When is Unreasonable, Reasonable?
bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
May 2014
47th Annual International Franchise Association Legal Symposium
David Gurnick, along with representatives from Brinker International (known for the Chili’s and Macaroni Grill brands) and Restaurant Services Inc. (national cooperative of Burger King franchisees) were invited to speak at the IFA’s Annual Legal Symposium in Chicago, discussing aspects of the cooperative business model. Barry Kurtz and Tal Grinblat also attended. Tal served as roundtable facilitator on manufacturing issues facing franchise companies.
Barry Kurtz & Bryan H. Clements in Fresno County Bar Association’s Bar Bulletin
“Many unsuspecting businesses that have licensed their trade marks and marketing plans to others without providing the required disclosures or registering as a franchise have been found to be in violation of federal and state law.” Click Is Franchising the Right Model for Your Client’s Business? for further information.
Tal Grinblat & David Gurnick in American Bar Association’s Franchise Law Journal
“Implicit in the franchise relationship is that the franchisor owns intellectual property, which others cannot use without the franchisor’s permission. But this fundamental premise is not entirely correct.” Continue reading: OPIP: When Is It Lawful to Use Other People’s Intellectual Property in Franchising?
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: Crown Imports, LLC v. Superior Court and Classic Distributing & Beverage Group.
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.