How 1. Franchises are Created:
Franchise agreement Blankenship v. Dialist
- Corporation sold a franchise illegally. - Is the franchisee entitled to the return of the full amount paid for the franchise? Plus attorney fees? YES! NOTES: P's alleged franchisee status affirmed by CT b/c CT found corp. had sold franchise in violation of Franchise Disclosure Act A franchise means a contact or agreement oral or written, expressed or implied between two or more persons by which (1) a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, and (2) the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating a franchisor or its affiliate (3) the franchisee is required to pay, directly or indirectly, a franchise fee of $100 or more. Franchise Disclosure Act - a franchise exists if the following three criteria are met: 1. Granted the right to offer, sell, distribute product under marketing plan suggested by franchisor 2. Use of the name, trademark, trade name, service mark, or other commercial symbol 3. Franchisee must pay $100 or more in franchise fee 4. Plaintiff is entitled to the costs of the action including, without limitation, reasonable attorney's fees Marketing plan: Plan relating to some aspect of conducting a biz that specifies price, discounts, sales display and/or equipment, sales technique
Dunkin Donuts V. Minera
breach of contract for under-reporting gross sales counterclaim: breach of obligation of good faith in the franchisee agreement
Minerva = DD franchisee in Florida
DD's offers Minerva a new franchise agreement where you need 2/3 of the local franchise owners to approve advertising Minerva says NO because of new rules regarding advertising where area people vote on methods... could hurt her business DD's = pissed; they think Katherine is not giving them all % of her earnings. DD's suspects Katherine is UNDER-REPRESENTING sales (which is not allowed) No where did she give DD's permission to AUDIT her business, but they did illegally. Audit shows Minerva not paying DD right % of earnings. DD's audits again. DD sends note terminating franchise. Minerva continues to use their name and run them.
DD's files suit for FAILING TO RECORD AND REPORT SALES & FAILING TO PAY DD's THEIR FAIR % of SALES MINERVA files counterclaim stating that DD's breached obligation of good faith, fiduciary, and violated the Florida Deceptive and Unfair Trade Practices Act DD's did not bring Preliminary Injunction... they knew they'd lose Preliminary injunction is a court order forbidding party from engaging in specified acts Court Found: - DD's retaliating for Katherine "not playing with the team" - DD's employed a "yield and usage" audit unfair. - DD's is AT FAULT - Katherine is rewarded $650,000 for damages (for loss of profits between audit and future) - This is later REDUCED to only $2!!!! Because Katherine didn't lose money, the audit won't hurt her business, won't hurt profits, won't hurt her future.
** Bulk of language for contract = drafted by a franchisor.** The contract must be followed to the T. Court tries to help franchisee. Any ambiguity is the contract is held against the party who drafted it!
2. Issues involving Franchises:
The covenant of Good Faith Camp Creek v. Sheraton
- 2 hotels near Airport in Atlanta. - Both under Sheraton brand, confusing to guests, computer system, etc. WHAT ARE THE CLAIMS? WHAT IS THE OUTCOME?
The covenant of good faith cannot be used to rewrite or override the express terms of a contract When the parties include contract language on the issue of competing franchises the implied covenant will not defeat those terms. When there is no such language the franchisor may not capitalize upon the franchisee's business in bad faith If you are going to compete with a f/or or f/ee make sure you put it into the contract; if it is not in the contract, then you should not do it. Bad faith: You need to present evidence of damages connected to these bad acts You cannot use contractual discretion in bad faith In order to win a case based on good faith you must show damages that are the direct result of it
Misuse of Confidential Information: You must show sufficient evidence of damages with respect to its allegation on the misuse of confidential information The License and Reservations Agreements: Standard franchise relationship does not present a fiduciary relationship Customer Contracts and Relationships: Plaintiff must demonstrate that absent the interference, those relations were reasonably likely to develop in fact. 1. Camp Creek failed to show that the customers that stayed at Sheraton Gateway would have stayed at the Inn if Sheraton Gateway did not exist Misappropriation of Trade Secrets: Plaintiff must show that (1) it had a trade secret and (2) the opposing party misappropriated the trade secret Lanham Act:
there can be no Lanham Act claim if the defendant's name is accurate and creates no false impression P must have rights in the name at issue to seek protection
Passing Off where A sells its product under B's name and "reverse-passing-off" where A sells B's product under A's name Implied covenant of good faith and fair dealings: implicit in every contract under most state law requires parties in a K to deal honestly and in good faith in the performance and enforecement of agreement must no impair the other party's right to receive the fruits of the K covenant of good faith may not be used to override specific language of K 1. if there is no such language, the franchisor may not capitalize on the franchisee's biz in bad faith Unjust enrichment: recovery available only when when as a matter of fact there is no legal contract
Negligence, Liability Martin V. McDonald's
Robbery at McDonald's Wrongful death and assault of employees. Claim of whether of not McDonald's failed to perform its duty to establish security procedures and to make sure they were effective. In order for plaintiffs to recover on a theory of negligence, they must establish that there was a (1) duty owed to them by the defendant, that (2) defendant breached its duty, that (3) they were injured, and that (4) defendants breach of duty or negligence was the proximate cause of their injuries. Case law supports the proposition that liability can arise from the negligent performance of a voluntary undertaking The failure to properly complete or to carry out an assumed duty imposes liability Once you assume a duty, you are liable for it Once McDonald's Corp. assumed the duty to provide security and protection to plaintiffs, it had the obligation to perform this duty with due care and competence, and any failure to do so would lead to a finding of breach of duty
OUTCOME: - McDonald's Negligent. Workers Compensation Claim:
The finding of agency relationship between McDs Corp. and Ferret (manager) does not make McDs. Ferret's employer. Thus, it does not make McD. Corp the employer of the plaintiffs and therefore does not make the Corp liable for Workers' Compensation Act.
Franchisor/ Franchisee relationship: Independent or Agent Cislaw V. Southland Corp.
Family suing corp for selling cigarettes responsible for son's death. Corp says it's not liable directly or vicariously. It's up to franchisor what he sells. He is an independent contractor.
Is there an agency relationship? Agency Relationship: Where the franchise agreement gives the franchisor complete or substantial control over the franchisee. The most important factor in determining whether one is an agent or independent contractor is whether the principal has the right to control the manner and means of accomplishing the result desired If the principal has the authority to exercise complete control, whether or not that right is exercised with respect to all details, a principal-agent relationship exists. Strong evidence is the right to discharge at will, without cause A franchisor can retain control as is necessary to protect and maintain its trademark, trade name, and goodwill without the risk of creating an agency relationship
PRINCIPAL: agent of another person. If he/she is authorized to act for or in place of the principal and is subject to the right of the principal to control his actions. INDEPENDENT CONTRACTOR: one who in rending services exercises an independent employment or occupation and represents his employer only as to the result of his work and not as to the means whereby it is to be accomplished. If there is an agency relationship, does that make Corp. liable? YES. But No agency relationship existed.
Apparent Authority Holiday Inn, Inc. v. Hospitality Venture
hotel bar, not enough space for parking. Fight in the lot next door. Death and injuries. Question of whether or not bar's duty also extends passed their prop. Foreseeability: past experience is enough to prove.
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may also be established by proof of inadequate security.
Duty of reasonable care: If business activities extend beyond the establishments legal boundaries (parking lot) then the business has the duty to protect patrons in that area as well Apparent Agency/Authority: Three elements needed: 1. A representation by the principal 2. Reliance on that representation by a 3rd party 3. A change of position by the 3rd person in reliance upon such representation to his detriment All three elements must be proven before an apparent agency is established Ex. "she felt it was safe because, it's a Holiday Inn" If there is Apparent Authority then the franchisor is liable Four Requirements for Determining the admissibility of expert testimony: 1. opinion evidence be helpful to trier of fact 2. witness be qualified as an expert 3. opinion evidence can be applied to evidence offered at trial 4. that evidence, although technically relevant, must not present a substantial danger of unfair prejudice that outweighs its value. ISSUE: When an inviter has extended its business activities beyond the area actually owned or leased and an invitee is injured in that extended area, can the inviter be liable under a negligence theory? YES!
3. Termination of Franchise
Termination immediate El Pollo Loco v. Hashim Case
Statute of Limitations and Discovery rule: The discovery rule applies to unique breach of cases when: 1. the injury or the act causing the injury, or both, have been difficult for the plaintiff to detect 2. the defendant has been in a far superior position to comprehend the act and the injury 3. the defendant had reason to believe the plaintiff remained ignorant that he had been wronged
4. fraud or misrepresentation must be present Immediate termination: for any material misrepresentations...made by franchisee in connection with the acquisition of the franchise. Reasons for termination: 1. Violation of agreement (misrepresentation outset) from WHY WOULD WE EVER WANT THIS LOSER?! 2. Currently franchisee for competing company = CONFLICT OF INTEREST Preliminary injunction: keep him from working as an El Pollo Loco franchisee. Irreparable harm can't be compensated by $ alone ** legal justification = trademark infringement Hashim argues: should have been give notice and correct the problem. Court says: NO WAY HASHIM! Incurable problems. You're a liar and your violations are too large and intentional!
Termination cured period Pizza Hut Inc. V. White
Pizza Hut terminated franchise with White for non-payment of fees White continued to use the name PIZZA HUT. *Gives likelihood of confusion to customers. *Irreparable injury to pizza hut for improper use of trademark and logo.
Preliminary Injunction: Plaintiff must show 4 things: 1. that there is a substantial likelihood that it will prevail on merits The 5th circuit states: "falsely suggesting affiliation with the trademark owner in a manner likely to cause confusion as to source of sponsorship constitutes infringement Plaintiff must show that its mark was used in commerce by the defendant without its consent and the unauthorized use is likely to cause confusion, or to cause mistake or to deceive 2. there is a substantial threat that irreparable harm will result if the injunction is not granted In a trademark infringement case, "a substantial likelihood of confusion constitutes irreparable injury Could dilute the value of the mark 3. the threatened injury outweighs the threatened harm to defendant 4. a preliminary injunction or temporary restraining order will not disserve the public interest
4. Anti-Trust
Tying arrangement Louis Martino V. McDonalds
Franchisee purchases Coke from Coke distributor not McDonald's. McDonald's wants franchisees to use Coke products for standardization. Martino wants opportunity to buy other products states that this is like a monopoly.
-Martino claims that this tying arrangement creates a monopoly. -Unlawful market power must be proven in order to prove an unlawful trying arrangement. -The tying product is the franchise of McDonalds. -The tied product is Coke. -The unlawful tying claim fails because McD gains no benefit from the arrangement. -Tying reduces consumer choice. The reason a company would want to have an unlawful tying arrangement is to gain Econ Value....none for MCD's here. Some economic benefit amounting to a commission or rebate is required for a tying claim. A rule of reason claim in a tying context likewise requires a substantial danger that the tying seller will acquire market power in the tied product market When the seller of the tying product has no financial interest in the tied product and the tied product is independently priced there is no danger to competition and no actionable conduct
Microsoft Corporation v. U.S
Tying arrangements are illegal when sellers exploit their market power over one product to force unwilling buyers into acquiring another. Tying: liability exists if 4 elements are present 1. 2 separate products are involved 2. the defendant affords its customers no choice but to take the tied product in order to obtain the tying product 3. the arrangement affects a substantial volume of interstate commerce 4. The defendant has market power in the tying product market
Basically, if you had a choice of buying packages of Microsoft with Int Exp or Microsoft with Netscape, that'd be OK. But because products aren't sold that way and are only sold as one ENTITY.... MONOPOLY exists. OUTCOME: Microsoft guilty of anti-trust!!!
5. Deceptive Trade Practices
Pelham v. McDonald
-Pelham sued McDonald's claiming liability for obesity from consumption. -They say NY Deceptive Trades Act would support that McDonald's is liable for obesity because of deceptive advertising. *Info. regarding ingredients and health effects is not easily obtainable. *Used deceptive trade practices based on marketing to children. *Negligence: failure to warn of harmful product To state a claim for deceptive trade practices, a plaintiff must show: 1. that the act, practice, or advertisement was consumer-oriented. 2. that the act, practice, or advertisement was misleading in a material respect. 3. that the plaintiff was injured as a result of the deceptive practice, act, or advertisement. ** The standard for whether an act or practice is misleading is objective, requiring a showing that a reasonable consumer would have been misled by the defendant's conduct.** Does Pelham even have a claim? -Not really. It's common knowledge that McDonald's should not be eaten everyday. What McDonald's argued that plaintiff's claims fail because: (1) they are not plead with sufficient specificity (2) acts or practices cannot be deceptive if the consuming public already is aware of the "concealed" characteristics and therefore is not deceived. Puffery: Exaggerated general statements that make no specific claims on which consumers would rely. Example: Subway exaggerates that it is the `healthy alternative' to fast food.
Review Notes Franchis has no fiduciary duty Default franchisor not liable for actions of franchisee but this can change Liability occurs if: 1. you have too much control over franchisee 2. reasonable 3rd person relied upon representation 3. direct assumption of a duty by the franchisor ANTI Trust 1, maintenance of a monopoly through anti-competitive actions
negligence? Rule: In order for plaintiffs to recover on a theory of negligence, they must establish that there was a duty owed to them by the defendant, that defendant breached its duty, that they were injured, and that defendants breach of duty or negligence was the proximate cause of their injuries. Case law supports the proposition that liability can arise from the negligent performance of a voluntary undertaking The failure to properly complete or to carry out an assumed duty imposes liability Once you assume a duty, you are liable for it Ex. (McDonald's Corp. V. Martin) assumed the duty to provide security and protection to plaintiffs, it had the obligation to perform this duty with due care and competence, and any failure to do so would lead to a finding of breach of duty Agency Relationship: Where the franchise agreement gives the franchisor complete or substantial control over the franchisee. If the principal has the authority to exercise complete control, whether or not that right is exercised with respect to all details, a principal-agent relationship exists. Strong evidence is the right to discharge at will, without cause A franchisor can retain control as is necessary to protect and maintain its trademark, trade name, and goodwill without the risk of creating an agency relationship Apparent Authority ? Rule:
For Apparent Authority three elements needed: 1. A representation by the principal 2. Reliance on that representation by a 3rd party 3. A change of position by the 3rd person in reliance upon such representation to his detriment Ex. (Holiday Inn v. Hospitality Venture) "She felt it was safe because it's a Holiday Inn" If there is Apparent Authority then the franchisor is liable
covenant of good faith and fair dealing? Rule: The covenant of good faith cannot be used to rewrite or override the express terms of a contract When the parties include contract language on the issue of competing franchises the implied covenant will not defeat those terms. When there is no such language the franchisor may not capitalize upon the franchisee's business in bad faith If you are going to compete with a f/or or f/ee make sure you put it into the contract; if it is not in the contract, then you should not do it. Bad faith: You need to present evidence of damages connected to these bad acts You cannot use contractual discretion in bad faith In order to win a case based on good faith you must show damages that are the direct result of it preliminary injunction Rule: (El Pollo Loco/ Pizza Hut) Preliminary Injunction: Plaintiff must show 4 things 1. that there is a substantial likelihood that it will prevail on merits 2. there is a substantial threat that irreparable harm will result if the injunction is not granted In a trademark infringement case, "a substantial likelihood of confusion constitutes irreparable injury Could dilute the value of the mark 3. the threatened injury outweighs the threatened harm to defendant 4. a preliminary injunction or temporary restraining order will not disserve the public interest Immediate termination: for any material misrepresentations...made by franchisee in connection with the acquisition of the franchise.. Monopoly
Rule: If the evidence reveals a significant exclusionary impact in the relevant market, the defendant's conduct will be labeled "anticompetitive"- and liability will attachunless the defendant comes forward with specific, procompetitive business motivations that explain the full extent of its exclusionary conduct In order to be liable a plaintiff must prove 1. that the defendant has engaged in predatory or anticompetitive conduct 2. with a specific intent to "Monopolize" 3. that there is a "dangerous probability" that the defendant will succeed in achieving monopoly power
tying arrangement in section one of the Sherman Act? Rule: Tying: liability exists if 4 elements are present 6. 2 separate products are involved 7. the defendant affords its customers no choice but to take the tied product in order to obtain the tying product 8. the arrangement affects a substantial volume of interstate commerce 9. The defendant has market power in the tying product market Defense The supreme court concluded that the "character of the demand" for the constuent components, not their functional relationship, determined whether separate "products" were actually involved. Just because the products uses compliment each other, does not mean they are one. In this case the commercial reality is that consumers today perceive cork removers and stoppers as two different "products", for which there is a separate demand. Rule: Franchise Disclosure Act: Franchisor must disclose all information about the franchise in the franchise agreement. Plaintiff is entitled to the costs of the action including, without limitation, reasonable attorney's fees Rule In order for plaintiffs to recover on a theory of negligence, they must establish that there was a duty owed to them by the defendant, that defendant breached its duty, that they were injured, and that defendants breach of duty or negligence was the proximate cause of their injuries. Case law supports the proposition that liability can arise from the negligent performance of a voluntary undertaking Foreseeability: past experience is enough to prove. If business activities extend beyond the establishments legal boundries (parking lot) then the business has the duty to protect patrons in that area aswell
The case stated that a business has the duty to protect patrons and 3rd parties outside the shops physical boundries.