Court Watch

Franchisor's Decision Not to Renew Franchisee's Lease

A U.S. District Court in New Jersey has held that if a franchisor, as sublessor of the lease of the franchised location, elects not to renew its master lease, it may terminate a Franchise Agreement denominated as a Commission Marketer Agreement (“CMA”) that was coterminous with the lease. In Luso Fuel Inc. v. BP Products North America, Inc. CCH Bus. Franchise Guide '14,166 (D. N.J., June 29, 2009), the plaintiff became a gasoline station franchise in July 2007 as the transferee of a prior owner. Since 1970, the defendant franchisor and its predecessor had a ground lease on the station premises that it subleased to its franchisee. The ground lease was to expire in December 2008, unless the defendant renewed it, which it had the right to do “at its election.” The CMA stated that the term of the franchise was subject to the term of the ground lease. In June 2008, the plaintiff was notified by the defendant that the defendant had lost its right to continue its tenancy, and, therefore, the CMA would terminate at the end of 2008. The plaintiff spent a considerable sum of money on the location based, it claimed, on the defendant's assurance that the lease would be renewed.

The plaintiff sued the defendant on a variety of theories, including violation of the New Jersey Franchise Practices Act (“NJFPA”), misrepresentation, and breach of the implied covenant of good faith and fair dealing. In a not-for-publication opinion, the court granted the defendant's motion to dismiss, heard as a motion for summary judgment.

The court held that even though the franchisee was in good standing under the CMA and the NJFPA prohibits the termination of a franchise except for good cause, defined as “failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise,” the termination was for good cause. This was because the termination, while not strictly in keeping with the language of the NJFPA, was not arbitrary or capricious since the CMA provided for the termination of the franchise upon the expiration of the ground lease, and that was a clear and nondiscriminatory standard. The defendant merely executed a negotiated contract right not to renew the ground lease, a right of which the plaintiff was aware.

The plaintiff disputed the defendant's claim that the defendant did not have the right to renew the ground lease, and it claimed that the defendant verbally represented that it would renew the lease. The court found that these claims were immaterial since the CMA and the ground lease specifically gave the defendant the right to renew the lease “at its election,” and the merger clause of the CMA precluded reliance on terms not in that agreement, such as the alleged promise to renew.

The claim that the defendant's refusal to renew the lease violated the implied covenant of good faith and fair dealing (which, if found to apply, would prevent the defendant from doing anything to prevent the plaintiff from receiving the benefits of the CMA) was not applicable, according to the court, since the covenant could not be used to alter the express terms of the agreement giving the defendant the right not to renew the lease. Similarly, the plaintiff's misrepresentation claim was found to be without merit since the defendant merely did what it had the right to do under the contract, and reliance on the alleged representation that defendant would renew the lease was, as a result, unwarranted and was prevented from consideration by the parol evidence rule. The fraudulent inducement exception to the parol evidence rule did not apply, according to the court, since the plain terms of the contract contradicted the alleged representation on which the plaintiff claimed to rely.

The lesson: “Get it in writing,” and do not rely on promises not in a contract, particularly if the contract contains terms contrary to the promises on which one's client may seek to rely.

Enforcing Equitable Arbitration Awards

There are very few decisions that guide practitioners about the proper procedures to enforce either interim or final arbitration awards granting equitable relief. While arbitrators have the power under various rules to issue final or interim awards granting equitable or nonmonetary relief (see, e.g., Rule 34, “Interim Measures,” of the Commercial Rules of American Arbitration Association), practitioners have sometimes grappled with the issue of how to put teeth into those awards, especially where those awards may deal with discovery questions. A recent unpublished California appellate case is an excellent example of the advantages that can be obtained by enforcing a nonmonetary award that granted the franchisor immediate possession of the franchised premises on termination of the franchise. (Under Rule 8.1115(a), California Rules of Court, an opinion that is not certified for publication cannot be cited or relied on by a court or party.)

In Mustard Franchise Corporation v. Yek, Incorporated, Bus. Franchise Guide (CCH) '14,175 (Ca. Ct. App., June 24, 2009), the franchisor brought an arbitration proceeding seeking to terminate a franchise. After the arbitrator ruled in favor of the franchisor, the franchisor asked the arbitrator to enforce its repurchase rights and give it immediate possession of the franchised premises. When the franchisee failed to give the franchisor immediate possession, the franchisor filed an action in court for injunctive relief to obtain possession and sought to confirm the arbitration award.

The trial court treated the application for injunctive relief as a petition to confirm the award. By doing so, the franchisor was allowed to sidestep the usual showing to obtain a preliminary injunction or temporary restraining order (“TRO”), such as the posting of a bond, proving likelihood of success on the merits, balancing the hardships and showing irreparable harm. The appellate court affirmed this procedure, finding that, while seeking a preliminary injunction and TRO, the suit was in essence a petition to confirm the award. While the petition was a few days premature under California law (which requires that a petition can only be filed after 10 days have elapsed from the granting of the award, to allow a petition to correct the award), the court gave no weight to the argument because no prejudice was shown.

While the case cannot be cited or relied on (presumably because the court did not believe it paved any new ground), it can be beneficial to show how trial and appellate courts are likely to rule and the advantages with regard to confirmation of nonmonetary arbitration final or interim awards.

Domino's Not Vicariously Liable for Injuries Caused By Delivery Driver

In Viado v. Domino's Pizza, LLC 2009 WL 2766996 (Or. App. Sept. 2, 2009), an intermediate Oregon appellate court has adopted the rule that franchisors are not liable for the tortious acts of their franchisee's employees unless the franchisor controlled the manner of performance of the conduct causing the injury. The result will make it very difficult for an injured plaintiff to prove vicarious liability in Oregon on the part of franchisors and could signal a nationwide trend away from the traditional analysis of determining if the franchisee was simply an “agent” of the franchisor in determining vicarious liability. Some states have adopted the rule that in order to be liable, the franchisor must control the instrumentality that caused the injury. (See Kerl v. Rasmussen, Inc. (Wis. 2004) 682 N.W.2d 328, 342; Exxon Corp. v. Tidwell (Tex. 1993) 867 S.W.2d 19, 23.)

In Viado, the franchisee's employee's automobile collided with a motorcycle driven by the plaintiff. Negligence on the part of the employee was presumed for purposes of Domino's motion for summary judgment. The trial court granted the motion, and this was affirmed on appeal.

The court first determined whether the franchisee was an “employee-agent” or “non-employee agent” of the franchisor, an important distinction because if the franchisee is a “non-employee agent,” the plaintiff would need to show that the franchisor had the right to control the specific conduct giving rise to the tort claim. The Domino's guides given to Domino's franchisees contained a number of “standards” pertaining to driver safety, such as requiring no cell-phone use, no looking for addresses, proof of insurance, good driving record, participation in safe-driving training, etc. The court also examined the franchise agreement and operating manual and pointed to a number of provisions (including dress codes, hours, order preparation and delivery, and advertising) that it found went beyond the stage of setting standards into controlling certain day-to-day operations, and it concluded that a reasonable juror could conclude that Domino's retained sufficient control over certain day-to-day operations of the franchisee to establish an agency relationship. While that determination might establish vicarious liability in other jurisdictions (like California), the court held that it was still necessary to determine whether the relationship created an “employee agency,” in order to automatically foist vicarious liability on the franchisor.

The court determined that the franchisee was not an employee-agent because the franchisor did not retain the right to control the performance of services of the franchisee. Because of the complex nature of the franchise relationship, the franchisee was not deemed an “employee-agent,” even though the franchisor had the right to control many facets of the franchisee's business. Of import to the court's decision were the absence of any compensation from Domino's and the franchisee's retention of rights to assign or transfer the business, the right to place advertisements, and the responsibility for site development.

Even though the franchisee was not an employee-agent, this still did not end the inquiry, since a franchisor could be liable for the acts of its non-employee agents if the franchisor retained the right to control the manner of performance of the conduct in question, meaning that the franchisor must be shown to control the physical details of the manner of performance of the subject conduct. The plaintiff argued that Domino's had this right of control by its creation of detailed standards over the franchisee's drivers. Issuing overall “standards” was not enough, said the court, since none of them related to the physical details of the manner of driving. The fact that Domino's required driver training or imposed driving safety standards was of no import because none of these led to the accident. The court hinted that if Domino's had established particularized driving standards regarding the physical details of driving, such as prescribing the route that drivers must take, liability might have been found.

The decision still leaves some uncertainty as to what it would take to impose liability on the franchisor. Even if Domino's controlled the route (which might be the case with many airport shuttle franchisors), for example, unless the accident resulted from something unsafe as to the route, there still might not be liability. It remains to be seen what will be necessary to impose liability on a non-employee agent.

Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. Charles G. Miller is a shareholder and director of the firm. Hart and Miller can be reached by phone at 415-956-1900.

Franchisor's Decision Not to Renew Franchisee's Lease

A U.S. District Court in New Jersey has held that if a franchisor, as sublessor of the lease of the franchised location, elects not to renew its master lease, it may terminate a Franchise Agreement denominated as a Commission Marketer Agreement (“CMA”) that was coterminous with the lease. In Luso Fuel Inc. v. BP Products North America, Inc. CCH Bus. Franchise Guide '14,166 (D. N.J., June 29, 2009), the plaintiff became a gasoline station franchise in July 2007 as the transferee of a prior owner. Since 1970, the defendant franchisor and its predecessor had a ground lease on the station premises that it subleased to its franchisee. The ground lease was to expire in December 2008, unless the defendant renewed it, which it had the right to do “at its election.” The CMA stated that the term of the franchise was subject to the term of the ground lease. In June 2008, the plaintiff was notified by the defendant that the defendant had lost its right to continue its tenancy, and, therefore, the CMA would terminate at the end of 2008. The plaintiff spent a considerable sum of money on the location based, it claimed, on the defendant's assurance that the lease would be renewed.

The plaintiff sued the defendant on a variety of theories, including violation of the New Jersey Franchise Practices Act (“NJFPA”), misrepresentation, and breach of the implied covenant of good faith and fair dealing. In a not-for-publication opinion, the court granted the defendant's motion to dismiss, heard as a motion for summary judgment.

The court held that even though the franchisee was in good standing under the CMA and the NJFPA prohibits the termination of a franchise except for good cause, defined as “failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise,” the termination was for good cause. This was because the termination, while not strictly in keeping with the language of the NJFPA, was not arbitrary or capricious since the CMA provided for the termination of the franchise upon the expiration of the ground lease, and that was a clear and nondiscriminatory standard. The defendant merely executed a negotiated contract right not to renew the ground lease, a right of which the plaintiff was aware.

The plaintiff disputed the defendant's claim that the defendant did not have the right to renew the ground lease, and it claimed that the defendant verbally represented that it would renew the lease. The court found that these claims were immaterial since the CMA and the ground lease specifically gave the defendant the right to renew the lease “at its election,” and the merger clause of the CMA precluded reliance on terms not in that agreement, such as the alleged promise to renew.

The claim that the defendant's refusal to renew the lease violated the implied covenant of good faith and fair dealing (which, if found to apply, would prevent the defendant from doing anything to prevent the plaintiff from receiving the benefits of the CMA) was not applicable, according to the court, since the covenant could not be used to alter the express terms of the agreement giving the defendant the right not to renew the lease. Similarly, the plaintiff's misrepresentation claim was found to be without merit since the defendant merely did what it had the right to do under the contract, and reliance on the alleged representation that defendant would renew the lease was, as a result, unwarranted and was prevented from consideration by the parol evidence rule. The fraudulent inducement exception to the parol evidence rule did not apply, according to the court, since the plain terms of the contract contradicted the alleged representation on which the plaintiff claimed to rely.

The lesson: “Get it in writing,” and do not rely on promises not in a contract, particularly if the contract contains terms contrary to the promises on which one's client may seek to rely.

Enforcing Equitable Arbitration Awards

There are very few decisions that guide practitioners about the proper procedures to enforce either interim or final arbitration awards granting equitable relief. While arbitrators have the power under various rules to issue final or interim awards granting equitable or nonmonetary relief (see, e.g., Rule 34, “Interim Measures,” of the Commercial Rules of American Arbitration Association), practitioners have sometimes grappled with the issue of how to put teeth into those awards, especially where those awards may deal with discovery questions. A recent unpublished California appellate case is an excellent example of the advantages that can be obtained by enforcing a nonmonetary award that granted the franchisor immediate possession of the franchised premises on termination of the franchise. (Under Rule 8.1115(a), California Rules of Court, an opinion that is not certified for publication cannot be cited or relied on by a court or party.)

In Mustard Franchise Corporation v. Yek, Incorporated, Bus. Franchise Guide (CCH) '14,175 (Ca. Ct. App., June 24, 2009), the franchisor brought an arbitration proceeding seeking to terminate a franchise. After the arbitrator ruled in favor of the franchisor, the franchisor asked the arbitrator to enforce its repurchase rights and give it immediate possession of the franchised premises. When the franchisee failed to give the franchisor immediate possession, the franchisor filed an action in court for injunctive relief to obtain possession and sought to confirm the arbitration award.

The trial court treated the application for injunctive relief as a petition to confirm the award. By doing so, the franchisor was allowed to sidestep the usual showing to obtain a preliminary injunction or temporary restraining order (“TRO”), such as the posting of a bond, proving likelihood of success on the merits, balancing the hardships and showing irreparable harm. The appellate court affirmed this procedure, finding that, while seeking a preliminary injunction and TRO, the suit was in essence a petition to confirm the award. While the petition was a few days premature under California law (which requires that a petition can only be filed after 10 days have elapsed from the granting of the award, to allow a petition to correct the award), the court gave no weight to the argument because no prejudice was shown.

While the case cannot be cited or relied on (presumably because the court did not believe it paved any new ground), it can be beneficial to show how trial and appellate courts are likely to rule and the advantages with regard to confirmation of nonmonetary arbitration final or interim awards.

Domino's Not Vicariously Liable for Injuries Caused By Delivery Driver

In Viado v. Domino's Pizza, LLC 2009 WL 2766996 (Or. App. Sept. 2, 2009), an intermediate Oregon appellate court has adopted the rule that franchisors are not liable for the tortious acts of their franchisee's employees unless the franchisor controlled the manner of performance of the conduct causing the injury. The result will make it very difficult for an injured plaintiff to prove vicarious liability in Oregon on the part of franchisors and could signal a nationwide trend away from the traditional analysis of determining if the franchisee was simply an “agent” of the franchisor in determining vicarious liability. Some states have adopted the rule that in order to be liable, the franchisor must control the instrumentality that caused the injury. ( See Kerl v. Rasmussen, Inc. (Wis. 2004) 682 N.W.2d 328, 342; Exxon Corp. v. Tidwell (Tex. 1993) 867 S.W.2d 19, 23.)

In Viado, the franchisee's employee's automobile collided with a motorcycle driven by the plaintiff. Negligence on the part of the employee was presumed for purposes of Domino's motion for summary judgment. The trial court granted the motion, and this was affirmed on appeal.

The court first determined whether the franchisee was an “employee-agent” or “non-employee agent” of the franchisor, an important distinction because if the franchisee is a “non-employee agent,” the plaintiff would need to show that the franchisor had the right to control the specific conduct giving rise to the tort claim. The Domino's guides given to Domino's franchisees contained a number of “standards” pertaining to driver safety, such as requiring no cell-phone use, no looking for addresses, proof of insurance, good driving record, participation in safe-driving training, etc. The court also examined the franchise agreement and operating manual and pointed to a number of provisions (including dress codes, hours, order preparation and delivery, and advertising) that it found went beyond the stage of setting standards into controlling certain day-to-day operations, and it concluded that a reasonable juror could conclude that Domino's retained sufficient control over certain day-to-day operations of the franchisee to establish an agency relationship. While that determination might establish vicarious liability in other jurisdictions (like California), the court held that it was still necessary to determine whether the relationship created an “employee agency,” in order to automatically foist vicarious liability on the franchisor.

The court determined that the franchisee was not an employee-agent because the franchisor did not retain the right to control the performance of services of the franchisee. Because of the complex nature of the franchise relationship, the franchisee was not deemed an “employee-agent,” even though the franchisor had the right to control many facets of the franchisee's business. Of import to the court's decision were the absence of any compensation from Domino's and the franchisee's retention of rights to assign or transfer the business, the right to place advertisements, and the responsibility for site development.

Even though the franchisee was not an employee-agent, this still did not end the inquiry, since a franchisor could be liable for the acts of its non-employee agents if the franchisor retained the right to control the manner of performance of the conduct in question, meaning that the franchisor must be shown to control the physical details of the manner of performance of the subject conduct. The plaintiff argued that Domino's had this right of control by its creation of detailed standards over the franchisee's drivers. Issuing overall “standards” was not enough, said the court, since none of them related to the physical details of the manner of driving. The fact that Domino's required driver training or imposed driving safety standards was of no import because none of these led to the accident. The court hinted that if Domino's had established particularized driving standards regarding the physical details of driving, such as prescribing the route that drivers must take, liability might have been found.

The decision still leaves some uncertainty as to what it would take to impose liability on the franchisor. Even if Domino's controlled the route (which might be the case with many airport shuttle franchisors), for example, unless the accident resulted from something unsafe as to the route, there still might not be liability. It remains to be seen what will be necessary to impose liability on a non-employee agent.

Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. Charles G. Miller is a shareholder and director of the firm. Hart and Miller can be reached by phone at 415-956-1900.