Court Watch

The franchisee then commenced a lawsuit, alleging breach of contract due to inadequate notice of termination, breach of contract due to premature notice of termination, breach of the duty of good faith and fair dealing, and tying violations under federal antitrust law. The federal court dismissed all of the franchisee's claims on summary judgment.

With respect to the franchisee's breach of contract claims related to termination of the franchise relationship, the court held that the franchisor properly terminated the franchise agreements in July 2007, even though the franchisee was not provided 30 days to cure the final default articulated in the franchisor's June 27, 2007 Notice of Default. Specifically, the court held that each of the franchisee's repeated defaults in the prior months provided an independent basis to immediately terminate the franchise agreements, regardless of the fact that the last default notice articulated the 30-day contractual right to cure that was never given. Therefore, the franchisor had the right to terminate the franchisee's franchise rights because the franchisee repeatedly failed to timely cure his defaults after being given 30 days to cure those earlier independent defaults, regardless of the fact that he was not given the right to cure the default articulated in the June 2007 Notice of Default. The federal court also held the franchisee's insolvency provided an independent basis for immediate termination.

With respect to the franchisee's remaining claims for breach of the duty of good faith and fair dealing and violation of federal antitrust laws, the federal court held that the franchisee released those claims because those claims accrued prior to May 2006, the date the franchisee executed the last General Release of All Claims. In holding the franchisee released these claims, the court specifically found that the franchisee was presumed to have read the General Release and should be bound by any contract he willingly signed. The court also held that the franchisee's arguments of unequal bargaining power and economic duress were not persuasive. Lastly, the court specifically held that a waiver of antitrust violations is not contrary to public policy.

Burda will prove to be a useful case for franchisors faced with a wrongful termination claim or a challenge to a general release signed by the parties to a franchise relationship. Franchisors giving their franchisees numerous opportunities to rectify their defaults may rely upon Burda to defeat a terminated franchisee's claim that the extended opportunities to cure somehow served as a waiver of the franchisor's right to terminate the franchise relationship. Thus, even where a franchisor goes above and beyond the terms of the franchise agreement to preserve the franchise relationship, the court's determination in Burda protects a franchisor's right to terminate for an independent default. Lastly, Burda is useful to address the arguments often raised by franchisees when confronted with a general release: unequal bargaining power, duress or public policy considerations.

A Minute Can Make a Difference

Franchise attorneys understand the importance of filing first in order to litigate a case in their chosen forum, especially in franchise termination situations where both parties believe they have legal claims. The recent case of Motorscope, Inc. v. Precision Tune, Inc., Bus. Franchise Guide ' 14,915 (CCH) (D. Minn. Oct. 4, 2012) highlights the importance of the race to the courthouse, and, with electronic court filings that allow lawsuits to be commenced after the close of business, shows that every minute counts.

Defendant Precision Tune Auto Care System and its wholly owned subsidiary Precision Franchising LLC (collectively “Precision Franchising”) have their principal place of business in Virginia. Precision Franchising is a franchisor of automotive service businesses. Plaintiff Motorscope, Inc. is a Minnesota corporation and has been an area developer for Precision Franchising in Minnesota, North Dakota and South Dakota under an area agreement since 1978. After a series of transfers and attempted transfers of one franchised location (Center 030-03), on April 17, 2012, Precision Franchising sent Motorscope a Notice of Termination, Notice of Expiration and Non-Renewal for Motorsope's area agreement and a Notice of Termination of the Franchise Agreement for Center 030-03. Also on April 17, 2012, Precision Franchising sent Motorscope an Offer of Settlement and Compromise, proposing new agreements between the parties. The parties then entered into a Standstill Agreement in order to discuss settlement possibilities. The Standstill Agreement was set to expire on May 30, 2012 at 5 p.m. EDT and stated that upon expiration “both parties would have all rights to commence any action they had as if the Standstill Agreement had never been entered into.”

The parties did not reach a settlement of their dispute. Therefore, at 5:01 p.m. EDT on May 30, 2012, Motorscope filed a lawsuit in the federal district court in Minnesota, seeking injunctive and declaratory relief or, in the alternative, damages for wrongful termination of the franchise agreement and area agreement. The very next day, on May 31, 2012, Precision Franchising filed a lawsuit in the Eastern District of Virginia for breach of contract damages and declaratory judgment related to the termination of the two agreements. Both parties then moved to dismiss, stay or transfer the other party's case.

The Minnesota court first considered whether it should dismiss or stay the Minnesota case so that the action could proceed in Virginia. Although less than one day separated the filing of the two complaints, the Minnesota court applied the first-filed rule, which provides that in cases of concurrent jurisdiction, “the first court in which jurisdiction attaches has priority to consider the case.” Precision Franchising argued that exceptions to the first-filed rule apply, including that Motorscope acted in bad faith and raced to the courthouse in an attempt to prevent a Virginia forum by filing its case one minute after the expiration of the standstill, and that Motorscope's claims were purely defensive because they sought a declaratory judgment. The Minnesota court disagreed and found no compelling reason to apply any of these exceptions to the first-filed rule. It ruled that Motorscope negotiated in good faith during the standstill period and properly waited until the period expired before commencing a lawsuit. In addition, Motorscope's claims were deemed not purely defensive because they did not merely seek declaratory relief ' they also sought injunctive relief to prevent the termination or, in the alternative, damages for wrongful termination.

The court then considered whether to transfer the case to Virginia under 28 U.S.C. ' 1404(a). Factors commonly evaluated on a motion to transfer venue include the convenience of the parties, the convenience of the witnesses and the interests of justice. Here, the court concluded that because each party's documents and witnesses were in its home state, the convenience of the parties and witnesses did not favor either venue. In addition, whichever party's factual allegations were true, resulting in harm to that party, the injury will be suffered in that party's home state. Therefore, both states had an equal connection to the case. Because the convenience and interests of justice factors were equally balanced between the two states, Precision Franchising could not meet its burden of showing that the analysis favored a transfer, and the motion was denied. This case affirms the importance of filing a lawsuit quickly when negotiations break down or a standstill agreement expires in order to preserve a chosen forum.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. They can be contacted at [email protected] and [email protected], respectively.

Franchisor's Termination Proper After Series of Default Notices

The U.S. District Court for the Southern District of Ohio addressed several issues important to franchisors and their legal counsel last month in Burda v. Wendy's Int'l, Inc., Bus. Franchise Guide (CCH) ' 14,908 (S.D. Ohio Oct. 9, 2012). First, the federal court tackled the issue of whether a franchisor could properly terminate a franchise after providing numerous notices of default over a series of several months, but then terminating the franchise prior to the contractual 30-day cure period set forth in the franchisor's last notice of default. The federal court also addressed whether a franchisee's claims may be dismissed if the franchisee executed a general release during the course of the franchise relationship.

In Burda, a franchisee acquired 13 Wendy's restaurant locations between 1996 and 2007. In connection with the acquisition of each location, the franchisee executed a “General Release of All Claims” against the franchisor and its subsidiaries. Pursuant to the General Releases, the franchisee waived any and all claims that could have been asserted against the franchisor as of the date of the release. In 2004, the franchisee's sales began to suffer, and by early 2006, the franchisee was failing to meet its royalty and fee obligations under each respective franchise agreement. In May 2006, the franchisor allowed the franchisee to defer amounts due under the franchise agreements and, again, required the franchisee to sign another General Release of All Claims. The franchisee continued to fall behind in its obligations under the franchise agreements and, for five consecutive months beginning in February 2007, the franchisor sent notices of default to the franchisee. The franchisor delivered the last Notice of Default on June 27, 2007. In July 2007, the franchisee was handed a “Notice of Default and Termination of Unit Franchise Agreements,” informing the franchisee that the franchisor was immediately terminating all franchise agreements.

The franchisee then commenced a lawsuit, alleging breach of contract due to inadequate notice of termination, breach of contract due to premature notice of termination, breach of the duty of good faith and fair dealing, and tying violations under federal antitrust law. The federal court dismissed all of the franchisee's claims on summary judgment.

With respect to the franchisee's breach of contract claims related to termination of the franchise relationship, the court held that the franchisor properly terminated the franchise agreements in July 2007, even though the franchisee was not provided 30 days to cure the final default articulated in the franchisor's June 27, 2007 Notice of Default. Specifically, the court held that each of the franchisee's repeated defaults in the prior months provided an independent basis to immediately terminate the franchise agreements, regardless of the fact that the last default notice articulated the 30-day contractual right to cure that was never given. Therefore, the franchisor had the right to terminate the franchisee's franchise rights because the franchisee repeatedly failed to timely cure his defaults after being given 30 days to cure those earlier independent defaults, regardless of the fact that he was not given the right to cure the default articulated in the June 2007 Notice of Default. The federal court also held the franchisee's insolvency provided an independent basis for immediate termination.

With respect to the franchisee's remaining claims for breach of the duty of good faith and fair dealing and violation of federal antitrust laws, the federal court held that the franchisee released those claims because those claims accrued prior to May 2006, the date the franchisee executed the last General Release of All Claims. In holding the franchisee released these claims, the court specifically found that the franchisee was presumed to have read the General Release and should be bound by any contract he willingly signed. The court also held that the franchisee's arguments of unequal bargaining power and economic duress were not persuasive. Lastly, the court specifically held that a waiver of antitrust violations is not contrary to public policy.

Burda will prove to be a useful case for franchisors faced with a wrongful termination claim or a challenge to a general release signed by the parties to a franchise relationship. Franchisors giving their franchisees numerous opportunities to rectify their defaults may rely upon Burda to defeat a terminated franchisee's claim that the extended opportunities to cure somehow served as a waiver of the franchisor's right to terminate the franchise relationship. Thus, even where a franchisor goes above and beyond the terms of the franchise agreement to preserve the franchise relationship, the court's determination in Burda protects a franchisor's right to terminate for an independent default. Lastly, Burda is useful to address the arguments often raised by franchisees when confronted with a general release: unequal bargaining power, duress or public policy considerations.

A Minute Can Make a Difference

Franchise attorneys understand the importance of filing first in order to litigate a case in their chosen forum, especially in franchise termination situations where both parties believe they have legal claims. The recent case of Motorscope, Inc. v. Precision Tune, Inc., Bus. Franchise Guide ' 14,915 (CCH) (D. Minn. Oct. 4, 2012) highlights the importance of the race to the courthouse, and, with electronic court filings that allow lawsuits to be commenced after the close of business, shows that every minute counts.

Defendant Precision Tune Auto Care System and its wholly owned subsidiary Precision Franchising LLC (collectively “Precision Franchising”) have their principal place of business in Virginia. Precision Franchising is a franchisor of automotive service businesses. Plaintiff Motorscope, Inc. is a Minnesota corporation and has been an area developer for Precision Franchising in Minnesota, North Dakota and South Dakota under an area agreement since 1978. After a series of transfers and attempted transfers of one franchised location (Center 030-03), on April 17, 2012, Precision Franchising sent Motorscope a Notice of Termination, Notice of Expiration and Non-Renewal for Motorsope's area agreement and a Notice of Termination of the Franchise Agreement for Center 030-03. Also on April 17, 2012, Precision Franchising sent Motorscope an Offer of Settlement and Compromise, proposing new agreements between the parties. The parties then entered into a Standstill Agreement in order to discuss settlement possibilities. The Standstill Agreement was set to expire on May 30, 2012 at 5 p.m. EDT and stated that upon expiration “both parties would have all rights to commence any action they had as if the Standstill Agreement had never been entered into.”

The parties did not reach a settlement of their dispute. Therefore, at 5:01 p.m. EDT on May 30, 2012, Motorscope filed a lawsuit in the federal district court in Minnesota, seeking injunctive and declaratory relief or, in the alternative, damages for wrongful termination of the franchise agreement and area agreement. The very next day, on May 31, 2012, Precision Franchising filed a lawsuit in the Eastern District of Virginia for breach of contract damages and declaratory judgment related to the termination of the two agreements. Both parties then moved to dismiss, stay or transfer the other party's case.

The Minnesota court first considered whether it should dismiss or stay the Minnesota case so that the action could proceed in Virginia. Although less than one day separated the filing of the two complaints, the Minnesota court applied the first-filed rule, which provides that in cases of concurrent jurisdiction, “the first court in which jurisdiction attaches has priority to consider the case.” Precision Franchising argued that exceptions to the first-filed rule apply, including that Motorscope acted in bad faith and raced to the courthouse in an attempt to prevent a Virginia forum by filing its case one minute after the expiration of the standstill, and that Motorscope's claims were purely defensive because they sought a declaratory judgment. The Minnesota court disagreed and found no compelling reason to apply any of these exceptions to the first-filed rule. It ruled that Motorscope negotiated in good faith during the standstill period and properly waited until the period expired before commencing a lawsuit. In addition, Motorscope's claims were deemed not purely defensive because they did not merely seek declaratory relief ' they also sought injunctive relief to prevent the termination or, in the alternative, damages for wrongful termination.

The court then considered whether to transfer the case to Virginia under 28 U.S.C. ' 1404(a). Factors commonly evaluated on a motion to transfer venue include the convenience of the parties, the convenience of the witnesses and the interests of justice. Here, the court concluded that because each party's documents and witnesses were in its home state, the convenience of the parties and witnesses did not favor either venue. In addition, whichever party's factual allegations were true, resulting in harm to that party, the injury will be suffered in that party's home state. Therefore, both states had an equal connection to the case. Because the convenience and interests of justice factors were equally balanced between the two states, Precision Franchising could not meet its burden of showing that the analysis favored a transfer, and the motion was denied. This case affirms the importance of filing a lawsuit quickly when negotiations break down or a standstill agreement expires in order to preserve a chosen forum.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. They can be contacted at [email protected] and [email protected], respectively.