New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

This week's Franchise Law podcast is an interview with the Vice President of Franchisee Development for Huntington Learning Center, Tom Spadea. The interview took place at February's 2008 International Franchise Association's Annual Convention in Orlando, Florida and discusses franchise development and recruitment strategies, the new Franchise Disclosure Document, and a discussion on how to train your employees on policy and procedure updates.

This week's Franchise Law Podcast is presented by  Adam J. Siegelheim of Stark & Stark's Franchise group.

You can download the New Jersey Legal Update podcast #73 here (8.6 MB)

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This week's Franchise Law podcast is an interview with the President of MFV Expositions, Tom Portesy. The interview discusses the growing rate of franchises in and outside of the United States and what this means for the future of the franchise industry. The interview took place at the 2008 Franchise Expo South, held earlier this month in Miami Beach, Florida.

This week's Franchise Law Podcast is presented by Shareholder of Stark & Stark's Franchise Law Group, Adam J. Siegelheim.

You can download the New Jersey Legal Update podcast #72 here. (3.6 MB)

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This week's Franchise Law podcast is an interview with Chief Franchising Officer of Hollywood Tans, Steve Beagelman. The interview took place at the 2008 Franchise Expo South, held earlier this month in Miami Beach, Florida.

This week's Franchis Law Podcast is presented by Shareholder of Stark & Stark's Franchise Law Group, Adam J. Siegelheim.

You can download the New Jersey Legal Update Podcast # 71 here. (6.8 MB)

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This week's New Jersey Legal Update podcast will discuss the necessary insurance coverage needed for franchisors in order to protect your franchise system against claims. This podcast will address good practices to follow when determining your level of insurance, as well as a discussion on industry standards and the various types of coverage available to you and your business.

This week's New Jersey Legal Update is presented by Adam J. Siegelheim, a member of Stark & Stark's Franchise Group.

You can download the New Jersey Legal Update Podcast # 70 here. (6 MB)

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Franchisors and their counsel are not the only ones scrambling to digest the intricacies of the revised FTC Rule. Citing the challenges in examiners having to learn a new disclosure format, the franchise coordinated review program has been suspended indefinitely.  The suspension went into effect on July 31, 2007. 

The coordinated review program was adopted to streamline the franchise registration process.  It provided franchisors with the ability to simultaneously register their franchise offering in two or more participating states.  A lead examiner would then be assigned to coordinate and oversee the registration process among the states.  Prior to the suspension, 11 states participated in the program. 

The future of the coordinated review program is not known.  However, state administrators plan to re-evaluate the program after July 1, 2008, when the new disclosure format becomes mandatory and examiners will no longer have to review disclosures under both the new and old formats.  

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In a recent decision by the Court of Appeals for the Third Circuit, the court held that the express language of the franchise agreement will govern over any previously agreed upon terms and conditions. 

In Travelodge Hotels, Inc. v Honeysuckle Enterprises, Inc., the franchisee had previously owned and operated an independent hotel in Branson, Missouri.  During discussions with Travelodge, it indicated that it would convert to a Travelodge franchise if it could be assured that such conversion would result in a fifteen percent increase in business.  Sales representatives of Travelodge provided Honeysuckle with a “Monthly Lost Business Summary Report” indicating that Travelodge was unable to fulfill 13,000 reservations in Honeysuckle’s market.  The franchisee and the sales representatives from Travelodge calculated that 5,400 of those reservations would have amounted to a fifteen percent increase in the franchisee’s business.

Honeysuckle subsequently entered into a license agreement with Travelodge.  Although Honeysuckle negotiated three changes from the original license agreement, the final agreement did not include any reference to the condition regarding increased sales.  In contrast, the license agreement expressly disavowed any express or implied covenants or warranties that were not otherwise stated in the agreement.  The license agreement also contained language that the franchisee acknowledge that no salesperson made any promise or provided information about projected sales, revenues, income, etc. 

After entering into the license agreement, the franchisee failed to pay the required royalty payments.  Travelodge filed suit in the United States District Court for the district of New Jersey seeking outstanding fees as well as liquidated damages.  Honeysuckle filed a breach of contract counterclaim, as well as a claim that it was fraudulently induced to enter into the license agreement by Travelodge producing the “Monthly Lost Business Summary Report”, indicating that Honeysuckle would increase its business by at least fifteen percent.  Honeysuckle also produced evidence that the report inaccurately reported the number of room requests.  Notwithstanding, the District Court entered judgment in favor of Travelodge. 

In affirming the District Court’s decision, the Court of Appeals held that if the franchisee believed that Travelodge had guaranteed the fifteen percent increase in business, it would have insisted that such term be included as one of the negotiated changes to the license agreement and would not have signed an agreement that expressly negated any such guarantee.  In addition, the court held that any purported reliance by Honeysuckle on Travelodge’s statements were refuted by the multiple acknowledgments contained in the agreement that no Travelodge representative made any representations about sales and profits. 

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NaturalLawn of America, Inc (NaturalLawn), a national franchisor of organic-based lawn care services obtained a preliminary injunction against a former New Jersey franchisee (the West Group), enjoining it from continuing to operate.  NaturalLawn of America, Inc. v. West Group, LLC, 484 F.Supp.2d 392 (D.MD. 2007). 

The West Group entered into three separate franchise agreements for different territories in New Jersey.  At the expiration of these agreements, the West Group elected not to renew its franchise agreement, claiming that NaturalLawn’s marketing practices violated New Jersey law regarding pesticides. 

Each franchise agreement contained post-termination covenants, including a two-year non-compete.  Notwithstanding, upon the expiration of the franchise agreements, the West Group began operating a substantially similar business in the same territories, providing its customers with a letter indicating that it was now operating under the name “Jersey Green”.

NaturalLawn filed suit in the United States District Court in Maryland.  In granting the preliminary injunction, the court described the West Group’s behavior as  “inexcusable” and “as blatant and unjustified a repudiation of subsisting contractual obligations in a commercial context as had been known to or encountered by this court.”    The court held that NaturalLawn was likely to succeed in proving that its trademark had been infringed, that West Group misappropriated NaturalLawn’s trade secrets, including its customer lists, and that the West Group had violated the non-compete. 

In rejecting the West Group’s argument that NaturalLawn’s marketing practices violated New Jersey law, the court referred to this argument as “deeply misguided” and that the court was “not remotely convinced that New Jersey law is violated by [NaturalLawn’s] business model.”   In addition to not providing the court with sufficient evidence that the marketing practices violated New Jersey law, the court also pointed out that the West Group provided no plausible explanation as to why it continued to operate the franchises for more than two years.  

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Throughout New Jersey and Pennsylvania, the familiar Mobil gas station signage and products are gone, replaced with the new brand Lukoil.  Time will tell whether Getty Petroleum Marketing’s (“Getty”) re-branding efforts will have a positive or negative impact on its franchisees.  However, in the matter captioned, Akshayraj, Inc. v. Getty Petroleum Marketing, Inc., certain New Jersey and Pennsylvania franchisee operators are betting on the latter and have filed suit in the United States District Court in the District of New Jersey against Getty and Lukoil Americas Corporation (“Lukoil”). 

In their Complaint, the franchisee operators allege that the conversion to Lukoil has constructively terminated their franchise agreements, in violation of the Petroleum Marketing Practices Act, the New Jersey Franchise Practices Act and Pennsylvania’s franchise laws.  The plaintiffs contend that the brand change to Lukoil has resulted in the franchisees operating a generic station, as opposed to the “recognizable, identifiable and sought out [Mobil] branded stations.”   The plaintiffs further allege that were being charged the same higher whole sale prices for a product without any customer base or brand loyalty.

Defendants Getty and Lukoil moved to dismiss the Complaint.   The District Court dismissed the franchisee operator’s breach of contract claims, claiming that Getty breached the franchise agreement by refusing to provide Mobil products to its franchisees.  The court noted that the franchise agreements specifically provided Getty with the right, at its sole discretion, to change its brand (including its proprietary marks and products).  

Preliminary, the court also did not find any evidence of record to establish that Lukoil was a generic brand.  However, on the remaining counts dealing with this issue, the court converted the Defendants’ motion to dismiss to a motion for summary judgment.  The franchisee operator’s will now need to demonstrate some material question of fact related to whether Lukoil is a generic brand. 

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In the recent decision, Allen v. World Inspection Network, Int’l, Inc., 389 N.J.Super. 115, 911 A.2d 484 (App. Div. 2006), the New Jersey appellate division held that a franchise agreement provision-requiring that all disputes be arbitrated in the State of Washington- was enforceable.   

Prior to this decision, the New Jersey Supreme Court held that forum-selection clauses in franchise agreements are presumptively invalid, and should not be enforced. Kubis & Perszyk Assocs. v. Sun Microsystems, 146 N.J. 176 (1996).   The Supreme Court’s rational was based, in part, on the presumption that forum-selection clauses are unfairly imposed on the franchisee, as a result of the franchisor’s superior bargaining position.  However, the Allen Court distinguished the Kubis ruling, on the basis that arbitration clauses are governed by the Federal Arbitration Act, which preempts New Jersey law.  

Significantly, the Allen court also rejected the franchisee’s argument that even if the arbitration clause is enforceable, the court could require the parties to arbitrate their claims, but not enforce the portion of the provision which required the parties to arbitrate in Washington.   In rejecting this argument, the court concluded that the location of the arbitration was also an integral part of the arbitration clause and was therefore also governed by the Federal Arbitration Act.  

As noted in a prior blog posting, the United States District Court had also considered this issue and reached the same conclusions. 

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Adam J. Sieglheim, member of Stark & Stark's Franchise group, authored the article, Long-Delayed Revisions for Franchise Regs: Many Inconsistencies Between Federal and States' Disclosure Requirements Eliminated for the June 25 edition of the New Jersey Law Journal.

The article discusses the Federal Trade Commission's announcement of substantial revisions to its franchise disclosure requirements.

You can read the full article here.

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