Ten cases rise to top for two attorneys
There were no blockbusters this past year in franchise legal cases, but rather a number of decisions that illuminated the need for attorneys to be vigilant, according to two franchise attorneys.
Earsa Jackson of Strasburger & Price in Dallas, and David Gurnick of Lewitt Hackman in Encino, California, will present their picks for the most important developments at the American Bar Association Forum on Franchising in November. Franchise Times asked them to preview the cases they believe made up the year’s top 10, and they kindly obliged.
“A good many of these cases were reminders of best practices,” said Jackson, who added “the difficulty was picking out 10.” Here goes:
1. What is a franchise?
“Each year the question comes up over and over again, whether an arrangement is actually a franchise,” said Jackson, mostly because if it is, franchisees have protections under various rules. In Ervin Equipment v. Wabash National, the franchisee asserted claims under two different tests, under a franchise relationship statute and then under an unfair practices act. In this case one court ruled in opposite ways on the two tests. The lesson for lawyers: “Don’t just look at the franchise relationship test; obviously look at other statutory items where you can get relief,” Jackson advised.
2. Watch for typos
A typographical error lies at the crux of Wow Café and Wingery Franchising Account. An area development agreement said the franchisor was going to sell a minimum number of franchises in the geography. Typically, however, it is the franchisee that takes on that obligation. “The trial court said there was a mutual mistake, and it was obviously a typo,” said Gurnick. But on appeal to the Fifth Circuit, the court reversed. “It’s a scary decision and an alert to lawyers drafting agreements, because everybody being human, and franchise agreements being long, it’s possible to have a human typographic mistake in an agreement,” he said. “If the court then interprets that as being intended language, the roles of the parties could be dramatically changed.”
3. Disclaimers and waivers
Yumilicious Franchise v. Barrie, Glynn and Why Not makes the list because “every year there’s a question whether disclaimers or waivers are effective or not.” A franchisee brought counterclaims against the franchisor, claiming there were misrepresentations that amounted to fraud. But the counterclaim was thrown out, primarily because of disclaimer language in the agreement that the franchisee had signed. “Sometimes courts will not throw out fraud-based claims based on disclaimers,” said Jackson. “Having the Fifth Circuit say this disclaimer was dispositive was a big win for the franchisor.”
4. Are your trade secrets secret?
In Rib City Franchising v. Bowen, the franchisee stops paying and the franchise agreement gets terminated. But the franchisee changes the restaurant name from Rib City to Pig City, and on the website keeps up links they were using before as Rib City, and they continue using recipes from the prior business. “The franchisor goes to court and partially gets an injunction,” said Gurnick, so the former franchisee has to take down the website pages and social media that had references to Rib City. But the court doesn’t stop them from operating under the name Pig City. “The court is saying the franchisor has not shown sufficiently that the trade secrets were infringed or that the recipes were proprietary,” said Gurnick. “That’s a troubling development from the franchisor side.”
5. A rare trip to jail
In Meineke Car Care Centers v. Asar Inc., the franchisee was ordered to stop using the marks, return the manual and transfer the telephone number, but the former franchisee basically ignored the court’s order, said Jackson. “The franchisee was ordered to pay $1,000 a day and provide some records, and the franchisee snubbed all of that.” Then the court directed the U.S. Marshall to arrest the franchisee. “That’s an extreme case,” Jackson said. “You typically don’t see that there’s an order that a franchisee gets arrested and thrown in jail.”
6. Forum selection matters
Here is an important drafting tip from Gurnick: Make forum selection clauses mandatory for ultimate strength. The case is Cluck-U-Chicken v. Cluck U Corp., which Gurnick calls an example of the “fallout” from the U.S. Supreme Court decision in 2013 in a case known as Atlantic Marine. “Everybody is aware how divided the Supreme Court is,” Gurnick said, with all sorts of 4-5 or now 4-4 decisions. “This was a 9 to 0 decision that a forum selection clause in an agreement is enforceable.”
Today, courts are “somewhat routinely” enforcing forum selection clauses, but in the Cluck U case, the forum selection clause was permissive rather than mandatory and the court refused to change the venue. Why does the venue matter? “It’s really important, so you know the judges,” Jackson explained. “The judge or judges hearing the cases is very important.”
7. Beyond joint employer
Many cases rattled the joint employer cage—that is, holding the franchisor responsible for labor law violations on the part of its franchisees. But our pair of lawyers selected just one: Ochoa v. McDonald’s, a class-action suit filed by employees at a franchisee’s location in California. The plaintiffs extended the definition of an employer as someone who directly or indirectly or through an agent controls the employee’s work life. The important thing “is that the ostensible agency part of this survived summary judgment,” Jackson said, meaning for the first time that theory has been added to the mix of possible plaintiffs’ weapons.
8. Sugar battles
The sugary drink wars reached a new level in San Francisco, with the city and county adopting an ordinance requiring a tobacco-like warning on sugary soda, something like this: Drinking the beverage “contributes to obesity, diabetes and tooth decay.” Not surprisingly, the American Beverage Association objected, and asked for an injunction based on First Amendment grounds. “The beverage folks wanted there to be heightened scrutiny whether that law was necessary and didn’t impinge free speech, and the court said no, it would get rational scrutiny because it was commercial speech, which is entitled to less protection,” Gurnick said. The case is called American Beverage Association v. City and County of San Francisco.
9. Federal law for trade secrets
In May, Congress passed the Defend Trade Secrets Act, which President Obama described as “legislation that for the first time will provide civil actions for companies or individuals that are stealing trade secrets from our American innovators.” “So for the first time you have a federal action,” rather than just state statutes, “and obviously the goal of this is to have quick action,” Jackson said. In Panera v. Michael Nettles and Papa John’s, Panera seized on the law to seek a temporary restraining order when an executive went to work at Papa John’s before his one-year non-compete had expired. “We’ll probably see more cases like this in the coming months. This will be very large in the franchising world, because every franchisor has trade secrets,” Gurnick added.
10. Oh, the irony
The case name Civility Experts Worldwide v Molly Manners proved irresistible to our top 10 pickers. “While it is very serious, it also has an ironic element to it,” said Gurnick. “Here are two companies whose business is the emphasis of good manners and civility, and one of them stole the other’s manual and programming. And more than that, they had been in a lawsuit earlier and ... they settled it, and then the fight began again.” In a very lengthy opinion, the court compared the two manuals, and “time after time after time” found that Molly Manners had copied Civility Experts materials. But the elements copied related to good manners and good behavior and thus were not protectable under U.S. copyright law—in other words, it was stuff everyone’s mother probably taught them. As a final twist, the court said although it would not grant relief under copyright law, “this case is going to go on, and we’ll talk about whether Molly Manners had breached the settlement agreement.” Bad manners, indeed.