Court Watch

Master Franchisor's Claim For Wrongful Termination Under the Wisconsin Fair Dealership Law Fails

The U.S. District Court for the Western District of Wisconsin held that a sandwich shop master franchisor, Brown Dog, Inc. ('Brown Dog'), failed to substantially comply with its agreement to meet its development quotas for opening new franchises despite being only one or two franchises behind in any given quarter. Therefore, the Quizno's Franchise Company's ('Quizno's') termination of the parties' agreement was lawful under the Wisconsin Fair Dealership Law (the 'WFDL'). Brown Dog, Inc., et al. v. The Quizno's Franchise Company LLC, BFG '13,229 (Dec. 27, 2005).

By way of background, the court noted that in 1992 Quizno's only had about 40 restaurants open, but at the time of the trial, Quizno's had about 4000 restaurants open worldwide. Although it had many underperforming master franchisors from 1994 to 2002, Quizno's made no concerted effort to force its master franchisors to meet their development quotas. But the explosive growth of the restaurant chain during the 1990s, coupled with a change in management in 2002, resulted in a policy change that favored enforcement of the development quotas.

Brown Dog signed an area development agreement with Quizno's in 2002 that required that a certain number of franchises be open by the end of each quarter in the central Wisconsin market. Quizno's terminated Brown Dog in 2003 after six quarters of missed quotas.

Brown Dog claimed that Quizno's termination was unlawful because Quizno's did not have 'good cause' as required under the WFDL. The WFDL states that a grantor may not cancel or materially change an agreement without 'good cause' and that good cause exists if a dealer has not substantially complied with 'the essential and reasonable requirements imposed upon him by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on similarly situated dealers either by their terms or the manner of their enforcement.' Wisc. Stat. '135.02(4).

Brown Dog argued that it was in substantial compliance with the terms of the agreement ' in any given quarter it was only one or two restaurants behind, and often it 'caught up' to the preceding quarter's quota during the next quarter. Further, Brown Dog asserted that it achieved 97.8% compliance if the agreement is evaluated in terms of 'open store days' that the agreement required. The court noted that the agreement did not mention 'open store days,' but did clearly state that the determination as to whether Brown Dog met its development obligations is based on the number of restaurants open and operating at the end of a sales quarter. The parties agreed upon this term at the time of contract formation, and Brown Dog conceded that the quota was a reasonable and essential term of the agreement. Therefore, the only issue was whether six straight quarters of missing the quota by a low number constitutes a failure to substantially comply with the agreement.

The court looked to the express language of the WFDL to provide a time frame within which one could judge whether there was substantial compliance under the agreement. The court reasoned that because the WFDL required 90 days prior written notice of termination and 60 days after notice for the dealer to cure the specified deficiencies, the WFDL indicated that 5 months of noncompliance constituted 'good cause.' The court further supported its conclusion that 5 months of being under quota by even one restaurant is good cause for termination based on the 'hyper-competitiveness of the fast food market,' the criticality to Quizno's business plan of constant, predictable growth, and Wisconsin's pattern jury instruction which states that noncompliance is substantial if it is of such an extent and nature that there has been no 'practical fulfillment' of the terms of the agreement.

Brown Dog next argued that the termination was unlawful because Quizno's had discriminated against it in violation of the WFDL. Specifically, Brown Dog contended that it was unfair and discriminatory that master franchisors that were granted franchise rights during the 1990s (prior to the 2002 policy change) were given more lenient treatment; several of them were not terminated after years of failing to meet their development quotas. But the court explained that the WFDL does not provide franchisees with a statutory right to insist on identical treatment and does not prevent a franchisor from changing a business practice in a fashion that helps one franchisee and hurts another. The court turned up the volume on this point, sardonically stating: 'Brown Dog argues that a scintilla of differentiation mandates judgment in Brown Dog's favor, and toward this end it trumpets each [master franchisor] that received even a quarter's more time as proof positive that unlawful discrimination occurred … It is risible for Brown Dog to imply that after jettisoning its tolerance for mediocrity, Quizno's nonetheless was required ever after to provide each underperforming [master franchisor] with as much cure time as its worst-ever [master developer] had received prior to the policy change.' The court concluded that it is not discriminatory for a franchisor to consider each master franchisor's situation and to decide to keep or terminate a master franchisor based on whether or not it has met newly imposed policies.

Although Quizno's succeeded in convincing the court that Brown Dog was in breach of the agreement, the court rejected Quizno's counterclaim for lost profits. The court further stated that Quizno's had not presented any evidence that it actually incurred any costs or expenses that it otherwise would not have to pay. In fact, the court reasoned that Quizno's may well have come out ahead as a result of the breach and resulting termination of the agreement. But the court nonetheless awarded Quizno's $1 in nominal damages, adding that it trusted that 'Quizno's will be gracious enough not to require payment.'

The Brown Dog court based its decision in large part on the express language of the agreement and the WFDL, rather than crafting its own interpretation of 'substantial compliance.' The Brown Dog decision is good news for many franchisors seeking to terminate master franchisors that are not complying with development quotas, even where the noncompliance is arguably minor. This decision also provides some comfort to franchisors that are seeking to enforce the terms of their agreements after a long period of non-enforcement. The court wisely recognized that a franchisor must have the ability to re-evaluate its policies and establish new policies in light of its evolving business and changing market demands.

Florida Statutes Apply to Claims Made By Out-of-State Franchisees Where Franchisor Is Located in Florida

Ten franchisees filed suit against their franchisor, Lady of America Franchisor Corp. ('LOA'), alleging violations of various Minnesota and Florida laws. Although all of the franchises were not located in Florida and none of the franchisees were residents of Florida, the U.S. District Court for the District of Minnesota denied LOA's motion to dismiss the claims filed under Florida law. Deborah Randall, et al. v. Lady of America Franchise Corp., et al. BFG '13,202 (Oct. 21, 2005).

LOA is a franchisor of health clubs, and the company is based in Florida. The franchisees all purchased franchises from the franchisor beginning in 2002 and operated the franchises outside of Florida. When the franchises did not flourish as originally expected, the franchisees sought to invoke the protections of both Minnesota and Florida law, claiming, among other things, that LOA violated the franchise registration laws of Minnesota, as well as Florida relationship and deceptive and unfair trade practices statutes.

The court rejected LOA's argument that the claims brought by the franchisees under the franchise registration laws of Minnesota were barred by the statute of limitations. However, the interesting part of the decision is how the court handled the franchisees' claims brought under Florida law.

The Florida Franchise Misrepresentation Act ('FFMA') provides a private right of action to any 'person' who shows a violation of the FFMA. Under the FFMA, a person is defined as 'an individual, partnership, corporation, association, or other entity doing business in Florida.' Fla. Stat. '817.416(1)(a). LOA argued that because the franchises are located outside of Florida, the franchisees were not 'doing business in Florida' as required under the FFMA, and therefore the franchisees are not entitled to the protections of the FFMA. Referencing various decisions, the court determined that the FFMA applies if the franchisor does business in Florida ' regardless of the location of the franchises. LOA next argued that the claims under the Florida Deceptive and Unfair Trade Practices Act should be dismissed because the statute only applies to Florida residents, and none of the litigant franchisees are residents of Florida. The court flatly rejected this argument, stating that precedent dictated that the Florida Deceptive and Unfair Trade Practices Act applied to nonresidents.

Franchisors and their legal counsel are aware that statutes granting protections to franchisees in a particular jurisdiction will usually apply to the relationship between a franchisor and a franchisee if the franchise is located in the jurisdiction or if the franchisee is a resident of the jurisdiction. The Randall decision highlights the need to also consider the possibility that the laws of the state in which the franchisor is located will apply.

What Is a Franchise? Connecticut Supreme Court Provides Further Insight

Franchise attorneys continue to debate that ever-present question of how and when a distributorship crosses the line and becomes a franchise. The Connecticut Supreme Court recently tackled this question when it determined that certain distribution and sales representative agreements with a manufacturer were not a franchise within the meaning of the Connecticut Franchise Act. Robert Edmands, et al. v. Cuno, Inc. BFG '13,302 (March 21, 2006).

Robert Edmands ('Edmands') and Cuno, Inc. ('Cuno'), a manufacturer of filtration products, entered into agreements in 1972 under which Edmands and his former business partner were designated as sales representatives and distributors of CUNO products in Connecticut and specified counties in Massachusetts. The court explained that two types of agreements were signed, which included: 1) sales representative agreements, which governed Edmands' solicitation of orders for CUNO products from customers, for which Cuno, following shipment and billing, paid a commission to Edmands; and 2) distributorship agreements, which governed the sale of CUNO products from Cuno to Edmands, which Edmands then in turn sold to customers from Edmands' inventory.

In late 2000, Cuno sent Edmands written notice of cancellation without cause of all of the agreements. Although Cuno believed it was not required to provide a reason for the cancellation, it stated that it believed it would be a better business practice for Cuno to sell its product directly in Edmands' market and that it had been disappointed in Edmands' coverage of the territory.

As a result of the cancellation, Edmands filed a complaint against Cuno in July 2001, alleging that the parties' relationship was that of a franchisor-franchisee, and accordingly, that Cuno's termination of the franchise was without cause and proper notice as required under the Connecticut Franchise Act. Edmands also claimed that Cuno's actions violated the Connecticut Unfair Trade Practices Act ('CUTPA') and implied covenants of good faith and fair dealing. The lower court held that Cuno was entitled to summary judgment on the Connecticut Franchise Act claim because there was no franchise relationship between the parties. Because the claims under CUTPA and the implied covenants of good faith and fair dealing were predicated on the alleged violations of the Connecticut Franchise Act, the lower court also granted summary judgment in favor of Cuno on these claims as well. On appeal, Edmands contended that the lower court improperly concluded that there was no franchise relationship under the Connecticut Franchise Act.

The lower court based its ruling upon a determination that Edmands failed to demonstrate sufficient control by Cuno such that the court could find that there was a marketing plan prescribed in substantial part by Cuno, a necessary element of a 'franchise' as defined by Connecticut statute. The court explained that the factors historically deemed relevant to the inquiry of whether there was a marketing plan prescribed in substantial part by a franchisor are 'whether the franchisor has control over the hours and days of operation, advertising, lighting, employee uniforms, prices, hiring of staff, sales quotas and management training.' The court also noted that it is relevant whether the manufacturer provided the distributor with financial support, and had the right to audit its books or inspect its premises.

The court added that the above list of factors is not definitive. However, when present to a sufficient degree, these factors reflect that the manufacturer has deprived the distributor of the right to exercise independent judgment in conducting its business, and therefore a franchise relationship exists.

Edmands contended that Cuno exercised sufficient control over his business primarily by setting prices, exerting pressure regarding the hiring and retention of staff, controlling inventory, prescribing and monitoring sales through an annual sales planning process, and setting marketing requirements. The court first analyzed the issue of pricing, which it noted is a factor that Connecticut law has identified as 'one of the most significant criteria for determining control.' Despite the fact that Cuno clearly controlled pricing under the express terms of the sales representative agreements, it only provided suggested pricing under the distributorship agreements. The court explained that Edmands must establish that Cuno controls pricing in 'the overall operation of their business pursuant to the agreements collectively.' Based on this rationale, the court held that because Edmands had the freedom to determine the percentage of his business conducted as a distributor, the agreements, when viewed collectively, did not evidence that Cuno controlled pricing.

The court then looked at the issue of whether control was established by Cuno's control over Edmands' hiring of staff. The court quickly found that the evidence supported the lower court's determination that control was not established. Although Cuno repeatedly expressed concerns about Edmands' efforts to replace salespersons over a number of years, only one communication could be viewed as a veiled threat of termination if Edmands' hiring efforts were not successful. The court stated that the fact that Cuno did not take adverse action for several years despite its dissatisfaction with Edmands' staffing efforts indicates there was no meaningful control over Edmands' hiring practices. Similarly, the court found that there was not sufficient evidence that Cuno exercised control over inventory. Although there were suggested inventory levels, the distributorship agreements allowed Edmands to order any quantity of merchandise he chose.

Finally, the court turned to Edmands' claim that Cuno exercised control pursuant to a marketing plan substantially prescribed by Cuno by virtue of an annual 'sales action plan.' The parties met annually to create a plan for customer accounts to be developed. Cuno initially created a list of customer accounts, which was then modified by Edmands. The list was then presented to Edmands' sales staff, which forecasted projected sales and prescribed activities needed to achieve the projections. The court noted that Edmands' testimony was somewhat conflicting as to which party had the final word on the sales projections, but Cuno described the process as 'cooperative.' What the court found dispositive was Cuno's response to Edmands' failure to meet the sales projections. When Edmands' sales fell short of projections, Cuno's typical response was to simply send a quick note stating the amount of the shortfall and asking how Edmands intended to respond. The court stated that it was not enough that Edmands may have reasonably felt under enormous pressure to meet the sales targets. Ultimately, the court found that the marketing plan did nothing more than set sales goals and did not prescribe Edmands' operation of his business.

In conclusion, the court stated '[t]he defendant's ability to exert meaningful control over the plaintiffs' operation of their business is belied by both its inability to compel the plaintiffs to achieve its objectives over a sustained period of time and its inaction when the plaintiffs failed to satisfy those objectives.'

Rupert Barkoff is a partner in Kilpatrick Stockton LLP's Atlanta office, where he chairs the firm's Franchise Team. He is former chair of the American Bar Association's Forum on Franchising. He can be contacted at [email protected]. Kitt Shipe is an associate with Kilpatrick Stockton in Atlanta. She can be contacted by phone at 404-815-6500 or by e-mail at [email protected].

Master Franchisor's Claim For Wrongful Termination Under the Wisconsin Fair Dealership Law Fails

The U.S. District Court for the Western District of Wisconsin held that a sandwich shop master franchisor, Brown Dog, Inc. ('Brown Dog'), failed to substantially comply with its agreement to meet its development quotas for opening new franchises despite being only one or two franchises behind in any given quarter. Therefore, the Quizno's Franchise Company's ('Quizno's') termination of the parties' agreement was lawful under the Wisconsin Fair Dealership Law (the 'WFDL'). Brown Dog, Inc., et al. v. The Quizno's Franchise Company LLC, BFG '13,229 (Dec. 27, 2005).

By way of background, the court noted that in 1992 Quizno's only had about 40 restaurants open, but at the time of the trial, Quizno's had about 4000 restaurants open worldwide. Although it had many underperforming master franchisors from 1994 to 2002, Quizno's made no concerted effort to force its master franchisors to meet their development quotas. But the explosive growth of the restaurant chain during the 1990s, coupled with a change in management in 2002, resulted in a policy change that favored enforcement of the development quotas.

Brown Dog signed an area development agreement with Quizno's in 2002 that required that a certain number of franchises be open by the end of each quarter in the central Wisconsin market. Quizno's terminated Brown Dog in 2003 after six quarters of missed quotas.

Brown Dog claimed that Quizno's termination was unlawful because Quizno's did not have 'good cause' as required under the WFDL. The WFDL states that a grantor may not cancel or materially change an agreement without 'good cause' and that good cause exists if a dealer has not substantially complied with 'the essential and reasonable requirements imposed upon him by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on similarly situated dealers either by their terms or the manner of their enforcement.' Wisc. Stat. '135.02(4).

Brown Dog argued that it was in substantial compliance with the terms of the agreement ' in any given quarter it was only one or two restaurants behind, and often it 'caught up' to the preceding quarter's quota during the next quarter. Further, Brown Dog asserted that it achieved 97.8% compliance if the agreement is evaluated in terms of 'open store days' that the agreement required. The court noted that the agreement did not mention 'open store days,' but did clearly state that the determination as to whether Brown Dog met its development obligations is based on the number of restaurants open and operating at the end of a sales quarter. The parties agreed upon this term at the time of contract formation, and Brown Dog conceded that the quota was a reasonable and essential term of the agreement. Therefore, the only issue was whether six straight quarters of missing the quota by a low number constitutes a failure to substantially comply with the agreement.

The court looked to the express language of the WFDL to provide a time frame within which one could judge whether there was substantial compliance under the agreement. The court reasoned that because the WFDL required 90 days prior written notice of termination and 60 days after notice for the dealer to cure the specified deficiencies, the WFDL indicated that 5 months of noncompliance constituted 'good cause.' The court further supported its conclusion that 5 months of being under quota by even one restaurant is good cause for termination based on the 'hyper-competitiveness of the fast food market,' the criticality to Quizno's business plan of constant, predictable growth, and Wisconsin's pattern jury instruction which states that noncompliance is substantial if it is of such an extent and nature that there has been no 'practical fulfillment' of the terms of the agreement.

Brown Dog next argued that the termination was unlawful because Quizno's had discriminated against it in violation of the WFDL. Specifically, Brown Dog contended that it was unfair and discriminatory that master franchisors that were granted franchise rights during the 1990s (prior to the 2002 policy change) were given more lenient treatment; several of them were not terminated after years of failing to meet their development quotas. But the court explained that the WFDL does not provide franchisees with a statutory right to insist on identical treatment and does not prevent a franchisor from changing a business practice in a fashion that helps one franchisee and hurts another. The court turned up the volume on this point, sardonically stating: 'Brown Dog argues that a scintilla of differentiation mandates judgment in Brown Dog's favor, and toward this end it trumpets each [master franchisor] that received even a quarter's more time as proof positive that unlawful discrimination occurred … It is risible for Brown Dog to imply that after jettisoning its tolerance for mediocrity, Quizno's nonetheless was required ever after to provide each underperforming [master franchisor] with as much cure time as its worst-ever [master developer] had received prior to the policy change.' The court concluded that it is not discriminatory for a franchisor to consider each master franchisor's situation and to decide to keep or terminate a master franchisor based on whether or not it has met newly imposed policies.

Although Quizno's succeeded in convincing the court that Brown Dog was in breach of the agreement, the court rejected Quizno's counterclaim for lost profits. The court further stated that Quizno's had not presented any evidence that it actually incurred any costs or expenses that it otherwise would not have to pay. In fact, the court reasoned that Quizno's may well have come out ahead as a result of the breach and resulting termination of the agreement. But the court nonetheless awarded Quizno's $1 in nominal damages, adding that it trusted that 'Quizno's will be gracious enough not to require payment.'

The Brown Dog court based its decision in large part on the express language of the agreement and the WFDL, rather than crafting its own interpretation of 'substantial compliance.' The Brown Dog decision is good news for many franchisors seeking to terminate master franchisors that are not complying with development quotas, even where the noncompliance is arguably minor. This decision also provides some comfort to franchisors that are seeking to enforce the terms of their agreements after a long period of non-enforcement. The court wisely recognized that a franchisor must have the ability to re-evaluate its policies and establish new policies in light of its evolving business and changing market demands.

Florida Statutes Apply to Claims Made By Out-of-State Franchisees Where Franchisor Is Located in Florida

Ten franchisees filed suit against their franchisor, Lady of America Franchisor Corp. ('LOA'), alleging violations of various Minnesota and Florida laws. Although all of the franchises were not located in Florida and none of the franchisees were residents of Florida, the U.S. District Court for the District of Minnesota denied LOA's motion to dismiss the claims filed under Florida law. Deborah Randall, et al. v. Lady of America Franchise Corp., et al. BFG '13,202 (Oct. 21, 2005).

LOA is a franchisor of health clubs, and the company is based in Florida. The franchisees all purchased franchises from the franchisor beginning in 2002 and operated the franchises outside of Florida. When the franchises did not flourish as originally expected, the franchisees sought to invoke the protections of both Minnesota and Florida law, claiming, among other things, that LOA violated the franchise registration laws of Minnesota, as well as Florida relationship and deceptive and unfair trade practices statutes.

The court rejected LOA's argument that the claims brought by the franchisees under the franchise registration laws of Minnesota were barred by the statute of limitations. However, the interesting part of the decision is how the court handled the franchisees' claims brought under Florida law.

The Florida Franchise Misrepresentation Act ('FFMA') provides a private right of action to any 'person' who shows a violation of the FFMA. Under the FFMA, a person is defined as 'an individual, partnership, corporation, association, or other entity doing business in Florida.' Fla. Stat. '817.416(1)(a). LOA argued that because the franchises are located outside of Florida, the franchisees were not 'doing business in Florida' as required under the FFMA, and therefore the franchisees are not entitled to the protections of the FFMA. Referencing various decisions, the court determined that the FFMA applies if the franchisor does business in Florida ' regardless of the location of the franchises. LOA next argued that the claims under the Florida Deceptive and Unfair Trade Practices Act should be dismissed because the statute only applies to Florida residents, and none of the litigant franchisees are residents of Florida. The court flatly rejected this argument, stating that precedent dictated that the Florida Deceptive and Unfair Trade Practices Act applied to nonresidents.

Franchisors and their legal counsel are aware that statutes granting protections to franchisees in a particular jurisdiction will usually apply to the relationship between a franchisor and a franchisee if the franchise is located in the jurisdiction or if the franchisee is a resident of the jurisdiction. The Randall decision highlights the need to also consider the possibility that the laws of the state in which the franchisor is located will apply.

What Is a Franchise? Connecticut Supreme Court Provides Further Insight

Franchise attorneys continue to debate that ever-present question of how and when a distributorship crosses the line and becomes a franchise. The Connecticut Supreme Court recently tackled this question when it determined that certain distribution and sales representative agreements with a manufacturer were not a franchise within the meaning of the Connecticut Franchise Act. Robert Edmands, et al. v. Cuno, Inc. BFG '13,302 (March 21, 2006).

Robert Edmands ('Edmands') and Cuno, Inc. ('Cuno'), a manufacturer of filtration products, entered into agreements in 1972 under which Edmands and his former business partner were designated as sales representatives and distributors of CUNO products in Connecticut and specified counties in Massachusetts. The court explained that two types of agreements were signed, which included: 1) sales representative agreements, which governed Edmands' solicitation of orders for CUNO products from customers, for which Cuno, following shipment and billing, paid a commission to Edmands; and 2) distributorship agreements, which governed the sale of CUNO products from Cuno to Edmands, which Edmands then in turn sold to customers from Edmands' inventory.

In late 2000, Cuno sent Edmands written notice of cancellation without cause of all of the agreements. Although Cuno believed it was not required to provide a reason for the cancellation, it stated that it believed it would be a better business practice for Cuno to sell its product directly in Edmands' market and that it had been disappointed in Edmands' coverage of the territory.

As a result of the cancellation, Edmands filed a complaint against Cuno in July 2001, alleging that the parties' relationship was that of a franchisor-franchisee, and accordingly, that Cuno's termination of the franchise was without cause and proper notice as required under the Connecticut Franchise Act. Edmands also claimed that Cuno's actions violated the Connecticut Unfair Trade Practices Act ('CUTPA') and implied covenants of good faith and fair dealing. The lower court held that Cuno was entitled to summary judgment on the Connecticut Franchise Act claim because there was no franchise relationship between the parties. Because the claims under CUTPA and the implied covenants of good faith and fair dealing were predicated on the alleged violations of the Connecticut Franchise Act, the lower court also granted summary judgment in favor of Cuno on these claims as well. On appeal, Edmands contended that the lower court improperly concluded that there was no franchise relationship under the Connecticut Franchise Act.

The lower court based its ruling upon a determination that Edmands failed to demonstrate sufficient control by Cuno such that the court could find that there was a marketing plan prescribed in substantial part by Cuno, a necessary element of a 'franchise' as defined by Connecticut statute. The court explained that the factors historically deemed relevant to the inquiry of whether there was a marketing plan prescribed in substantial part by a franchisor are 'whether the franchisor has control over the hours and days of operation, advertising, lighting, employee uniforms, prices, hiring of staff, sales quotas and management training.' The court also noted that it is relevant whether the manufacturer provided the distributor with financial support, and had the right to audit its books or inspect its premises.

The court added that the above list of factors is not definitive. However, when present to a sufficient degree, these factors reflect that the manufacturer has deprived the distributor of the right to exercise independent judgment in conducting its business, and therefore a franchise relationship exists.

Edmands contended that Cuno exercised sufficient control over his business primarily by setting prices, exerting pressure regarding the hiring and retention of staff, controlling inventory, prescribing and monitoring sales through an annual sales planning process, and setting marketing requirements. The court first analyzed the issue of pricing, which it noted is a factor that Connecticut law has identified as 'one of the most significant criteria for determining control.' Despite the fact that Cuno clearly controlled pricing under the express terms of the sales representative agreements, it only provided suggested pricing under the distributorship agreements. The court explained that Edmands must establish that Cuno controls pricing in 'the overall operation of their business pursuant to the agreements collectively.' Based on this rationale, the court held that because Edmands had the freedom to determine the percentage of his business conducted as a distributor, the agreements, when viewed collectively, did not evidence that Cuno controlled pricing.

The court then looked at the issue of whether control was established by Cuno's control over Edmands' hiring of staff. The court quickly found that the evidence supported the lower court's determination that control was not established. Although Cuno repeatedly expressed concerns about Edmands' efforts to replace salespersons over a number of years, only one communication could be viewed as a veiled threat of termination if Edmands' hiring efforts were not successful. The court stated that the fact that Cuno did not take adverse action for several years despite its dissatisfaction with Edmands' staffing efforts indicates there was no meaningful control over Edmands' hiring practices. Similarly, the court found that there was not sufficient evidence that Cuno exercised control over inventory. Although there were suggested inventory levels, the distributorship agreements allowed Edmands to order any quantity of merchandise he chose.

Finally, the court turned to Edmands' claim that Cuno exercised control pursuant to a marketing plan substantially prescribed by Cuno by virtue of an annual 'sales action plan.' The parties met annually to create a plan for customer accounts to be developed. Cuno initially created a list of customer accounts, which was then modified by Edmands. The list was then presented to Edmands' sales staff, which forecasted projected sales and prescribed activities needed to achieve the projections. The court noted that Edmands' testimony was somewhat conflicting as to which party had the final word on the sales projections, but Cuno described the process as 'cooperative.' What the court found dispositive was Cuno's response to Edmands' failure to meet the sales projections. When Edmands' sales fell short of projections, Cuno's typical response was to simply send a quick note stating the amount of the shortfall and asking how Edmands intended to respond. The court stated that it was not enough that Edmands may have reasonably felt under enormous pressure to meet the sales targets. Ultimately, the court found that the marketing plan did nothing more than set sales goals and did not prescribe Edmands' operation of his business.

In conclusion, the court stated '[t]he defendant's ability to exert meaningful control over the plaintiffs' operation of their business is belied by both its inability to compel the plaintiffs to achieve its objectives over a sustained period of time and its inaction when the plaintiffs failed to satisfy those objectives.'

Rupert Barkoff is a partner in Kilpatrick Stockton LLP's Atlanta office, where he chairs the firm's Franchise Team. He is former chair of the American Bar Association's Forum on Franchising. He can be contacted at [email protected]. Kitt Shipe is an associate with Kilpatrick Stockton in Atlanta. She can be contacted by phone at 404-815-6500 or by e-mail at [email protected].