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Frequently Asserted Franchisee Causes of Action Against Franchisors


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Frequently Asserted Franchisee Causes of Action Against Franchisors

  1. 1. CLAIMS BY FRANCHISEES <ul><li>Carmen D. Caruso </li></ul><ul><li>Schwartz Cooper Chartered </li></ul><ul><li>Chicago </li></ul>
  2. 2. CLAIMS BY FRANCHISEES <ul><li>Contract </li></ul><ul><ul><li>Express </li></ul></ul><ul><ul><li>Implied </li></ul></ul><ul><li>Misrepresentation </li></ul><ul><ul><li>Fraud </li></ul></ul><ul><ul><li>Negligence </li></ul></ul><ul><ul><li>Inducement </li></ul></ul><ul><ul><li>Post-Sale </li></ul></ul><ul><li>Statutory </li></ul><ul><ul><li>Registration & Disclosure </li></ul></ul><ul><ul><li>Relationship </li></ul></ul><ul><ul><li>Termination </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Discrimination </li></ul></ul>
  3. 3. Representing The Other Side? <ul><li>What Would Lincoln Do? </li></ul>
  4. 4. FRANCHISEE PERSPECTIVE <ul><ul><li>TRUTHFUL DISCLOSURES </li></ul></ul><ul><ul><li>HONEST, GOOD FAITH PERFORMANCE </li></ul></ul><ul><ul><li>PROTECTION OF EQUITY </li></ul></ul><ul><ul><li>FULL PROTECTION BY THE LEGAL SYSTEM </li></ul></ul>
  5. 5. The Offering Circular <ul><li>Mom & Pop Franchisors </li></ul><ul><li>Inbound Franchisors </li></ul><ul><li>Internet Documents </li></ul><ul><li>Outsourcing </li></ul><ul><li>New FTC Rule </li></ul>
  6. 6. Offering Circular <ul><li>Who owns the Marks? </li></ul><ul><li>Who are you dealing with? </li></ul><ul><li>Follow the money </li></ul><ul><li>Does the Franchise Agreement defeat the claim? </li></ul><ul><ul><li>Statutory No Waiver Provisions </li></ul></ul>
  7. 7. Fraudulent Inducement <ul><li>Damages vs. Rescission </li></ul><ul><li>Integration vs. No Reliance Clauses </li></ul>
  8. 8. “ If a contract was procured by fraud, an integration clause reciting that the written agreement was complete “ would go down the drain with the contract of which it was a part” <ul><li>Vigortone AG Prods., Inc. v. AG Products </li></ul>
  9. 9. “ No defendant may escape liability for actual fraud through the use of general disclaimers” Healy v. Carlson Travel Network Assocs. (dicta)
  10. 10. Negligent Misrepresentation In Illinois, a defendant is not liable unless it is engaged in the “ business of supplying information ” First Midwest Bank, N.A. v. Stewart Title Co. , 2005 WL 119802 (1 st Dist. 2005) Some courts reject this argument categorically
  11. 11. PROMISSORY FRAUD <ul><li>Promise made with no intent of future performance (as part of fraud scheme) </li></ul><ul><li>Subject to “complete agreement” clause ? </li></ul>
  12. 12. STATE FRANCHISE ACTS <ul><li>Registration & Disclosure Claims </li></ul><ul><li>Fraud in the Sales Process </li></ul><ul><ul><li>Extra-territorial (offer made in state) </li></ul></ul><ul><ul><li>Strict liability – “any untrue statements” or omissions that are materially “misleading” </li></ul></ul>
  13. 13. Little FTC Acts <ul><li>State law cause of action for violating the FTC Rule </li></ul><ul><ul><li>Improper Earnings Claims </li></ul></ul><ul><ul><li>False Earnings Claims </li></ul></ul>
  14. 14. Little FTC Acts <ul><li>Scienter Issues </li></ul><ul><li>Reliance </li></ul><ul><li>Transaction vs. loss causation </li></ul><ul><li>Remedies </li></ul>
  16. 16. The Franchise Agreement <ul><li>The only evidence you’ll ever need? </li></ul><ul><li>Evidence to be considered along with the parties’ communications and conduct? </li></ul>
  17. 17. EXCEPTIONS TO EVERY RULE <ul><li>Franchisors often seek to expand the Franchise Agreement to impose new duties or restrictions or reinterpret existing ones </li></ul><ul><li>Reinvestment Requirements </li></ul><ul><li>The Franchisee must meet system standards established by the Franchisor and modified from time to time </li></ul>
  18. 18. Franchisor’s Interpretation: <ul><ul><li>In the home stretch of a twenty year term, Franchisees were told to reinvest a fixed percentage of their annual revenue in order to qualify for another franchise agreement after expiration </li></ul></ul><ul><ul><li> Fiore v. McDonald’s Corporation </li></ul></ul>
  19. 19. <ul><li>Aid to Construction of Existing Terms </li></ul><ul><li>Fills “Gaps” </li></ul><ul><li>Exercise discretion fairly and reasonably, with “proper motive”, and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” </li></ul>IMPLIED COVENANT OF GOOD FAITH & FAIR DEALING
  20. 20. <ul><li>Product Supply: “Franchisor May Profit” on Franchisee Purchases </li></ul><ul><li>How much? </li></ul><ul><li>Above market prices? </li></ul><ul><li>Alternative suppliers? </li></ul><ul><li>Good Faith & Fair Dealing? </li></ul>AMBIGUITY
  21. 21. Waiver of Good Faith & Fair Dealing <ul><li>Express and Implied Waivers </li></ul><ul><li>Lack of Mutuality ? </li></ul><ul><ul><li>“ Franchisor May….” </li></ul></ul><ul><li>Creating a Vacuum </li></ul><ul><li>Who Wears the White Hat? </li></ul>
  22. 22. Expanding the Contract                     <ul><li>Parol Evidence </li></ul><ul><li>Custom and Practice </li></ul><ul><li>Course of Dealing </li></ul><ul><li>Oral Modification </li></ul><ul><li>Promissory or equitable estoppel </li></ul><ul><li>Recoupment </li></ul><ul><li>Unjust Enrichment </li></ul>
  23. 23. Experts In Franchising <ul><li>Industry Consultants </li></ul><ul><li>Daubert Issues </li></ul>
  24. 24. Fiduciary Duties <ul><li>Buying Agent Cases </li></ul><ul><ul><li>Hotel Industry </li></ul></ul><ul><ul><li>Advertising Purchases </li></ul></ul>
  25. 25. STATE FRANCHISING ACTS <ul><li>Post-Sale Protection Varies </li></ul><ul><li>Membership in Trade Associations </li></ul><ul><li>Discrimination (offensive & defensive claims) </li></ul>
  26. 26. Discrimination as a Defense to Termination Seventh Circuit: “ discrimination requires proof of “arbitrary disparate treatment among similarly situated individuals or entities.” Canada Dry Corp. v. Nehi Beverage Co., Inc., But this holding is in question.
  27. 27. Terminations <ul><li>Statutory Protection </li></ul><ul><ul><li>Distinct from expiration/non-renewal </li></ul></ul><ul><li>Franchisee Dilemma </li></ul><ul><ul><li>Lanham Act </li></ul></ul><ul><li>Injunctions against termination </li></ul><ul><ul><li>Burden of Proof </li></ul></ul><ul><ul><li>Irreparable Injury </li></ul></ul><ul><ul><li>Bond </li></ul></ul>
  28. 28. Terminations <ul><li>Counterclaims </li></ul><ul><li>Exit Strategy </li></ul><ul><li>Non-Competes </li></ul><ul><ul><li>Rescission </li></ul></ul><ul><ul><li>Antecedent Breach </li></ul></ul><ul><ul><li>Good Cause vs. Good Faith </li></ul></ul>
  29. 29. Good Faith vs. Good Cause <ul><li>Where a franchisee failed to pay royalties, creating good cause for termination, the franchisee nonetheless presented sufficient evidence that the franchisor acted in bad faith in causing the termination through its cannibalization of the franchisee's business.    Interim Health Care of Northern Illinois v. Interim Health Care </li></ul>
  30. 30. <ul><li>What Would Lincoln Do? </li></ul>
  31. 31. “ Discourage litigation. Persuade your neighbors to compromise whenever you can. … As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.&quot;