News Briefs

Waffle House denies the allegations. “Waffle House Inc. has no tolerance for discrimination in our restaurants, and we react swiftly and decisively if we find a violation of our anti-discrimination policies,” wrote the company in a statement.

Pat Warner, Waffle House director of communications, told FBLA that the allegations of discrimination represent an extraordinarily small percentage of Waffle House patrons. “Since the allegations were first made in 2000, we have served more than 700 million customers,” he said. “There have been about 20 allegations in that time.”

So far, Waffle House has shown no inclination to settle the lawsuits. Two cases have gone to jury trials, and Waffle House has won both: in U.S. District Court, District of South Carolina, Charleston Division, in Oct. 2004, and in U.S. District Court, Western North Carolina District, Asheville Division, in Jan. 2005. “In both cases, the jury deliberated for less than an hour,” said Warner. “We were exonerated, and the plaintiffs were assessed court costs. We feel confident that juries will continue to approve of what we are doing.”

Perkins noted that “the NAACP was not involved in those two cases, but from what I understand the facts differ. We have very good plaintiffs and very strong evidence.”

In defending against the lawsuits, Waffle House has provided evidence of its “substantial and proactive” training system that teaches its employees to treat all customers with respect and friendliness, said Warner. The company produces and distributes training videos, and it has developed a binder with a daily training message that store managers must review and sign, which makes clear the company's standards for treatment of all customers. Also, Waffle House posts in each restaurant a toll-free number that any patron can call to complain about ill-treatment, “whether that's a service issue or cold coffee,” said Warner.

Waffle House has about 1400 restaurants, which are split nearly equally between company-owned and franchised locations. Waffle House has about 50 franchisees today, according to Warner, and minority owners are “well-represented,” he added.

Jimmy John's Wins $1.3 million in Damages from Franchisees

In January, the U.S. District Court for the Central District of Illinois ruled in favor of sandwich franchisor Jimmy John's Franchise Inc. and Jimmy John's Enterprises Inc. in a lawsuit against two former franchisees for violating franchise covenants and the Illinois Trade Secrets Act. Jimmy John's was awarded nearly $1.3 million in damages.

Jimmy John's (Elgin, IL) filed the suit in Dec. 2003 against two former franchisees, Robert Otey and Jack Brinson, after they opened a sandwich shop in Greencastle, IN, under the name Mama's Deli and Delivery. Jimmy John's sued Otey and Brinson for breaking a franchise covenant that prohibited them from owning any business engaged in selling food similar to that of Jimmy John's and for violating trade secrets.

In an e-mail interview with FBLA, Jimmy John's founder and CEO Jimmy John Liautaud explained that the restaurant that Otey and Brinson opened “improperly diluted the Greencastle, Indiana, market by … using Jimmy John's concepts and trade secrets.”

Liautaud wrote that Otey's and Brinson's performance as franchisees is “irrelevant” to the lawsuit, though he added that Jimmy John's had not terminated nor non-renewed the franchisees' contracts.

In April 2004, the U.S. District Court entered a default judgment against Otey and Brinson. The partners were permanently enjoined from operating a retail restaurant promoting or selling prepared food products or any other business that sells or offers to sell prepared food products similar to Jimmy John's. They also were barred from using or disclosing any proprietary or confidential information obtained from Jimmy John's Inc. After a bench trial in Nov. 2004, the court entered a judgment for $314,523 in compensatory damages, and in Dec. 2004 the court awarded punitive damages and attorneys' fees and costs for a total of nearly $1.3 million.

Otey and Brinson could not be located to comment on the litigation.

Founded in 1983, Jimmy John's has grown to more than 280 corporate and franchised locations in more than 27 states and two countries. It plans to open 105 more franchised outlets in 2005 and five or six company-owned restaurants, according to Liautaud, concentrating in metropolitan New York City and Boston.

U-Haul Dealer Declared Not a Franchisee by California Court

U-Haul Co. of California and U-Haul International Inc. (“U-Haul”) won a potentially significant victory in a trial court case in which a former dealer challenged the company's termination of his contract. Former dealer David Thueson sued U-Haul in Humbolt County (California) Superior Court for terminating his dealership contract in Sept. 2003 without cause. Thueson claimed that he was told by U-Haul representatives that his dealership would only be terminated for cause, and, furthermore, that he was entitled to termination protections granted franchisees under the California franchise laws.

U-Haul, the nation's largest do-it-yourself moving equipment renter, challenged Thueson's claim that he was a franchisee, as well as his unfair business practice claim under California's Business & Professions Code. Superior Court Judge Michael Brown agreed with U-Haul that Thueson was not a franchisee under the California Franchise Relations Act (“CFRA”). With the decision, U-Haul's decision to terminate the dealership with 30 days notice was upheld.

In disputing Thueson's purported franchisee status, U-Haul argued, among other things, that Thueson did not make a payment for his dealership; was not provided with a marketing plan; and was not using the U-Haul trademark for his businesses, which Thueson operated as Action Rental. In maintaining that U-Haul provided no marketing plan, U-Haul argued that it “did not set Thueson's hours, did not compel him to pass a training program, and did not regulate the employment or appearance of Thueson's employees.”

U-Haul also disputed that Thueson's payments to U-Haul of $40/month for a telephone, dedicated phone line, and electronic reporting service qualified as franchise fees. The court agreed that the payments were ordinary business expenses and not an investment for the dealership rights. According to Rochelle Spandorf, Sonnenschein, Nath & Rosenthal (Los Angeles), who was not involved in the litigation, while Thueson's payments were for ordinary business items, they were nevertheless paid to U-Haul and apparently required by the dealer contract. The CFRA regards payments to the franchisor even for ordinary, but required, items differently than ordinary business expenses paid to third parties, Spandorf observed. At the same time, U-Haul might have characterized Thueson's payments as qualifying for the $1000/year exemption under the CFRA for rental of tangible property, an argument that U-Haul apparently never proferred. Even though U-Haul did not formally rent the phone equipment and line, it required its dealers to use its property in exchange for the dealer's monthly payment, an arrangement that seems functionally equivalent to a lease, Spandorf added.

U-Haul issued a statement after the decision that the ruling might have implications nationally for dealers who challenge U-Haul's business practices. In a statement provided to FBLA, U-Haul declared: “The company values its relationships with its independent dealers and recognizes their contribution, as independent business people, to the company's continued success … The court's decision affirms the company's position that these dealers are, in fact, independent businesses, not franchisees, and that the company had a right to terminate the dealership contract as it did.”

Despite U-Haul's victory, Spandorf points out that the decision illustrates the breadth of California's franchise laws and the serious risk that independent dealer and distributor networks may be attacked as hidden franchises. Putting things into perspective, however, practitioners should remember that the U-Haul case is just a trial court decision with no value as legal precedent.

Franchise Disclosure Compliance Calendar Posted Online

Franchising consultant Michael H. Seid has updated his Franchise Disclosure Compliance Calendar for 2005. The Calendar reflects how franchisors must comply with the Federal Trade Commission's (FTC) requirement that franchisors must provide a complete UFOC within 10 business days of the first “face to face” meeting with a prospective franchisee, and the FTC's requirement that a prospective franchisee must be given a complete “ready to sign” set of all documents at least 5 business days prior to signing a contract. To read the calendar and download a printable copy, go to www.msaworldwide.com/index.cfm/fa/calendar.

Update: Court Rules that California's Proposition 64 Is Not Retroactive

The impact of California's Proposition 64 has been somewhat muted, at least temporarily, by a Feb. 1 decision from a California Court of Appeal. In Californians for Disability Rights v. Mervyn's, LLC, 2005 Cal.App.Lexis 160 (1st Appellate District), the court held that Proposition 64 is not retroactive and does not apply to cases that were pending before the election.

As covered in FBLA in Nov. 2004, franchisors and franchisees tended to support Proposition 64 because it reduced their exposure to lawsuits filed by private citizens under California's Unfair Competition Law, Bus. & Prof. Code Sections 17200, et seq. Proposition 64 also limited recovery to an injunction and restitution, thus removing damages from the equation.

“Among other things, Proposition 64 includes a traditional 'standing' requirement, which means that a 17200 plaintiff must have been injured or damaged by the alleged unfair business practice,” noted Jeffrey L. Fillerup, Luce, Forward, Hamilton & Scripps (San Francisco). “Proposition 64 also requires that a class be certified if a private plaintiff sues on behalf of the general public. Prior to Prop 64, an unfair business practice claim under 17200 was commonly alleged in franchise litigation, both in cases filed by consumers against franchisors and/or franchisees.”

Frequently, Section 17200 was used by franchisees that were in litigation with their franchisors about unfair business practices. “The law will reduce the number of consumer-type 17200 cases in which an individual plaintiff sues 'on behalf of the general public,'” predicted Fillerup. “However, it will not affect business vs. business cases, such as 17200 claims filed in conjunction with intellectual property or unfair competition claims.”

Fillerup added that he believes that the retroactivity issue is not yet resolved. “Defendants in the pending cases will likely not give up fighting for retroactivity, and the issue will certainly end up in the California Supreme Court, whether in this case or another,” he said.

Available: Fundamentals of Franchising, 2nd edition

“Fundamentals of Franchising, 2nd edition,” edited by Rupert Barkoff and Andrew Selden, has been published by the American Bar Association. This comprehensive book is an indispensable update for franchise attorneys. The editors and more than a dozen additional contributors have revised and expanded the book to reflect the latest developments in franchise trademark law; structuring a unit franchise relationship; franchise registration and disclosure; franchise relationships (transfers, renewals, terminations, etc.); advising franchisees; and antitrust law. “Fundamentals of Franchising” can be purchased directly from ABA by going to its Web site at www.abanet.org. The price is $100 (or $85 for ABA members).

Victorious in Two Discrimination Lawsuits, Waffle House and Its Franchisees Still Face 20 More

Although two juries have found in favor of Waffle House and its franchisees, the chain of restaurants still faces more than 20 lawsuits that charge that individual restaurants have discriminated against African American patrons in the past several years.

The Washington Lawyers' Committee for Civil Rights & Urban Affairs is coordinating lawsuits filed on behalf of individual patrons of Waffle House restaurants in Alabama, Georgia, North Carolina, South Carolina, Texas, and Virginia. The specific incidents cited in the lawsuits vary, but they share the allegation that African American patrons were ill-treated by servers in Waffle House restaurants. Some lawsuits also allege that racial epithets were directed at African Americans when they requested service, according to NAACP attorney Kimberly Perkins. NAACP joined the plaintiffs in some of the lawsuits in Jan. 2005. “We are seeking to compel Waffle House to stop discriminating on the basis of race,” said Perkins. “We believe this is coming from the corporate offices of the company.”

Waffle House denies the allegations. “Waffle House Inc. has no tolerance for discrimination in our restaurants, and we react swiftly and decisively if we find a violation of our anti-discrimination policies,” wrote the company in a statement.

Pat Warner, Waffle House director of communications, told FBLA that the allegations of discrimination represent an extraordinarily small percentage of Waffle House patrons. “Since the allegations were first made in 2000, we have served more than 700 million customers,” he said. “There have been about 20 allegations in that time.”

So far, Waffle House has shown no inclination to settle the lawsuits. Two cases have gone to jury trials, and Waffle House has won both: in U.S. District Court, District of South Carolina, Charleston Division, in Oct. 2004, and in U.S. District Court, Western North Carolina District, Asheville Division, in Jan. 2005. “In both cases, the jury deliberated for less than an hour,” said Warner. “We were exonerated, and the plaintiffs were assessed court costs. We feel confident that juries will continue to approve of what we are doing.”

Perkins noted that “the NAACP was not involved in those two cases, but from what I understand the facts differ. We have very good plaintiffs and very strong evidence.”

In defending against the lawsuits, Waffle House has provided evidence of its “substantial and proactive” training system that teaches its employees to treat all customers with respect and friendliness, said Warner. The company produces and distributes training videos, and it has developed a binder with a daily training message that store managers must review and sign, which makes clear the company's standards for treatment of all customers. Also, Waffle House posts in each restaurant a toll-free number that any patron can call to complain about ill-treatment, “whether that's a service issue or cold coffee,” said Warner.

Waffle House has about 1400 restaurants, which are split nearly equally between company-owned and franchised locations. Waffle House has about 50 franchisees today, according to Warner, and minority owners are “well-represented,” he added.

Jimmy John's Wins $1.3 million in Damages from Franchisees

In January, the U.S. District Court for the Central District of Illinois ruled in favor of sandwich franchisor Jimmy John's Franchise Inc. and Jimmy John's Enterprises Inc. in a lawsuit against two former franchisees for violating franchise covenants and the Illinois Trade Secrets Act. Jimmy John's was awarded nearly $1.3 million in damages.

Jimmy John's (Elgin, IL) filed the suit in Dec. 2003 against two former franchisees, Robert Otey and Jack Brinson, after they opened a sandwich shop in Greencastle, IN, under the name Mama's Deli and Delivery. Jimmy John's sued Otey and Brinson for breaking a franchise covenant that prohibited them from owning any business engaged in selling food similar to that of Jimmy John's and for violating trade secrets.

In an e-mail interview with FBLA, Jimmy John's founder and CEO Jimmy John Liautaud explained that the restaurant that Otey and Brinson opened “improperly diluted the Greencastle, Indiana, market by … using Jimmy John's concepts and trade secrets.”

Liautaud wrote that Otey's and Brinson's performance as franchisees is “irrelevant” to the lawsuit, though he added that Jimmy John's had not terminated nor non-renewed the franchisees' contracts.

In April 2004, the U.S. District Court entered a default judgment against Otey and Brinson. The partners were permanently enjoined from operating a retail restaurant promoting or selling prepared food products or any other business that sells or offers to sell prepared food products similar to Jimmy John's. They also were barred from using or disclosing any proprietary or confidential information obtained from Jimmy John's Inc. After a bench trial in Nov. 2004, the court entered a judgment for $314,523 in compensatory damages, and in Dec. 2004 the court awarded punitive damages and attorneys' fees and costs for a total of nearly $1.3 million.

Otey and Brinson could not be located to comment on the litigation.

Founded in 1983, Jimmy John's has grown to more than 280 corporate and franchised locations in more than 27 states and two countries. It plans to open 105 more franchised outlets in 2005 and five or six company-owned restaurants, according to Liautaud, concentrating in metropolitan New York City and Boston.

U-Haul Dealer Declared Not a Franchisee by California Court

U-Haul Co. of California and U-Haul International Inc. (“U-Haul”) won a potentially significant victory in a trial court case in which a former dealer challenged the company's termination of his contract. Former dealer David Thueson sued U-Haul in Humbolt County (California) Superior Court for terminating his dealership contract in Sept. 2003 without cause. Thueson claimed that he was told by U-Haul representatives that his dealership would only be terminated for cause, and, furthermore, that he was entitled to termination protections granted franchisees under the California franchise laws.

U-Haul, the nation's largest do-it-yourself moving equipment renter, challenged Thueson's claim that he was a franchisee, as well as his unfair business practice claim under California's Business & Professions Code. Superior Court Judge Michael Brown agreed with U-Haul that Thueson was not a franchisee under the California Franchise Relations Act (“CFRA”). With the decision, U-Haul's decision to terminate the dealership with 30 days notice was upheld.

In disputing Thueson's purported franchisee status, U-Haul argued, among other things, that Thueson did not make a payment for his dealership; was not provided with a marketing plan; and was not using the U-Haul trademark for his businesses, which Thueson operated as Action Rental. In maintaining that U-Haul provided no marketing plan, U-Haul argued that it “did not set Thueson's hours, did not compel him to pass a training program, and did not regulate the employment or appearance of Thueson's employees.”

U-Haul also disputed that Thueson's payments to U-Haul of $40/month for a telephone, dedicated phone line, and electronic reporting service qualified as franchise fees. The court agreed that the payments were ordinary business expenses and not an investment for the dealership rights. According to Rochelle Spandorf, Sonnenschein, Nath & Rosenthal (Los Angeles), who was not involved in the litigation, while Thueson's payments were for ordinary business items, they were nevertheless paid to U-Haul and apparently required by the dealer contract. The CFRA regards payments to the franchisor even for ordinary, but required, items differently than ordinary business expenses paid to third parties, Spandorf observed. At the same time, U-Haul might have characterized Thueson's payments as qualifying for the $1000/year exemption under the CFRA for rental of tangible property, an argument that U-Haul apparently never proferred. Even though U-Haul did not formally rent the phone equipment and line, it required its dealers to use its property in exchange for the dealer's monthly payment, an arrangement that seems functionally equivalent to a lease, Spandorf added.

U-Haul issued a statement after the decision that the ruling might have implications nationally for dealers who challenge U-Haul's business practices. In a statement provided to FBLA, U-Haul declared: “The company values its relationships with its independent dealers and recognizes their contribution, as independent business people, to the company's continued success … The court's decision affirms the company's position that these dealers are, in fact, independent businesses, not franchisees, and that the company had a right to terminate the dealership contract as it did.”

Despite U-Haul's victory, Spandorf points out that the decision illustrates the breadth of California's franchise laws and the serious risk that independent dealer and distributor networks may be attacked as hidden franchises. Putting things into perspective, however, practitioners should remember that the U-Haul case is just a trial court decision with no value as legal precedent.

Franchise Disclosure Compliance Calendar Posted Online

Franchising consultant Michael H. Seid has updated his Franchise Disclosure Compliance Calendar for 2005. The Calendar reflects how franchisors must comply with the Federal Trade Commission's (FTC) requirement that franchisors must provide a complete UFOC within 10 business days of the first “face to face” meeting with a prospective franchisee, and the FTC's requirement that a prospective franchisee must be given a complete “ready to sign” set of all documents at least 5 business days prior to signing a contract. To read the calendar and download a printable copy, go to www.msaworldwide.com/index.cfm/fa/calendar.

Update: Court Rules that California's Proposition 64 Is Not Retroactive

The impact of California's Proposition 64 has been somewhat muted, at least temporarily, by a Feb. 1 decision from a California Court of Appeal. In Californians for Disability Rights v. Mervyn's, LLC , 2005 Cal.App.Lexis 160 (1st Appellate District), the court held that Proposition 64 is not retroactive and does not apply to cases that were pending before the election.

As covered in FBLA in Nov. 2004, franchisors and franchisees tended to support Proposition 64 because it reduced their exposure to lawsuits filed by private citizens under California's Unfair Competition Law, Bus. & Prof. Code Sections 17200, et seq. Proposition 64 also limited recovery to an injunction and restitution, thus removing damages from the equation.

“Among other things, Proposition 64 includes a traditional 'standing' requirement, which means that a 17200 plaintiff must have been injured or damaged by the alleged unfair business practice,” noted Jeffrey L. Fillerup, Luce, Forward, Hamilton & Scripps (San Francisco). “Proposition 64 also requires that a class be certified if a private plaintiff sues on behalf of the general public. Prior to Prop 64, an unfair business practice claim under 17200 was commonly alleged in franchise litigation, both in cases filed by consumers against franchisors and/or franchisees.”

Frequently, Section 17200 was used by franchisees that were in litigation with their franchisors about unfair business practices. “The law will reduce the number of consumer-type 17200 cases in which an individual plaintiff sues 'on behalf of the general public,'” predicted Fillerup. “However, it will not affect business vs. business cases, such as 17200 claims filed in conjunction with intellectual property or unfair competition claims.”

Fillerup added that he believes that the retroactivity issue is not yet resolved. “Defendants in the pending cases will likely not give up fighting for retroactivity, and the issue will certainly end up in the California Supreme Court, whether in this case or another,” he said.

Available: Fundamentals of Franchising, 2nd edition

“Fundamentals of Franchising, 2nd edition,” edited by Rupert Barkoff and Andrew Selden, has been published by the American Bar Association. This comprehensive book is an indispensable update for franchise attorneys. The editors and more than a dozen additional contributors have revised and expanded the book to reflect the latest developments in franchise trademark law; structuring a unit franchise relationship; franchise registration and disclosure; franchise relationships (transfers, renewals, terminations, etc.); advising franchisees; and antitrust law. “Fundamentals of Franchising” can be purchased directly from ABA by going to its Web site at www.abanet.org. The price is $100 (or $85 for ABA members).