COURT WATCH

In the course of the application for change of ownership by Rivermont, substantial upgrades to the hotel were proposed at an estimated cost of approximately $1.4 million. According to the court, the upgrade plan was a key feature in Rivermont's attempt to purchase the hotel and to have its franchise application approved. Critically, during the application process, Rivermont acknowledged several times in writing that Holiday did not enter into oral franchise agreements or any matters pertaining to the granting of franchises. Each of these documents stated that Holiday had the sole right to approve or disapprove the application for any reason.

Three days before the closing on the hotel sale, Rivermont allegedly contacted a Holiday representative and informed her that the closing would take place in three days, and asked her whether Rivermont should proceed with the closing. According to Rivermont, Holiday's vice president of franchise administration said that licensing would be forthcoming and that Rivermont should close on the property. According to Rivermont, it closed on the property in reliance on Holiday's representation. But four days after Rivermont closed on the transaction, it learned that Holiday had approved the transfer of the franchise subject to the condition that the hotel would not be on Holiday's national network until the renovation plan was completed to Holiday's satisfaction. In other words, Rivermont would not receive many of the benefits of Holiday's franchise system without first completing approximately $1.4 million in renovations. Rivermont refused to accept this condition, and later filed a suit against Holiday and Bass alleging fraud and detrimental reliance. Holiday and Bass moved for summary judgment.

The trial court granted summary judgment in favor of Holiday and Bass. It held that Rivermont could not prove the elements of fraud by clear and convincing evidence because Holiday's alleged assurance to Rivermont that its application would be approved was a prediction of future events only, and not a statement of past or present material fact. According to the court, predictions of future conduct cannot be the basis of a fraud claim.

The Court of Appeals agreed completely with the trial court. It held that there was not enough evidence to support a claim of fraudulent misrepresentation, in light of all the facts that Rivermont knew and Rivermont's previous agreement acknowledging that Holiday did not make oral representations respecting licenses and franchises. The court held, as a matter of law, that a party may not rely on oral representations that conflict with written disclaimers that the complaining party earlier specifically acknowledged in writing. In other words, it was unreasonable for Rivermont to rely on the oral representations of Holiday's employee after it specifically acknowledged in writing that it would not rely on any oral representations with respect to the franchise approval process. Thus, the appellate court affirmed the grant of summary judgment.

Franchisor Not Vicariously Liable for Slip and Fall at Franchised Hotel

The New York Supreme Court (Appellate Division) recently affirmed a trial court's decision to grant summary judgment in favor of a hotel franchisor and against one of the franchised hotel's patrons who allegedly slipped on water in the hotel, on the grounds that the franchisor was not vicariously liable for the purported negligent acts of the franchisee's employees. Hart v. Marriott International, Inc., 2003 WL 1923710 (N.Y. A.D. 3rd Dep. 2003).

On May 15, 1998, Sandy Hart allegedly slipped on water and fell on the dance floor in the banquet room of the Albany Marriott Hotel. She sued Marriott International, Inc., the franchisor of the hotel, alleging that it was vicariously liable for acts of its franchisee. In its answer, Marriott claimed, among other things, that it cannot be vicariously liable for its franchisee's alleged negligence. Soon thereafter, Marriott moved for summary judgment, seeking a full dismissal of the case.

The trial court granted Marriott's motion. On appeal, the reviewing court affirmed the decision. It noted that the most significant factor to consider in determining whether a franchisor may be held vicariously liable for the acts of its franchisee is the degree of control that the franchisor maintains over the daily operations of the franchisee or, more specifically, the manner of performing the very work in the course of which the accident occurred. Applying the law, the appellate court noted that Marriott's franchise agreement with its franchisees specifically provided that the franchisee, an independent contractor, was responsible for the daily maintenance, management, and operation of its hotel. Further, noted the court, the franchisee had its own written policy detailing how its employees were required to handle wet floors to avoid slips and falls. The court further noted that the plaintiff offered no proof raising a question of fact as to the issue of the day-to-day control over maintenance and management by the franchisee. Accordingly, the appellate court affirmed the trial court's decision to grant summary judgment in favor of Marriott and to dismiss the case.

Certification By Independent Accounting Firm Precludes Franchisee Challenge to Advertising Fund

The U.S. District Court for the Northern District of Illinois has granted, in part, a franchisor's motion for summary judgment dismissing its franchisees' breach of contract claims concerning the franchisor's operation of an advertising fund, largely relying on the certification of the operation of the fund by an independent accounting firm. Dunkin' Donuts Inc. v. N.A.S.T., Inc., 2003 WL 1877626 (N.D.Ill. 2003).

Plaintiff Dunkin' Donuts, Inc. ('Dunkin' Donuts') commenced an action against four franchisees, based on their alleged fraud, breach of contract, and trademark infringement in connection with the operation of several Dunkin' Donuts franchises in Illinois and Wisconsin. The franchisees asserted several counterclaims, including claims stemming from Dunkin' Donuts' alleged improper operation of the Advertising Fund provided for in the parties' franchise agreements.

The parties' franchise agreements provided that the Dunkin' Donuts franchisees were required to pay 5% of gross sales into an advertising fund managed by Dunkin' Donuts. The franchise agreements provided Dunkin' Donuts with substantial discretion concerning the content of all advertising, as well as the media in which the advertising was to be placed. Further, the franchise agreements required Dunkin' Donuts to provide the franchisees, upon their request, a statement of receipts and disbursements of the advertising fund, prepared by an independent certified public accountant. Dunkin' Donuts retained Ernst & Young to perform an annual independent audit of the fund in accordance with generally accepted accounting principles.

The franchisees alleged that Dunkin' Donuts incurred excessive administrative expenses in connection with the operation of the advertising fund, which constituted a breach of contract and breach of the implied covenant of good faith and fair dealing. However, the court dismissed the franchisees' contentions that certain accounting practices in connection with the advertising fund constituted a breach of contract as a matter of law, since the operation of the fund was audited by Ernst & Young. The court held that the certification of the accounting practices by an independent accounting firm could not be challenged as impermissible simply on the franchisees' say-so. The court noted that protection from such claims is why an independent evaluation is sought in the first place, and the franchisees could not call for a different methodology just because they preferred the answer that it would provide. However, the franchisees were permitted to conduct limited additional discovery on one claim of allegedly excessive administrative expenses, since the franchisees had submitted some, although insufficient, evidence concerning their claim.

The franchisees also asserted that Dunkin' Donuts' alleged failure to pay to the franchisees the supplier rebates it had received from third parties violated its stated Operating Philosophy. The court granted summary judgment for Dunkin' Donuts on this claim, on the grounds that the Operating Philosophy was not a contract between Dunkin' Donuts and the franchisees; that the Operating Philosophy itself specifically states that it is not intended to supersede or take the place of any other agreement between the parties; and that the franchise agreements contained integration provisions providing that they were the entire, full, and complete agreements between the parties.

The court also granted summary judgment for Dunkin' Donuts on the franchisees' claim that Dunkin' Donuts breached its contract by violating certain of the American Association of Franchisees and Dealers Fair Franchising Standards, since such provisions cannot trump or modify the parties' fully integrated franchise agreements.

Potential Franchisee's Failure to Conclude Franchise Approval Process Bars Claims Against Franchisor

The U.S. Court of Appeals for the Sixth Circuit has held that a potential franchisee's contract, tort, and statutory claims against its putative franchisor were barred as a result of the potential franchisee's failure to successfully complete the franchisor's application process. Conner v. Hardee's Systems, Inc., ____ F.3d ____, 2003 WL 932432 (6th Cir. 2003).

In 1998, Hardee's sent to plaintiffs, who were interested in becoming Hardee's franchisees, various materials, including a franchise application and a franchise approval process checklist. The checklist was divided into two sections: the application process and the development process. The plaintiffs successfully completed the application process and were thus financially approved. They were also operationally approved, subject to their completing Hardee's basic training program.

The second half of the franchise approval process was the development process, which consisted of the following steps: submission of a preliminary site application; execution of a commitment or development agreement and payment of an associated fee; submission of a final site package for approval by Hardee's real estate department; site approval by Hardee's; execution of a franchise agreement and payment of a franchise fee; and training of personnel.

Although the plaintiffs submitted six preliminary site applications for franchise locations, Hardee's rejected all of the sites, and the plaintiffs did not complete any of their remaining steps of the development process. Thereafter, Hardee's decided to develop company-owned restaurants in the county in which the plaintiffs had proposed opening their franchise location and actually opened two company-owned restaurants in that county (one at a location submitted by the plaintiffs and rejected by Hardee's).

The plaintiffs brought an action to recover damages arising from claims of breach of contract, negligent and/or intentional misrepresentation, and violation of the Tennessee Consumer Protection Act. Following extensive discovery, the district court granted Hardee's motion for summary judgment, dismissing plaintiffs' complaint in its entirety. On appeal, the Sixth Circuit affirmed.

While conceding that the parties never executed a franchise agreement and expressly intended to execute a franchise agreement at a later date, the plaintiffs contended that correspondence from Hardee's confirming their financial and operational approval amounted to a contract. The court noted that Tennessee law provides that in order for the parties to make an enforceable contract binding them to prepare and execute a subsequent final agreement, it is necessary that agreement be expressed on all essential terms that are to be incorporated in the document. However, the parties never reached an agreement as to the franchise location ' one of the most essential and material terms in a franchise agreement ' and the court therefore affirmed the dismissal of the contract claims. The court held that any alleged agreement to grant a franchise at some yet to be determined location was too indefinite to be enforced. Moreover, the court held that the correspondence between the parties could not reasonably be inferred to have waived the express requirement that the parties execute a franchise agreement in order for the plaintiffs to become Hardee's franchisees.

The plaintiffs next argued that Hardee's agents committed the tort of negligent and/or intentional misrepresentation when they repeatedly stated that Hardee's did not intend to develop company-owned stores in their county. However, the court affirmed the dismissal of these claims, since the plaintiffs were unable to prove that the information supplied by Hardee's agents was false. The record showed that the statements by Hardee's agents were admittedly made 'to their knowledge.' Under Tennessee law, such qualified statements could not give rise to a misrepresentation claim.

Finally, the court affirmed the dismissal of the plaintiffs' claims under the Tennessee Consumer Protection Act, Tenn. Code Ann. '47-18-101 et. seq. (1995 & Supp. 2000). The first two branches of plaintiffs' claim under the Act echoed their breach of contract and misrepresentation claims and were dismissed for the reasons described above. The third and last prong of plaintiffs' claim under the Act alleged that Hardee's appropriated the plaintiffs' real estate knowledge. However, the record demonstrated that Hardee's did not appropriate the plaintiffs' real estate information, and instead had independently obtained information concerning prospective sites for its company-owned restaurants in the county. Because the plaintiffs did not direct the court to any evidence to the contrary, the court affirmed the lower court's dismissal of this claim as well.

Susan H. Morton is a partner and David W. Oppenheim is an associate of New York City's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP.

Franchisor Did Not Commit Fraud Concerning Transfer Approval

The Kentucky Court of Appeals has recently affirmed a trial court's decision to grant summary judgment in favor of a franchisor against the purchaser of one Holiday Inn hotel franchise where the purchaser alleged that it purchased the franchise based on the franchisor's oral representations that it would approve the transfer unconditionally, but the franchisor later conditioned approval on renovation of the hotel. Rivermont Inn, Inc. v. Bass Hotels and Resorts, Inc. and Holiday Hospitality Franchising, Inc., 2003 WL 1786650 (Ky. App. 2003).

Rivermont Inn, Inc. ('Rivermont') purchased an existing Holiday Inn hotel in Louisville, KY, from one of Bass Hotels and Resorts, Inc. ('Bass') and Holiday Hospitality Franchising, Inc.'s ('Holiday') existing franchisees. (Rivermont already operated another Holiday Inn franchise in Indiana.) Rivermont intended to continue to operate the hotel as a Holiday Inn. However, the franchise agreement for the location provided that, although the franchises were transferable, Holiday had the right to approve or disapprove of the transfer.

In the course of the application for change of ownership by Rivermont, substantial upgrades to the hotel were proposed at an estimated cost of approximately $1.4 million. According to the court, the upgrade plan was a key feature in Rivermont's attempt to purchase the hotel and to have its franchise application approved. Critically, during the application process, Rivermont acknowledged several times in writing that Holiday did not enter into oral franchise agreements or any matters pertaining to the granting of franchises. Each of these documents stated that Holiday had the sole right to approve or disapprove the application for any reason.

Three days before the closing on the hotel sale, Rivermont allegedly contacted a Holiday representative and informed her that the closing would take place in three days, and asked her whether Rivermont should proceed with the closing. According to Rivermont, Holiday's vice president of franchise administration said that licensing would be forthcoming and that Rivermont should close on the property. According to Rivermont, it closed on the property in reliance on Holiday's representation. But four days after Rivermont closed on the transaction, it learned that Holiday had approved the transfer of the franchise subject to the condition that the hotel would not be on Holiday's national network until the renovation plan was completed to Holiday's satisfaction. In other words, Rivermont would not receive many of the benefits of Holiday's franchise system without first completing approximately $1.4 million in renovations. Rivermont refused to accept this condition, and later filed a suit against Holiday and Bass alleging fraud and detrimental reliance. Holiday and Bass moved for summary judgment.

The trial court granted summary judgment in favor of Holiday and Bass. It held that Rivermont could not prove the elements of fraud by clear and convincing evidence because Holiday's alleged assurance to Rivermont that its application would be approved was a prediction of future events only, and not a statement of past or present material fact. According to the court, predictions of future conduct cannot be the basis of a fraud claim.

The Court of Appeals agreed completely with the trial court. It held that there was not enough evidence to support a claim of fraudulent misrepresentation, in light of all the facts that Rivermont knew and Rivermont's previous agreement acknowledging that Holiday did not make oral representations respecting licenses and franchises. The court held, as a matter of law, that a party may not rely on oral representations that conflict with written disclaimers that the complaining party earlier specifically acknowledged in writing. In other words, it was unreasonable for Rivermont to rely on the oral representations of Holiday's employee after it specifically acknowledged in writing that it would not rely on any oral representations with respect to the franchise approval process. Thus, the appellate court affirmed the grant of summary judgment.

Franchisor Not Vicariously Liable for Slip and Fall at Franchised Hotel

The New York Supreme Court (Appellate Division) recently affirmed a trial court's decision to grant summary judgment in favor of a hotel franchisor and against one of the franchised hotel's patrons who allegedly slipped on water in the hotel, on the grounds that the franchisor was not vicariously liable for the purported negligent acts of the franchisee's employees. Hart v. Marriott International, Inc., 2003 WL 1923710 (N.Y. A.D. 3rd Dep. 2003).

On May 15, 1998, Sandy Hart allegedly slipped on water and fell on the dance floor in the banquet room of the Albany Marriott Hotel. She sued Marriott International, Inc., the franchisor of the hotel, alleging that it was vicariously liable for acts of its franchisee. In its answer, Marriott claimed, among other things, that it cannot be vicariously liable for its franchisee's alleged negligence. Soon thereafter, Marriott moved for summary judgment, seeking a full dismissal of the case.

The trial court granted Marriott's motion. On appeal, the reviewing court affirmed the decision. It noted that the most significant factor to consider in determining whether a franchisor may be held vicariously liable for the acts of its franchisee is the degree of control that the franchisor maintains over the daily operations of the franchisee or, more specifically, the manner of performing the very work in the course of which the accident occurred. Applying the law, the appellate court noted that Marriott's franchise agreement with its franchisees specifically provided that the franchisee, an independent contractor, was responsible for the daily maintenance, management, and operation of its hotel. Further, noted the court, the franchisee had its own written policy detailing how its employees were required to handle wet floors to avoid slips and falls. The court further noted that the plaintiff offered no proof raising a question of fact as to the issue of the day-to-day control over maintenance and management by the franchisee. Accordingly, the appellate court affirmed the trial court's decision to grant summary judgment in favor of Marriott and to dismiss the case.

Certification By Independent Accounting Firm Precludes Franchisee Challenge to Advertising Fund

The U.S. District Court for the Northern District of Illinois has granted, in part, a franchisor's motion for summary judgment dismissing its franchisees' breach of contract claims concerning the franchisor's operation of an advertising fund, largely relying on the certification of the operation of the fund by an independent accounting firm. Dunkin' Donuts Inc. v. N.A.S.T., Inc., 2003 WL 1877626 (N.D.Ill. 2003).

Plaintiff Dunkin' Donuts, Inc. ('Dunkin' Donuts') commenced an action against four franchisees, based on their alleged fraud, breach of contract, and trademark infringement in connection with the operation of several Dunkin' Donuts franchises in Illinois and Wisconsin. The franchisees asserted several counterclaims, including claims stemming from Dunkin' Donuts' alleged improper operation of the Advertising Fund provided for in the parties' franchise agreements.

The parties' franchise agreements provided that the Dunkin' Donuts franchisees were required to pay 5% of gross sales into an advertising fund managed by Dunkin' Donuts. The franchise agreements provided Dunkin' Donuts with substantial discretion concerning the content of all advertising, as well as the media in which the advertising was to be placed. Further, the franchise agreements required Dunkin' Donuts to provide the franchisees, upon their request, a statement of receipts and disbursements of the advertising fund, prepared by an independent certified public accountant. Dunkin' Donuts retained Ernst & Young to perform an annual independent audit of the fund in accordance with generally accepted accounting principles.

The franchisees alleged that Dunkin' Donuts incurred excessive administrative expenses in connection with the operation of the advertising fund, which constituted a breach of contract and breach of the implied covenant of good faith and fair dealing. However, the court dismissed the franchisees' contentions that certain accounting practices in connection with the advertising fund constituted a breach of contract as a matter of law, since the operation of the fund was audited by Ernst & Young. The court held that the certification of the accounting practices by an independent accounting firm could not be challenged as impermissible simply on the franchisees' say-so. The court noted that protection from such claims is why an independent evaluation is sought in the first place, and the franchisees could not call for a different methodology just because they preferred the answer that it would provide. However, the franchisees were permitted to conduct limited additional discovery on one claim of allegedly excessive administrative expenses, since the franchisees had submitted some, although insufficient, evidence concerning their claim.

The franchisees also asserted that Dunkin' Donuts' alleged failure to pay to the franchisees the supplier rebates it had received from third parties violated its stated Operating Philosophy. The court granted summary judgment for Dunkin' Donuts on this claim, on the grounds that the Operating Philosophy was not a contract between Dunkin' Donuts and the franchisees; that the Operating Philosophy itself specifically states that it is not intended to supersede or take the place of any other agreement between the parties; and that the franchise agreements contained integration provisions providing that they were the entire, full, and complete agreements between the parties.

The court also granted summary judgment for Dunkin' Donuts on the franchisees' claim that Dunkin' Donuts breached its contract by violating certain of the American Association of Franchisees and Dealers Fair Franchising Standards, since such provisions cannot trump or modify the parties' fully integrated franchise agreements.

Potential Franchisee's Failure to Conclude Franchise Approval Process Bars Claims Against Franchisor

The U.S. Court of Appeals for the Sixth Circuit has held that a potential franchisee's contract, tort, and statutory claims against its putative franchisor were barred as a result of the potential franchisee's failure to successfully complete the franchisor's application process. Conner v. Hardee's Systems, Inc., ____ F.3d ____, 2003 WL 932432 (6th Cir. 2003).

In 1998, Hardee's sent to plaintiffs, who were interested in becoming Hardee's franchisees, various materials, including a franchise application and a franchise approval process checklist. The checklist was divided into two sections: the application process and the development process. The plaintiffs successfully completed the application process and were thus financially approved. They were also operationally approved, subject to their completing Hardee's basic training program.

The second half of the franchise approval process was the development process, which consisted of the following steps: submission of a preliminary site application; execution of a commitment or development agreement and payment of an associated fee; submission of a final site package for approval by Hardee's real estate department; site approval by Hardee's; execution of a franchise agreement and payment of a franchise fee; and training of personnel.

Although the plaintiffs submitted six preliminary site applications for franchise locations, Hardee's rejected all of the sites, and the plaintiffs did not complete any of their remaining steps of the development process. Thereafter, Hardee's decided to develop company-owned restaurants in the county in which the plaintiffs had proposed opening their franchise location and actually opened two company-owned restaurants in that county (one at a location submitted by the plaintiffs and rejected by Hardee's).

The plaintiffs brought an action to recover damages arising from claims of breach of contract, negligent and/or intentional misrepresentation, and violation of the Tennessee Consumer Protection Act. Following extensive discovery, the district court granted Hardee's motion for summary judgment, dismissing plaintiffs' complaint in its entirety. On appeal, the Sixth Circuit affirmed.

While conceding that the parties never executed a franchise agreement and expressly intended to execute a franchise agreement at a later date, the plaintiffs contended that correspondence from Hardee's confirming their financial and operational approval amounted to a contract. The court noted that Tennessee law provides that in order for the parties to make an enforceable contract binding them to prepare and execute a subsequent final agreement, it is necessary that agreement be expressed on all essential terms that are to be incorporated in the document. However, the parties never reached an agreement as to the franchise location ' one of the most essential and material terms in a franchise agreement ' and the court therefore affirmed the dismissal of the contract claims. The court held that any alleged agreement to grant a franchise at some yet to be determined location was too indefinite to be enforced. Moreover, the court held that the correspondence between the parties could not reasonably be inferred to have waived the express requirement that the parties execute a franchise agreement in order for the plaintiffs to become Hardee's franchisees.

The plaintiffs next argued that Hardee's agents committed the tort of negligent and/or intentional misrepresentation when they repeatedly stated that Hardee's did not intend to develop company-owned stores in their county. However, the court affirmed the dismissal of these claims, since the plaintiffs were unable to prove that the information supplied by Hardee's agents was false. The record showed that the statements by Hardee's agents were admittedly made 'to their knowledge.' Under Tennessee law, such qualified statements could not give rise to a misrepresentation claim.

Finally, the court affirmed the dismissal of the plaintiffs' claims under the Tennessee Consumer Protection Act, Tenn. Code Ann. '47-18-101 et. seq. (1995 & Supp. 2000). The first two branches of plaintiffs' claim under the Act echoed their breach of contract and misrepresentation claims and were dismissed for the reasons described above. The third and last prong of plaintiffs' claim under the Act alleged that Hardee's appropriated the plaintiffs' real estate knowledge. However, the record demonstrated that Hardee's did not appropriate the plaintiffs' real estate information, and instead had independently obtained information concerning prospective sites for its company-owned restaurants in the county. Because the plaintiffs did not direct the court to any evidence to the contrary, the court affirmed the lower court's dismissal of this claim as well.

Susan H. Morton is a partner and David W. Oppenheim is an associate of New York City's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP.