You can read the full article on the Wall Street Journal Online (registration required).

Potentially more significant than the proposed changes to the definition of “place of business” is the additional language that the Bill would tack on to the “general purpose” section of the Franchise Practices Act. The proposed Bill would add the following language:

“…and 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. The legislature finds that these protections are necessary to protect not only retail businesses, but also wholesale distribution franchisees that “through their efforts” enhance the reputation and goodwill of franchisors in this State. Further, the legislature declares that the courts have in some cases more narrowly construed the Franchise Practices Act then was intended by the legislature”.

This additional language should concern franchisors doing business in New Jersey, since it is unnecessary to achieve the expansion to the “place of business” definition that is the focus of the Bill. This tougher language may indicate that there are further changes to the statute being considered. Certainly, the inclusion of the proposed language would be used as a justification by judges to give much broader application to the Act than has been the case in years past.

The two Bills are currently in the initial stage of the legislative process, and will probably not be acted upon until May or June of this year. The current sponsors of the two Bills are Assemblyman Joseph Cryan – District 20 (Union County) and Senator Bob Smith – District 17 (Middlesex and Somerset Counties). The legislation was introduced in the House on March 10, 2008, and in the Senate of March 17, 2008.

A “contract of adhesion” is legal-speak for “non-negotiable” and is “take-it-or-leave-it” in nature.  Most franchise agreements are non-negotiable because it is important for the system to maintain uniform and consistent standards.  However, various courts have deemed franchise agreements to be contracts of adhesion because of the superior bargaining power of the franchisor.  Since most franchise agreements are contracts of adhesion, and if this Bill passes, it will be extraordinarily difficult for franchisors to enforce non-competition agreements among franchisees in Vermont. 

One can only hope that this idea does not spread beyond the borders of the Green Mountain State.    Vermont’s legislature appears intent of following this strange course of action, which is out of step with the other states.  Watch this log for more updates.

Legal Eagles are chosen annually from hundreds of nominations across the country. Legal Eagles are recognized for their strong reputations among their peers, an active involvement in the franchise community through organizations such as the International Franchise Association and the American Association of Franchisors, and their experience and expertise in the franchise industry.

Rachel Lilienthal Stark concentrates her practice in the representation of start-up and emerging franchisors on a variety of issues including compliance with all federal and state regulations, disclosure documents, acquisitions and financing.

Adam J. Siegelheim focuses his practice in the representation of franchisors in various matters, including the preparation of disclosure documents, state registrations, and compliance with applicable federal and state regulations. Mr. Siegelheim is a member of the International Franchise Association, the American Bar Association Forum on Franchising and the New Jersey Bar Association's Franchise Law Committee.

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)

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.

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 impact of this legislation is considerable.   New Jersey courts, like several other states, have held that franchise agreement provisions providing for out-of-state arbitrations are enforceable.  See Allen v. World Inspection Network, Int’l, Inc., 389 N.J.Super.115, 911 A.2d 484 (App. Div. 2006).  Previously, 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).  However, New Jersey courts (as in other states) have distinguished arbitration provisions from other forum selection clauses under the rational that the Federal Arbitration Act preempts state franchise laws.   This legislation would effectively negate the rational applied by the Allen court, as well as other courts throughout the country. 
 
While not much will occur during the remainder of August due to Congress’ summer break, these bills will be moving through the respective Committees at the beginning of September.

The deceptively titled “Employee Free Choice Act of 2007” has been defeated in Congress.  The Act, which would have allowed for, among other things, “card voting” by employees to establish a union (in lieu of an actual, verifiable vote) posed a significant risk to the franchisor community. 

Although strong union interests quickly moved the bill through the House in the Spring, bi-partisan action has effectively defeated the Bill.  Although this is good news for franchisors, the franchisor community needs to watch for any attempts to revive this defeated legislation over the next year leading up to the presidential election campaign.

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.  

You can read the full article here.

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.

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.