Focused on Franchise Law - January 2013

by Lewitt Hackman
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MARK MELTON HAS BECOME OF COUNSEL TO THE FIRM 

Mark Melton of Kurtz Law GroupWe are pleased to announce that Mark Melton became of counsel to our firm in October 2012. Mark adds more than 20 years of franchise experience as both a franchisor and a franchisee to Kurtz Law Group. Mark recently sold Coverall Mountain & Pacific, a master franchise company he built from the ground up to become an operation spanning six states and supporting more than 560 franchisees and 2,600 business clients. Coverall Mountain & Pacific was twice named one of the 500 fastest-growing U.S. companies by Inc. Magazine.

 

Mark earned his J.D. at the Santa Barbara College of Law, graduating with honors. Mark also earned an MBA from Claremont Graduate University - Peter F. Drucker School of Management. Mark brings a wide range of practical experience to the firm in franchising, business transactions, mergers and acquisitions, securities and general corporate matters. Mark's knowledge and experience will help the firm better serve its franchise clients in franchise-related and business transactional matters. Mark lives in Santa Barbara and will be working at both our Woodland Hills and Santa Barbara offices. You can reach Mark at: mmelton@kurtzfranchiselaw.com.

 

FRANCHISOR 101:  PERSONAL LIABILITY IN NEW YORK FOR A FRANCHISOR'S OWNERS 

Grandmaster Flash's lyrics "New York, New York, big city of dreams, but everything in New York ain't always what it seems!" must be ringing in the ears of Michael and Kathy Butler (the "Butlers") following a recent decision by the U.S. Bankruptcy Court in Charlotte, North Carolina. The court found the Butlers personally liable for $714,000 plus interest as the owners of a franchisor that sold unregistered franchises to John Mangione ("Mangione") for stores to be located in New York City.

 

The Butlers owned PRS Franchise Systems, LLC ("PRS"), a North Carolina based franchisor of retail stores providing promotional materials and services for small businesses. In May 2007, PRS sold 12 franchises to Mangione but did not provide Mangione with an offering prospectus in advance of the sale and failed to escrow Mangione's franchise fees in a trust account, which was required since PRS' registration had lapsed and its renewal application was pending. The Butlers dissolved PRS and filed bankruptcy. Mangione filed suit claiming the Butlers were personally liable under New York's Franchise Sales Act (the "Act") to reimburse him for the initial franchise fees he paid to PRS. The Butlers claimed that the "corporate shield doctrine" protected them from personal liability, regardless of whether PRS was found liable. The court disagreed and found that the Butlers intentionally allowed PRS' New York registration to lapse, knowingly and willfully sold unregistered franchises to Mangione, and failed to escrow fees in violation of the Act. The court held that under the Act "officers are personally liable for their participation in tortious acts that cause harm to a third party" and that any person who "directly participates in an unlawful offer or sale [of a franchise, is civilly liable] for the purchaser's resulting damages." For some, New York may be a "big city of dreams." But for the Butlers, selling unregistered franchises for 12 New York stores turned out to be a nightmare. Click here to see the case.

 

FRANCHISEE 101:   BEER & WINE FRANCHISEES ENJOY PROTECTION FROM TERMINATION

Many states, including California and Ohio, have laws protecting beer and wine distributors from the arbitrary termination of their distribution agreements by their manufacturers. Ohio's Alcoholic Beverage Franchise Act (the "Act") allows a successor manufacturer that acquires all or substantially all of the stock or assets of another manufacturer to terminate a distribution agreement upon 90 days written notice without "just cause" or the franchisee's consent. The Act does not define successor manufacturer, which was the central issue in Beverage Distributors, Inc. v. Miller Brewing Co.

 

In late 2007, the parent companies of Miller Brewing Company ("Miller") and Coors Brewing Company ("Coors") formed MillerCoors as a joint venture to better compete against their main competitor, Anheuser Busch. Miller and Coors transferred their U.S. brands to the newly formed company and agreed to share management and control of MillerCoors jointly and equally. In early 2008, MillerCoors notified several Ohio distributers (the "Franchisees") that it was terminating their franchise agreements. The Franchisees filed suit in district court, which held that MillerCoors was not a successor manufacturer because Miller and Coors never relinquished control over their brands.

 

On appeal, MillerCoors argued that neither predecessor, Miller nor Coors, controlled MillerCoors since neither owned/controlled a majority interest in the new company. The 6th Circuit Court of Appeals rejected this argument because the MillerCoors operating agreement provided that each board member owed a fiduciary duty to the company that had appointed him/her, and not to MillerCoors, which, it said, provided each company with "a veto right over the operating decisions of MillerCoors." Accordingly, the court held MillerCoors failed to qualify as a successor manufacturer under the Act and could not terminate the franchise agreements without "just cause." Click here to see the case.

 

BARRY KURTZ HONORED AS 2013 SUPER LAWYER

Barry Kurtz has been selected as a 2013 Super Lawyer in his specialty of Franchise Law. This honor is bestowed by the Journal of Law and Politics, in conjunction with Los Angeles Magazine. Barry was likewise selected as a Super Lawyer in 2010, 2011 and 2012. The Super Lawyer designation is the result of peer evaluation. Nominations are received from thousands of lawyers throughout the state. According to the Journal of Law and Politics, this honor is reserved for the top 5% of the lawyers in each practice area.

 

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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