Court Watch

In determining whether American Dairy Queen met the standards for the grant of this preliminary injunction, the court found it still true that neither party had established a strong likelihood of success on the merits. The court did not deny the injunction, however, because it found that there would be irreparable harm to American Dairy Queen without the injunction because the company would suffer irreparable harm to its reputation and goodwill each day that Vander Vreken represented his restaurant to be an authorized American Dairy Queen while not complying with American Dairy Queen's quality standards.

The court further found that if Vander Vreken prevailed at trial, any losses he suffered before trial could be fully compensated through the award of money damages. In balancing the injuries to both parties, therefore, the court found it clear that any injury to Vander Vreken was compensable by money damages, while the injury to American Dairy Queen was not. In evaluating whether the issuance of an injunction would serve the public interest, furthermore, the court agreed with American Dairy Queen that the public interest in the quality of food it consumes cannot be served by allowing a franchisee to operate a restaurant that has failed its franchisor's inspections.

Baskin Robbins' Alleged Failure to Disclose Was Not Fraud

The U.S. District Court for the Eastern District of Texas granted summary judgment in favor of Baskin Robbins against claims that it was guilty of fraud under California law by failing to disclose certain information to more than 40 franchisees in several Southeastern states. This information included the alleged knowledge that Baskin Robbins planned to phase out single-brand formats and certain “non-strategic” areas, by redirecting its marketing efforts and declining to renew franchise agreements. Brock v. Baskin Robbins, USA, Co., et al., 2003 WL 21309428, CCH Bus. Fran. Guide Par. 12,585 (E.D. Tex. 2003).

The franchisees claimed that Baskin Robbins had a duty to disclose certain information to them, and that the failure to do so amounted to fraud. Specifically, they claimed that Baskin Robbins knew that single-brand store formats were unviable and that it intended on phasing out “non-strategic locations,” but failed to inform prospective and current franchisees of this. The franchisees claimed that Basking Robbins had violated the California Franchise Investment Law (CFIL) and committed common-law fraud.

The court disposed of the CFIL claim quickly by pointing out that none of the franchisees operated or lived in California.

Turning to the fraud claim, the court examined whether or not Baskin Robbins had a duty to disclose the information, assuming it to be true. The presumption of such a duty to disclose, the court held, is premised on the existence of a fiduciary relationship. But the parties' contractual relationship did not by itself create such a relationship, the court ruled. Even if a trust were created as to Baskin Robbins' expenditure of advertising funds, the court reasoned, it did not follow that fiduciary duties attached to every other aspect of the parties' relationship not connected to maintaining the advertising fund. Because there was no duty to disclose, the court ruled that the fraud claim must fail.

The court went on to observe that even assuming Baskin Robbins did have a duty to disclose (which it did not), the franchisees had not meet their summary judgment burden on their allegations that Baskin Robbins intended to pull out of non-strategic markets but failed to disclose this. The first “bit of evidence” that the franchisees cited was a 1985 market plan created by five company employees and 10 franchisees in and for the Chicago area market. The second “bit” was the fact that Baskin Robbins halted national advertising in the late 1990s in favor of concentrating on larger, metropolitan markets.

The franchisees argued that the inference permissibly drawn from this evidence suggested that Baskin Robbins intended to pull out of non-strategic markets but failed to disclose this. The court observed that the fact that Baskin Robbins resumed national marketing in 2000 seriously undermined the inference the franchisees argued should attach to the late 1990s decision to stop such marketing. And the court concluded that the Chicago plan, standing alone, was not sufficient evidence on this point. In sum, the court ruled, no reasonable jury could make the series of inferential leaps the franchisees demanded “based on this paltry evidence” in order to conclude that Baskin Robbins had failed to disclose a material fact. Thus, even assuming a duty to disclose existed, the court ruled that Baskin Robbins still deserved judgment as a matter of law in its favor as to the “non-strategic market” allegations.

Franchisor's Damages for Future Profits Not Precluded

In a decision that franchisors will welcome, interpreting the well-known Postal Instant Press v. Sealy (51 Cal.Rptr.2d 365 [1996]) case decided under California law, the U.S. District Court for the Southern District of California has declined to dismiss a franchisor's claim for lost future profits even if the franchisor had terminated the agreement, provided the franchisor could prove, as it alleged in the complaint, that the franchisee's conduct proximately caused the damages, and the award was neither excessive, oppressive, nor disproportionate. It's Just Lunch Franchise, LLC v. BLFA Enterprises, LLC, F.Supp. 2d , 2003 WL 21735005 (S.D. Cal. 2003).

BLFA, a dating/matchmaking franchisee of It's Just Lunch, found its franchise was not profitable, and failed to make required royalty and advertising fund payments. It's Just Lunch alleged that BLFA sent it a letter and an e-mail terminating the franchise agreement and closed the business. It's Just Lunch brought suit, alleging that BLFA was in breach of the franchise agreement and seeking damages for future lost royalties and advertising fees as well as past due royalties and fees.

In its motion to dismiss, BLFA claimed that It's Just Lunch was the party that breached and terminated the agreement and argued that under California law and pursuant to Sealy, damages for future profits are not recoverable if the franchisee fails to make royalty payments and the franchisor subsequently terminates the franchising agreement.

The court observed that the resolution of the dispute required a fact-intensive inquiry into which party first terminated or breached the franchise agreement. Taking the allegations in the franchisor's complaint as true, as required when ruling on a motion to dismiss, the court had to assume that BLFA terminated the agreement. Thus, the court concluded that the complaint stated sufficient facts to survive the motion to dismiss.

On the subject of damages, the court agreed with BLFA that under Sealy, a franchisor that has terminated the franchise agreement cannot recover its future lost profits as damages. But the court found this principle inapplicable to the facts pleaded in the complaint. In Sealy, the franchisee failed to make several royalty payments as specified in the franchise agreement, and the franchisor declared that the franchisee was in breach and terminated the agreement. The Sealy court found that the franchisor could not recover its future profits where it had terminated the agreement, because the damage was proximately caused by the franchisor's termination rather than by the franchisee's breach. In addition, it found that an award of future profits under those circumstances would amount to “unreasonable, unconscionable or grossly oppressive” damages. According to the court in Sealy, the possibility of an award of future profits would provide the franchisor with a bludgeon in every contract dispute, because unless the franchisee complies, it is faced with the threat of the franchisor terminating the agreement and being awarded future profits.

However, the court observed, the Sealy court expressly refused to consider whether damages for future profits would be available in circumstances which, as alleged in It's Just Lunch's complaint, the franchisee terminated the agreement. Moreover, the court continued, Sealy did not preclude the award of future profits even if the franchisor terminates the agreement, if the franchisee's conduct proximately caused the damages, and the award is neither excessive, oppressive, nor disproportionate. Thus, the court concluded that Sealy does not preclude an award of future profits under the facts pleaded in the complaint of It's Just Lunch, and that BLFA did not meet its burden of showing that the franchisor's claim for future profits was without factual support, or that the amount in controversy, to a legal certainty, was less than the jurisdictional amount.

Distributorship Agreement Not a Franchise Under Minnesota Franchise Act

The Minnesota Court of Appeals has recently affirmed a trial court's decision and held that a distribution agreement between Barnmaster, a company that manufactures and sells horse barns, and its Minnesota distributor was not a franchise under the Minnesota Franchise Act (MFA) because Barnmaster did not charge a fee for the right to enter into the business or to continue its operation. Hogin v. Barnmaster, Inc., 2003 WL 21500044 (Minn. App. 2003).

Hogin entered into a distributorship agreement with Barnmaster in 1996. Pursuant to the agreement, Hogin was required to purchase and maintain a display Barnmaster barn to be located on a freeway or heavily traveled highway. Under the agreement, which was terminable at will by either party on 30-days notice, Barnmaster was not responsible for any of Hogin's business expenses.

Hogin sold only three barns from the inception of the agreement in 1996 through 1998. Barnmaster's vice-president of marketing and sales visited Hogin's site in 1998 and instructed him to move his display to a more heavily traveled location, but Hogin refused. Barnmaster then terminated Hogin's distributorship agreement in September 1999.

Following the termination, Hogin reported Barnmaster to the Minnesota Department of Corporations (DOC). The DOC conducted an investigation and determined that Barnmaster was a “franchise” under the MFA. Because Barnmaster was not registered as a franchisor as required by the MFA, the DOC ordered Barnmaster to cease and desist from offering or selling any franchises in Minnesota. While Barnmaster had a right to request a hearing, it chose not to.

Hogin then instituted a civil action against Barnmaster for damages relating to Barnmaster's termination of Hogin's alleged franchise. He contended that Barnmaster's termination of the franchise was an unfair franchise business practice in violation of the MFA. After a bench trial, the district court determined that the distributorship agreement was not a franchise under the MFA, and that Barnmaster was thus entitled, under the distributorship agreement, to terminate its relationship with Hogin on 30-days notice.

Hogin appealed the district court's decision and claimed that the distributorship agreement was indeed a franchise under the MFA. The appellate court disagreed and affirmed the trial court's decision. Specifically, it found that the prior decision of the DOC that Barnmaster was selling franchises had no collateral estoppel effect vis a vis Hogin's claims because the DOC administrative proceeding was not “actually litigated,” which is required for the application of the collateral estoppel doctrine. Stated differently, according to the appellate court, because there was not a full hearing before the DOC issued the cease-and-desist order, Barnmaster was not estopped from claiming that the distributorship agreement was not a franchise.

Finally, the appellate court turned to the substantive issue of whether the distribution agreement was a franchise under the MFA. The appellate court observed that in certain circumstances, required purchases of products in excessive quantities or at prices exceeding the bona fide wholesale value, may disguise indirect franchise fees. However, according to the court, that was not the case here, for which the required product purchases were minimal and at a reasonable price. The court then held that since Barnmaster did not charge a franchise fee, either directly or indirectly, for the right to enter the business or to continue its operation, the relationship between Barnmaster and Hogin was not a franchise. The appellate court therefore affirmed the trial court's decision.

Preliminary Injunction Granted Against Former Franchisee's Trademark Use

The U.S. District Court for the Eastern District of Michigan has granted a preliminary injunction sought by American Dairy Queen, preventing a terminated franchisee from continuing to use American Dairy Queen's marks. Vander Vreken v. American Dairy Queen Corp. et al., 261 F.Supp.2d 821 (E.D. Mich. 2003).

After American Dairy Queen terminated Vander Vreken's franchise agreement for failure to comply with its quality and service standards, Vander Vreken sought and won a preliminary injunction in state court permitting it to continue to operate under American Dairy Queen's marks, but the U.S. District Court subsequently dissolved the injunction because it found that the stringent standard for entry of injunctive relief had not been met because neither party had established a strong likelihood of success on the merits. This ruling meant that American Dairy Queen had had the right to terminate the franchise agreement; nevertheless, Vander Vreken announced his intention to reopen the store following its winter closing, still bearing American Dairy Queen's trademarks, and the franchisor moved for a preliminary injunction preventing him from doing so.

In determining whether American Dairy Queen met the standards for the grant of this preliminary injunction, the court found it still true that neither party had established a strong likelihood of success on the merits. The court did not deny the injunction, however, because it found that there would be irreparable harm to American Dairy Queen without the injunction because the company would suffer irreparable harm to its reputation and goodwill each day that Vander Vreken represented his restaurant to be an authorized American Dairy Queen while not complying with American Dairy Queen's quality standards.

The court further found that if Vander Vreken prevailed at trial, any losses he suffered before trial could be fully compensated through the award of money damages. In balancing the injuries to both parties, therefore, the court found it clear that any injury to Vander Vreken was compensable by money damages, while the injury to American Dairy Queen was not. In evaluating whether the issuance of an injunction would serve the public interest, furthermore, the court agreed with American Dairy Queen that the public interest in the quality of food it consumes cannot be served by allowing a franchisee to operate a restaurant that has failed its franchisor's inspections.

Baskin Robbins' Alleged Failure to Disclose Was Not Fraud

The U.S. District Court for the Eastern District of Texas granted summary judgment in favor of Baskin Robbins against claims that it was guilty of fraud under California law by failing to disclose certain information to more than 40 franchisees in several Southeastern states. This information included the alleged knowledge that Baskin Robbins planned to phase out single-brand formats and certain “non-strategic” areas, by redirecting its marketing efforts and declining to renew franchise agreements. Brock v. Baskin Robbins, USA, Co., et al., 2003 WL 21309428, CCH Bus. Fran. Guide Par. 12,585 (E.D. Tex. 2003).

The franchisees claimed that Baskin Robbins had a duty to disclose certain information to them, and that the failure to do so amounted to fraud. Specifically, they claimed that Baskin Robbins knew that single-brand store formats were unviable and that it intended on phasing out “non-strategic locations,” but failed to inform prospective and current franchisees of this. The franchisees claimed that Basking Robbins had violated the California Franchise Investment Law (CFIL) and committed common-law fraud.

The court disposed of the CFIL claim quickly by pointing out that none of the franchisees operated or lived in California.

Turning to the fraud claim, the court examined whether or not Baskin Robbins had a duty to disclose the information, assuming it to be true. The presumption of such a duty to disclose, the court held, is premised on the existence of a fiduciary relationship. But the parties' contractual relationship did not by itself create such a relationship, the court ruled. Even if a trust were created as to Baskin Robbins' expenditure of advertising funds, the court reasoned, it did not follow that fiduciary duties attached to every other aspect of the parties' relationship not connected to maintaining the advertising fund. Because there was no duty to disclose, the court ruled that the fraud claim must fail.

The court went on to observe that even assuming Baskin Robbins did have a duty to disclose (which it did not), the franchisees had not meet their summary judgment burden on their allegations that Baskin Robbins intended to pull out of non-strategic markets but failed to disclose this. The first “bit of evidence” that the franchisees cited was a 1985 market plan created by five company employees and 10 franchisees in and for the Chicago area market. The second “bit” was the fact that Baskin Robbins halted national advertising in the late 1990s in favor of concentrating on larger, metropolitan markets.

The franchisees argued that the inference permissibly drawn from this evidence suggested that Baskin Robbins intended to pull out of non-strategic markets but failed to disclose this. The court observed that the fact that Baskin Robbins resumed national marketing in 2000 seriously undermined the inference the franchisees argued should attach to the late 1990s decision to stop such marketing. And the court concluded that the Chicago plan, standing alone, was not sufficient evidence on this point. In sum, the court ruled, no reasonable jury could make the series of inferential leaps the franchisees demanded “based on this paltry evidence” in order to conclude that Baskin Robbins had failed to disclose a material fact. Thus, even assuming a duty to disclose existed, the court ruled that Baskin Robbins still deserved judgment as a matter of law in its favor as to the “non-strategic market” allegations.

Franchisor's Damages for Future Profits Not Precluded

In a decision that franchisors will welcome, interpreting the well-known Postal Instant Press v. Sealy (51 Cal.Rptr.2d 365 [1996]) case decided under California law, the U.S. District Court for the Southern District of California has declined to dismiss a franchisor's claim for lost future profits even if the franchisor had terminated the agreement, provided the franchisor could prove, as it alleged in the complaint, that the franchisee's conduct proximately caused the damages, and the award was neither excessive, oppressive, nor disproportionate. It's Just Lunch Franchise, LLC v. BLFA Enterprises, LLC, F.Supp. 2d , 2003 WL 21735005 (S.D. Cal. 2003).

BLFA, a dating/matchmaking franchisee of It's Just Lunch, found its franchise was not profitable, and failed to make required royalty and advertising fund payments. It's Just Lunch alleged that BLFA sent it a letter and an e-mail terminating the franchise agreement and closed the business. It's Just Lunch brought suit, alleging that BLFA was in breach of the franchise agreement and seeking damages for future lost royalties and advertising fees as well as past due royalties and fees.

In its motion to dismiss, BLFA claimed that It's Just Lunch was the party that breached and terminated the agreement and argued that under California law and pursuant to Sealy, damages for future profits are not recoverable if the franchisee fails to make royalty payments and the franchisor subsequently terminates the franchising agreement.

The court observed that the resolution of the dispute required a fact-intensive inquiry into which party first terminated or breached the franchise agreement. Taking the allegations in the franchisor's complaint as true, as required when ruling on a motion to dismiss, the court had to assume that BLFA terminated the agreement. Thus, the court concluded that the complaint stated sufficient facts to survive the motion to dismiss.

On the subject of damages, the court agreed with BLFA that under Sealy, a franchisor that has terminated the franchise agreement cannot recover its future lost profits as damages. But the court found this principle inapplicable to the facts pleaded in the complaint. In Sealy, the franchisee failed to make several royalty payments as specified in the franchise agreement, and the franchisor declared that the franchisee was in breach and terminated the agreement. The Sealy court found that the franchisor could not recover its future profits where it had terminated the agreement, because the damage was proximately caused by the franchisor's termination rather than by the franchisee's breach. In addition, it found that an award of future profits under those circumstances would amount to “unreasonable, unconscionable or grossly oppressive” damages. According to the court in Sealy, the possibility of an award of future profits would provide the franchisor with a bludgeon in every contract dispute, because unless the franchisee complies, it is faced with the threat of the franchisor terminating the agreement and being awarded future profits.

However, the court observed, the Sealy court expressly refused to consider whether damages for future profits would be available in circumstances which, as alleged in It's Just Lunch's complaint, the franchisee terminated the agreement. Moreover, the court continued, Sealy did not preclude the award of future profits even if the franchisor terminates the agreement, if the franchisee's conduct proximately caused the damages, and the award is neither excessive, oppressive, nor disproportionate. Thus, the court concluded that Sealy does not preclude an award of future profits under the facts pleaded in the complaint of It's Just Lunch, and that BLFA did not meet its burden of showing that the franchisor's claim for future profits was without factual support, or that the amount in controversy, to a legal certainty, was less than the jurisdictional amount.

Distributorship Agreement Not a Franchise Under Minnesota Franchise Act

The Minnesota Court of Appeals has recently affirmed a trial court's decision and held that a distribution agreement between Barnmaster, a company that manufactures and sells horse barns, and its Minnesota distributor was not a franchise under the Minnesota Franchise Act (MFA) because Barnmaster did not charge a fee for the right to enter into the business or to continue its operation. Hogin v. Barnmaster, Inc., 2003 WL 21500044 (Minn. App. 2003).

Hogin entered into a distributorship agreement with Barnmaster in 1996. Pursuant to the agreement, Hogin was required to purchase and maintain a display Barnmaster barn to be located on a freeway or heavily traveled highway. Under the agreement, which was terminable at will by either party on 30-days notice, Barnmaster was not responsible for any of Hogin's business expenses.

Hogin sold only three barns from the inception of the agreement in 1996 through 1998. Barnmaster's vice-president of marketing and sales visited Hogin's site in 1998 and instructed him to move his display to a more heavily traveled location, but Hogin refused. Barnmaster then terminated Hogin's distributorship agreement in September 1999.

Following the termination, Hogin reported Barnmaster to the Minnesota Department of Corporations (DOC). The DOC conducted an investigation and determined that Barnmaster was a “franchise” under the MFA. Because Barnmaster was not registered as a franchisor as required by the MFA, the DOC ordered Barnmaster to cease and desist from offering or selling any franchises in Minnesota. While Barnmaster had a right to request a hearing, it chose not to.

Hogin then instituted a civil action against Barnmaster for damages relating to Barnmaster's termination of Hogin's alleged franchise. He contended that Barnmaster's termination of the franchise was an unfair franchise business practice in violation of the MFA. After a bench trial, the district court determined that the distributorship agreement was not a franchise under the MFA, and that Barnmaster was thus entitled, under the distributorship agreement, to terminate its relationship with Hogin on 30-days notice.

Hogin appealed the district court's decision and claimed that the distributorship agreement was indeed a franchise under the MFA. The appellate court disagreed and affirmed the trial court's decision. Specifically, it found that the prior decision of the DOC that Barnmaster was selling franchises had no collateral estoppel effect vis a vis Hogin's claims because the DOC administrative proceeding was not “actually litigated,” which is required for the application of the collateral estoppel doctrine. Stated differently, according to the appellate court, because there was not a full hearing before the DOC issued the cease-and-desist order, Barnmaster was not estopped from claiming that the distributorship agreement was not a franchise.

Finally, the appellate court turned to the substantive issue of whether the distribution agreement was a franchise under the MFA. The appellate court observed that in certain circumstances, required purchases of products in excessive quantities or at prices exceeding the bona fide wholesale value, may disguise indirect franchise fees. However, according to the court, that was not the case here, for which the required product purchases were minimal and at a reasonable price. The court then held that since Barnmaster did not charge a franchise fee, either directly or indirectly, for the right to enter the business or to continue its operation, the relationship between Barnmaster and Hogin was not a franchise. The appellate court therefore affirmed the trial court's decision.