. The court states that if the case were in Minnesota or Texas, bankruptcy would not render the non-compete unenforceable.

 Business Take Away: Bankruptcy changes the typical rules and not all states have the same laws.

 Do want to know the non-compete laws in your state? Call or email us!

No liability for disclosure claim: Speak now or forever hold your peace.

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Nothing lasts forever. That includes the right to sue for franchise disclosure violations. If a franchisor does not comply with franchise disclosure laws, the franchisee has only a finite time to file a complaint.

 This is referred to as the statute of limitation in the legal world. The statute of the limitations is the set period of time that claim must be filed. If the time period the complaining party has lapses, they cannot sue. There may be no remedy. No liability.

 So goes the case of Stocco v. Gemological Institute of America, Inc., Gemological Institute”. Frederick Stocco and Kathleen Stocco, collectively “Stoccos” entered into a license agreement with the Gemological Institute in 2007. The license agreement was a franchise to be operated in California. In 2012, the Stoccos sued Gemological Institute. In one count, the Stoccos alleged Gemological Institute violated California franchise disclosure laws.

 California’s disclosure law states:

 No action shall be maintained to enforce any liability created ….. unless brought before ….. [4] four years after ………the violation, [or] the expiration of [1] one year after the discovery……..

That means the Stoccos could not claim a violation of the California franchise disclosure laws past 4 years. Do the math. The violation occurred in 2007 and the Stoccos did not bring their compliant until 2012. That is 5 years. The court disregarded the discovery issue. Four years was absolute. The Stoccos did not bring the claim within the 4 year window, the claim was dismissed!

 Now, that is not the end of the story. The Stoccos had numerous other claims against Gemological Institute. So, don’t assume a franchisor is off the hook after 4 years. In this case there were 5 other claims against the franchisor that will have to be defended.

 Business Take Away: Disclosure violations have a finite life, but there are other counts to consider.

 If you have an issue regarding a franchise disclosure violation, we want to hear about it. Contact us to discuss your specific case!

Franchisor left on the hook for state law violations.

Copyright 123RF Stock Photos
Copyright 123RF Stock Photos

Recently on the Gettins’ Blawg, we discussed the case of CHUTICH et al v. PAPA JOHN‘S INTERNATIONAL. In that case, consumers were trying to hold the Papa John franchisor accountable for endorsing a franchisee practice of texting a consumer contrary to federal consumer protect laws. Franchisors working nationally should be aware and informed about national laws. That is a no brainer!

Should franchisors be responsible for complying with laws in all 50 states? Knowing and acting in compliance with federal law is hard enough. But, that may not be enough! If franchisors are implementing nationwide franchise programs, franchisors need to know and comply with laws in all 50 states! Take the case of Simpson v. Best Western International, Inc. Simpson and a group of the callers to the Best Western reservation line are suing Best Western for recording their cell phone calls to the reservation line in violation of the California law.

We have all heard the pre-record message: “This call may be recorded for quality assurance purposes.” That message is given in order to comply with state law requirements. States have various laws regarding the recording of the phone conversations. State laws are not the same. The statute in this case is a California law that pertains to cell phone calls. Not all states have this same law or even a law similar. Best Western could be liable for $5,000 for each cell phone call made to or from a California caller. How many calls do you think occurred between the Best Western reservation line and California callers? This could add up to a huge liability for Best Western!

So what is the best practice for franchisors that are implementing national or centralized franchise programs? The franchisor cannot possibly engineer a national reservation line or other national initiatives specifically tailored to the laws in each state. What is a franchisor to do? Franchisors need to apply the highest dominator approach. Franchisors need to be aware of differing state laws and implement national programs that satisfy the most restrictive state law mandates.

Business take away: Apply the highest dominator approach when implementing national franchise programs!

I paid the minimum royalty fee. Can I still be in default of the franchise agreement?

Franchise Agreements may contain minimum royalty fee requirements and performance standards. What is the difference between the two? Can you be in default even if you pay the minimum royalty fee amount? Listen to the video and learn the answers.
 

Minimum Sales Requirement More Than Double in 10 Years

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Over the last 10 years or so, franchisors have begun including performance standards, minimum gross sales requirements, and minimum royalty rates in their franchise agreements. Whatever vintage they are (sales requirements, minimum sale or royalty), the whole rationale is this: The franchisor wants to make sure that the franchise territory is not tied up, underperforming, or underutilized.

The performance standards, minimum gross sales requirements, and minimum royalty rates are commonly stated in straight dollar amounts. Those dollar amounts may seem a bit measly, when the franchise agreement comes up for renewal 10 years later.

The franchisor can up the dollar amounts at the time of renewal. Right? One franchisee argued no way, no go. The case is Home Instead, Inc. v. David Florance et. al. The franchise agreement in question stated, in pertinent part, “The franchisee must maintain minimum gross sales of $30,000 per month after the end of the fifth year of operation of the Franchised Business through the end of the term of this Agreement or any renewal term of a renewal Franchise Agreement (the Performance Standard).”

In this case the franchisor wanted to raise the $30,000 to $70,000, a more than double increase of the Performance Standard. The franchisee read the franchise agreement to say that the $30,000 would run forever over all renewal periods. The court called this a “strained reading” of the franchise agreement. The court went on to say that “This reading places a permanent ceiling on the Performance Standard.” The court honed in on the word “minimum.”

The court found that the $30,000 stated in the initial franchise agreement “creates a floor, not a ceiling.” “Nothing in [the franchise agreement] §2.F prohibits the franchisor from raising the minimum amount.”

 Lesson from the Court: Each word has meaning, make sure to heed the meaning.

Minimum performance standards are disclosed in several item numbers of the franchise disclosure document.

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