Focused on Franchise Law - April 2013

by Lewitt Hackman
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KURTZ LAW GROUP
 

BARRY KURTZ AND BRYAN CLEMENTS FEATURED IN TWO BAR ASSOCIATION PUBLICATIONS

 

"What Every Lawyer Should Know About Franchise Law" authored by Barry Kurtz and Bryan Clements, was published in both the March 2013 issue of the Alameda County Bar Association's monthly news magazine, ACBA News (http://acbanews.wordpress.com/), which was approved for continuing legal education credit for attorneys, and the April 2013 issue of the Fresno County Bar Association's Bar Bulletin.  

 

FRANCHISOR 101: OUT OF CONTROL - FRANCHISOR NOT LIABLE FOR FRANCHISEE'S NEGLIGENCE

 

Royal Dispatch Services, Inc. operates a vehicle dispatch service franchise that receives calls from customers and refers them to its franchised drivers through a computer system Royal requires the franchisees to purchase or lease from Royal. Under Royal's franchise agreement, franchisees may use Royal's name, signage and trademarks, must purchase late model Lincoln town cars, must service and maintain the vehicles at their own expense, must pay for their own insurance and must acquire and maintain all necessary licenses. Royal collects the livery charges from the franchisees' customers, retains approximately 20% in commissions for itself, and pays the franchisees when they redeem vouchers they have received from passengers. Franchisees may accept or decline passenger referrals from Royal, choose their own routes and accept passengers from other dispatch companies. While Royal requires its franchisees to abide by the vehicle maintenance, dress and conduct standards prescribed in its "Rule Book," Royal does not discipline its franchisees if they do not do so. Rather, the "Rule Book" provides that franchisees may be fined by the decision of a committee of franchisees.

 

Kaykov entered into a franchise agreement with Royal in 2000. In 2007, Kaykov accepted a dispatch from Royal to pick up Leach in New York City. During the trip, Kaykov struck a construction vehicle in New Jersey that was operated by Fletcher, injuring Leach. Leach sued Kaykov, Royal and Fletcher and prevailed at trial against Kaykov and Fletcher, but not against Royal. Fletcher later sued Royal claiming Royal, as Kaykov's franchisor, was vicariously liable for Kaykov's negligence despite language in the franchise agreement that established an independent contractor relationship between Royal and Kaykov and stated that Kaykov was "not deemed to be an employee or agent of Royal." Under New Jersey law, an independent contractor relationship is characterized by "attributes of self-employment and self-determination in the economic and professional sense."

 

The court rejected Fletcher's vicarious liability claim and decided the case in Royal's favor. The court held that Kaykov was operating his own enterprise as a franchisee and independent contractor of Royal, and that regardless of the authority that Royal commanded under the franchise agreement, Royal had no control over the manner and means in which Kaykov performed under the franchise agreement. Although Kaykov failed to properly control his vehicle, he exercised self-determination in the manner in which he performed.

 

Leach v. Kaykov showcases the value of the liability protection franchisors enjoy from the independent contractor relationships established in well drafted franchise agreements.

 

FRANCHISEE 101: IMPROPER TERMINATION MAY BE A CONSTRUCTIVE TERMINATION

According to a US district court judge in Budget Blinds Inc. v. LeClair, a franchisee with a franchise agreement governed by Wisconsin law may be entitled to damages from its franchisor under a claim for "constructive termination" of its franchise agreement if the franchisor does not comply with the notice and cure requirements of the Wisconsin Fair Dealership Law (WFDL).

Budget Blinds, a Window covering business franchisor, and Josh LeClair signed a franchise agreement in 2007 that specified it was governed by the WFDL and that gave LeClair a protected territory in Madison, Wisconsin. Morris, another franchisee with an adjacent exclusive territory, and LeClair agreed to allow each other to sell into the other's territory, and both made and reported sales in the other's territory to Budget. In 2011, Morris complained to Budget that LeClair was making unauthorized sales into his territory. Without providing LeClair any notice or an opportunity to cure, Budget filed an arbitration demand against LeClair for breach of the franchise agreement based upon LeClair's unauthorized sales. LeClair filed a counterclaim against Budget claiming that Budget had constructively terminated the franchise agreement in violation of the WFDL when Budget shut down LeClair's access to Budget's "B-Fast" record-keeping and management system, redirected his sales leads to another franchisee, refused to discuss Budget's allegations to explore potential remedies and discriminatorily enforced the franchise agreement's provision against selling in another franchisee's territory against him.

 

The arbitrator agreed that Budget had constructively terminated the franchise agreement by failing to comply with the WFDL, which requires a franchisor to provide a franchisee with 90 days prior written notice of termination and a 60 day opportunity to cure the default. The district court upheld the arbitrator's award citing case law that held that a franchise agreement is constructively terminated when a franchisor has effectively ended the commercially meaningful aspects of the franchise relationship or taken actions that have seriously effected the franchisee's ability to continue operating its franchise in its current market. The court rejected Budget's argument that constructive termination was impossible when the franchisor did not actually terminate the franchise agreement.

 

Franchisees who receive notices of default or termination should always verify that their notices were issued in compliance with their franchise agreements and applicable law. 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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