Franchise 101: Enjoined in Margaritaville; and Personal Jurisdiction over Non-Resident Principal in Massachusetts

June 2019

Franchisor 101: Enjoined in Margaritaville

Eskimo Hut, a franchisor of convenience stores that sell frozen daiquiris-to-go, convinced a Texas appellate court that it would probably win on claims that South Plains, a franchisee using a nonconforming drink mix, breached the franchise agreement, as well as probable irreparable harm. The court in South Plains Sno, Inc. v. Eskimo Hut Worldwide upheld a temporary injunction prohibiting the franchisee from selling frozen drinks in any manner other than specified in Eskimo Hut’s operations manual.

Eskimo Hut showed that South Plains breached the franchise agreement by using less base-mix than required in the recipe or by not even buying base-mix. The franchisee admitted refusing to comply with Eskimo Hut standards, testifying to using only two ounces of base-mix in a drink batch rather than three gallons as Eskimo Hut specified. The franchisee claimed the franchise agreement was illegal because it required preparation of alcoholic drinks according to Eskimo Hut specifications. According to South Plains, this violated a Texas law saying control of alcoholic beverages must be by the permittee. The appellate court was not convinced.

Pointing to the franchise agreement’s provision for irreparable harm, the court found Eskimo Hut showed probable injury from violation of the provisions requiring compliance with brand standards. These contractual provisions are generally insufficient by themselves to obtain an injunction. But the court emphasized that brand recognition and uniform standards among franchisees are the core of the parties’ agreement. This supported the trial court’s conclusion that the franchisee’s actions placed Eskimo Hut at risk of irreparable injury.

The franchisee challenged irreparable injury claiming Eskimo Hut did not control the amount or type of alcohol added to daiquiris, making consistency of drinks sold by different franchisees impossible. Weighing Eskimo Hut’s testimony that the flavor for the frozen drinks comes from the base-mix, against the recipe South Plains used, the court found that South Plains was selling, as an Eskimo Hut branded daiquiri, a different drink than other franchisees. This allowed an inference that Eskimo Hut was suffering ongoing harm.

Government regulation in some industries, like alcoholic beverages statutes, pose a challenge to franchisor control over brand standards. This is because the standards may be illegal under the regulations. Here, Eskimo Hut acknowledged it did not control the wine or distilled spirits vendors, or the type or amount of alcohol to purchase for daiquiris, because such controls would be illegal. Franchisors seeking entry to highly regulated industries should understand the realities of franchisees trying to exploit these prohibitions and consult franchise counsel for proper enforcement planning to maintain system standards.

Source: South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd., Tex. App., ¶16,405

Franchisee 101: Personal Jurisdiction over Non-Resident Principal in Massachusetts

In a wrongful death suit by a Massachusetts wife of a man and their child who drowned in a Montreal hotel pool, a Massachusetts federal court held in Nandjou v. Marriott International that it had jurisdiction under the state long-arm statute over hotel franchisor, Marriott, and its Montreal franchisee.

The court applied a three part test for personal jurisdiction over defendants Marriott and its franchisee, non-residents of Massachusetts: (1) whether the claim arose out of Marriott’s and the franchisee’s Massachusetts activities, (2) whether those Massachusetts contacts were a “purposeful availment” of the privilege of doing business in Massachusetts, and (3) whether the exercise of jurisdiction was reasonable.

The court analyzed whether Marriott’s actions in Massachusetts could be attributed to its Montreal franchisee. In exchange for annual fees and costs, Marriott marketed the franchisee’s hotel, and the franchisee used Marriott’s name and marketing abilities expecting Marriott would advertise its hotel and customers would visit the hotel because it was affiliated with Marriott. The court found that when the plaintiff’s husband checked into the hotel, the franchisee accepted the discounted rate Marriott gave the plaintiff’s husband in Massachusetts. Therefore, based on the relationship between the parties, the court held that Marriott’s communications to the plaintiff’s family in Massachusetts was attributable to the franchisee.

Next, the court looked at the purposeful availment test. For defendants to purposefully avail themselves of the privilege of doing business in Massachusetts, their contacts must be voluntary, such that they should reasonably anticipate being brought into court in Massachusetts. The court found both requirements were met because Marriott chose to advertise the franchisee’s hotel in Massachusetts through direct mail advertisements and other means.

Finally, the court held that exercising jurisdiction over the defendants would be reasonable. The court considered the potential burden on the defendants, Massachusetts’ interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the judicial system’s interest in the most effective resolution and social policy considerations. These factors weighed in favor of the plaintiff, therefore the court’s exercise of jurisdiction was reasonable.

Generally, if a business uses an agent or maintains an office with staff, a bank account, and a local phone number in a jurisdiction, the assertion of personal jurisdiction is expected. However, as this case shows, franchisees in systems that advertise on the internet and by direct mail need to realize that absence of a physical presence in a forum sometimes is not is enough to avoid being brought into unexpected and inconvenient courts.

Source: Nandjou v. Marriott International Inc., D. Mass., ¶16,417