COURT WATCH

Franchisor's Internet Sales Do Not Violate Exclusive Territory

An American Arbitration Association Panel in Minneapolis, MN, has ruled that H&R Block, Inc., a tax preparation service franchisor, did not violate a franchise agreement by offering tax preparation services over the Internet, even though some customers were within the franchisee's exclusive territory. In the Matter of Arbitration Between Franklin 1989 Revocable Family Trust, Claimant, and H&R Block, Inc., Respondent (AAA, Minneapolis, Minnesota, Case No. 16114005401) (2002). The case is summarized in the CCH Business Franchise Guide. Bus. Franchise Guide (CCH) 12,473.

According to CCH's summary opinion, an H&R Block franchisee moved for injunctive relief to preclude its franchisor from servicing customers in the franchisee's exclusive territory. The franchisee claimed that under its franchise agreement with H&R Block, H&R Block was prohibited from 'operating from a location' in the franchisee's exclusive territory. The panel interpreted that provision to mean that H&R Block's Internet services could not 'unreasonably intrude on the franchisee's operations.' According to the summary opinion, 'so long as the franchisor's Internet services did not unreasonably intrude on the franchisee's brick-and-mortar operations, the franchisor was not operating in violation of the franchisee's territorial exclusivity.'

The panel held that H&R Block did not violate its franchisee's exclusive territory. It found that H&R Block's Internet marketing and sales efforts were directed at a different market. The panel also observed that during the alleged encroachment period, the franchisee actually increased the number of its customers and its overall revenues. Indeed, the panel also observed that there was some evidence that the franchisee actually received additional customers from the franchisor's Internet sales efforts. Based on its review of the evidence, according to CCH, the panel found that the franchisee failed to show that H&R Block's Internet services were harmful to the franchisee or that they caused the franchisee to lose any business. The panel therefore denied the franchisee's request for an injunction.

Franchisee's Violation of Federal Laws Is Material Breach of Agreement

The U.S. District Court for the Southern District of Florida has ruled after a bench trial that a franchisor's termination of a franchise for the franchisee's violation of federal tax and employment laws was a material breach of the franchise agreement, and as a result, the franchisor was entitled to terminate the franchise agreement. Dunkin' Donuts Incorporated v. Martinez, ' F.Supp.2d ' 2003 WL 685875 (S.D.Fla. 2003).

The franchisees were the owners of multiple Dunkin' Donuts shops and one Dunkin' Donuts/Baskin Robbins combination shop in the Miami Beach area. Based on an anonymous tip and subsequent investigation, Dunkin' Donuts learned that the defendants were violating federal tax and employment laws. After learning of this violation of federal law, Dunkin' Donuts terminated the franchises.

Dunkin' Donuts claimed that because the franchisees violated federal tax and employment laws, it could terminate the agreements because the franchisee violated the 'obey all laws' provision of the agreements. Dunkin' Donuts contended that the continued operation of the franchises by the defendants, after their receipt of a notice of default and termination, constituted trademark and trade dress infringement and unfair competition in violation of the Lanham Act. Dunkin' Donuts sought an order from the court enforcing the termination of the franchise agreements, requiring the franchisees to comply with all post-termination obligations in the franchise agreements, and its reasonable attorneys' fees and costs as provided for in the franchise agreements. The franchisees argued that they fully complied with all the terms of the franchise agreements; that they did not violate federal tax or employment laws; and that they were allowed to continue to operate their Dunkin' Donuts/Baskin Robbins franchises pending a judicial determination of their dispute with Dunkin' Donuts.

The court conducted a bench trial and found that Dunkin' Donuts was completely justified in its termination of the franchises. It found that the 'obey all laws' provision contained in each of the franchise agreements was clear and unambiguous. Based on its review of the evidence, the court found that the franchisees did fail to comply with the Internal Revenue Code as well as federal employment laws. Specifically, the court found that the defendants deducted as business expenses certain personal expenses including private school tuition for their families, restaurant meals, video amusement games, clothing, and even a vacation home.

The court held that Dunkin' Donuts was entitled to the relief it sought. It enjoined the franchisees from continuing to use Dunkin' Donuts' trademarks and trade dress. The court also held that the franchisees were required to comply with all of their post-termination obligations in the franchise agreements, including delivery of possession of their shops to Dunkin' Donuts. Finally, the court awarded Dunkin' Donuts reasonable attorneys' fees and expenses incurred in connection with the litigation as provided for in the franchise agreements.

Franchisor Not Vicariously Liable for Master Franchisor's Employee

The U.S. District Court for the Western District of Washington has held that a franchisor was not vicariously liable for the acts of an employee of its master franchisor because the franchisor did not retain sufficient control over the day-to-day operations of the master franchisor for a finding of vicarious liability. Okocha v. Jani-King, Inc., Bus. Franchise Guide (CCH) 12,379 (W.D. Wash. 2002).

Austin Okocha, a Jani-King franchisee, purchased a janitorial services franchise from Jani-King's master franchisor, Robert H. Vennell Co., Inc., ('Vennell') in 1993. Vennell had the exclusive right to sell Jani-King franchises in King County, WA. Okocha operated its Jani-King franchise in Seattle. In the summer of 1999, Okocha had a physical altercation with one of Vennell's employees at one of the franchisee's cleaning job sites. Because of the altercation, the franchisee lost a customer. Okocha brought suit against Vennell and its employee. He also brought suit against Jani-King based upon principles of vicarious liability.

Jani-King moved for summary judgment, arguing that it could not be vicariously liable for the acts of its master franchisor's employee because it had no control over the master franchisor or its employees. Specifically, Jani-King argued that the franchisee could not prove that Jani-King retained any power over the hiring and supervision of the master franchisor's employees, which was the cause of plaintiff's alleged injury. Jani-King also relied on its agreement with the master franchisor which provided that the master franchisor was solely responsible for the relations with any individual franchisee licensed to do business as a Jani-King dealer, and that the master franchisor was responsible for all labor services.

But Okocha contended that Jani-King was vicariously liable for the actions of its master franchisor because Jani-King retained some amount of control over the operations of its master franchisor, including even establishing policies, practices, and procedures that the master franchisor was required to follow in its business.

The court granted summary judgment in favor of Jani-King. According to the court, based upon existing law in Washington and in other states, Jani-King did not retain sufficient control over its master franchisor in order to impose vicarious liability on it for the actions of the master franchisor's employee. The court found that because the master franchisor retained exclusive authority to hire, fire, and supervise all of its employees, Jani-King did not sufficiently control the day-to-day operations of the master franchisor, and it was therefore not subject to vicarious liability.

Franchisee's Fraudulent Misrepresentations Justify Immediate Termination

The U.S. Court of Appeals for the Ninth Circuit has affirmed an Order from the U.S. District Court for the Central District of California granting a preliminary injunction and holding that a franchisor's termination of the franchise agreement based upon material misrepresentations made by the franchisee in connection with the acquisition of the franchise was proper. El Pollo Loco, Inc. v. Hashim, F.3d 2003 WL 132626 (9th Cir. 2003).

El Pollo Loco (EPL) brought suit against Hashim, a former franchisee, to enforce its post-termination rights under a franchise agreement. EPL terminated its franchise agreement with Hashim because he made material misrepresentations in connection with the acquisition of an EPL franchise. Specifically, Hashim told EPL in his franchise application that he was not a franchisee for any competitor, when in fact he was a franchisee for Kentucky Fried Chicken (KFC). While Hashim did acknowledge that he was previously a KFC franchisee, he told EPL that he was no longer a KFC franchisee when in fact he was. Upon learning of the misrepresentation, EPL terminated Hashim's franchise agreement immediately. EPL then filed suit against Hashim seeking a preliminary injunction to enforce its post-termination rights under the franchise agreement and to prevent Hashim from continuing to operate his restaurants. The district court granted EPL's motion for a preliminary injunction.

On appeal, Hashim argued that EPL's breach of contract claims were barred by the applicable statute of limitations, and the district court committed reversible error in granting the requested relief. The court easily disposed of that claim. It affirmed the District Court's conclusion that the discovery rule, which operates to toll the applicable statute of limitations, may be applied in circumstances in which the franchisor's discovery of the franchisee's breach of the agreement was hindered by the franchisee's misrepresentations and fraud. 

With respect to the substantive claims, the Court of Appeals affirmed the District Court's finding that EPL was entitled to a preliminary injunction. It held that Hashim's disclosures in the franchise application were material misrepresentations that warranted the immediate termination of the franchise agreements. 

This month's Court Watch was written by Susan H. Morton, a partner, and David W. Oppenheim, an associate, with New York's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP.

Franchisor's Internet Sales Do Not Violate Exclusive Territory

An American Arbitration Association Panel in Minneapolis, MN, has ruled that H&R Block, Inc., a tax preparation service franchisor, did not violate a franchise agreement by offering tax preparation services over the Internet, even though some customers were within the franchisee's exclusive territory. In the Matter of Arbitration Between Franklin 1989 Revocable Family Trust, Claimant, and H&R Block, Inc., Respondent (AAA, Minneapolis, Minnesota, Case No. 16114005401) (2002). The case is summarized in the CCH Business Franchise Guide. Bus. Franchise Guide (CCH) 12,473.

According to CCH's summary opinion, an H&R Block franchisee moved for injunctive relief to preclude its franchisor from servicing customers in the franchisee's exclusive territory. The franchisee claimed that under its franchise agreement with H&R Block, H&R Block was prohibited from 'operating from a location' in the franchisee's exclusive territory. The panel interpreted that provision to mean that H&R Block's Internet services could not 'unreasonably intrude on the franchisee's operations.' According to the summary opinion, 'so long as the franchisor's Internet services did not unreasonably intrude on the franchisee's brick-and-mortar operations, the franchisor was not operating in violation of the franchisee's territorial exclusivity.'

The panel held that H&R Block did not violate its franchisee's exclusive territory. It found that H&R Block's Internet marketing and sales efforts were directed at a different market. The panel also observed that during the alleged encroachment period, the franchisee actually increased the number of its customers and its overall revenues. Indeed, the panel also observed that there was some evidence that the franchisee actually received additional customers from the franchisor's Internet sales efforts. Based on its review of the evidence, according to CCH, the panel found that the franchisee failed to show that H&R Block's Internet services were harmful to the franchisee or that they caused the franchisee to lose any business. The panel therefore denied the franchisee's request for an injunction.

Franchisee's Violation of Federal Laws Is Material Breach of Agreement

The U.S. District Court for the Southern District of Florida has ruled after a bench trial that a franchisor's termination of a franchise for the franchisee's violation of federal tax and employment laws was a material breach of the franchise agreement, and as a result, the franchisor was entitled to terminate the franchise agreement. Dunkin' Donuts Incorporated v. Martinez, ' F.Supp.2d ' 2003 WL 685875 (S.D.Fla. 2003).

The franchisees were the owners of multiple Dunkin' Donuts shops and one Dunkin' Donuts/Baskin Robbins combination shop in the Miami Beach area. Based on an anonymous tip and subsequent investigation, Dunkin' Donuts learned that the defendants were violating federal tax and employment laws. After learning of this violation of federal law, Dunkin' Donuts terminated the franchises.

Dunkin' Donuts claimed that because the franchisees violated federal tax and employment laws, it could terminate the agreements because the franchisee violated the 'obey all laws' provision of the agreements. Dunkin' Donuts contended that the continued operation of the franchises by the defendants, after their receipt of a notice of default and termination, constituted trademark and trade dress infringement and unfair competition in violation of the Lanham Act. Dunkin' Donuts sought an order from the court enforcing the termination of the franchise agreements, requiring the franchisees to comply with all post-termination obligations in the franchise agreements, and its reasonable attorneys' fees and costs as provided for in the franchise agreements. The franchisees argued that they fully complied with all the terms of the franchise agreements; that they did not violate federal tax or employment laws; and that they were allowed to continue to operate their Dunkin' Donuts/Baskin Robbins franchises pending a judicial determination of their dispute with Dunkin' Donuts.

The court conducted a bench trial and found that Dunkin' Donuts was completely justified in its termination of the franchises. It found that the 'obey all laws' provision contained in each of the franchise agreements was clear and unambiguous. Based on its review of the evidence, the court found that the franchisees did fail to comply with the Internal Revenue Code as well as federal employment laws. Specifically, the court found that the defendants deducted as business expenses certain personal expenses including private school tuition for their families, restaurant meals, video amusement games, clothing, and even a vacation home.

The court held that Dunkin' Donuts was entitled to the relief it sought. It enjoined the franchisees from continuing to use Dunkin' Donuts' trademarks and trade dress. The court also held that the franchisees were required to comply with all of their post-termination obligations in the franchise agreements, including delivery of possession of their shops to Dunkin' Donuts. Finally, the court awarded Dunkin' Donuts reasonable attorneys' fees and expenses incurred in connection with the litigation as provided for in the franchise agreements.

Franchisor Not Vicariously Liable for Master Franchisor's Employee

The U.S. District Court for the Western District of Washington has held that a franchisor was not vicariously liable for the acts of an employee of its master franchisor because the franchisor did not retain sufficient control over the day-to-day operations of the master franchisor for a finding of vicarious liability. Okocha v. Jani-King, Inc., Bus. Franchise Guide (CCH) 12,379 (W.D. Wash. 2002).

Austin Okocha, a Jani-King franchisee, purchased a janitorial services franchise from Jani-King's master franchisor, Robert H. Vennell Co., Inc., ('Vennell') in 1993. Vennell had the exclusive right to sell Jani-King franchises in King County, WA. Okocha operated its Jani-King franchise in Seattle. In the summer of 1999, Okocha had a physical altercation with one of Vennell's employees at one of the franchisee's cleaning job sites. Because of the altercation, the franchisee lost a customer. Okocha brought suit against Vennell and its employee. He also brought suit against Jani-King based upon principles of vicarious liability.

Jani-King moved for summary judgment, arguing that it could not be vicariously liable for the acts of its master franchisor's employee because it had no control over the master franchisor or its employees. Specifically, Jani-King argued that the franchisee could not prove that Jani-King retained any power over the hiring and supervision of the master franchisor's employees, which was the cause of plaintiff's alleged injury. Jani-King also relied on its agreement with the master franchisor which provided that the master franchisor was solely responsible for the relations with any individual franchisee licensed to do business as a Jani-King dealer, and that the master franchisor was responsible for all labor services.

But Okocha contended that Jani-King was vicariously liable for the actions of its master franchisor because Jani-King retained some amount of control over the operations of its master franchisor, including even establishing policies, practices, and procedures that the master franchisor was required to follow in its business.

The court granted summary judgment in favor of Jani-King. According to the court, based upon existing law in Washington and in other states, Jani-King did not retain sufficient control over its master franchisor in order to impose vicarious liability on it for the actions of the master franchisor's employee. The court found that because the master franchisor retained exclusive authority to hire, fire, and supervise all of its employees, Jani-King did not sufficiently control the day-to-day operations of the master franchisor, and it was therefore not subject to vicarious liability.

Franchisee's Fraudulent Misrepresentations Justify Immediate Termination

The U.S. Court of Appeals for the Ninth Circuit has affirmed an Order from the U.S. District Court for the Central District of California granting a preliminary injunction and holding that a franchisor's termination of the franchise agreement based upon material misrepresentations made by the franchisee in connection with the acquisition of the franchise was proper. El Pollo Loco, Inc. v. Hashim, F.3d 2003 WL 132626 (9th Cir. 2003).

El Pollo Loco (EPL) brought suit against Hashim, a former franchisee, to enforce its post-termination rights under a franchise agreement. EPL terminated its franchise agreement with Hashim because he made material misrepresentations in connection with the acquisition of an EPL franchise. Specifically, Hashim told EPL in his franchise application that he was not a franchisee for any competitor, when in fact he was a franchisee for Kentucky Fried Chicken (KFC). While Hashim did acknowledge that he was previously a KFC franchisee, he told EPL that he was no longer a KFC franchisee when in fact he was. Upon learning of the misrepresentation, EPL terminated Hashim's franchise agreement immediately. EPL then filed suit against Hashim seeking a preliminary injunction to enforce its post-termination rights under the franchise agreement and to prevent Hashim from continuing to operate his restaurants. The district court granted EPL's motion for a preliminary injunction.

On appeal, Hashim argued that EPL's breach of contract claims were barred by the applicable statute of limitations, and the district court committed reversible error in granting the requested relief. The court easily disposed of that claim. It affirmed the District Court's conclusion that the discovery rule, which operates to toll the applicable statute of limitations, may be applied in circumstances in which the franchisor's discovery of the franchisee's breach of the agreement was hindered by the franchisee's misrepresentations and fraud. 

With respect to the substantive claims, the Court of Appeals affirmed the District Court's finding that EPL was entitled to a preliminary injunction. It held that Hashim's disclosures in the franchise application were material misrepresentations that warranted the immediate termination of the franchise agreements. 

This month's Court Watch was written by Susan H. Morton, a partner, and David W. Oppenheim, an associate, with New York's Kaufmann, Feiner, Yamin, Gildin & Robbins LLP.