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Former Franchisee Held in Contempt; Attorneys Have Trouble With Fee Request
In H&R Block Tax Services, LLC v. Judy Strauss, Bus. Franchise Guide (CCH) '15,593 (USDC, N.D. New York, July 7, 2015), a former H&R Block franchisee was held in contempt of court for not complying with a restraining order issued by the court enforcing the post-termination non-competition covenants in her expired Franchise Agreement. The agreement required, among other things, that for one year after the agreement ended, the franchisee would not solicit her former clients, engage in a competing business within 45 miles of her former H&R Block office, or allow her former office to be used for tax preparation services. In February 2015, Block obtained an order from the court restraining Strauss from violating those provisions. In the instant action, Block sought to hold Strauss in contempt for violating that order.
After the Franchise Agreement ended, Judy Strauss, the former franchisee, set up shop in a town less than 45 miles from her former office, retained her original office and did not modify its sign, which still advertised “tax services.” She ran a newspaper advertisement where her former office was located, promoting her tax-preparation services, and collected material from clients at her former office that she processed at her new location. In her defense, she claimed she exercised good faith in trying to comply with the original order, since her new office was 42.5 miles away from her old office, the weather had been too bad for her to change her sign, and that the newspaper advertisement was prepared weeks before the court's order and she could not control when it was published. She admitted she was receiving tax work at her original office, but was not processing it there. Needless to say, the court was not pleased.
Since there was no question of the defendant's noncompliance, the court looked at her diligence in seeking to comply in a reasonable manner with the original order. Only by such compliance could she avoid being held in contempt and being liable for damages and attorneys' fees.
The defendant knew from her own efforts that her new office was less than 45 miles from her original one. The court indicated that she could have sought a modification of the court's original order reducing the non-competition area, but did not do so. She merely went ahead with her business at the offending location. She also allowed the pending advertisement to go forward without making any effort to have it cancelled or modified. She acknowledged that maintaining the words “tax services” on her sign was in violation of the original order, but she said she would modify the sign right after the hearing. She did not have much of an explanation for taking work at her original office but doing it elsewhere.
In order to fashion an appropriate remedy, the court, noting that all this went on during the 2015 tax season, extended its original order for another year so that it would be effective through the 2016 tax season in order to allow Block to seek to establish a new franchised location in the area of the defendant's original office. The court held that an appropriate measure of damages for the violation of its original order would be the amount of the royalties that would have been otherwise payable to Block had the defendant remained an H&R Block office during the contempt period. Since Block's royalty was 40% of a franchisee's revenue, damages were determined to be $17,200 in lost royalties.
The court next addressed the availability and amount of the attorneys' fees sought by the plaintiff. Citing U.S. Court of Appeals for the Second Circuit precedent, the court found that the willfulness of the defendant and the absence of reasonable diligence in complying with its order justified awarding the plaintiff attorneys' fees as an item of damages. The plaintiff's attorneys asked for $31,3232.70 in fees, including fees for an out-of-area franchise law specialist. The court employed the “lodestar” test in determining a reasonable fee: reasonable number of hours worked based on the nature and complexity of the matter; reasonable hourly rates based on the skill and experience of those who were needed to work on the case; and equitable adjustments determined by the court, such as reductions for excessive or redundant time spent by counsel.
The court found that this was not an overly complex matter and that the plaintiff's attorneys did not present contemporaneous time records justifying their time, merely billing summaries. As such, the court reduced the number of hours for which fees were requested by 30%, partially as a sanction for not producing detailed contemporaneous time records. It knocked another 5% off the number of hours claimed, since it found the time spent on this matter excessive. It next reviewed the experience of each of the people who worked on the case, determined their experience and assigned what it considered to be a reasonable rate for equivalent counsel in the court's district. In reducing the billing rate for the out-of-district franchise law specialist employed by the plaintiff, the court noted that higher rates for such counsel could only be justified by a showing that a substantially better result was likely to be produced by such counsel rather than a competent local counsel, something that was not done here. In sum the court awarded $15,616.40 to the plaintiff for its attorneys' fees.
There were several recent cases involving forum selection provisions, where the franchisor was successful in enforcing a forum selection clause and moving the case from the venue selected by the franchisee to the franchisor's home state. In another recent case, the franchisee was successful in moving the case to its home forum, but there was no forum selection clause in the franchise agreement. What these cases tell us is that forum selection clauses are alive and well and that attempts to challenge them are usually unsuccessful.
In Noble Roman's, Inc. v. B&MP, LLC Bus. Fran. Guide (CCH) '15,631 USDC, S.D. Ind. On Oct. 22, 2015, a pizza franchisor sued its franchisee in the franchisor's home state of Indiana. The franchisee operated in Illinois. The franchisor's suit was for failure to pay royalties, purchasing products from the franchisor that were used in competing products, and Lanham Act violations. A motion to dismiss for improper venue was denied because of the failure to raise it in the initial motion to dismiss. Notwithstanding, the franchisees filed a motion to transfer under 28 U.S.C. ' 1404(a) for the convenience of parties and witnesses. Essentially finding that the witness and party convenience factor was a “wash” because of the close proximity between Illinois and Indiana, the court drilled down to where the events in question occurred. The court chose to ignore the language in the franchise agreement that recited that it was executed and accepted in Indiana, because it apparently was not true.
However, even if that language was accepted, the breach and Lanham Act violations occurred in Illinois. There was no discussion as to whether the failure to pay royalties was deemed to have occurred in Illinois or Indiana, but a good argument could be made that if the royalties were to be paid to the franchisor in Indiana, that's where the breach occurred. Important to the outcome was the court's emphasis on the Illinois Franchise Disclosure Act of 1987 as evidencing a strong interest on the part of Illinois to protect Illinois franchisees and as voiding out of state forum selection clauses. The franchisee was thus able to prevail on its motion.
In Ajax Holdings, LLC v. Comet Cleaners Franchise Group, LLC, Bus. Fran. Guide (CCH) '15,639, USDC, E.D. Ark, W.Div. (Oct. 9, 2015), the franchisee sued the franchisor in the franchisee's home state of Arkansas, claiming misrepresentations in violation of the Arkansas Franchise Practices Act. The franchise agreement had a forum selection clause for Texas, the franchisor's home state. The franchisor moved to dismiss the complaint in the state court for failure of the franchisee to attach the relevant franchise agreements to the complaint. It then removed the case and moved to transfer venue to Texas. The franchisee moved to remand the case, claiming that by moving to dismiss in the state court, the franchisor waived its right to remove the case.
The court denied the motion to remand on the basis that it was not based on the merits of the case, but a procedural failure to attach a relevant document. It thus did not indicate an intent to litigate on the merits that would constitute waiver. With respect to the motion to transfer venue, the court relied upon Atlantic Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. of Texas, 134 S. Ct. 568 (2013), which gives a forum selection clause much weight. First, it shifts the burden on the party opposing transfer when the normal rule is to give preference to the plaintiff's choice of forum. Second, because the parties have agreed to the proper forum, the parties are deemed to have waived private interests such as convenience of parties or witnesses. That leaves the party challenging transfer to few arguments. In the Ajax Holdings case, the franchisee argued that the forum selection clause did not apply because its suit did not arise out of the franchise agreements but rather was based on the franchise protection statute. Not surprisingly, that argument did not get the franchisee very far since the claims were contract-related as existing only by virtue of a franchise relationship.
The only argument left for the franchisee was that the forum selection clause was against public policy because it would displace the protections of the Arkansas Franchise Practices Act. The court rejected this argument because there was nothing in the Act that invalidated forum selection clauses. Another problem with that argument, but not raised by the court or parties, is that it is possible that a Texas court may well apply the Arkansas franchise law under its choice of law rules. The Ajax Holdings case makes clear that in the absence of a state statute prohibiting forum selection clauses, they will be upheld.
On a similar note, a district court in Missouri wasted no time transferring a case brought under various Texas statutes to that state. In Armstrong v. Curves, International, Inc., Bus. Fran. Guide (CCH) '15,634, U.S.D.C., E.D. Mo. (Oct. 15, 2015), numerous groups of franchisees sued for breach of contract and violations of the Texas Business Opportunity Act and Texas Deceptive Trade Practices Act. The court dismissed many of the claims on the basis of the applicable statutes of limitations. With respect to the forum selection clause, the court applied Atlantic Marine, supra. The only argument offered by the franchisees was that the forum selection clause could not be enforced because it was induced by fraud. The problem with that argument was that the fraud charged went to the entirety of the agreement and was not directed to the forum selection clause. In an appropriate case, fraud in the inducement of the forum selection clause itself could block enforcement of it, but this was not such a case.
Lessons to be learned from these cases and Atlantic Marine:
- A motion to dismiss will not lie to enforce a forum selection clause; It must be a motion to transfer venue under 28 U.S.C. ' 1404.
- A motion to transfer venue will likely be granted when there is a forum selection clause. No longer will it be necessary for the moving party to bear the burden of establishing all of the factors set forth under 28 U.S.C. ' 1404 (a).
- Few grounds exist to set aside a forum selection clause.
Former Franchisee Held in Contempt; Attorneys Have Trouble With Fee Request
In H&R Block Tax Services, LLC v. Judy Strauss, Bus. Franchise Guide (CCH) '15,593 (USDC, N.D.
After the Franchise Agreement ended, Judy Strauss, the former franchisee, set up shop in a town less than 45 miles from her former office, retained her original office and did not modify its sign, which still advertised “tax services.” She ran a newspaper advertisement where her former office was located, promoting her tax-preparation services, and collected material from clients at her former office that she processed at her new location. In her defense, she claimed she exercised good faith in trying to comply with the original order, since her new office was 42.5 miles away from her old office, the weather had been too bad for her to change her sign, and that the newspaper advertisement was prepared weeks before the court's order and she could not control when it was published. She admitted she was receiving tax work at her original office, but was not processing it there. Needless to say, the court was not pleased.
Since there was no question of the defendant's noncompliance, the court looked at her diligence in seeking to comply in a reasonable manner with the original order. Only by such compliance could she avoid being held in contempt and being liable for damages and attorneys' fees.
The defendant knew from her own efforts that her new office was less than 45 miles from her original one. The court indicated that she could have sought a modification of the court's original order reducing the non-competition area, but did not do so. She merely went ahead with her business at the offending location. She also allowed the pending advertisement to go forward without making any effort to have it cancelled or modified. She acknowledged that maintaining the words “tax services” on her sign was in violation of the original order, but she said she would modify the sign right after the hearing. She did not have much of an explanation for taking work at her original office but doing it elsewhere.
In order to fashion an appropriate remedy, the court, noting that all this went on during the 2015 tax season, extended its original order for another year so that it would be effective through the 2016 tax season in order to allow Block to seek to establish a new franchised location in the area of the defendant's original office. The court held that an appropriate measure of damages for the violation of its original order would be the amount of the royalties that would have been otherwise payable to Block had the defendant remained an H&R Block office during the contempt period. Since Block's royalty was 40% of a franchisee's revenue, damages were determined to be $17,200 in lost royalties.
The court next addressed the availability and amount of the attorneys' fees sought by the plaintiff. Citing U.S. Court of Appeals for the Second Circuit precedent, the court found that the willfulness of the defendant and the absence of reasonable diligence in complying with its order justified awarding the plaintiff attorneys' fees as an item of damages. The plaintiff's attorneys asked for $31,3232.70 in fees, including fees for an out-of-area franchise law specialist. The court employed the “lodestar” test in determining a reasonable fee: reasonable number of hours worked based on the nature and complexity of the matter; reasonable hourly rates based on the skill and experience of those who were needed to work on the case; and equitable adjustments determined by the court, such as reductions for excessive or redundant time spent by counsel.
The court found that this was not an overly complex matter and that the plaintiff's attorneys did not present contemporaneous time records justifying their time, merely billing summaries. As such, the court reduced the number of hours for which fees were requested by 30%, partially as a sanction for not producing detailed contemporaneous time records. It knocked another 5% off the number of hours claimed, since it found the time spent on this matter excessive. It next reviewed the experience of each of the people who worked on the case, determined their experience and assigned what it considered to be a reasonable rate for equivalent counsel in the court's district. In reducing the billing rate for the out-of-district franchise law specialist employed by the plaintiff, the court noted that higher rates for such counsel could only be justified by a showing that a substantially better result was likely to be produced by such counsel rather than a competent local counsel, something that was not done here. In sum the court awarded $15,616.40 to the plaintiff for its attorneys' fees.
There were several recent cases involving forum selection provisions, where the franchisor was successful in enforcing a forum selection clause and moving the case from the venue selected by the franchisee to the franchisor's home state. In another recent case, the franchisee was successful in moving the case to its home forum, but there was no forum selection clause in the franchise agreement. What these cases tell us is that forum selection clauses are alive and well and that attempts to challenge them are usually unsuccessful.
In Noble Roman's, Inc. v. B&MP, LLC Bus. Fran. Guide (CCH) '15,631 USDC, S.D. Ind. On Oct. 22, 2015, a pizza franchisor sued its franchisee in the franchisor's home state of Indiana. The franchisee operated in Illinois. The franchisor's suit was for failure to pay royalties, purchasing products from the franchisor that were used in competing products, and Lanham Act violations. A motion to dismiss for improper venue was denied because of the failure to raise it in the initial motion to dismiss. Notwithstanding, the franchisees filed a motion to transfer under 28 U.S.C. ' 1404(a) for the convenience of parties and witnesses. Essentially finding that the witness and party convenience factor was a “wash” because of the close proximity between Illinois and Indiana, the court drilled down to where the events in question occurred. The court chose to ignore the language in the franchise agreement that recited that it was executed and accepted in Indiana, because it apparently was not true.
However, even if that language was accepted, the breach and Lanham Act violations occurred in Illinois. There was no discussion as to whether the failure to pay royalties was deemed to have occurred in Illinois or Indiana, but a good argument could be made that if the royalties were to be paid to the franchisor in Indiana, that's where the breach occurred. Important to the outcome was the court's emphasis on the Illinois Franchise Disclosure Act of 1987 as evidencing a strong interest on the part of Illinois to protect Illinois franchisees and as voiding out of state forum selection clauses. The franchisee was thus able to prevail on its motion.
In Ajax Holdings, LLC v. Comet Cleaners Franchise Group, LLC, Bus. Fran. Guide (CCH) '15,639, USDC, E.D. Ark, W.Div. (Oct. 9, 2015), the franchisee sued the franchisor in the franchisee's home state of Arkansas, claiming misrepresentations in violation of the Arkansas Franchise Practices Act. The franchise agreement had a forum selection clause for Texas, the franchisor's home state. The franchisor moved to dismiss the complaint in the state court for failure of the franchisee to attach the relevant franchise agreements to the complaint. It then removed the case and moved to transfer venue to Texas. The franchisee moved to remand the case, claiming that by moving to dismiss in the state court, the franchisor waived its right to remove the case.
The court denied the motion to remand on the basis that it was not based on the merits of the case, but a procedural failure to attach a relevant document. It thus did not indicate an intent to litigate on the merits that would constitute waiver. With respect to the motion to transfer venue, the court relied upon
The only argument left for the franchisee was that the forum selection clause was against public policy because it would displace the protections of the Arkansas Franchise Practices Act. The court rejected this argument because there was nothing in the Act that invalidated forum selection clauses. Another problem with that argument, but not raised by the court or parties, is that it is possible that a Texas court may well apply the Arkansas franchise law under its choice of law rules. The Ajax Holdings case makes clear that in the absence of a state statute prohibiting forum selection clauses, they will be upheld.
On a similar note, a district court in Missouri wasted no time transferring a case brought under various Texas statutes to that state. In Armstrong v. Curves, International, Inc., Bus. Fran. Guide (CCH) '15,634, U.S.D.C., E.D. Mo. (Oct. 15, 2015), numerous groups of franchisees sued for breach of contract and violations of the Texas Business Opportunity Act and Texas Deceptive Trade Practices Act. The court dismissed many of the claims on the basis of the applicable statutes of limitations. With respect to the forum selection clause, the court applied Atlantic Marine, supra. The only argument offered by the franchisees was that the forum selection clause could not be enforced because it was induced by fraud. The problem with that argument was that the fraud charged went to the entirety of the agreement and was not directed to the forum selection clause. In an appropriate case, fraud in the inducement of the forum selection clause itself could block enforcement of it, but this was not such a case.
Lessons to be learned from these cases and Atlantic Marine:
- A motion to dismiss will not lie to enforce a forum selection clause; It must be a motion to transfer venue under 28 U.S.C. ' 1404.
- A motion to transfer venue will likely be granted when there is a forum selection clause. No longer will it be necessary for the moving party to bear the burden of establishing all of the factors set forth under 28 U.S.C. ' 1404 (a).
- Few grounds exist to set aside a forum selection clause.
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