Franchise 101: No Control, No Liability; and Muscling Through the Competition
FRANCHISOR 101: No Control, No Liability
A California federal court granted summary judgment in favor of Red Roof Inns, a hotel franchisor, on sex trafficking claims brought under the Trafficking Victims Protection Reauthorization Act (TVPRA).
The plaintiff was allegedly trafficked by a third party at a Red Roof Inn location owned by a franchisee over a three-month period. It was undisputed the third party knew one of the individuals employed at the franchised hotel would allow the third party to use the hotel for trafficking activities. The plaintiff brought claims against the franchisor, claiming the franchisor was directly liable for her trafficking under the TVPRA’s perpetrator liability, beneficiary liability, and vicarious liability.
The court granted summary judgment in favor of the franchisor as to perpetrator liability, holding that the plaintiff did not provide sufficient evidence to prove that the franchised hotel’s employees knew about the alleged trafficking or that the employees reported the trafficking activities to the franchisor. Similarly, the court rejected beneficiary liability because the evidence did not demonstrate that the franchised hotel ever informed the franchisor about the alleged trafficking activity during the alleged trafficking.
Lastly, the court granted the franchisor’s motion for summary judgment as to vicarious liability. To establish vicarious liability, the plaintiff was required to show that the hotel franchisor and franchisee were in an agency relationship and that the employees of the hotel were liable under the TVPRA.
The franchise agreement stated the franchisee was granted a license to use Red Roof’s brand, logo and name in its operation of the hotel and that the franchisee’s agents, employees and successors, would act as independent contractors. The plaintiff argued there was an agency connection between the franchisor and franchisee because the franchisor handled the marketing for the franchised hotel, provided the online room reservation system, and provided the property management system that tracked the rooms for housekeeping.
The court disagreed, holding the franchisor-franchisee relationship does not necessarily create an agency relationship unless the franchisor exercises control over the franchisee’s day-to-day operation of the hotel, which was not the case in this instance.
Franchisors should review the terms of their franchise agreements with franchise counsel to ensure its provisions cannot be interpreted to create an agency relationship between the franchisor and franchisee, which may open the franchisor up to liability for these types of claims.
J.M. v. Red Roof Inns, Inc., No. 2:22-cv-00672-KJM-JDP, 2024 U.S. Dist. LEXIS 190967 (E.D. Cal. Oct. 18, 2024)
FRANCHISEE 101: Muscling Through the Competition
A Minnesota district court issued a preliminary injunction against a former franchisee who engaged in a competing business during the franchise relationship.
Snap Fitness, Inc., a gym franchisor, entered into a franchise agreement with the franchisee for the operation of a Snap Fitness gym franchise in Hixson, Tennessee. The franchisee attempted to terminate their franchise agreement prior to expiration and began operating a competing gym from the Snap Fitness location. The franchisee announced on their Snap Fitness Facebook page that they were de-branding from Snap Fitness and transferring to their own independent gym, Scenic City Fitness 24/7. The franchisee also promoted their competing gym with a new logo featuring the name Scenic City Fitness 24/7 breaking through the Snap Fitness logo.
Snap Fitness filed suit and a motion for preliminary injunction after the franchisee failed to comply with a cease and desist letter.
The court granted the preliminary injunction, finding that Snap Fitness was likely to succeed on the merits of its claim for breach of the in-term and post-term non-compete covenants and confidentiality obligations. The court found the non-compete covenants reasonable in geographic scope, 10 miles, and duration, two years, based on precedent upholding similar restrictions in franchise agreements.
The court also concluded the covenants were necessary to protect Snap Fitness’ franchise system and goodwill. The court further found the franchisee’s logo featuring Snap Fitness’ marks was likely to cause consumer confusion given the similarity of the marks and that the Scenic City Fitness 24/7 business directly competed with Snap Fitness. Snap Fitness also presented evidence of actual consumer confusion.
The court also determined that if the injunction was denied, there was a threat of irreparable harm to Snap Fitness. The court noted: “if one disgruntled franchisee is allowed to brazenly break away from the franchisor, it would send irreparably damaging signals to other franchisees. Some might see it as a chance to reap the benefits of a franchise system, then jump ship, with no consequences.”
The court further found that the balance of harms favored Snap Fitness because the franchisee’s harm was self-inflicted – they improperly attempted to terminate the franchise agreement and moved ahead with a competing gym. Finally, the court found that the public interest weighed in favor of granting the injunction.
Franchisees should consult with counsel before rebranding and operating a competing business to determine the impact and enforceability of non-compete covenants in their franchise agreement.
Snap Fitness, Inc. v. Scenic City Fitness, Inc., No. 24-CV-2803 (NEB/DTS), 2024 U.S. Dist. LEXIS 189651 (D. Minn. Oct. 18, 2024)