Court Watch

The court then considered an alternative proposed by the plaintiff: an Issue Class to determine liability on a class-wide basis. This proposal could have led to certification of a limited class for purposes of determining the first element of the deceptive trade practices claim only. The court found that the commonality and typicality requirements of Rule 23(a) and the predominance requirement of Rule 23(b)(3) were met with respect to the liability issues. However, the plaintiffs failed to satisfy the numerosity requirement of Rule 23(a) because they had not shown that there were any other persons who had not reached the age of 21 when the case was commenced, were exposed to McDonald's marketing scheme in New York, ate regularly at McDonald's restaurants, and developed the same medical conditions as the named plaintiffs. Therefore, the court declined to certify the proposed issue class.

Cynthia M. Klaus is a shareholder and Meredith A. Bauer is an associate at Larkin Hoffman in Minneapolis. They can be contacted at [email protected] or 952-896-3392, and [email protected] or 952-896-3263, respectively.

No Affirmative Duty on Franchisor to Enforce Territory Restrictions

A recent case out of the district court in Michigan highlights the tensions that can arise when disputes occur among franchisees. Although not directly involved, a franchisor can unwittingly be pulled into a lawsuit or be subject to a claim based on a franchisee's frustration that it is failing to do enough to resolve the dispute. Cottage Inn Carryout & Delivery, Inc. v. True Freedom Investments, LLC et al., 2010 U.S. Dist. LEXIS 113170 (E.D. Mich. Oct. 20, 2010), began with a dispute among two franchisees related to sales outside of their protected territories, but it ended with a claim against the franchisor for its failure to stop one of its franchisees from encroaching on the protected territory of the other franchisee.

In this case, the franchisee, True Freedom Investments, LLC (“True Freedom”) discovered shortly after acquiring a franchise from Cottage Inn Carryout & Delivery Inc., a pizza franchisor (“Cottage Inn”), that another franchisee in the Cottage Inn system was delivering pizzas and other food items within the protected territory granted to it under the franchise agreement. True Freedom notified Cottage Inn of the issue, and the franchisor subsequently conducted an audit that confirmed the allegation. True Freedom subsequently defaulted on the franchise agreement and ceased operating as a Cottage Inn franchisee.

The court action arose when Cottage Inn made a claim against True Freedom for breach of franchise agreement and demanded payment of amounts due under the agreement. True Freedom responded with a counterclaim alleging that Cottage Inn breached the franchise agreement by failing to take action to stop the other franchisee from making deliveries within its protected territory. Cottage Inn then moved to dismiss the counterclaim for failure to state a claim upon which relief could be granted.

The question before the court in deciding whether to grant the motion to dismiss was whether the franchisor could be affirmatively required to monitor and police its franchisees to ensure that they did not encroach upon each other's protected territories. The court considered the provisions of the franchise agreement in order to determine the franchisor's affirmative obligations, specifically the paragraph granting True Freedom its protected territory. The provision in question provided: “[Cottage Inn] will not establish, or grant a franchise to another person to establish, another Cottage Inn store the physical premises of which are located within the area described in Exhibit B as the 'Protected Territory Area.'”

The court interpreted this provision according to its plain language in order to give effect to the parties' intentions, and it found True Freedom's argument without merit. It rejected True Freedom's argument that the language was ambiguous as to the duties of the parties, and instead found that no language existed in the agreement which imposed an affirmative duty on the franchisor to take action to monitor a franchisee's territory and stop any infringing activity. Rather, it simply stated that the franchisor would not itself establish or grant someone else a franchise within the Protected Territory Area. No further implicit promises could be read into the agreement. Further, an integration clause and a no-oral-modification clause in the franchise agreement made any alleged oral promises or representations between the parties inadmissible.

Notably, the franchisee also argued that the franchisor breached the covenant of good faith and fair dealing, which prohibits any party to a contract to do anything that interferes with the right of the other party to receive the fruits of the contract. This claim was necessarily rejected, as Michigan law does not recognize a cause of action for the breach of the implied covenant of good faith and fair dealing.

This case highlights the importance of the wording of the protected territory provision in a franchise agreement. If a franchisor does not in practice police its franchisees to ensure that they are not making sales outside of their protected territories, the franchisor should review its agreements to ensure that no duty can be found to exist, or is implied in the language, requiring it to take affirmative action to ensure that its franchisees do not encroach on each other's territories.

Class Certification Denied in McDonald's Obesity Case

In the latest decision in the famous case by consumers against McDonald's Corporation, the federal court for the Southern District of New York denied class certification (Pelman v. McDonald's Corp., 2010 WL 4261390 (S.D.N.Y. Oct. 27, 2010)). After a series of dismissals and amended complaints, the plaintiffs alleged that McDonald's engaged in deceptive trade practices prohibited by New York General Business Law ' 349, by representing that its food products were healthier than they actually were. The plaintiffs claimed that the nutritional misrepresentations resulted in adverse medical conditions. The putative class consisted of New York residents who “were exposed to Defendant's deceptive business practices and, as a result thereof, purchased and consumed the Defendant's products in New York State stores/franchises, directly causing economic losses in the form of the financial costs of the Defendant's goods, causing ' detrimental and adverse health effects and/or diseases.”

The plaintiffs argued that the class should be certified under Federal Rule of Civil Procedure 23(b), which requires that “the questions of law or fact common to class members predominate over any questions affecting only individual members. ' ” To analyze the predominance argument, the court considered whether the elements of the deceptive trade practices claim could be decided through class-wide, rather than individual, proof. To prevail on a deceptive trade practice claim, a plaintiff must show that: 1) the defendant made misrepresentations that were likely to mislead a reasonable consumer; 2) the plaintiff was deceived by those misrepresentations; and 3) as a result, the plaintiff suffered injury.

As part of the third element, the plaintiffs must show that the deceptive practice caused an actual injury. Thus, the plaintiffs in this case must show that the representations by McDonald's caused the alleged medical conditions. According to expert testimony, the cause of a person's medical condition depends on a range of individual factors. Because the causation element required individual inquiries, common questions of fact did not predominate, and the court decided that the case was not appropriate for class treatment. Similarly, whether an individual consumer chose to eat McDonald's food based on the nutritional representations by McDonald's, the second element of the deceptive trade practices claim, also was deemed an individual inquiry.

The court then considered an alternative proposed by the plaintiff: an Issue Class to determine liability on a class-wide basis. This proposal could have led to certification of a limited class for purposes of determining the first element of the deceptive trade practices claim only. The court found that the commonality and typicality requirements of Rule 23(a) and the predominance requirement of Rule 23(b)(3) were met with respect to the liability issues. However, the plaintiffs failed to satisfy the numerosity requirement of Rule 23(a) because they had not shown that there were any other persons who had not reached the age of 21 when the case was commenced, were exposed to McDonald's marketing scheme in New York, ate regularly at McDonald's restaurants, and developed the same medical conditions as the named plaintiffs. Therefore, the court declined to certify the proposed issue class.

Cynthia M. Klaus is a shareholder and Meredith A. Bauer is an associate at Larkin Hoffman in Minneapolis. They can be contacted at [email protected] or 952-896-3392, and [email protected] or 952-896-3263, respectively.