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

In a recent unpublished decision by the New Jersey Appellate Division, known as Ashwall and Winograd v. Prestige Management Services, Inc., et als. (Decided October 16, 2007), the Court dealt with a claim by employees of a New Jersey automobile dealership franchise who claimed religious discrimination and “promissory estoppel” against their former employer.  The Plaintiffs, a manager and top-salesman, claimed discrimination based on their religious faith (Judaism) under the New Jersey Law Against Discrimination.  One of them had also claimed that, since he had been given the task of turning a non-profitable dealership “around,” that he was entitled to employment for at least a reasonable period of time. 


His argument was that he had been a very successful manager of another dealership, and by asking him to take on the management of a non-profitable dealership, the franchisee in effect “owed” him employment for a certain period of time.  This claim had been dismissed by the trial judge prior to the trial of the case, and was never heard by a jury.  While there appears to have been some factual merit to the Plaintiffs’ argument, the Appellate Division relied on traditional notions of “at-will” employment and determined that the Court had been correct in dismissing the claim for Promissory Estoppel as they did not find that there was enough evidence that the parties had intended to enter a long-term commitment.  Specifically, the Court was looking for “assurances of employment” that were “clear, specific and definite.”  The franchisee in this case avoided any liability on the “promissory estoppel” claim (though there was a jury verdict against it for discrimination). 


This case highlights the potential for confusion between the franchisee who owns several locations and employees who are “specially assigned” to trouble-shoot certain kinds of jobs.  To avoid this confusion, a franchisee should notify an employee clearly and in writing that their “at-will” employment relationship continues despite the new assignment and that there is no guarantee of continued employment.  Such a written assurance would have most likely avoided litigation in this case and would have saved the franchisee from having to defend such a claim.

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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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Punitive damages are meant to punish the defendant, not compensate the Plaintiff. Generally speaking, they are allowed only in cases where the defendant’s conduct has been especially egregious. As a result, punitive damages are rarely awarded, leading many in the franchise community to disregard the danger of having punitive damages awarded against them.  

The danger, however, is real. A case in point was the recent punitive damages award in Tarr v. Bob Ciasulli's Mack Auto Mall, Inc., 390 N.J.Super. 557, 916 A.2d 484 (A.D. February 2007). According to the published court opinion, this was a sexual harassment case where a relatively manageable award of $25,000.00 against an automobile sales franchisee ballooned into an additional $85,000.00 in punitive damages (and attorneys fees) resulting in a very expensive day for the Franchisee. 

Other recent cases have awarded significantly higher punitive damage awards (though they are often reduced later through the appeal process). The bottom line is that the franchise community, like any other employer, needs to be vigilant in preventing “bad” conduct from becoming “egregious/outrageous” conduct.

Address employee problems quickly and be proactive when an employee complains of discrimination and/or harassment. Taking these steps may very well convince a judge that, while the conduct may merit an award of compensatory damages, punitive damages are not appropriate.  In this way you can help manage risks and keep troublesome litigation from becoming business-killing litigation.

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Believe it or not, franchisors can have more to fear than simply disputes with franchisees.  Sometimes, in the litigious world in which we live, franchisors are confronted with litigation filed by people they have never heard of, relatives, and even “friends” of the franchisee.

Consider this scenario: the franchisor receives legal papers in the mail.  He or she looks quizzically at the name of the Plaintiff and pulls the franchise agreement out of the file cabinet, flipping to the signature page.  The “franchisee” who signed the franchise agreement is not the same person who filed the claim.
How can this be?  Strangely enough, friends and relatives who claim “sweat equity” in the franchise, or who loaned money to the franchisee to purchase the franchise have decided they are entitled to damages for (fill in one of numerous claims here). Luckily for the franchisor, fundamentals of corporate law enter the picture at this point and, with a few exceptions, result in dismissal of the case.  This is due to the general rule that litigation is limited to the parties who actually signed the franchise agreement. 

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Buckeye Check Cashing, Inc. v. Cardegna, 126 S.Ct. 1204 (2006).

This U.S. Supreme Court breathes new life into a 1967 decision known as Prima Paint Corp. v. Flood & Conklin, 388 U.S. 395 (1967) which held that arbitration clauses in franchise agreements are enforceable even where other provisions of the contract are unenforceable. For example, even in situations where the Franchisee claimed that he had been fraudulently induced into signing a Franchise Agreement, the fraud claim would be determined by the arbitrator, and the matter would not be decided by a Court. Various cases subsequent to the Prima Paint decision, notably cases from the 9th Circuit (California), along with numerous state court decisions have “muddied the waters” on this issue. The recent Buckeye decision, however, clearly reaffirms the U.S. Supreme Court’s holding that claims such as unconscionability and fraudulent inducement would have to be resolved by an arbitrator, and that those claims would not provide a mechanism for avoiding arbitration.

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Some Domino’s franchisees have asserted that Domino’s has acted unreasonably in forcing its franchisees to purchase an “exorbitantly expensive” point of sale system that is defective and flawed and designed to collect information that Domino’s “misappropriates” for its own use. In Bores, et al. v. Dominos Pizza LLC, No. 05-cv-2498 (D. Minn. 2005), three Domino’s franchisees, owning twenty-five locations between them, have alleged that Domino’s is requiring its franchisees to purchase point-of-sale systems from restricted sources at uncompetitive pricing, through the unfair and unreasonable pricing of the system in order to make a significant profit.

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

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Keshock v. Carousel Sys., Inc.

A recent case highlights a significant advantage New Jersey franchisees have over franchisees in Pennsylvania. In New Jersey, all contracts (including UFOC's) are subject to implied covenants of "good faith" and "fair dealing." This means that a franchisor's conduct in performing its duties under the UFOC (such as training, advertising, etc.) is subject to a higher standard than simply what is written in the UFOC. For example, if a franchisor states that it will use its "best efforts" to obtain an appropriate location for a franchisee, those "best efforts" will be judged on a "good faith and fair dealing" standard. In contrast, Pennsylvania has no "good faith and fair dealing" requirement regarding performance of UFOC obligations (See recent confirming decision in Keshock v. Carousel Sys., Inc., No. 04-758, 2005 WL 1198867). The bottom line is that franchisees and franchisors in Pennsylvania need to take extra care in drafting UFOC's.

Technorati Tags: New Jersey : Franchise

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Jesse Cohen, et al. v. Stratis Business Centers, Inc.

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

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