'Ambiguous' Franchise Agreement Sinks Franchisor

According to the plaintiffs, when they confronted the chief executive of PODS about the charges and the terms they had agreed upon, the senior executive simply told them that the contract that had been signed “doesn't work for me.”

The franchisees sued PODS in the U.S. District Court in Atlanta for breach of contract, and won summary judgment and attorneys' fees of more than $1.5 million. The judgment was affirmed in an emphatic July 8, 2015, opinion by the Eleventh Circuit.

The Case

At the heart of the case was a provision in PODS' franchise agreement containing a poorly worded 139-word sentence fragment that the Court of Appeals determined was ambiguous, and commented that it “could be exhibit A in a law school class on bad drafting.” At the outset of the case, PODS seemed to concede that the provision was ambiguous, even referring to it in documents in the case as “unintelligible as written.” Under the law, that then meant the case rested heavily on which side could prove the intent of the parties when they signed the contract.

PODS further argued that its in-house legal liaison employee who negotiated the terms and drafted the addenda to PODS' standard form agreement lacked authority to negotiate and prepare the agreement. PODS also claimed that the final agreement was the result of the employee's “scrivener's error.”

But PODS executives ultimately admitted in deposition testimonies that the legal liaison's job responsibilities specifically included negotiating and preparing these franchise agreements. That left the plaintiffs to focus on proving the parties' intent when they negotiated the terms of the agreement, and that the final documents in fact reflected what the parties meant to include. When a contract is ambiguous, extrinsic evidence of the parties' intent is properly considered by the court.

The Appeal

Hard-fought discovery of key documents by the plaintiffs' attorneys carried the day when the court was presented with correspondence during the negotiations that confirmed both sides intended for the contract to exclude cross-country revenue from royalties. And perhaps most stunningly, the plaintiffs' attorneys presented the court with an affidavit from the in-house legal liaison who drafted the agreements that supported the franchisees' understanding of the contracts. The employee confirmed that the parties negotiated to change the definition of “net sales” ' “so that it not include any revenue generated from the cross-country move program and so that royalties would not be charged on such revenue generated from the cross-country move program.”

The legal liaison, who has since left her employment with PODS, also said that she had never been contacted by any person at PODS about the subject matter of the dispute or her role in negotiating and drafting the documents. According to the former employee, “nobody from PODS has ever asked me what took place during the course of my negotiations with [plaintiffs], why the changes to the franchise agreements as set forth in the respective addenda were made or what those revised terms were intended to mean.”

On the question of the parties' intent, the Eleventh Circuit determined that the “extrinsic evidence is overwhelming. The record establishes beyond any dispute that the representatives on both sides who negotiated these franchise agreements and attempted to commit their agreements to writing intended to exclude cross-country revenues from the definition of 'net sales.'”

The key to the case was producing the affidavit and the correspondence between the parties during negotiations.

Conclusion

There are several takeaways from the victory for franchisees. Sometimes franchisees do not assert their rights because they do not want to get into a fight against a much bigger franchising company that has greater resources. But this case shows that you can win these disputes when you have the law on your side. This is a textbook case in how important it is to conduct negotiations in writing, and how demonstrated exchanges of correspondence between the parties that clearly supported the plaintiffs' understanding of what both parties believed they were signing was the key to success.

Additionally, there was great value of a clause in the contract allowing the prevailing party in litigation to recover fees. Including the prevailing party clause in a contract makes it much easier for a smaller business to stand its ground when it is right.

Scott M. Ratchick is an Atlanta-based attorney with Chamberlain, Hrdlicka, White, Williams & Aughtry. Ratchick, along with the firm's Scott Augustine and Jill Johnson, represented the franchisees in Coyote Portable Storage v. PODS Enterprises. He may be reached at 404-588-3434 or [email protected]. This article also appeared in The Daily Report, an ALM sibling publication of this newsletter.

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a judgment entered in favor of a group of franchisees who sued for breach of contract when the franchisor charged them royalties and fees that the parties negotiated specifically to exclude from their franchise agreements. Coyote Portable Storage v. PODS Enterprises, No. 13-14996 (11th Cir. 2015).

Background

The franchisor, PODS Enterprises, a national moving and storage company, had negotiated with a few of its early franchisees to exclude revenue from a certain segment of the business, the “cross-country moves” segment, from the definition of “net sales” on which PODS charged royalties and fees. But as the business grew, the “cross-country moves” segment turned out to be very lucrative, so despite its agreement, PODS charged royalties and fees on that revenue.

According to the plaintiffs, when they confronted the chief executive of PODS about the charges and the terms they had agreed upon, the senior executive simply told them that the contract that had been signed “doesn't work for me.”

The franchisees sued PODS in the U.S. District Court in Atlanta for breach of contract, and won summary judgment and attorneys' fees of more than $1.5 million. The judgment was affirmed in an emphatic July 8, 2015, opinion by the Eleventh Circuit.

The Case

At the heart of the case was a provision in PODS' franchise agreement containing a poorly worded 139-word sentence fragment that the Court of Appeals determined was ambiguous, and commented that it “could be exhibit A in a law school class on bad drafting.” At the outset of the case, PODS seemed to concede that the provision was ambiguous, even referring to it in documents in the case as “unintelligible as written.” Under the law, that then meant the case rested heavily on which side could prove the intent of the parties when they signed the contract.

PODS further argued that its in-house legal liaison employee who negotiated the terms and drafted the addenda to PODS' standard form agreement lacked authority to negotiate and prepare the agreement. PODS also claimed that the final agreement was the result of the employee's “scrivener's error.”

But PODS executives ultimately admitted in deposition testimonies that the legal liaison's job responsibilities specifically included negotiating and preparing these franchise agreements. That left the plaintiffs to focus on proving the parties' intent when they negotiated the terms of the agreement, and that the final documents in fact reflected what the parties meant to include. When a contract is ambiguous, extrinsic evidence of the parties' intent is properly considered by the court.

The Appeal

Hard-fought discovery of key documents by the plaintiffs' attorneys carried the day when the court was presented with correspondence during the negotiations that confirmed both sides intended for the contract to exclude cross-country revenue from royalties. And perhaps most stunningly, the plaintiffs' attorneys presented the court with an affidavit from the in-house legal liaison who drafted the agreements that supported the franchisees' understanding of the contracts. The employee confirmed that the parties negotiated to change the definition of “net sales” ' “so that it not include any revenue generated from the cross-country move program and so that royalties would not be charged on such revenue generated from the cross-country move program.”

The legal liaison, who has since left her employment with PODS, also said that she had never been contacted by any person at PODS about the subject matter of the dispute or her role in negotiating and drafting the documents. According to the former employee, “nobody from PODS has ever asked me what took place during the course of my negotiations with [plaintiffs], why the changes to the franchise agreements as set forth in the respective addenda were made or what those revised terms were intended to mean.”

On the question of the parties' intent, the Eleventh Circuit determined that the “extrinsic evidence is overwhelming. The record establishes beyond any dispute that the representatives on both sides who negotiated these franchise agreements and attempted to commit their agreements to writing intended to exclude cross-country revenues from the definition of 'net sales.'”

The key to the case was producing the affidavit and the correspondence between the parties during negotiations.

Conclusion

There are several takeaways from the victory for franchisees. Sometimes franchisees do not assert their rights because they do not want to get into a fight against a much bigger franchising company that has greater resources. But this case shows that you can win these disputes when you have the law on your side. This is a textbook case in how important it is to conduct negotiations in writing, and how demonstrated exchanges of correspondence between the parties that clearly supported the plaintiffs' understanding of what both parties believed they were signing was the key to success.

Additionally, there was great value of a clause in the contract allowing the prevailing party in litigation to recover fees. Including the prevailing party clause in a contract makes it much easier for a smaller business to stand its ground when it is right.

Scott M. Ratchick is an Atlanta-based attorney with Chamberlain, Hrdlicka, White, Williams & Aughtry. Ratchick, along with the firm's Scott Augustine and Jill Johnson, represented the franchisees in Coyote Portable Storage v. PODS Enterprises. He may be reached at 404-588-3434 or [email protected]. This article also appeared in The Daily Report, an ALM sibling publication of this newsletter.