News Briefs

The International Franchise Association (“IFA”), which lobbied against the bill last year, is opposing it again. “From our perspective the bill still contains the same problematic issues that it contained last year, and we have relayed those concerns to lawmakers,” said Dean Heyl, IFA's director of state government relations, public policy & tax counsel.

IFA believes that the bill represents “over-arching government intrusion” into the franchising relationship, and that its specific measures would be particularly harmful to the nearly 83,000 franchise establishments in the state. Heyl said that IFA opposes the renewal proposal because it would lead to “perpetual franchises,” rather than franchise contracts written for a set term of years. As another example, Heyl said that California's code affecting franchising already gives franchisees the right to free association, so the proposal in AB 1141 is unnecessary.

However, Miller said that franchisees need greater protection, especially those who have built up their businesses and unexpectedly find themselves facing an unfair termination or a franchisor's resistance to a sale that would enable the franchisee to recoup his or her investment in a strong business. He added that some of the provisions in AB 1141 are already found in some franchise contracts. “One argument that's been made in the past against the bill is that it's draconian and will thwart franchise growth in California,” said Miller. “But my Subway franchise contract has some of these clauses, like the extended cure period, and Subway is doing just fine in California. It's been one of the fastest-growing franchisors in the state in the last 10 years.”

In the Senate, SB 610 uses the same language as AB 1141, but it only covers franchisees' freedom of association.

Meanwhile, another bill in the Senate, SB 538, is far less controversial and will likely receive support from franchisors and franchisees. This bill would update California's franchise registration rules to match federal rules created in 2007 when the federal Franchise Rule was updated. For example, it would replace the term “Uniform Franchise Offering Circular” in the rules with today's preferred term “Franchise Disclosure Document.” AB 538 also would change the old requirement that an investor be given the pertinent disclosure document from 10 days prior to a franchise purchase to match the federal requirement of 14 days.

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Judge Strikes Down NYC's Large-Drink Ban

On March 11, a New York State judge struck down New York City's ban on the sale of sugary drinks in volumes greater than 16 ounces a day before the ban was to take effect. Judge Milton Tingling of the New York Supreme Court found that the New York City Board of Health does not have the authority to impose the ban and that the provisions of the ban unfairly target some sellers of drinks, but not others. New York City Mayor Michael Bloomberg said that the city would appeal the decision.

“The Portion Cap Rule, if upheld, would create an administrative Leviathan and violate the separation of powers doctrine,” Tingling wrote in his decision. Later in the opinion, he wrote, “It is arbitrary and capricious because it applies to some but not all food establishments in the City, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on re-fills, defeat and/or serve to gut the purpose of the Rule.”

Franchise representatives have made much the same argument. They also pointed out that the ban applied to restaurants, but not to convenience stores and groceries. “We applaud the court's decision to prevent Mayor Bloomberg's unnecessary and ineffective proposal from being enacted and enforced,” said IFA Senior Vice President of Government Relations & Public Policy Judith Thorman. “The proposal was an example of government overreach that unfairly targeted restaurant franchises and would have done little to combat obesity, while placing excessive and arbitrary costs on franchisees throughout New York City.”

IFA is not one of seven plaintiffs in the lawsuit, but IFA is a member of New Yorkers for Beverage Choices, a coalition of businesses that opposes the ban.

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Aaron's and Its Franchisees Sued for Spying on Customers

Aaron's, Inc., one of the nation's largest rent-to-own franchisors, and some of its franchisees are facing new class action lawsuits for allegedly installing software on rented computers that could track customers' usage without their knowledge. According to court filings, the software could track and save passwords, credit card numbers and Social Security numbers. It could also take photos and videos of users. In some instances, the information was allegedly forwarded back to Aaron's electronically.

The first lawsuit was filed in 2011 in Pennsylvania, and it led to a settlement with the Federal Trade Commission on Sept. 25, 2012 (Brian Byrd and Crystal Byrd, et al. v. Aaron's Inc., et al., Civil No. 11-CV-101 in the U.S. District Court for the Western District of Pennsylvania). Pennsylvania is the home of Designerware LLC, one of two companies that created the software, and also a named defendant in the lawsuits. The benefit of the software is that it can help rental stores recover equipment that might not be returned. However, customers were not informed about the software and its tracking capabilities. In the first lawsuit, settlements were reached with the Aaron's franchisee who rented to the plaintiffs, as well as with several other rent-to-own franchises and Designerware LLC. Aaron's Inc. was not involved in the settlement. The new lawsuits were filed in California and Georgia in March 2013 by different plaintiffs, but with the same basic allegations as well as additional claims that some of the franchisee-rented computers were transmitting information to Aaron's Inc.

Aaron's maintains that, because it did not install the software on any computers rented by its company-owned stores, it should not be sued. It would not provide a statement to FBLA, but a search of its website found the following statement that was apparently posted after the first litigation was filed in 2011: “Aaron's, Inc. respects our customers' privacy. Not one of our 1,300+ company-operated stores has used PC Rental Agent or any other product developed by Designerware LLC. The customers referenced in today's filings in the Byrd litigation are customers of certain independently owned and operated Aaron's franchisees and are not customers of Aaron's, Inc. The referenced Designerware emails were caused by actions taken by the certain franchisees, not Aaron's, Inc. Aaron's disagrees with the claims made in the litigation and will defend the litigation vigorously.”

Plaintiffs' attorney Maury A. Herman of Herman, Herman & Katz, LLC in New Orleans, could not be reached by press time.

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Quiznos Franchisees Start Lawsuit Cycle Again

Barely a year after Quiznos settled lawsuits with 18 franchisees for $10 million, the sandwich franchisor is facing a new round of 13 lawsuits from franchisees who are alleging the same violations. At issue are the markups on food and small goods that franchisees are required to purchase from American Food Distributors (“AFD”), a wholly owned subsidiary of Quiznos. AFD was formed in January 2001 to consolidate sourcing of food and goods for franchisees. While these arrangements are not uncommon in franchising, the Quiznos franchisees took issue with “hidden markups” that they claimed improperly transferred more than $100 million per year from their pockets to AFD.

A look at one of the recent lawsuits, filed in the Denver District Court by franchisee Avengers, Inc., and its owners Andre Bonyadian, Tina Alamian and Alice Boniadian, shows that the franchisees are making 28 claims. These include alleged violations of Colorado's Organized Crime Control Act, Consumer Protection Act, breach of contract and conspiracy. The Avengers, Inc. lawsuit alleges that Quiznos promised in its Uniform Franchise Offering Circulars used in the early 2000s to “negotiate purchase arrangements with suppliers for the benefit of Franchisees, which often include volume discounts,” but those discounts did not materialize. Instead, the lawsuit alleges that AFD charged “significant hidden mark-ups to the food, paper, and other supplies that the franchisees were contractually obligated to buy from Quiznos (the 'Mandated Essential Goods').”

Franchisees allege that Quiznos compounded the problem by pushing volume through its franchises by increasing coupon and other discount programs ” ' in order to push more Mandated Essential Goods out the door to the end consumer, thereby increasing AFD's hidden profits ' “

Quiznos provided a single statement to the media and would not elaborate for FBLA. “We believe that these lawsuits are completely without merit,” the statement read. “Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and
helping our franchise owners grow their sales and profits.”

Similar allegations were the basis for a class action lawsuit that was settled in 2010 by about 6,090 franchisees. In that settlement, the plaintiffs received a one-time payment of $3,600 per store, but the sole-source contracts were not modified.

The most recent 13 lawsuits, each filed in December 2012, come from 10 plaintiffs who opted out of the 2010 settlement and three plaintiffs who took the settlement, according to Jeffrey Cohen, Ballard Spahr LLP (Denver), who is representing the new plaintiffs and who represented the prior plaintiffs. Cohen said he could not discuss pending litigation, so he would not discuss why plaintiffs who accepted settlements are now filing new lawsuits.

Defendants in the lawsuits include Quiznos LLC and numerous affiliated companies (such as Quiznos Finance), AFD, and numerous third-party suppliers, lenders and Avenue Capital Group, a private investment firm that bought Quiznos in 2011 when a bankruptcy seemed imminent. Former Quiznos executives Patrick E. Meyers, Richard E. Schaden, Richard F. Schaden, and Steven B. Shaffer are also named as defendants. For the first time, the lawsuits also name third-party distributors with which AFD contracted for the supplies.

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Trimmer Franchisee Bill Filed in CA Assembly

For the second consecutive term, the California Assembly and Senate are considering bills that would strengthen legal protection for franchisees. After a bill was stalled in 2012, Brian Dahle (R-District 1) authored the California Small Business Investment Protection Act, Assembly Bill 1141, which was introduced in March.

AB 1141 covers the same turf as a bill (AB 2305) that passed one Assembly committee last year but died in another committee. However, AB 1141 is trimmed down to focus on just four major aspects of the prior bill that would add language to the California Business and Professions Code. It would require both parties to operate in “good faith in the performance and enforcement of the franchise contract,” specifically including:

• Freedom of association. Protect the formation of independent associations.
• Transfer rights. Prohibit a franchisor from imposing unreasonable conditions on the sale or transfer of a franchise. Require a franchisor to respond, in writing, within 30 days to a franchisee's notification that it has found a buyer for the franchise. Ease transfer of a franchise to a family member who is not currently a co-franchisee.
• Termination. Franchisors could terminate only for “good cause ' [that consists] of a substantial and material breach of any lawful requirement of the franchise agreement ' ” Franchisors would have to give written notice and 60 days to cure (up from the current 30 days), except under certain conditions when terminations could be quicker.
• Renewal rights. A franchisee would have the right to renew a franchise contract if it is in good standing with a franchisor. Renewal would be for the same term period as the prior contract and under the terms being offered to new California franchisees at the time.

“This bill is about one-third the size of last year's legislation. There's nothing about encroachment, sourcing of goods, and other issues that are more complex and controversial. The idea is to create a bill that people can get their hands around and that even the people who might oppose it as legislation would agree that these are industry best practices,” said Keith Miller, a Subway franchise owner who is the chairman of the Coalition of Franchisee Associations (“CFA”). The CFA drafted the initial language for the bill and found a sponsor in the legislature.

The International Franchise Association (“IFA”), which lobbied against the bill last year, is opposing it again. “From our perspective the bill still contains the same problematic issues that it contained last year, and we have relayed those concerns to lawmakers,” said Dean Heyl, IFA's director of state government relations, public policy & tax counsel.

IFA believes that the bill represents “over-arching government intrusion” into the franchising relationship, and that its specific measures would be particularly harmful to the nearly 83,000 franchise establishments in the state. Heyl said that IFA opposes the renewal proposal because it would lead to “perpetual franchises,” rather than franchise contracts written for a set term of years. As another example, Heyl said that California's code affecting franchising already gives franchisees the right to free association, so the proposal in AB 1141 is unnecessary.

However, Miller said that franchisees need greater protection, especially those who have built up their businesses and unexpectedly find themselves facing an unfair termination or a franchisor's resistance to a sale that would enable the franchisee to recoup his or her investment in a strong business. He added that some of the provisions in AB 1141 are already found in some franchise contracts. “One argument that's been made in the past against the bill is that it's draconian and will thwart franchise growth in California,” said Miller. “But my Subway franchise contract has some of these clauses, like the extended cure period, and Subway is doing just fine in California. It's been one of the fastest-growing franchisors in the state in the last 10 years.”

In the Senate, SB 610 uses the same language as AB 1141, but it only covers franchisees' freedom of association.

Meanwhile, another bill in the Senate, SB 538, is far less controversial and will likely receive support from franchisors and franchisees. This bill would update California's franchise registration rules to match federal rules created in 2007 when the federal Franchise Rule was updated. For example, it would replace the term “Uniform Franchise Offering Circular” in the rules with today's preferred term “Franchise Disclosure Document.” AB 538 also would change the old requirement that an investor be given the pertinent disclosure document from 10 days prior to a franchise purchase to match the federal requirement of 14 days.

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Judge Strikes Down NYC's Large-Drink Ban

On March 11, a New York State judge struck down New York City's ban on the sale of sugary drinks in volumes greater than 16 ounces a day before the ban was to take effect. Judge Milton Tingling of the New York Supreme Court found that the New York City Board of Health does not have the authority to impose the ban and that the provisions of the ban unfairly target some sellers of drinks, but not others. New York City Mayor Michael Bloomberg said that the city would appeal the decision.

“The Portion Cap Rule, if upheld, would create an administrative Leviathan and violate the separation of powers doctrine,” Tingling wrote in his decision. Later in the opinion, he wrote, “It is arbitrary and capricious because it applies to some but not all food establishments in the City, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on re-fills, defeat and/or serve to gut the purpose of the Rule.”

Franchise representatives have made much the same argument. They also pointed out that the ban applied to restaurants, but not to convenience stores and groceries. “We applaud the court's decision to prevent Mayor Bloomberg's unnecessary and ineffective proposal from being enacted and enforced,” said IFA Senior Vice President of Government Relations & Public Policy Judith Thorman. “The proposal was an example of government overreach that unfairly targeted restaurant franchises and would have done little to combat obesity, while placing excessive and arbitrary costs on franchisees throughout New York City.”

IFA is not one of seven plaintiffs in the lawsuit, but IFA is a member of New Yorkers for Beverage Choices, a coalition of businesses that opposes the ban.

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Aaron's and Its Franchisees Sued for Spying on Customers

Aaron's, Inc., one of the nation's largest rent-to-own franchisors, and some of its franchisees are facing new class action lawsuits for allegedly installing software on rented computers that could track customers' usage without their knowledge. According to court filings, the software could track and save passwords, credit card numbers and Social Security numbers. It could also take photos and videos of users. In some instances, the information was allegedly forwarded back to Aaron's electronically.

The first lawsuit was filed in 2011 in Pennsylvania, and it led to a settlement with the Federal Trade Commission on Sept. 25, 2012 (Brian Byrd and Crystal Byrd, et al. v. Aaron's Inc., et al., Civil No. 11-CV-101 in the U.S. District Court for the Western District of Pennsylvania). Pennsylvania is the home of Designerware LLC, one of two companies that created the software, and also a named defendant in the lawsuits. The benefit of the software is that it can help rental stores recover equipment that might not be returned. However, customers were not informed about the software and its tracking capabilities. In the first lawsuit, settlements were reached with the Aaron's franchisee who rented to the plaintiffs, as well as with several other rent-to-own franchises and Designerware LLC. Aaron's Inc. was not involved in the settlement. The new lawsuits were filed in California and Georgia in March 2013 by different plaintiffs, but with the same basic allegations as well as additional claims that some of the franchisee-rented computers were transmitting information to Aaron's Inc.

Aaron's maintains that, because it did not install the software on any computers rented by its company-owned stores, it should not be sued. It would not provide a statement to FBLA, but a search of its website found the following statement that was apparently posted after the first litigation was filed in 2011: “Aaron's, Inc. respects our customers' privacy. Not one of our 1,300+ company-operated stores has used PC Rental Agent or any other product developed by Designerware LLC. The customers referenced in today's filings in the Byrd litigation are customers of certain independently owned and operated Aaron's franchisees and are not customers of Aaron's, Inc. The referenced Designerware emails were caused by actions taken by the certain franchisees, not Aaron's, Inc. Aaron's disagrees with the claims made in the litigation and will defend the litigation vigorously.”

Plaintiffs' attorney Maury A. Herman of Herman, Herman & Katz, LLC in New Orleans, could not be reached by press time.

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Quiznos Franchisees Start Lawsuit Cycle Again

Barely a year after Quiznos settled lawsuits with 18 franchisees for $10 million, the sandwich franchisor is facing a new round of 13 lawsuits from franchisees who are alleging the same violations. At issue are the markups on food and small goods that franchisees are required to purchase from American Food Distributors (“AFD”), a wholly owned subsidiary of Quiznos. AFD was formed in January 2001 to consolidate sourcing of food and goods for franchisees. While these arrangements are not uncommon in franchising, the Quiznos franchisees took issue with “hidden markups” that they claimed improperly transferred more than $100 million per year from their pockets to AFD.

A look at one of the recent lawsuits, filed in the Denver District Court by franchisee Avengers, Inc., and its owners Andre Bonyadian, Tina Alamian and Alice Boniadian, shows that the franchisees are making 28 claims. These include alleged violations of Colorado's Organized Crime Control Act, Consumer Protection Act, breach of contract and conspiracy. The Avengers, Inc. lawsuit alleges that Quiznos promised in its Uniform Franchise Offering Circulars used in the early 2000s to “negotiate purchase arrangements with suppliers for the benefit of Franchisees, which often include volume discounts,” but those discounts did not materialize. Instead, the lawsuit alleges that AFD charged “significant hidden mark-ups to the food, paper, and other supplies that the franchisees were contractually obligated to buy from Quiznos (the 'Mandated Essential Goods').”

Franchisees allege that Quiznos compounded the problem by pushing volume through its franchises by increasing coupon and other discount programs ” ' in order to push more Mandated Essential Goods out the door to the end consumer, thereby increasing AFD's hidden profits ' “

Quiznos provided a single statement to the media and would not elaborate for FBLA. “We believe that these lawsuits are completely without merit,” the statement read. “Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and
helping our franchise owners grow their sales and profits.”

Similar allegations were the basis for a class action lawsuit that was settled in 2010 by about 6,090 franchisees. In that settlement, the plaintiffs received a one-time payment of $3,600 per store, but the sole-source contracts were not modified.

The most recent 13 lawsuits, each filed in December 2012, come from 10 plaintiffs who opted out of the 2010 settlement and three plaintiffs who took the settlement, according to Jeffrey Cohen, Ballard Spahr LLP (Denver), who is representing the new plaintiffs and who represented the prior plaintiffs. Cohen said he could not discuss pending litigation, so he would not discuss why plaintiffs who accepted settlements are now filing new lawsuits.

Defendants in the lawsuits include Quiznos LLC and numerous affiliated companies (such as Quiznos Finance), AFD, and numerous third-party suppliers, lenders and Avenue Capital Group, a private investment firm that bought Quiznos in 2011 when a bankruptcy seemed imminent. Former Quiznos executives Patrick E. Meyers, Richard E. Schaden, Richard F. Schaden, and Steven B. Shaffer are also named as defendants. For the first time, the lawsuits also name third-party distributors with which AFD contracted for the supplies.

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