COURT WATCH

The plaintiffs alleged five causes of action: Counts One and Two alleged deceptive acts and practices in violation of the New York Consumer Protection Act; Count Three alleged negligence in the sale of food products that were high in cholesterol, fat, salt, and sugar when studies show that such foods cause obesity and detrimental health effects; Count Four alleged that McDonald's failed to warn consumers of ingredients, quantity, qualities, and levels of cholesterol, fat, salt, and sugar content and other ingredients in those products which could lead to obesity and health problems; and, Count Five alleged negligence in the marketing of food products that were physically and psychologically addictive.

The court followed the principle that legal consequences should not attach to the consumption of hamburgers and other fast food fare unless consumers are unaware of the dangers of eating the food. According to the court, this guiding principle comports with New York law: If consumers know (or reasonably should know) the potential ill health effects of eating at McDonald's, they cannot blame McDonald's if they, nonetheless, choose to eat a surfeit of super-sized McDonald's products. On the other hand, the court noted, consumers cannot be expected to protect themselves against the danger that was solely within McDonald's knowledge.

The court reasoned, therefore, that one necessary element of any potential viable claim against McDonald's must be that it products involve a danger that is not within the common knowledge of consumers. The court held that plaintiffs failed to allege with any specificity that the products sold by McDonald's and consumed by the plaintiffs involve a danger not within the common knowledge of consumers. The court therefore dismissed the complaint in its entirety, but it granted the plaintiffs leave to amend the complaint within 30 days.

DONUT FRANCHISEE TERMINATED FOR FAILURE TO ADHERE TO STANDARDS

The U.S. District Court for the Southern District of New York has ruled that a Dunkin' Donuts franchisee who failed to operate its shop in accordance with Dunkin' Donuts' standards for health, sanitation, and safety violated its franchise agreement; was properly terminated; and therefore should be enjoined from continuing to hold itself out as an authorized Dunkin' Donuts franchisee. Dunkin' Donuts Incorporated v. Barr Donut, LLC, et al., ' F.Supp.2d ', 2003 WL 184017 (S.D.N.Y. 2003).

Barr Donut became a Dunkin' Donuts franchisee in Melville, NY, in 1998. In the summer of 2000, Barr's shop was inspected by a Dunkin' Donuts representative who found a number of health, sanitation and safety violations. Dunkin' Donuts gave Barr a notice to cure the violations. The shop was re-inspected 4 days later, and the violations had not been cured. The shop was inspected again on May 4, 2001. A number of health, sanitation, and safety violations were again found, and they were not cured when the shop was inspected again 3 days later. The same cycle of inspection-notice-failure-to-cure occurred a third time beginning on August 10, 2001. Specifically, during the August 12, 2001 re-inspection, Dunkin' Donuts found mouse droppings, flies, stagnant water collecting on the floor, and expired food products.

On August 20, 2001, Dunkin' Donuts served a Supplemental Notice of Termination on Barr, terminating the Franchise Agreement and demanding that Barr immediately comply with its post-termination obligations in the Franchise Agreement. After Barr continued to operate its shop as if it were still a licensed Dunkin' Donuts franchisee, Dunkin' Donuts moved for a preliminary injunction terminating the Franchise Agreement and enjoining Barr's unauthorized use of Dunkin' Donuts trademarks and trade dress.

Barr denied that its shop was unsanitary. It claimed that the shop was inspected on August 13, 2001 by its own inspector, who found no evidence of insect or rodents inside or outside the facility. Barr also contended that Dunkin' Donuts had a duty to help it resolve alleged violations, but it failed to do so. Specifically, Barr claimed that since it purchased the franchise, it was not provided with any training at Dunkin' Donuts' corporate training center, and presumably for that reason, if the shop was unsanitary, then Dunkin' Donuts was responsible.

While Barr admitted that a franchisee's violation of a franchisor's standards for health, sanitation, and safety would permit the franchisor to terminate the franchise agreement, it maintained that there was an issue of material fact as to whether it ever committed any health, sanitation, or safety violations because of the reports of its own inspectors, who said that there had never been an insect or a rodent infestation problem during the time that the independent investigators had been servicing the shop. Barr also noted that it had previously passed health inspections conducted by the county and township health inspectors.

The court granted the preliminary injunction sought by Dunkin' Donuts because Barr did not authenticate the letter from its independent investigator or provide any standards that the independent inspector relied on when evaluating the shop. According to the court, the photographs produced by Dunkin' Donuts depicting, among other things, mold, flies, food stored on filthy surfaces, open flour bags, stagnant water, and mouse droppings ' indisputably revealed a store with serious sanitation problems. And while Barr submitted into evidence its own photographs depicting a much more sanitized version of the store, those photographs were taken in August 2002 ' 1 year after the re-inspection of the premises and the notice of termination. The court observed that under the franchise agreement, Barr had 1 day, not 1 year, to cure violations that were reported by Dunkin' Donuts. The court was not persuaded by Barr's claim that Dunkin' Donuts violated the franchise agreement by failing to provide training with respect to health and sanitation standards. According to the court, even if Dunkin' Donuts did breach the franchise agreement, which the court believed it did not, Barr could not rely on Dunkin' Donuts' alleged wrongdoing to avoid the consequences of its own breach.

ILLINOIS ACT INAPPLICABLE TO FRANCHISE AGREEMENT

The U.S. District Court for the Northern District of Illinois has ruled that the Illinois Franchise Disclosure Act (IFDA), enacted in 1987, did not apply to a franchise agreement that was entered into in 1976, even though the agreement was subsequently renewed every 5 years until it was terminated in December 2000. Jake Flowers, Inc. v. Kaiser, 2002 WL 31906688 (N.D. Ill. 2002).

Jake's, a pizza shop franchisor, sued its former franchisee, Kaiser, for alleged violations of the Lanham Act and related common law claims after Kaiser continued to use the franchisor's marks and system without authorization after the franchise was terminated. Kaiser brought a counterclaim alleging, in part, that Jake's violated the IFDA. In response, Jake's claimed that the IFDA did not apply because the franchise agreement between the parties was originally entered into in 1976, and the IFDA was not enacted until 1987. According to Jake's, the IFDA did not apply retroactively, and therefore, Kaiser was not entitled to its protection.

Kaiser argued, on the other hand, that although the original franchise agreement was signed in 1976, the agreement was subsequently renewed every 5 years until Jake's terminated it in December 2000. Thus, according to Kaiser, because the agreement was renewed after the IFDA was enacted, it applied to the franchisee's business relationship with Jake's.

The court dismissed Kaiser's IFDA claim. It held that the IFDA applies prospectively and not retroactively. It further found that the 1976 agreement between the parties was a continuing agreement, not one that was seriously reviewed on an annual basis or even a 5-year basis. Indeed, the court observed that the parties did not even sign renewals every 5 years. As a result, the court held that the agreement was effective, but it was not governed by the IFDA. The court therefore granted the franchisor's motion for summary judgment relating to the IFDA claim.

TRUCKER NOT ENTITLED TO PROTECTION OF WISCONSIN ACT

The Seventh Circuit has ruled that a trucker who delivered milk from farmers to Land O' Lakes' production facilities was not a 'dealer' entitled to the protections of the Wisconsin Fair Dealership Law ('WFDL') when the cooperative terminated his contract. Timothy J. Van Groll, Plaintiff-Appellant v. Land O' Lakes, Inc., Bus. Franchise Guide (CCH) '12,450 (7th Cir. 2002).

The court observed that in order to be a 'dealer' under the WFDL there must be: (i) a contract or agreement between two or more persons; (ii) by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising, or other commercial symbol; and (iii) in which there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise. The court noted that 'dealership' in terms of trademark use requires a finding that the dealer made a substantial investment in the mark.

The court found that the trucker made little investment into the product or the brand he hauled. Land O' Lakes never required him to buy his truck, although he did so. In addition, according to the court, the trucker's claim that his truck could not be converted for other uses simply showed that he invested in his trucking business, not in his relationship with Land O' Lakes. While the truck was specially equipped to haul milk, he could have accepted another job hauling milk for any of the many other dairies or haulers in the area, the court observed.

The trucker also pointed to a non-compete clause in the contract and the fact that he received a manual as indicia that he was a dealer, but the court disagreed. The non-compete clause applied only to the member farmers the trucker served, and he was free to deliver milk to or from anyone else. Thus, the court found, the trucker's relationship with Land O' Lakes did not preclude his finding work after the termination. And much of the manual consisted simply of applicable federal and state regulations. Land O' Lakes exercised little control over the trucker other than requiring him to wear a clean uniform and to keep the milk clean while dropping it off at the Land O' Lakes facility. The trucker's use of the trademark was not sufficient to make him a 'dealer' either, the court ruled, because he did not make a substantial investment in the trademark. Land O' Lakes paid all of the costs of putting a logo on his truck, and Land O' Lakes provided his uniform.

This month's Court Watch was written by Susan H. Morton, a partner and David W. Oppenheim, an associate of New York City's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP. Phone (212) 755-3100.

First 'McLawsuit' Dismissed But Leave to Amend Is Granted

The U.S. District Court for the Southern District of New York recently dismissed, in its entirety, a complaint brought against McDonald's on behalf of parents of children who consumed McDonald's products, alleging violations of state consumer protection laws, negligence in the sale of defective products or the failure to warn of the dangers of over-consumption. Ashley Pelman, et al. v. McDonald's Corporation, et al., F.Supp.2d ', 2003 WL 145584 (S.D.N.Y. 2003).

The plaintiffs allege that McDonald's Corp.'s practices in making and selling its products were deceptive and that this deception caused the children who consumed its products to injure their health by becoming obese. The court noted that the case involved questions of personal responsibility, common knowledge and public health, and the role of society and the courts in addressing such issues. The case was first filed by the plaintiffs in the New York State Supreme Court, Bronx County. McDonald's removed the case to federal court, however, alleging as the basis of the removal that plaintiffs had fraudulently joined non-diverse parties in order to defeat diversity jurisdiction. After removing the case, McDonald's filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief could be granted.

The plaintiffs alleged five causes of action: Counts One and Two alleged deceptive acts and practices in violation of the New York Consumer Protection Act; Count Three alleged negligence in the sale of food products that were high in cholesterol, fat, salt, and sugar when studies show that such foods cause obesity and detrimental health effects; Count Four alleged that McDonald's failed to warn consumers of ingredients, quantity, qualities, and levels of cholesterol, fat, salt, and sugar content and other ingredients in those products which could lead to obesity and health problems; and, Count Five alleged negligence in the marketing of food products that were physically and psychologically addictive.

The court followed the principle that legal consequences should not attach to the consumption of hamburgers and other fast food fare unless consumers are unaware of the dangers of eating the food. According to the court, this guiding principle comports with New York law: If consumers know (or reasonably should know) the potential ill health effects of eating at McDonald's, they cannot blame McDonald's if they, nonetheless, choose to eat a surfeit of super-sized McDonald's products. On the other hand, the court noted, consumers cannot be expected to protect themselves against the danger that was solely within McDonald's knowledge.

The court reasoned, therefore, that one necessary element of any potential viable claim against McDonald's must be that it products involve a danger that is not within the common knowledge of consumers. The court held that plaintiffs failed to allege with any specificity that the products sold by McDonald's and consumed by the plaintiffs involve a danger not within the common knowledge of consumers. The court therefore dismissed the complaint in its entirety, but it granted the plaintiffs leave to amend the complaint within 30 days.

DONUT FRANCHISEE TERMINATED FOR FAILURE TO ADHERE TO STANDARDS

The U.S. District Court for the Southern District of New York has ruled that a Dunkin' Donuts franchisee who failed to operate its shop in accordance with Dunkin' Donuts' standards for health, sanitation, and safety violated its franchise agreement; was properly terminated; and therefore should be enjoined from continuing to hold itself out as an authorized Dunkin' Donuts franchisee. Dunkin' Donuts Incorporated v. Barr Donut, LLC, et al., ' F.Supp.2d ', 2003 WL 184017 (S.D.N.Y. 2003).

Barr Donut became a Dunkin' Donuts franchisee in Melville, NY, in 1998. In the summer of 2000, Barr's shop was inspected by a Dunkin' Donuts representative who found a number of health, sanitation and safety violations. Dunkin' Donuts gave Barr a notice to cure the violations. The shop was re-inspected 4 days later, and the violations had not been cured. The shop was inspected again on May 4, 2001. A number of health, sanitation, and safety violations were again found, and they were not cured when the shop was inspected again 3 days later. The same cycle of inspection-notice-failure-to-cure occurred a third time beginning on August 10, 2001. Specifically, during the August 12, 2001 re-inspection, Dunkin' Donuts found mouse droppings, flies, stagnant water collecting on the floor, and expired food products.

On August 20, 2001, Dunkin' Donuts served a Supplemental Notice of Termination on Barr, terminating the Franchise Agreement and demanding that Barr immediately comply with its post-termination obligations in the Franchise Agreement. After Barr continued to operate its shop as if it were still a licensed Dunkin' Donuts franchisee, Dunkin' Donuts moved for a preliminary injunction terminating the Franchise Agreement and enjoining Barr's unauthorized use of Dunkin' Donuts trademarks and trade dress.

Barr denied that its shop was unsanitary. It claimed that the shop was inspected on August 13, 2001 by its own inspector, who found no evidence of insect or rodents inside or outside the facility. Barr also contended that Dunkin' Donuts had a duty to help it resolve alleged violations, but it failed to do so. Specifically, Barr claimed that since it purchased the franchise, it was not provided with any training at Dunkin' Donuts' corporate training center, and presumably for that reason, if the shop was unsanitary, then Dunkin' Donuts was responsible.

While Barr admitted that a franchisee's violation of a franchisor's standards for health, sanitation, and safety would permit the franchisor to terminate the franchise agreement, it maintained that there was an issue of material fact as to whether it ever committed any health, sanitation, or safety violations because of the reports of its own inspectors, who said that there had never been an insect or a rodent infestation problem during the time that the independent investigators had been servicing the shop. Barr also noted that it had previously passed health inspections conducted by the county and township health inspectors.

The court granted the preliminary injunction sought by Dunkin' Donuts because Barr did not authenticate the letter from its independent investigator or provide any standards that the independent inspector relied on when evaluating the shop. According to the court, the photographs produced by Dunkin' Donuts depicting, among other things, mold, flies, food stored on filthy surfaces, open flour bags, stagnant water, and mouse droppings ' indisputably revealed a store with serious sanitation problems. And while Barr submitted into evidence its own photographs depicting a much more sanitized version of the store, those photographs were taken in August 2002 ' 1 year after the re-inspection of the premises and the notice of termination. The court observed that under the franchise agreement, Barr had 1 day, not 1 year, to cure violations that were reported by Dunkin' Donuts. The court was not persuaded by Barr's claim that Dunkin' Donuts violated the franchise agreement by failing to provide training with respect to health and sanitation standards. According to the court, even if Dunkin' Donuts did breach the franchise agreement, which the court believed it did not, Barr could not rely on Dunkin' Donuts' alleged wrongdoing to avoid the consequences of its own breach.

ILLINOIS ACT INAPPLICABLE TO FRANCHISE AGREEMENT

The U.S. District Court for the Northern District of Illinois has ruled that the Illinois Franchise Disclosure Act (IFDA), enacted in 1987, did not apply to a franchise agreement that was entered into in 1976, even though the agreement was subsequently renewed every 5 years until it was terminated in December 2000. Jake Flowers, Inc. v. Kaiser, 2002 WL 31906688 (N.D. Ill. 2002).

Jake's, a pizza shop franchisor, sued its former franchisee, Kaiser, for alleged violations of the Lanham Act and related common law claims after Kaiser continued to use the franchisor's marks and system without authorization after the franchise was terminated. Kaiser brought a counterclaim alleging, in part, that Jake's violated the IFDA. In response, Jake's claimed that the IFDA did not apply because the franchise agreement between the parties was originally entered into in 1976, and the IFDA was not enacted until 1987. According to Jake's, the IFDA did not apply retroactively, and therefore, Kaiser was not entitled to its protection.

Kaiser argued, on the other hand, that although the original franchise agreement was signed in 1976, the agreement was subsequently renewed every 5 years until Jake's terminated it in December 2000. Thus, according to Kaiser, because the agreement was renewed after the IFDA was enacted, it applied to the franchisee's business relationship with Jake's.

The court dismissed Kaiser's IFDA claim. It held that the IFDA applies prospectively and not retroactively. It further found that the 1976 agreement between the parties was a continuing agreement, not one that was seriously reviewed on an annual basis or even a 5-year basis. Indeed, the court observed that the parties did not even sign renewals every 5 years. As a result, the court held that the agreement was effective, but it was not governed by the IFDA. The court therefore granted the franchisor's motion for summary judgment relating to the IFDA claim.

TRUCKER NOT ENTITLED TO PROTECTION OF WISCONSIN ACT

The Seventh Circuit has ruled that a trucker who delivered milk from farmers to Land O' Lakes' production facilities was not a 'dealer' entitled to the protections of the Wisconsin Fair Dealership Law ('WFDL') when the cooperative terminated his contract. Timothy J. Van Groll, Plaintiff-Appellant v. Land O' Lakes, Inc., Bus. Franchise Guide (CCH) '12,450 (7th Cir. 2002).

The court observed that in order to be a 'dealer' under the WFDL there must be: (i) a contract or agreement between two or more persons; (ii) by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising, or other commercial symbol; and (iii) in which there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise. The court noted that 'dealership' in terms of trademark use requires a finding that the dealer made a substantial investment in the mark.

The court found that the trucker made little investment into the product or the brand he hauled. Land O' Lakes never required him to buy his truck, although he did so. In addition, according to the court, the trucker's claim that his truck could not be converted for other uses simply showed that he invested in his trucking business, not in his relationship with Land O' Lakes. While the truck was specially equipped to haul milk, he could have accepted another job hauling milk for any of the many other dairies or haulers in the area, the court observed.

The trucker also pointed to a non-compete clause in the contract and the fact that he received a manual as indicia that he was a dealer, but the court disagreed. The non-compete clause applied only to the member farmers the trucker served, and he was free to deliver milk to or from anyone else. Thus, the court found, the trucker's relationship with Land O' Lakes did not preclude his finding work after the termination. And much of the manual consisted simply of applicable federal and state regulations. Land O' Lakes exercised little control over the trucker other than requiring him to wear a clean uniform and to keep the milk clean while dropping it off at the Land O' Lakes facility. The trucker's use of the trademark was not sufficient to make him a 'dealer' either, the court ruled, because he did not make a substantial investment in the trademark. Land O' Lakes paid all of the costs of putting a logo on his truck, and Land O' Lakes provided his uniform.

This month's Court Watch was written by Susan H. Morton, a partner and David W. Oppenheim, an associate of New York City's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP. Phone (212) 755-3100.