Focused on Franchise Law - May 2014

by Lewitt Hackman
Contact

FRANCHISOR 101: 
When is Unreasonable, Reasonable?

Crown Imports, LLC (Crown) imports Corona beer from Mexico. In 2008, two of Crown's Southern California distributors, Classic and HBC, agreed that Classic would buy HBC's Crown distributorship. Crown denied approval of the transfer citing Classic's poor performance.  

 

In 2008 and 2009, Classic won top-distributorship awards, and in 2010, Classic again sought Crown's approval to buy HBC's distributorship. But Crown again refused consent, and HBC sold its distributorship to Anheuser-Busch. 


Classic sued Crown for interference, claiming that Crown had a secret plan to prevent Classic from acquiring HBC's distributorship. On appeal, the California Court of Appeal disagreed with Classic and with a lower court, and held that no genuine issues of fact existed as to whether Crown unlawfully withheld consent to the Classic/HBC transfer.

 

A plaintiff claiming interference must prove, among other things, that the defendant intentionally or negligently committed an independently wrongful act to disrupt an existing business relationship, which did disrupt the relationship. 

 

Classic argued Crown unreasonably withheld consent to its purchase of HBC's distribution rights in violation of California Business and Professions Code Section 25000.9, which, Classic claimed, amounted to an independently wrongful act. Section 25000.9 says that "Any beer manufacturer who unreasonably withholds consent [to a distributor transfer] shall be liable to the [distributor]."

 

In rejecting Classic's arguments, the court held that since Section 25000.9 provides a remedy for disappointed sellers, not buyers, Crown's denial, even if it was unreasonable and violated Section 25000.9, was not an independently wrongful act. Moreover, the court opined, Section 25000.9 can be read to "permit a beer manufacturer to unreasonably deny approval [of] a transfer." 

 

It ruled that "as long as a seller receives adequate compensation either from a successor purchaser or the manufacturer itself, there is no violation of the statute." The court further ruled that good policy reasons exist to let beer manufacturers unreasonably deny consent to transfers, provided they make the disappointed distributors whole. Under California law, beer distributors may not sell beer without first entering into written distribution agreements with manufacturers and filing the agreements with state. So, the court explained, if a manufacturer could not withhold consent, it would be forced to enter a new contract with the transferee distributor, even if it did not wish to do business with the new distributor.

 

Notwithstanding the court's reasoning and outcome in this case, California brewers should still keep in mind the risk that unreasonably denying consent to a distributor transfer may violate California law. Discretion remains a better part of valor. 
Read the appellate court opinion:
 
FRANCHISEE 101: Item 19 Misdirection Ultimately Discovered by Franchisee

Franchisors that make Item 19 financial performance representations (FPRs) must disclose all material facts and not knowingly conceal any facts necessary to make their disclosures true under the circumstances in which they are presented. Abbo v. Wireless Toyz L.L.C. provides hope for franchisees whose franchisors do not disclose all relevant facts in their FPRs. 

 

In August 2004, Wireless Phones, L.L.C. (WP) entered into a franchise agreement with Michigan franchisor Wireless Toyz Franchise, L.L.C. (Toyz) for a Wireless Toyz franchise to be located in Colorado. Wireless Toyz franchisees earn commissions by selling cellular equipment and 3rd party cellular contracts to customers. The commissions are reduced by Hits (customer discounts offered by cellular providers) and Charge Backs (recoupments due to early termination of customer contracts). 

 

Before buying the franchise, WP was given Toyz's disclosure document, which contained an FPR that made no mention of Hits and only cautioned that commissions could be subject to Charge Backs, but included no data to indicate the financial impact Charge Backs would have on a franchisee profits. WP apparently recognized the discrepancies, raised the issue and received verbal assurances from Toyz's owner that the average Hit would not exceed $50 and Charge Backs would average 5% to 7% percent of annual commissions.

 

After WP's store failed in 2009, WP brought suit, asserting, among other claims, that Toyz violated Michigan's Franchise Investment Law (MFIL) and committed the tort of fraudulent concealment by knowingly concealing facts regarding Hits and Chargebacks. 

 

A claim for fraudulent concealment arises from suppression of the truth with intent to defraud. The trial judge ruled that the evidence did not support a claim of fraudulent concealment, and WP appealed.

 

The appellate court overturned the trial court and ruled Toyz was liable for fraudulent concealment. The court held that the MFIL required Toyz to refrain from making material misrepresentations or omitting pertinent information from any disclosures relating to the sale of the franchise. The court found Toyz's FPR "omitted [material] information concerning average Hits and Chargebacks" that was necessary to make the FPRs not misleading and Toyz suppressed the truth by falsely giving WP verbal assurances that the impact of Hits and Chargebacks would be minimal.

Potential franchisees should carefully review their franchisor's FPRs to ensure that all pertinent financial information is fully presented and make further inquiry when they believe that is not the case.  

 

Read the court opinion re: Abbo v.Wireless Toyz Franchise.

 

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.

© Lewitt Hackman | Attorney Advertising

Written by:

Lewitt Hackman
Contact
more
less

Lewitt Hackman on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.