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

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)

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)

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)

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.  

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. 

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.  

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. 

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. 

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

You can read the full article here.

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

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

You can download the New Jersey Legal Update # 61 here. (9.05MB)

Technorati Tags: New Jersey : Podcast :  Franchise : Federal Trade Commission

To minimize disruption to the company’s operations and client relationships, a company can be proactive and have the key employee sign an agreement agreeing to certain restrictive covenants: 

Confidentiality Agreements. While an employee of your company, the employee will likely become familiar with confidential and proprietary information about the company, including its customer base, marketing strategies, supplier information and pricing of products. Confidentiality agreements require the employee to keep the business practices and operations of the company confidential both during and after the term of his or her employment. The confidentiality agreement should also require that the employee return and not remove from the company’s office, any confidential books, records, documents, lists, computer programs and other proprietary information. 

Non-Compete Agreements. This covenant restricts the employee from competing against the company for a certain time period, after the employee’s employment with the company is terminated.

Non-Solicitation of Clients. This covenant prohibits the employee from soliciting any person or business who was a current or prospective client during the employee’s term of his employment with the company. 

Non-Solicitation of Company Employees. This covenant prohibits the employee from soliciting any full or part-time employees of the company for purposes of inducing them to leave the employ or association with the company. In the event the departing employee intends to compete against the company, it will limit his or her ability to solicit other company employees to come work with the terminate employee. 

The enforceability of restrictive covenants generally depend on the geographical scope and duration of the provision.  In general, courts will only enforce restrictive covenants if they are reasonable in nature. Any restrictions on the terminated employee should be limited to only what is necessary to protect the company. For example, if the company’s clients and operations are limited to New Jersey, a court would likely scrutinize an agreement which contained prohibitions for any geographical areas outside of New Jersey, where the company does not operate. 

In addition, the enforceability of the agreement will likely depend on the jurisdiction in which the agreement is being enforced.  In certain states, restrictive covenants are generally unenforceable.   Even when they are enforceable, they are generally disfavored by courts because they interfere with a person’s ability to earn a livelihood. In some states, if a court finds that the restrictive covenant is overly broad, some courts may modify (“blue pencil”) the agreement to make it more reasonable (e.g., reducing the term of the non-compete from three years to one year).  

Provided that they are reasonable in nature, restrictive covenant agreements can be a useful tool to minimize the impact an employee can have on the company after his or her employment is terminated.

Technorati Tags: New Jersey : Restrictive Covenants

To prove their case, the franchisees have subpoenaed the deposition testimony of Papa John’s corporate representative to obtain information about Papa John’s point-of-sale system. The Louisville, Kentucky based Papa John’s immediately filed a motion in Kentucky federal court to quash the subpoena. Papa John’s motion papers asserted that if forced to provide deposition testimony in a dispute between Domino’s and its franchisees, it would be providing its biggest competitor with trade secrets and other confidential information about its system. Papa John’s further argued that the Domino’s franchisees have not demonstrated any substantial need that would justify compelling Papa John’s from disclosing its point-of-sale processes. At this time, neither Domino’s nor its franchisees have filed opposition papers to this motion. 

Technorati Tags: New Jersey : Franchise

You can download the New Jersey Legal Update Podcast # 31 here.(7.2MB)

Technorati Tags: New Jersey : Podcast : Franchise

John MacDonald and Adam Siegelheim of Stark & Stark's Franchise Group discuss a recent securities fraud claim brought by Krispy Kreme franchise owners and the Third Circuit's recent decision which found that arbitration forum-selection clauses in franchise agreements are enforcable.

You can download the New Jersey Legal Update Podcast # 25 here.(15MB)

Technorati Tags: New Jersey : Podcast : Franchise

Under New Jersey law, forum selection provisions in franchise agreements have been rendered enforceable. In Kubis v. Perszyk Assoc. v. Sun Microsystems, 680 A.2d 618 (N.J. 1996), the New Jersey Supreme Court held that the Forum-selection clauses in contracts subject to the New Jersey Franchise Practices Act are presumptively invalid and should not be enforced unless franchisor can satisfy burden of proving that clause was not imposed on the franchisee unfairly on the basis of its superior bargaining position. As a result, franchisors could not enforce their Forum-selection clauses to franchisees located in New Jersey. However, recently, the United States District Court held in Jesse Cohen, et al. v. Stratis Business Centers, Inc., et al.,, in a non-published decision, that the holding in Kubis applied only to judicial forums, as opposed to arbitral forums.

In Jesse Cohen, the franchise agreement contained an arbitration clause that stated in pertinent part, "[A]ny claim...that cannot be settled through negotiations, will be resolved solely and exclusively by binding arbitration initiated at and supervised by the [American Arbitration Association] office nearest to our home office at the time..."

The District Court held that the Federal Arbitration Act ("FAA") preempts Kubis to the extent that it invalidates forum selection clauses. In the past, District Courts sitting in other circuits have reached similar conclusions as the Jesse Cohen Court. However, this is the first decision in the third circuit (where New Jersey sits), to distinguish the New Jersey Supreme Court's ruling as not extending to arbitral forums and being preempted by the pro-arbitration policy of the FAA.

Technorati Tags: New Jersey : Franchise

This week's podcast is presented by Adam Siegelheim, a member of the Firm's Franchise group.

You can download the New Jersey Legal Update Podcast # 9 here(10MB).

To properly evaluate insurance coverage, you must first determine the types of insurance protection that your business will require. Some of the most common types of insurance for businesses include:

- Commercial General Liability
- Property
- Commercial Auto
- Business Interruption
- Workers Compensation
- Director and Officer Liability

The various types of insurance can be confusing and difficult to understand. A business's insurance needs will vary, depending on the nature of your business. However, generally, in deciding what type of insurance you need, you should consider the following:

- The type of items you are seeking to protect
(equipment,inventory, vehicles, buildings, etc.)
- What do you want to be protected from
(law suits, fire, theft, loss of business income, etc.)
- Who would you like to be protected
(Officers and Directors, full-time/part-time employees etc.)

Another key to protecting your business is purchasing policies with sufficient levels of insurance limits. Your insurance premium will be calculated, in part, based on the policy's limits. Your attorney or agent should be able to assist you in deciding how much insurance your business should have.

You must also determine whether your policies contain any exclusions or endorsements (an alteration to your policy that may restrict or decrease your level of coverage) that will bar types of losses that you are trying to insure against. It is not uncommon for a business to submit a claim to its insurance carrier only to have the claim denied as a result of an exclusion. Having gaps in your insurance coverage can be catastrophic and sometimes even fatal for a business. Therefore, you should make sure you understand the various exclusions and conditions that will be included in the policy. In the event that you already have insurance policies in place for your business, you should provide copies of the policies to your attorney to determine whether your existing coverage is offering you adequate protection.

Risk management is a crucial component to running a business that is often overlooked. The failure to obtain adequate insurance could expose your business to unnecessary risks and even place your business in severe jeopardy. However, with the proper insurance coverage, you can operate your business with the peace of mind of knowing that your business is protected from unforeseen accidents and losses.