News Briefs

Franchisors, Franchisees Might Benefit from Reform of Oklahoma Tort System

The franchise industry will be among the major beneficiaries if Oklahoma enacts tort reform legislation. The Oklahoma House of Representatives is now considering H.B. 2661, which would significantly limit damages that can be awarded in tort lawsuits, and proponents of the bill say that they expect it to pass the House and a tort reform bill to pass the Senate in the current legislative session.

“There's a strong sense that something needs to be done about tort legislation in Oklahoma, and that this bill is it,” said Mike Seney, vice president of operations for the Oklahoma State Chamber of Commerce.

H.B. 2661 would cap non-economic damage awards, restrict class action lawsuits and attorneys' fees in class action cases, place limits on product liability actions, and restrict punitive damage awards, among other provisions.

A lawsuit against Dollar Thrifty Automotive Group, the national franchisor of the Dollar and Thrifty rental car brands, is one of the recent cases that has drawn attention to Oklahoma's tort system. The lawsuit, filed in Mayes County District Court, is the result of an accident in September 2002 in which a Dodge passenger van rented from a Thrifty Rent-A-Car franchisee ran off the road and all but one of the 15 passengers drowned. The accident happened in Maine, and the van was rented from a Thrifty franchisee in Shreveport, LA, but the van's seller of record was a Chrysler dealership in Pryor, OK.

The plaintiffs' attorneys argued that the sale of the vehicle generated the connection that enabled them to sue Dollar Thrifty (as well as Daimler Chrysler and others) in Oklahoma. Oklahoma's joint and several liability provisions and lack of limits on damages for pain and suffering or punitive damages make it an attractive venue for such cases, charge critics of the lawsuit. Maine, which might appear to be a more logical place to try this particular case, limits damages for pain and suffering to $400,000 and punitive damages to $75,000.

The defendants in the case would not comment, but the Tulsa World newspaper reported that the defendants filed documents to have the case dismissed in Oklahoma and moved to Maine.

Oklahoma Gov. Brad Henry made tort reform a centerpiece of his state-of-the-state speech in January, and he has helped keep the bill atop legislators' agendas. “Governor Henry said that he wanted a bill that was 'Texas-plus,' and he got it,” said Seney, referencing Texas' tort reform enacted in 2003.

“The House bill isn't franchise-specific, but I haven't heard a single business leader in the state who says he's not very interested in seeing it passed,” said Seney. “It ranks right up there with workers' compensation for the business community.”

MaggieMoo's Ice Cream, Two Franchisees Appear Headed to Court

MaggieMoo's International, LLC has been sued by two former franchisees in the U.S. District Court for the Southern District of New York, who are alleging restraint of trade, antitrust violations, violations of federal and state franchise laws, and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). They are seeking more than $1 million in damages.

In a response to the complaint, MaggieMoo's has petitioned the court “to compel mediation in Maryland, in accordance with the franchisee agreements that the franchisees signed,” said company CEO and President Jon Jameson in an interview with FBLA. MaggieMoo's also is seeking to have the case transferred to the federal district court in Baltimore.

MaggieMoo's, based in Columbia, MD, is a franchisor of super-premium ice cream stores. It has more than 100 upscale shops across the country, and it plans to open approximately 1,000 by the end of 2008, of which “at least 90% will be franchises,” said Jameson.

The lawsuits arose after two prospective franchisees, G&R Moojestic Treats Inc. and JI International LLC, encountered difficulties in opening MaggieMoo's franchises in 2001-2002. G&R Moojestic Treats alleges that MaggieMoo's gave it right of first refusal to develop a store location in the Carousel Mall in Syracuse, NY, in 2001. “Despite having this right, the franchisee was not allowed to develop at that site, and more than 15 other sites were also rejected by MaggieMoo's in the next 6 months,” said Mitchell J. Kassoff, Esq. (South Orange, NJ), the attorney for the franchisees. “Meanwhile, a Cold Stone Creamery franchise [which sells the same type of upscale ice cream] opened at the Carousel Mall, and it's doing great today.” MaggieMoo's refused to refund the lost costs that G&R incurred as a result of purchasing a MaggieMoo's franchise.

In the Pennsylvania situation, JI International and its owner, Jun Iwata, did come to an agreement with MaggieMoo's about a location, and Iwata worked with another MaggieMoo's Pennsylvania franchisee to identify several additional locations for stores. But JI International alleges that the true development costs were about $300,000, well above the $215,000 that had been stated by MaggieMoo's. The lawsuit alleges that MaggieMoo's “admitted in writing that the information contained in the UFOC that it provided to Jun Iwata and JI International, LLC was materially wrong.”

Kassoff and the plaintiffs attempted to settle with MaggieMoo's prior to filing the lawsuit, according to Kassoff, and the offer they received from MaggieMoo's was only for one of the two franchisees and “was a very small offer.”

But MaggieMoo's views the prior settlement discussions and comments made to some local and business media outlets in a different light, according to Jameson. “This [dispute] reflects on the reputation of MaggieMoo's, with the public and our franchisees,” said Jameson, who joined the company as CEO in December 2003. “It is our belief that the plaintiffs may be interested in defaming our name and reputation, and may be engaging in practices approaching extortion. While we prefer and encourage straightforward and open discussion, MaggieMoo's International, LLC will not shy away from aggressive defense of our brand and good name, including the possibility of counterclaims if deemed appropriate.”

Franchises May Face Extra Taxation if Louisiana Wins Lawsuits

Louisiana's effort to tax in-state income by companies that are based in other states may ensnare franchisors with valuable trademarks, say taxation experts. National franchisors H&R Block and Wendy's are among the companies that are being sued by the Louisiana Department of Revenue (DER) for taxes based on the royalty payments that their franchisees have made to the corporate entity, which is registered in another state.

In January, the District Court in Baton Rouge heard the first of the taxation lawsuits, directed against Geoffrey, Inc., which owns the trademarks for Toys “R” Us. A lawsuit against retailer The Gap is next in line, and H&R Block and Wendy's are in the “preliminary stages,” according to Otha Nelson Curtis, Jr., attorney supervisor of the Corporate Income and Franchise Tax Team at the Louisiana DER. “The question is how corporations have structured themselves to have trademark and royalty payments sent outside of the state and reducing taxes on in-state operations,” he said. “The franchise relationship is a fact in the whole situation, but franchisors are not viewed differently than other corporations that are doing the same thing.”

Litigation is only one route that states are using to try to capture additional revenue during cash-strapped times, said Bruce S. Schaeffer, president of Franchise Valuations (New York, NY), and the author of books about franchise taxation and accounting. Other states, such as Alabama and Mississippi, have gone after revenue through legislation that eliminates tax deductions for royalty income that is paid out of state, he said. New Mexico is taxing the revenue of in-state operations, rather than income, which is yet another way to get tax revenue without having to address royalty payments, he said.

Louisiana's lawsuit is based on a ruling known as the “Geoffrey” case in 1994 by the South Carolina Supreme Court. The court upheld the state's claim that a special-purpose entity (located in Delaware) created to manage Toys “R” Us intellectual property had nexus with South Carolina, and thus was subject to income tax. The economic nexus with South Carolina was the toy stores to which Geoffrey licensed its trademarks.

“States hold the position that a physical presence in the state is not required for them to have the ability to tax in-state income,” said Sheldon Laskin, director of the Multistate Tax Commission's national nexus program. “The Geoffrey case traditionally is interpreted to mean that the trademark and underlying business is sufficient nexus because the stores using the trademark are present in the state.”

Maryland won litigation against clothing retailer SYL Inc. (a holding company that owned the intellectual property for the Syms clothing stores) and manufacturer Crown Cork & Seal in similar tax cases (Comptroller v. SYL Inc.; Comptroller v. Crown Cork and Seal Company (Delaware) (Md. Ct. App. June 9, 2003). In November 2003, the U.S. Supreme Court declined to hear an appeal from SYL of the ruling by the Maryland Court of Appeals that SYL was unfairly using a Delaware holding company to shelter income earned in Maryland from state taxes, and it made the same decision in January 2004 about Crown Cork & Seal.

Franchisors, Franchisees Might Benefit from Reform of Oklahoma Tort System

The franchise industry will be among the major beneficiaries if Oklahoma enacts tort reform legislation. The Oklahoma House of Representatives is now considering H.B. 2661, which would significantly limit damages that can be awarded in tort lawsuits, and proponents of the bill say that they expect it to pass the House and a tort reform bill to pass the Senate in the current legislative session.

“There's a strong sense that something needs to be done about tort legislation in Oklahoma, and that this bill is it,” said Mike Seney, vice president of operations for the Oklahoma State Chamber of Commerce.

H.B. 2661 would cap non-economic damage awards, restrict class action lawsuits and attorneys' fees in class action cases, place limits on product liability actions, and restrict punitive damage awards, among other provisions.

A lawsuit against Dollar Thrifty Automotive Group, the national franchisor of the Dollar and Thrifty rental car brands, is one of the recent cases that has drawn attention to Oklahoma's tort system. The lawsuit, filed in Mayes County District Court, is the result of an accident in September 2002 in which a Dodge passenger van rented from a Thrifty Rent-A-Car franchisee ran off the road and all but one of the 15 passengers drowned. The accident happened in Maine, and the van was rented from a Thrifty franchisee in Shreveport, LA, but the van's seller of record was a Chrysler dealership in Pryor, OK.

The plaintiffs' attorneys argued that the sale of the vehicle generated the connection that enabled them to sue Dollar Thrifty (as well as Daimler Chrysler and others) in Oklahoma. Oklahoma's joint and several liability provisions and lack of limits on damages for pain and suffering or punitive damages make it an attractive venue for such cases, charge critics of the lawsuit. Maine, which might appear to be a more logical place to try this particular case, limits damages for pain and suffering to $400,000 and punitive damages to $75,000.

The defendants in the case would not comment, but the Tulsa World newspaper reported that the defendants filed documents to have the case dismissed in Oklahoma and moved to Maine.

Oklahoma Gov. Brad Henry made tort reform a centerpiece of his state-of-the-state speech in January, and he has helped keep the bill atop legislators' agendas. “Governor Henry said that he wanted a bill that was 'Texas-plus,' and he got it,” said Seney, referencing Texas' tort reform enacted in 2003.

“The House bill isn't franchise-specific, but I haven't heard a single business leader in the state who says he's not very interested in seeing it passed,” said Seney. “It ranks right up there with workers' compensation for the business community.”

MaggieMoo's Ice Cream, Two Franchisees Appear Headed to Court

MaggieMoo's International, LLC has been sued by two former franchisees in the U.S. District Court for the Southern District of New York, who are alleging restraint of trade, antitrust violations, violations of federal and state franchise laws, and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). They are seeking more than $1 million in damages.

In a response to the complaint, MaggieMoo's has petitioned the court “to compel mediation in Maryland, in accordance with the franchisee agreements that the franchisees signed,” said company CEO and President Jon Jameson in an interview with FBLA. MaggieMoo's also is seeking to have the case transferred to the federal district court in Baltimore.

MaggieMoo's, based in Columbia, MD, is a franchisor of super-premium ice cream stores. It has more than 100 upscale shops across the country, and it plans to open approximately 1,000 by the end of 2008, of which “at least 90% will be franchises,” said Jameson.

The lawsuits arose after two prospective franchisees, G&R Moojestic Treats Inc. and JI International LLC, encountered difficulties in opening MaggieMoo's franchises in 2001-2002. G&R Moojestic Treats alleges that MaggieMoo's gave it right of first refusal to develop a store location in the Carousel Mall in Syracuse, NY, in 2001. “Despite having this right, the franchisee was not allowed to develop at that site, and more than 15 other sites were also rejected by MaggieMoo's in the next 6 months,” said Mitchell J. Kassoff, Esq. (South Orange, NJ), the attorney for the franchisees. “Meanwhile, a Cold Stone Creamery franchise [which sells the same type of upscale ice cream] opened at the Carousel Mall, and it's doing great today.” MaggieMoo's refused to refund the lost costs that G&R incurred as a result of purchasing a MaggieMoo's franchise.

In the Pennsylvania situation, JI International and its owner, Jun Iwata, did come to an agreement with MaggieMoo's about a location, and Iwata worked with another MaggieMoo's Pennsylvania franchisee to identify several additional locations for stores. But JI International alleges that the true development costs were about $300,000, well above the $215,000 that had been stated by MaggieMoo's. The lawsuit alleges that MaggieMoo's “admitted in writing that the information contained in the UFOC that it provided to Jun Iwata and JI International, LLC was materially wrong.”

Kassoff and the plaintiffs attempted to settle with MaggieMoo's prior to filing the lawsuit, according to Kassoff, and the offer they received from MaggieMoo's was only for one of the two franchisees and “was a very small offer.”

But MaggieMoo's views the prior settlement discussions and comments made to some local and business media outlets in a different light, according to Jameson. “This [dispute] reflects on the reputation of MaggieMoo's, with the public and our franchisees,” said Jameson, who joined the company as CEO in December 2003. “It is our belief that the plaintiffs may be interested in defaming our name and reputation, and may be engaging in practices approaching extortion. While we prefer and encourage straightforward and open discussion, MaggieMoo's International, LLC will not shy away from aggressive defense of our brand and good name, including the possibility of counterclaims if deemed appropriate.”

Franchises May Face Extra Taxation if Louisiana Wins Lawsuits

Louisiana's effort to tax in-state income by companies that are based in other states may ensnare franchisors with valuable trademarks, say taxation experts. National franchisors H&R Block and Wendy's are among the companies that are being sued by the Louisiana Department of Revenue (DER) for taxes based on the royalty payments that their franchisees have made to the corporate entity, which is registered in another state.

In January, the District Court in Baton Rouge heard the first of the taxation lawsuits, directed against Geoffrey, Inc., which owns the trademarks for Toys “R” Us. A lawsuit against retailer The Gap is next in line, and H&R Block and Wendy's are in the “preliminary stages,” according to Otha Nelson Curtis, Jr., attorney supervisor of the Corporate Income and Franchise Tax Team at the Louisiana DER. “The question is how corporations have structured themselves to have trademark and royalty payments sent outside of the state and reducing taxes on in-state operations,” he said. “The franchise relationship is a fact in the whole situation, but franchisors are not viewed differently than other corporations that are doing the same thing.”

Litigation is only one route that states are using to try to capture additional revenue during cash-strapped times, said Bruce S. Schaeffer, president of Franchise Valuations (New York, NY), and the author of books about franchise taxation and accounting. Other states, such as Alabama and Mississippi, have gone after revenue through legislation that eliminates tax deductions for royalty income that is paid out of state, he said. New Mexico is taxing the revenue of in-state operations, rather than income, which is yet another way to get tax revenue without having to address royalty payments, he said.

Louisiana's lawsuit is based on a ruling known as the “Geoffrey” case in 1994 by the South Carolina Supreme Court. The court upheld the state's claim that a special-purpose entity (located in Delaware) created to manage Toys “R” Us intellectual property had nexus with South Carolina, and thus was subject to income tax. The economic nexus with South Carolina was the toy stores to which Geoffrey licensed its trademarks.

“States hold the position that a physical presence in the state is not required for them to have the ability to tax in-state income,” said Sheldon Laskin, director of the Multistate Tax Commission's national nexus program. “The Geoffrey case traditionally is interpreted to mean that the trademark and underlying business is sufficient nexus because the stores using the trademark are present in the state.”

Maryland won litigation against clothing retailer SYL Inc. (a holding company that owned the intellectual property for the Syms clothing stores) and manufacturer Crown Cork & Seal in similar tax cases (Comptroller v. SYL Inc.; Comptroller v. Crown Cork and Seal Company (Delaware) (Md. Ct. App. June 9, 2003). In November 2003, the U.S. Supreme Court declined to hear an appeal from SYL of the ruling by the Maryland Court of Appeals that SYL was unfairly using a Delaware holding company to shelter income earned in Maryland from state taxes, and it made the same decision in January 2004 about Crown Cork & Seal.