Focused on Franchise Law - March 2013

by Lewitt Hackman
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BARRY KURTZ AND BRYAN CLEMENTS FEATURED IN MARCH 2013 VALLEY LAWYER

 

"Is Franchising the Right Model for Your Client's Business" authored by Barry Kurtz and Bryan Clements was published in the March 2013 issue of Valley Lawyer, the monthly magazine of the San Fernando Valley Bar Association [www.sfvba.org]. To see the article, click here.

 

 

RELOCATION OF SANTA BARBARA, CA OFFICE

 

We moved our Santa Barbara, CA office in February to 831 State Street, Suite 230, Santa Barbara, CA 93101 and changed our telephone number to (805) 965-9939.

 

FRANCHISOR 101:  TANNNG SALON BURN - NON-COMPETE ENFORCED IN PENNSYLVANIA

 

Having a well drafted franchise agreement can prove invaluable to franchisors. A recent Pennsylvania federal district court decision in Tantopia Franchising Company, LLC v. West Coast Tans of PA, LLC et al. is a perfect reminder why non-compete provisions are important.

  

In 2002, West Coast Tans of PA entered a franchise agreement to run a Philadelphia tanning salon with Tantopia, a franchisor of tanning salons. The franchise agreement contained a non-compete provision prohibiting West Coast from directly or indirectly operating a competing business in its protected territory or within ten miles of any of Tantopia's other franchises for two years after termination of the agreement. West Coast's owners signed a personal guarantee acknowledging that they would also be bound by the non-compete. The franchise agreement terminated when West Coast closed the Philadelphia salon in January 2012. TMA International LLC, a company purportedly owned and operated by Connors, obtained the former Philadelphia salon's tanning equipment at a sheriff's sale and entered into a store lease with a landlord to open a new independent tanning salon in Southampton within 3/10 of a mile of a Tantopia franchised location. Tantopia brought suit against West Coast, its owners, TMA and Connors claiming they were violating the non-compete provision in the original franchise agreement and to prevent them from opening the Southampton salon.

 

West Coast Tan's owners asserted they were not operating the Southampton salon, but merely advising Connors, and that the non-compete clause was overbroad because it sought to enjoin West Coast Tan and its owners from providing assistance to TMA in the organization of its business. But the court found West Coast Tan's owners had negotiated the store lease, a note, and other contracts to open the Southampton salon and held: "Connors is acting as a figurehead or straw man for [West Coast's principals] to mask their ownership or control of the Southampton salon." In granting the injunction against West Coast Tan's owners, the court pointed out that the purpose of restrictive covenants "is to protect against the use of capital in a competing business as well as the skill and expertise of the individual in question." The court also enjoined Connors, even though he had never signed an agreement with Tantopia, holding: "It is well-established that a non-covenantor who benefits from the covenantor's relationship with a competing business must abide by the same restrictive covenant agreed to by the covenantor." Click here to see the entire case.

 

 

FRANCHISEE 101:  IF AT FIRST YOU DON'T SUCCEED, TRY, TRY AGAIN

 

Undeterred by last year's disappointments, franchisees in the Golden State have regrouped this year and mounted a new offensive designed at passing franchisee favorable legislation in California. Last year, Assembly Bill 2305, The Level Playing Field for Small Businesses Act of 2012 (the "2012 Act"), was introduced in the California Assembly. The 2012 Act sought to revise California's Franchise Investment Law and Franchise Relations Act (the "CFIL & FRA") to provide greater protections for franchisees. But, to the chagrin of many franchise owners, the 2012 Act failed to move forward from Committee on a very close vote after many franchisors, business groups and franchise experts argued it was nebulous, unenforceable and bad for business.

 

Three new franchise protection bills were recently introduced. The most far-reaching, AB 1141, the California Small Business Investment Protection Act, aims to revise the CFIL & FRA to: 1) provide franchisees greater freedom to transfer their businesses, 2) require automatic renewal of franchise agreements absent a material breach, 3) protect franchisees from unreasonable terminations, 4) require the parties deal with each other in "good faith" and 5) provide franchisees the right to assemble in trade groups without fear of retaliation. Another, SB 610, if passed, would require parties to franchise agreements deal with each other in "good faith" and prohibit franchisors from restricting the right of franchisees to participate in franchisee associations.

 

Like last year, several large franchisors and related groups, including the International Franchise Association, have expressed serious concerns about AB 1141, and say they are worried about unintended consequences that would impede the growth of the franchising industry and hurt business in California. With so much at stake, we're expecting another fiery debate, and we will keep you updated.

 

 

MARK MELTON HAS BECOME OF COUNSEL TO THE FIRM

 

Mark Melton became of counsel to our firm in October 2012. Mark lives in Santa Barbara, CA and will be working at both our Woodland Hills and Santa Barbara offices. You can reach Mark at mmelton@kurtzfranchiselaw.com.

 

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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