Burger King and Tim Hortons Boarder Crossing Merger

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In this podcast, Adam Siegelheim, Shareholder in Stark & Stark’s Franchise Group, is joined by Richard Coyne of WithumSmith+Brown to discuss the recent merger between Burger King and Tim Hortons. Adam and Rick discuss the tax implications of the merge as well as tax inversion deals. 

You can listen to the full podcast online below.

 

Franchisee's Fraud Claim Rejected Under New Jersey Law

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The recent decision of Yogo Factory Franchising, Inc. v. Edmond Ying, et al., (US District Court D. New Jersey 2014), has been the subject of prior blog postings. We have discussed the court's enforcement of the arbitration provision contained in the franchise agreement and the court's re-affirmation that the New Jersey Consumer Fraud Act does not apply to the sale of franchises. Another noteworthy aspect of the court's decision is the discussion of the heightened standard under New Jersey law to successfully assert a fraud claim.

In this case, the franchisee alleged that the franchisor made various misrepresentations during the sales process, including misrepresenting potential earnings, profits, the amount of start-up costs, and the type of support that the franchisor would provide.

 

Franchisee did not plead fraud claims with particularity

The court noted that when asserting fraud under New Jersey law, it must be pleaded with particularity. This is a heightened standard that requires the claimant to be very specific when alleging fraud, and does not permit general and broad claims. For example, when asserting fraud, a franchisee would not only need to assert the substance of the alleged misrepresentation, but also the date, time and place of the misrepresentation.

In this case, the court held that the franchisee's fraud claims did not meet this standard. The franchisee did not specify which member of the franchisor made the misrepresentation and when. The court also noted that the franchisee claimed that the franchisor made material financial performance representations but did not specify exactly when and where they occurred. The court generally viewed the franchisee's fraud claim as just asserting legal conclusions, leaving the franchisor to guess as to the 'who, what, when, where and how of the events at issue".

 

Franchisee's allegations did not rise to level of fraud

Even if the franchisee had properly asserted its claim with particularity, the court concluded that it still failed to make a proper fraud claim. The court noted that the crux of the franchisee's fraud claim was that the franchisor misrepresented the amount of money it would generate and the amount of support it would provide.

In rejecting the fraud claim, the court pointed out the following:

  • Two of the three franchise agreements contained an integration clause stating that the agreement constitutes the entire, full and complete agreement between the parties and the agreement supersedes all prior agreements;
  • The agreements contained a provision stating that no other representations induced the franchisee to execute the franchise agreement;
  • The franchise agreements clearly state that the investment and any success is speculative; and
  • The franchisee executed a disclosure questionnaire stating that the franchisor did not make any promise concerning revenue, profit or operating costs of the franchised locations, except as set forth in Item 19 of the Franchise Disclosure Document.

Based on these factors, the court did not see any basis for fraud. The court also concluded that under established New Jersey law, a party cannot maintain a fraud claim based on the other party's failure to perform under a contract. The remedy is to bring a breach of contract claim – not a fraud claim.

This case underscores that if franchisors engage in some fairly common best practices (integration clauses, disclaimers to Item 19 financial performance representations, utilizing a disclosure questionnaire, etc.), they can reduce the likelihood of a franchisee maintaining a viable fraud claim under New Jersey law.

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Are Fines an Effective Tool for Franchisors?

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A common question that we receive from our franchisor clients is, “Can we update our FDD and franchise agreement permitting the franchisor to impose fines on franchisees for non-compliance?” The simple answer is that while you can update your documents to permit the imposition of fines, the real question franchisors should be asking is, “Are fines an effective tool to minimize instances of non-compliance with System standards?”

Recently, a hotel received unwanted attention for its policy of imposing wedding couples a $500 fine for every negative Yelp or other social media site review posted online by their guests.

As part of the policy posted on the hotel’s website, the rationale behind the fine was explained as follows:

Please know that despite the fact that wedding couples love Hudson and our inn, your friends and families may not,”… “If you have booked the inn for a wedding or other type of event . . . and given us a deposit of any kind . . . there will be a $500 fine that will be deducted from your deposit for every negative review . . . placed on any internet site by anyone in your party.

In response to the attention that this policy has generated, the hotel owners have responded that the policy was posted on its website as a joke, was never enforced and the policy has subsequently been removed from the hotel’s website. The reason this story has gone viral is the irony that a business could think that imposing fines is an effective way to limit negative reviews, rather than working to fix the service and operational issues that may prompt such negative reviews.

This story serves as an over exaggerated example of the ineffectiveness of using fines rather than resolving the underlying issue that is resulting in the behavior the fines are seeking to curtail. In the case of franchise systems, if a franchisor is considering implementing fines, it is usually because they are trying to stop a wide spread issue, and is not in response to some isolated instances involving “rogue” franchisees. This suggests that the franchisor should be focused on why the instances of non-compliance are increasing, rather than hoping that it can ignore the underlying problem and simply levy fines. While imposing a fine may result in short term results for increasing System compliance, it is difficult to imagine that it will achieve long term or permanent results if the underlying issues are not addressed.

Franchisors should also remember that when addressing non-compliance, there is not a “one size fits all” solution. If a franchisee is not following System standards because they are undercapitalized or struggling financially, it seems that imposing a fine would just be piling on to their problem. In that instance, the franchisee would view the franchisor as having no empathy and the relationship would further deteriorate. Similarly, if a franchisee is not following System standards because their business is struggling and they have become despondent and no longer keeping a close eye on their operations, imposing a fine may just lead to a franchisee’s sense of despair and increase their non-compliance.

While the use of fines may be effective in certain instances, it is difficult to see how a wholesale and indiscriminate use of fines would serve as a “silver bullet” to increase overall System compliance with brand standards. It is also difficult to see how fines could be effective in the long run, if the franchisor is not also focused on addressing the underlying behavior and issues that are resulting in the non-compliance.

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NLRB Finds McDonald's and its Franchisees are a Joint Employer

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The National Labor Relations Board Office of the General Counsel has created a firestorm in the franchise community with its recent decision that McDonald’s and its franchisees will be treated as joint employers with respect to allegations that they violated the rights of employees. The NLRB’s decision strikes at the heart of the franchising business model, which is based on franchises being independently owned and operated businesses.

If upheld, the NLRB’s decision could have a substantially adverse impact on the franchise industry and the overall economy. Franchise development leads to economic and job growth. One would expect business owners to be reluctant to expand through franchising if they could potentially be responsible for their franchisee’s employees. This decision could also result in increased pricing of goods and services, as a franchisor would likely need to increase its revenues to deal with this new potential liability. Increased pricing could ultimately result in decreased consumer spending and stall economic growth.

It is worth noting that the NLRB’s decision represents the first step in its administrative process. McDonald’s will have the opportunity to defend itself in an administrative hearing and will also have the opportunity to appeal that decision to the NLRB Board. Even if the NLRB upheld a decision against McDonald’s, it would then need to be enforced by a federal court.

Whether the NLRB’s Office of General Counsel’s decision withstands the scrutiny of its entire board and the federal court system remains to be seen. While this process plays out, a franchisor should take this as a cautionary reminder to regularly review its operations manual and other policies to ensure that it is not unnecessarily exerting too much control over its franchisee’s employees. Unless a policy is absolutely essential to the health of the brand and System, a franchisor should err on the side of being suggestive vs. required when creating policies that impact a franchisee’s employees.

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New Jersey Consumer Fraud Act does not Apply to Sale of Franchises

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In last week's blog posting we discussed the recent decision of Yogo Factory Franchising, Inc. v. Edmond Ying, et al., US District Court D. New Jersey 2014), in which the court enforced the arbitration clause contained in the franchise agreement. Also notable in this case was the court's decision reaffirming that the New Jersey Consumer Fraud Act did not apply to the sale of franchises.

In this case, the franchisee alleged that the franchisor committed fraud during the sale of the franchises. In particular, the franchisee claimed that the franchisor misrepresented the amount the franchisee would earn from the operation of the franchised locations and misrepresented the start-up costs. The franchisee asserted that the franchisor's actions were a violation under the New Jersey Consumer Fraud Act. The court held that the New Jersey Consumer Fraud Act did not apply to the sale of franchises.

In reaching its conclusion, the court noted prior Third Circuit decisions which concluded that franchises are not deemed consumer goods or services under the Consumer Fraud Act. "Franchises are not purchased for consumption but rather purchased for either present value of cash they are expected to produce in the future…and bear no resemblance to the commodities and services listed in the statutory definition of "merchandise" or the rules promulgated by the Division of Consumer Affairs."

If a franchisee was able to convince a court that a franchisor committed a violation of the Consumer Fraud Act, it could result in a court awarding a franchisee treble damages. For this reason, I would anticipate that franchisees will continue to assert claims under the New Jersey Consumer Fraud Act. However, as the Yogo Factory Franchising decision illustrates, these types of claims will likely not prevail in the Third Circuit.

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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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Older Entries

August 21, 2012 — The Importance of Including an Item 19 in your Franchise Disclosure Document

June 15, 2012 — Damage Control: Crisis management takes planning, managing and communicating

March 8, 2012 — U.S. District Court Applies New Jersey Franchise Practices Act and Finds Franchisor's Forum Selection Clause Unenforceable

August 18, 2011 — Strategies to Develop a Social Media Policy for Your Business

July 6, 2011 — Stark & Stark Shareholder Offers New Services for Clients in the Franchise Industry

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