Court Watch

Wrongfully Terminated Franchisee's Damages Not Limited to Remedies Afforded Under California Franchise Relations Act

A California appellate court has ruled that a franchisee whose franchise agreement was terminated by the franchisor without good cause in violation of the California Franchise Relations Act (“CFRA”) may sue a franchisor for breach of contract damages based on wrongful termination. In permitting the suit, the court refused to enforce a franchise agreement provision permitting the franchisor to terminate the agreement with or without cause, holding that the provision violated the CFRA and was therefore void and unenforceable. But the court ruled that the franchisee could not sue the franchisor for intentional interference with prospective economic advantage as a result of the wrongful termination. JRS Products, Inc. v. Matsushita Electric Corporation of America, 8 Cal.Rptr.3d 840 (Cal. App. 3d 2004).

JRS Products, Inc. (“JRS”) was a Panasonic fax machine dealer. Panasonic retained the right under the dealer agreement to compete directly with JRS and to terminate the relationship on 90 days' notice with or without cause. In the late 1990s, Panasonic became dissatisfied because JRS began to sell remanufactured toner cartridges at lower prices than Panasonic charged for its new toner cartridges, and because JRS included a letter of authorization from Panasonic in its solicitation packages to market and sell the remanufactured goods. In 1997, and without warning to JRS, Panasonic decided to terminate dealers that were selling remanufactured goods.

In April 1998, JRS received a notice of termination from Panasonic terminating the dealership in 90 days. In response, JRS filed an eight-count complaint in a California court. All but two of JRS' claims ' breach of contract and intentional interference with prospective economic advantage ' were dismissed by the court at the outset of the litigation. Subsequently, the court also dismissed JRS' breach of contract claim, and only the intentional interference claimed remained. The case was tried to a jury that returned a verdict in JRS' favor for more than $720,000 in compensatory damages and $2.5 million in punitive damages.

Panasonic appealed the jury verdict, claiming that the intentional interference claim was deficient because a party could not be liable for intentional interference with prospective economic advantage when the claim was not independent of the breach of contract claim.

The appellate court agreed with Panasonic, noting that the effect of the judgment was to award JRS tort damages for a breach of contract. It observed that even JRS conceded that a party to a contract could not recover damages in tort for breach of the contract. The compensatory and punitive damages judgments were therefore reversed.

But the appeal was not completely successful for Panasonic because the appellate court granted JRS' cross-appeal and reversed the trial court's decision to dismiss its breach of contract claim before the trial. On appeal, Panasonic argued that it could not be liable for breach of contract because the dealer agreement permitted it to terminate the dealership on 90 days notice with or without cause. Panasonic conceded that its termination of JRS without cause or an opportunity to cure any default violated the CFRA, but argued that the only damages available to JRS as a result of wrongful termination were those afforded under the CFRA and not common-law contract damages. Further, noted Panasonic, repurchase of the franchisee's inventory is the exclusive remedy under the CFRA for wrongful termination of a franchise without notice of good cause.

The appellate court disagreed with Panasonic. According to the appellate court, the CFRA plainly provided that the statute did not abrogate the right of a franchisee to sue under any other law. In other words, the CFRA was not the exclusive remedy available to JRS. The court reasoned that if repurchase of inventory was the exclusive remedy, franchisors would have no incentive to refrain from wrongfully terminating franchises and taking over businesses with the very inventory that they need to continue the franchised businesses, which would lead to an absurd result under a law that was designed to expand and not limit a franchisee's remedies.

The court also held that because the at-will termination provision in the dealer agreement violated the CFRA, it was void and unenforceable. As a result, according to the court, JRS could proceed against Panasonic alleging breach of contract for wrongful termination of the dealership agreement even though the agreement provided that Panasonic had the right to terminate it on 90 days notice with or without cause. The appellate court therefore reversed the trial court's decision and remanded the case back to the trial court.

Use of Improper Methods May Support a Tortious Interference Claim Even if the Franchisor Did Not Act Out of Malice

The U.S. Court of Appeals for the 11th Circuit recently held that an unsuccessful purchaser of a fast food franchise could continue to pursue its claim against the franchisor that refused to consent to the transaction, even if the franchisor's motives were not purely malicious, if the franchisor employed improper methods. KMS Restaurant Corp. v. Wendy's International, Inc., 2004 WL 392911 (11th Cir. 2004).

Over a decade ago, KMS Restaurant Corp. (“KMS”) sought to purchase 27 Wendy's restaurants from Citicorp, North America, Inc. (“Citicorp”), a Wendy's International, Inc. (“Wendy's”) franchisee. Citicorp's franchise agreement with Wendy's provided that Wendy's had the right to approve or disapprove the transaction. Wendy's refused to approve the transaction, and a protracted litigation between KMS and Wendy's ensued. KMS filed a two-count complaint against Wendy's for alleged tortious interference with its contract to purchase the restaurants from Citicorp and tortious interference with the business relationship that existed between the individual KMS investors.

KMS' complaint against Wendy's was based on one primary allegation. According to KMS, Wendy's tortiously interfered with KMS' business relationship with Citicorp and its individual investors by taking certain steps to destabilize KMS' corporate structure and then using the alleged lack of corporate stability as grounds for denying approval of KMS' franchise application, thus voiding the contract between KMS and Citicorp. But KMS did not allege that Wendy's acted with malice. Rather, it merely alleged that Wendy's utilized improper methods in deciding whether or not to approve the transaction.

The trial court granted summary judgment in favor of Wendy's because it held that under Florida law a franchisor's privilege to interfere was qualified only when malice was the sole basis for the interference. In other words, according to the court, in order for the franchisor to be liable for tortious interference, it must have acted solely out of spite, with the intent to do harm, or for some other improper motive. And in all other circumstances, said the trial court, the franchisor's right to interfere is absolute. Thus, since KMS' complaint did not allege that Wendy's acted solely out of malice, spite, or with some other bad motive, the court granted summary judgment in favor of Wendy's.

On appeal, the appellate court disagreed with the trial court's interpretation of Florida law. It observed that in tortious interference cases decided under Florida law in which the claims are based on an improper motive theory, the plaintiff must prove that the defendant acted purely out of malice. However, observed the appellate court, in cases in which the plaintiff is alleging tortious interference based on the improper methods utilized by the defendant in safeguarding its own business and contractual interests as opposed to the defendant's improper motives, a tortious interference claim may succeed even if the defendant did not act purely out of spite or malice. In other words, according to the appellate court, in those situations in which there is a qualified privilege to interfere with a business relationship between two parties, the holder of the privilege has an obligation to employ means that are not improper.

The Court of Appeals reinstated KMS' tortious interference claims and remanded the case back to the trial court to determine whether Wendy's utilized improper methods when it decided to not approve the transfer of the Wendy's franchises from Citicorp to KMS.

Washington-Based Dealer May Not Sue Distributor Under Illinois Disclosure Act

The U.S. District Court for the Northern District of Illinois held that a Washington-based dealer of audio and video products could not sue the distributor under the Illinois Franchise Disclosure Act (“IFDA”) even though the distributor maintained its U.S. offices in Illinois and the agreement between the parties called for the application of Illinois law on the grounds that the IFDA did not apply to out-of-state franchisees' and dealers' agreements. The dealer could, however, advance claims against the distributor for common-law fraud and violations of the Washington Franchise Investment Protection Act (“WFIPA”). Ward Enterprises, Inc. v. Bang & Olufsen America, 2003 WL 22859793 (N.D. Ill. 2003).

In June 1999, Ward Enterprises and Bang & Olufsen America (“BOA”) entered into a Licensed Dealer Agreement granting Ward Enterprises the right to sell BOA products at a retail outlet in Seattle, Washington for a term of 5 years. In February 2003, BOA terminated its agreement with Ward Enterprises. Ward Enterprises then brought a complaint against BOA alleging fraud, breach of fiduciary duty, and violations of the WFIPA and the IFDA. BOA moved to dismiss the complaint in its entirety.

The court noted that Ward Enterprises' complaint was based on its claims that BOA made false representations to Ward Enterprises during the negotiation of the dealership agreement, both orally and in various documents that were given to Ward Enterprises during the negotiation. Ward Enterprises also claimed that BOA made false representations in its business projections and that BOA failed to disclose that BOA's market surveys and analyses, on which Ward Enterprises allegedly relied, were not based on the factual data of actual results from other BOA retail outlets.

Based on those allegations, and accepting them as true on the motion to dismiss, as the court was required to do, the court held that Ward Enterprises adequately pled claims for fraud and violations of the WFIPA. But the court also held that Ward Enterprises could not advance its claim for violation of the IFDA because the IFDA only applies to businesses located in the state of Illinois. Citing a recent Seventh Circuit decision, the court observed that even a choice of law provision specifying Illinois law as the parties' choice of law would not save the franchisee's IFDA claim, if the franchisee was located outside of Illinois. Since Ward Enterprises operated retail locations exclusively in the state of Washington, the court granted BOA's motion to dismiss the IFDA claim.

Wrongfully Terminated Franchisee's Damages Not Limited to Remedies Afforded Under California Franchise Relations Act

A California appellate court has ruled that a franchisee whose franchise agreement was terminated by the franchisor without good cause in violation of the California Franchise Relations Act (“CFRA”) may sue a franchisor for breach of contract damages based on wrongful termination. In permitting the suit, the court refused to enforce a franchise agreement provision permitting the franchisor to terminate the agreement with or without cause, holding that the provision violated the CFRA and was therefore void and unenforceable. But the court ruled that the franchisee could not sue the franchisor for intentional interference with prospective economic advantage as a result of the wrongful termination. JRS Products, Inc. v. Matsushita Electric Corporation of America , 8 Cal.Rptr.3d 840 (Cal. App. 3d 2004).

JRS Products, Inc. (“JRS”) was a Panasonic fax machine dealer. Panasonic retained the right under the dealer agreement to compete directly with JRS and to terminate the relationship on 90 days' notice with or without cause. In the late 1990s, Panasonic became dissatisfied because JRS began to sell remanufactured toner cartridges at lower prices than Panasonic charged for its new toner cartridges, and because JRS included a letter of authorization from Panasonic in its solicitation packages to market and sell the remanufactured goods. In 1997, and without warning to JRS, Panasonic decided to terminate dealers that were selling remanufactured goods.

In April 1998, JRS received a notice of termination from Panasonic terminating the dealership in 90 days. In response, JRS filed an eight-count complaint in a California court. All but two of JRS' claims ' breach of contract and intentional interference with prospective economic advantage ' were dismissed by the court at the outset of the litigation. Subsequently, the court also dismissed JRS' breach of contract claim, and only the intentional interference claimed remained. The case was tried to a jury that returned a verdict in JRS' favor for more than $720,000 in compensatory damages and $2.5 million in punitive damages.

Panasonic appealed the jury verdict, claiming that the intentional interference claim was deficient because a party could not be liable for intentional interference with prospective economic advantage when the claim was not independent of the breach of contract claim.

The appellate court agreed with Panasonic, noting that the effect of the judgment was to award JRS tort damages for a breach of contract. It observed that even JRS conceded that a party to a contract could not recover damages in tort for breach of the contract. The compensatory and punitive damages judgments were therefore reversed.

But the appeal was not completely successful for Panasonic because the appellate court granted JRS' cross-appeal and reversed the trial court's decision to dismiss its breach of contract claim before the trial. On appeal, Panasonic argued that it could not be liable for breach of contract because the dealer agreement permitted it to terminate the dealership on 90 days notice with or without cause. Panasonic conceded that its termination of JRS without cause or an opportunity to cure any default violated the CFRA, but argued that the only damages available to JRS as a result of wrongful termination were those afforded under the CFRA and not common-law contract damages. Further, noted Panasonic, repurchase of the franchisee's inventory is the exclusive remedy under the CFRA for wrongful termination of a franchise without notice of good cause.

The appellate court disagreed with Panasonic. According to the appellate court, the CFRA plainly provided that the statute did not abrogate the right of a franchisee to sue under any other law. In other words, the CFRA was not the exclusive remedy available to JRS. The court reasoned that if repurchase of inventory was the exclusive remedy, franchisors would have no incentive to refrain from wrongfully terminating franchises and taking over businesses with the very inventory that they need to continue the franchised businesses, which would lead to an absurd result under a law that was designed to expand and not limit a franchisee's remedies.

The court also held that because the at-will termination provision in the dealer agreement violated the CFRA, it was void and unenforceable. As a result, according to the court, JRS could proceed against Panasonic alleging breach of contract for wrongful termination of the dealership agreement even though the agreement provided that Panasonic had the right to terminate it on 90 days notice with or without cause. The appellate court therefore reversed the trial court's decision and remanded the case back to the trial court.

Use of Improper Methods May Support a Tortious Interference Claim Even if the Franchisor Did Not Act Out of Malice

The U.S. Court of Appeals for the 11th Circuit recently held that an unsuccessful purchaser of a fast food franchise could continue to pursue its claim against the franchisor that refused to consent to the transaction, even if the franchisor's motives were not purely malicious, if the franchisor employed improper methods. KMS Restaurant Corp. v. Wendy's International, Inc., 2004 WL 392911 (11th Cir. 2004).

Over a decade ago, KMS Restaurant Corp. (“KMS”) sought to purchase 27 Wendy's restaurants from Citicorp, North America, Inc. (“Citicorp”), a Wendy's International, Inc. (“Wendy's”) franchisee. Citicorp's franchise agreement with Wendy's provided that Wendy's had the right to approve or disapprove the transaction. Wendy's refused to approve the transaction, and a protracted litigation between KMS and Wendy's ensued. KMS filed a two-count complaint against Wendy's for alleged tortious interference with its contract to purchase the restaurants from Citicorp and tortious interference with the business relationship that existed between the individual KMS investors.

KMS' complaint against Wendy's was based on one primary allegation. According to KMS, Wendy's tortiously interfered with KMS' business relationship with Citicorp and its individual investors by taking certain steps to destabilize KMS' corporate structure and then using the alleged lack of corporate stability as grounds for denying approval of KMS' franchise application, thus voiding the contract between KMS and Citicorp. But KMS did not allege that Wendy's acted with malice. Rather, it merely alleged that Wendy's utilized improper methods in deciding whether or not to approve the transaction.

The trial court granted summary judgment in favor of Wendy's because it held that under Florida law a franchisor's privilege to interfere was qualified only when malice was the sole basis for the interference. In other words, according to the court, in order for the franchisor to be liable for tortious interference, it must have acted solely out of spite, with the intent to do harm, or for some other improper motive. And in all other circumstances, said the trial court, the franchisor's right to interfere is absolute. Thus, since KMS' complaint did not allege that Wendy's acted solely out of malice, spite, or with some other bad motive, the court granted summary judgment in favor of Wendy's.

On appeal, the appellate court disagreed with the trial court's interpretation of Florida law. It observed that in tortious interference cases decided under Florida law in which the claims are based on an improper motive theory, the plaintiff must prove that the defendant acted purely out of malice. However, observed the appellate court, in cases in which the plaintiff is alleging tortious interference based on the improper methods utilized by the defendant in safeguarding its own business and contractual interests as opposed to the defendant's improper motives, a tortious interference claim may succeed even if the defendant did not act purely out of spite or malice. In other words, according to the appellate court, in those situations in which there is a qualified privilege to interfere with a business relationship between two parties, the holder of the privilege has an obligation to employ means that are not improper.

The Court of Appeals reinstated KMS' tortious interference claims and remanded the case back to the trial court to determine whether Wendy's utilized improper methods when it decided to not approve the transfer of the Wendy's franchises from Citicorp to KMS.

Washington-Based Dealer May Not Sue Distributor Under Illinois Disclosure Act

The U.S. District Court for the Northern District of Illinois held that a Washington-based dealer of audio and video products could not sue the distributor under the Illinois Franchise Disclosure Act (“IFDA”) even though the distributor maintained its U.S. offices in Illinois and the agreement between the parties called for the application of Illinois law on the grounds that the IFDA did not apply to out-of-state franchisees' and dealers' agreements. The dealer could, however, advance claims against the distributor for common-law fraud and violations of the Washington Franchise Investment Protection Act (“WFIPA”). Ward Enterprises, Inc. v. Bang & Olufsen America, 2003 WL 22859793 (N.D. Ill. 2003).

In June 1999, Ward Enterprises and Bang & Olufsen America (“BOA”) entered into a Licensed Dealer Agreement granting Ward Enterprises the right to sell BOA products at a retail outlet in Seattle, Washington for a term of 5 years. In February 2003, BOA terminated its agreement with Ward Enterprises. Ward Enterprises then brought a complaint against BOA alleging fraud, breach of fiduciary duty, and violations of the WFIPA and the IFDA. BOA moved to dismiss the complaint in its entirety.

The court noted that Ward Enterprises' complaint was based on its claims that BOA made false representations to Ward Enterprises during the negotiation of the dealership agreement, both orally and in various documents that were given to Ward Enterprises during the negotiation. Ward Enterprises also claimed that BOA made false representations in its business projections and that BOA failed to disclose that BOA's market surveys and analyses, on which Ward Enterprises allegedly relied, were not based on the factual data of actual results from other BOA retail outlets.

Based on those allegations, and accepting them as true on the motion to dismiss, as the court was required to do, the court held that Ward Enterprises adequately pled claims for fraud and violations of the WFIPA. But the court also held that Ward Enterprises could not advance its claim for violation of the IFDA because the IFDA only applies to businesses located in the state of Illinois. Citing a recent Seventh Circuit decision, the court observed that even a choice of law provision specifying Illinois law as the parties' choice of law would not save the franchisee's IFDA claim, if the franchisee was located outside of Illinois. Since Ward Enterprises operated retail locations exclusively in the state of Washington, the court granted BOA's motion to dismiss the IFDA claim.