New Jersey District Court Enforces Arbitration Provision in Franchise Agreement

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In Yogo Factory Franchising, Inc. v. Edmond Ying, et al., US District Court D. New Jersey 2014), the court enforced the arbitration clause and held that the arbitration clause should be applied to all the franchisee's claims arising from the franchise agreement. 

In this case, the franchisee alleged breach of contract, tort and statutory claims against the franchisor. In addition to contending that the franchisor breached the terms of the franchise agreement, the franchisee also alleged that the franchisor committed fraud during the sales process, and did not comply with the FTC disclosure requirements. The franchisee argued that the arbitration clause should be construed narrowly to only apply to the breach of contract claims and not the tort or statutory claims. The franchisee agreed that its claim that the franchisor breached the franchise agreement would be subject to the arbitration clause, but contended that its claims that it was fraudulently induced to enter into the franchise agreement, that the franchisor did not comply with the FTC disclosure laws, etc., were not subject to arbitration. The court disagreed and reasoned that the arbitration clause should be interpreted broadly to apply to all the franchisee's claims, not just the breach of contract. 

Had the court applied the franchisee's reasoning, then it would have created an end run for franchisees to avoid arbitration provisions by simply including tort or statutory claims in its complaints. The court's decision re-affirmed a "presumption in favor of arbitrability when determining both the existence and scope of an arbitration agreement". 

In sum, if a franchise agreement contains an arbitration clause, the parties should continue to expect a New Jersey court to broadly enforce the arbitration provision to all claims arising out of the franchise agreement.

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Insurance Agents did not Qualify as "Franchises" Under the New Jersey Franchise Practices Act

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The New Jersey Appellate Division recently held that insurance agents were not considered "franchises" under the New Jersey Franchise Practices Act (Mario DeLuca v. Allstate New Jersey Insurance Company (Superior Court of New Jersey, Appellate Division No. A-2724-11T4 (2014)).   

The Plaintiff insurance agents were independent insurance agents for Allstate. The court noted that "relationship between Allstate and plaintiffs did not constitute a franchise under the Act because there was no "community of interest" and plaintiffs did not maintain a "place of business" as those terms are used under the Act."  

Under the Act, a franchisee must maintain a fixed geographical location to offer or sell the franchisor's goods or services in order to establish a "place of business" under the New Jersey Franchise Practices Act (the "NJFPA"). In concluding that the plaintiff's did not maintain a "place of business," the court reasoned that the plaintiffs were merely agents and not insurers, authorized to sell insurance in the State of New Jersey. Since the plaintiff agents were not permitted to sell the insurance product themselves, they could not meet the "place of business" requirement under the NJFPA.

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The Differences Between Franchising and Licensing a Business

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In this podcast, Adam Siegelheim, Shareholder in Stark & Stark’s Franchise Group, discusses the differences between franchising and licensing a business, and which option may be best for you. 

You can listen to the full podcast online below.

When is a Franchisor Vicariously Liable for the Actions of its Franchisees?

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In the Matter of the Estate of Stephanie Anderson v. Denny’s Inc., et al. (U.S. District Court, D. New Mexico, November, 2013), an employee was killed during a robbery at the restaurant.  The court denied Denny’s motion for summary judgment and held that the issue of whether Denny’s, as the franchisor, was vicariously liable for the franchisee’s failure to provide a safe working environment would be submitted to the jury to determine.   The court’s reasoning was there were many factors that could potentially demonstrate that Denny’s had control over the franchisee’s operations.  These included (i) a royalty requirement based on sales; (ii) reporting requirements; (iii) requirement to adhere to System standards and attend training, (iv) required approval for site development, construction and remodeling; (v) Denny’s had the right to enter premises to protect its Proprietary Marks; (vi) the right by Denny’s to perform periodic inspections of the restaurant; (vii)  requirement to use certain  food vendors; (viii) the right terminate to the franchise agreement if franchisee does not comply with System standards; (ix) the right of Denny’s to purchase the business at fair market value upon the termination of the Franchise Agreement; (x) operating hours requirement; and (xi) employees had to adhere to Franchisor’s requirements regarding appearance. 

Based on these above factors, the district court concluded that it could not decide, as a matter of law, that the franchisor did not have control over the franchisee’s operations.  What is startling about this opinion is that the court relied on factors which are commonly found in many franchise agreements.   This analytical framework, if adopted by other courts, would essentially make it impossible for franchisors to have vicariously liability claims dismissed on summary judgment.  In this case, if the jury does find that Denny’s is vicariously liable for the franchisee’s failure to maintain a safe working environment, it would send shockwaves throughout the franchise industry, and would have franchisors re-evaluating their franchise agreements.   

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Is Your Non-Compete Enforceable Upon the Expiration of the Franchise Agreement?

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In Hamden vs. Total Car Franchising Corporation (November 22, 2013), the U.S. Court of Appeals in the Fourth Circuit distinguished the term “expiration” from “termination” and held that the non-compete clause was not enforceable against a franchisee after the franchise agreement expired.  

At the expiration of the franchise agreement, the franchisee advised the franchisor that it was not electing the option to renew and intended to operate a competing business.   The non-compete at issue applied to the two year period “following the termination of this Agreement”.

In reaching its decision, the court noted that the franchise agreement did not use the terms “termination” and “expiration” in the same manner.  The terms had separate meanings and were not interchangeable.  Therefore, the court concluded that the non-compete was not applicable once the agreement expired.  

This case serves as a cautionary reminder for franchisors to confirm that their post-term restrictive covenant clauses refer to the termination, expiration and/or non-renewal of the franchise agreement. 

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The Importance of Including an Item 19 in your Franchise Disclosure Document

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In this installment of the Franchise Law Podcast series, Adam Siegelheim, Shareholder in Stark & Stark’s Franchise Group, interviews Steve Beagelman, President of SMB Franchise Advisors. Mr. Siegelheim and Mr. Beeagelman discuss an important component of Franchise Disclosure Documents (FDD), item 19. An item 19 provides prospective franchisees with information relating to the financial performance of the brand and what they can expect in the way of sales, revenues and cost structures.

Mr. Siegelheim and Mr. Beagelman discuss the importance of having an item 19, the different ways you can structure your item 19, and for those who choose not to include an item 19, how that decision could impact the sales process.

You can listen to the full podcast online here.

Damage Control: Crisis management takes planning, managing and communicating

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Adam J. Siegelheim, Shareholder in Stark & Stark's Franchise Group, was featured in the June 2012 Franchise Update article, Damage Control: Crisis management takes planning, managing and communicating.

 

The article discusses how franchise brands can manage their brand's reputation, both online and off, in the world of 24/7 news, online reviews and social media. The article states that the three biggest components of crisis management and damage control are planning, management and communication. All three are critical in order to ensure your brand's longevity.

 

Mr. Siegelheim states, "You want to have a plan in place so if you can't avert a disaster, you can at least hit the ground running." 

 

You can read the full article online here.

U.S. District Court Applies New Jersey Franchise Practices Act and Finds Franchisor's Forum Selection Clause Unenforceable

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A recent decision by the United States District Court (The Business Store, Inc. v. Mail Boxes Etc., Case No. 11-3662 (Wolfson, U.S.D.J.)- February 16, 2012) servers as a reminder that a franchisor’s forum selection clause may not be enforceable in New Jersey. In this case, the plaintiff franchisee filed suit in New Jersey state court for alleged breaches of the franchise agreement. The franchisor removed the case to federal court and sought to transfer venue to the Southern District of California pursuant to the franchise agreement’s forum selection clause.

The District Court held that the franchise agreements were subject to the New Jersey Franchise Practices Act (NJFPA), and that the enforcement of the forum selection clause was against New Jersey public policy. The Court denied the franchisor’s motion to transfer venue. 
 

The District Court relied on the public policy rationale set forth by the New Jersey Supreme Court in Kubis & Persyzky Assoc., Inc. v. Sun Microsystems, Inc, 146 N.J. 176 (1996). In Kubis, the plaintiff brought a claim against a franchisor in state court alleging a violation of the NJFPA. That violation arose from the wrongful termination of the parties’ agreement by the franchisor. Although the franchise agreement contained a forum selection clause, the NJ Supreme Court refused to enforce it based on public policy grounds. The Court held that in cases related to the NJFPA, forum selection clauses are “presumptively invalid because they fundamentally conflict with the basic legislative objectives of protecting franchisees from the superior bargaining power of franchisors and providing swift and effective judicial relief against franchisors that violate the Act.” 
 

The District Court held that the NJFPA demonstrates a strong public policy that New Jersey franchisees have a forum to litigate against franchisors in New Jersey. The NJFPA’s legislative history reflects the concern that franchise agreements are often adhesion contracts in which franchisors pressure franchisees into agreeing to disadvantaged terms. As such, the central purpose of the NJFPA is to “protect franchisees from unreasonable termination by franchisors that may result from a disparity of bargaining power between national and regional franchisors and small franchisees.”   

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Strategies to Develop a Social Media Policy for Your Business

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Adam J. Siegelheim, Shareholder in Stark & Stark’s Franchise Group, authored the article, Strategies to Develop a Social Media Policy for Your Business, for the July 2011 edition of Mercer Business Magazine.

In the article, Mr. Siegelheim the importance of businesses implementing a social media plan in order to avoid negative publicity through social media outlets. Mr. Siegelheim states that companies who do not proactively manage their brand through social media channels risk their online reputation being placed in the hands of disgruntled customers and employees.

You can read the full article online here.
 

Stark & Stark Shareholder Offers New Services for Clients in the Franchise Industry

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Adam J. Siegelheim, Shareholder in Stark & Stark’s Franchise Group, was featured in the July 2011 Franchising Business & Law Alert article, Taking Client Services in Another Direction.

The article discusses Mr. Sigelheim’s idea to offer intensive client services specifically designed to reduce franchisor-franchisee tensions and avoid litigation. In the article, Mr. Siegelheim, talks about the Proactive Franchise Legal Solutions Program the firm offers to clients in the franchise industry.

You can read the full article online here.

 

Older Entries

June 3, 2011 — Stark & Stark Attorney Facilitates Deal With Local Business Owner to Expand into China

May 23, 2011 — 2011 International Franchise Association's Legal Symposium Recap

April 7, 2011 — The Legal Aspects of Franchising.

March 31, 2011 — Using Social Media to Grow Your Brand

March 15, 2011 — How to Use Social Media to Enhance Your Franchise

March 2, 2011 — Stark & Stark Attorney to Present NJICLE Seminar, The Legal Aspects of Franchising

March 1, 2011 — The Psychology of the Successful Franchisee

June 11, 2010 — Are Your Franchisees Your Employees?

May 19, 2010 — Stark & Stark Attorney To Present SCORE Seminar on Legal Considerations for Small Businesses

May 12, 2010 — Live Interview from the 2010 International Franchise Association Convention

April 29, 2010 — SCORE of Princeton to Hold Small Business Fair

April 12, 2010 — How to Implement a Mentor-Protégé Program to Help Your Franchise System Grow

March 9, 2010 — Live Interview from the Franchise Expo South - How to Fund Your Franchise

February 26, 2010 — Live Interview from the 2010 International Franchise Association Convention

February 9, 2010 — Live Interview from the Franchise Expo South - 2010 Economic Outlook

January 12, 2010 — Expanding Your Business Through Franchising

October 8, 2009 — Retrofitness Sued By New Jersey Fitness Club Owners

October 5, 2009 — Small Business Owners Need to Plan for Tax Increases in 2011

October 1, 2009 — Key Legal Considerations when Buying an Existing Business, Buying a Franchise, or Starting a Business From Scratch

August 28, 2009 — Stark & Stark Attorney to Present New Jersey Organization and Sale of Small Business Seminar

August 21, 2009 — Stark & Stark Attorney to Present a How to Start a Business Seminar

August 18, 2009 — Franchisors May Be Held Liable for the "Constructive Termination" of a Franchise

June 5, 2009 — How Do I Franchise My Business

April 1, 2009 — Live Interview From The 2009 International Franchise Expo

March 3, 2009 — Live Interview From The International Franchise Association's 2009 Annual Convention

November 14, 2008 — New Jersey Legal Update Podcast - # 74

October 31, 2008 — Insolvency in Franchise Businesses: Minimizing Risk and Maximizing Recovery Under the Bankruptcy Code

October 28, 2008 — State Committee takes a first look at the "Mobile" Franchise Bill

October 24, 2008 — Bankruptcy: Who's next in line?

October 22, 2008 — New Franchise Disclosure Laws

October 20, 2008 — "Mobile Franchise" Act Moves One Step Closer to Passage

September 29, 2008 — Buying an Existing Business -- What to Consider

August 20, 2008 — Stark & Stark Attorney Discusses Bennigan's Bankruptcy

August 14, 2008 — What Franchisors Can Expect in Bankruptcy

July 16, 2008 — The Franchise Relationship: Trends in the Law

June 25, 2008 — Vermont House Bill Which Would Have Rendered Non-Competes Unenforceable Does Not Pass

June 5, 2008 — How To Start A Business

May 7, 2008 — On Franchising

April 23, 2008 — NJ Legislature to Consider Applying the Franchise Practices Act to "Mobile" Franchises

April 7, 2008 — Vermont Legislature Introduces Legislation That May Render Non-Compete Provisions in Franchise Agreements

April 1, 2008 — Two Stark & Stark Attorneys Named Legal Eagles in Franchise

March 14, 2008 — New Jersey Legal Update - Podcast # 73

January 25, 2008 — New Jersey Legal Update - Podcast # 72

January 24, 2008 — New Jersey Legal Update - Podcast # 71

January 4, 2008 — New Jersey Legal Update - Podcast # 70

December 18, 2007 — At Will Employment Alive and Well in the Franchise Context

October 3, 2007 — Coordinated Review Program Indefinitely Suspended

August 27, 2007 — Do you think you have a deal? Maybe not, according to the Third Circuit.

August 21, 2007 — Congress Considering Legislation That Would Render Arbitration Clauses in Franchise Agreements Unenforceable

August 20, 2007 — The Franchisor Community Dodges Another Legislative Bullet

August 14, 2007 — Big Deal? Domino's Decision could have big impact, or not

August 2, 2007 — Court enters Preliminary Injunction Enjoining New Jersey Lawn Care Franchisee From Operating

July 30, 2007 — Don't Go West, Young Man. Buy Yourself a Franchise Instead

July 23, 2007 — What's in a Name?

July 11, 2007 — New Jersey Appellate Court finds Arbitration Clause Enforceable

June 28, 2007 — Long-Delayed Revisions for Franchise Regs: Many Inconsistencies Between Federal and States' Disclosure Requirements Eliminated

May 16, 2007 — Punitive Damages in Employment Cases Continue to Pose a Danger for the New Jersey Franchise Community

April 13, 2007 — New Jersey Legal Update - Podcast # 64

April 6, 2007 — New Jersey Legal Update - Podcast # 63

April 1, 2007 — Expanding Your Business Through Franchising

March 30, 2007 — Franchisor Being Sued by Franchisee's Mom?

March 16, 2007 — New Jersey Legal Update - Podcast # 61

February 22, 2007 — Restrictive Covenant Agreements For Franchises

January 9, 2007 — Franchise Emphasizes Careful Growth

October 23, 2006 — U.S. Supreme Court Backs Franchisor's Right to Enforce Arbitration Clauses

October 20, 2006 — New Jersey Legal Update - Podcast # 49

September 1, 2006 — New Jersey Legal Update - Podcast # 45

August 31, 2006 — Enforceability of "Third-Party" Non-Competition Agreements

August 23, 2006 — Leveling the Playing Field in Franchising

July 5, 2006 — Domino's Franchisees Seek Delivery From Papa John's

June 1, 2006 — Consider State Laws When Starting a Franchise

April 10, 2006 — Baby Boomers and Franchising

March 31, 2006 — New Jersey Legal Update - Podcast # 32

March 30, 2006 — Franchise Law In New Jersey

March 24, 2006 — New Jersey Legal Update - Podcast # 31

March 1, 2006 — New to Franchising? Beware of New Jersey Employment Law Requirements

February 14, 2006 — In Franchising: State Law Really Does Matter

February 3, 2006 — New Jersey Legal Update - Podcast # 25

January 10, 2006 — New Jersey District Court Finds Forum-Selection Clause Enforceable in Franchise Arbitration

December 15, 2005 — Siegelheim Comments on Post-Katrina Effects on Franchisors

November 21, 2005 — Siegelheim Comments Franchise Dispute

October 13, 2005 — Stark Comments on Running Multiple Businesses

September 2, 2005 — New Jersey Legal Update - Podcast #9

February 24, 2005 — New Jersey Franchises and License Agreements

January 28, 2005 — New Jersey Franchise Agreement Litigation

October 25, 2004 — Employee Theft

October 20, 2004 — Insurance Coverage for Your Business