Wiggin and Dana's Franchise Law Blog

Franchise Under Fire

Having been financially pummelled by shareholder lawsuits and an SEC investigation into its financial reporting, Krispy Kreme now faces claims from its franchisees. Most recently, the principals of its largest franchisee filed suit against the company, alleging that the company engaged in deceptive trade practices by defrauding them into signing personal guarantees and by billing the franchisee millions over what it represented its daily operations costs would be. The suit also alleges that Krispy Kreme misappropriated advertising funds paid by the franchisees. The lawsuit personally names Krispy Kreme former chairman and CEO Scott Livengood, as well as a number of former or existing Krispy Kreme officers. The plaintiff franchisee, Great Circle Family Foods, LLC, operates 30 Krispy Kreme franchises and services 800 wholesale accounts.

Kid-Friendly Pyramid Scheme

Of interest to QSR franchisors -- In keeping with the continuing efforts to address childhood obesity, the Department of Agriculture has recently unveiled a web tool for a junior food pyramid to promote healthy eating among children. The information on the kid-friendly food pyramid is no different from the information on the pyramid released last year. This article from MedPage notes that the childhood obesity rate has tripled to 15% over the last twenty years.

Blimpie Faces Lawsuit Alleging Mismanagement

In a lawsuit filed in Bridgeport, CT on September 15, 45 subfranchisors accused Blimpie, the sandwich shop franchisor, of misappropriating advertising funds and marketing fees. The subfranchisors also allege that Blimpie withheld their share of initial and continuing franchise fees. The suit seeks a declaratory judgment, an accounting and the appointment of a receiver. The subfranchisors also filed a motion to appoint a receiver pendente lite. The companies allege that Blimpie recently cited financial challenges as the basis for failing to send the July payments to the subfranchisors. Blimpie, based in Atlanta, GA, has not yet responded to the complaint, but is facing a class action arbitration from its franchisees filed in July 2004.

Burger King Keeps the Ball Rolling

Reporting a 60% EBITDA gain for the fiscal year, Burger King is looking to re-enter the stock market. When Diageo sold it in 2002, Burger King went private, but the company struggled to maintain its position as the second largest player in the burger market. See July 12, 2004 blog entry. Based on the strong gains, Burger King's CEO announced that an IPO for the company may come in this fiscal year. The Brand Autopsy Blog reprinted a Wall Street Journal interview with Brenneman on his successful strategy in May 2005, available here.

McDonald's to IPO Part of Chipotle

McDonald's Corporation announced on Wednesday that it plans to sell a minority stake in the Chipotle Mexican Grill chain through an IPO. According to the Chicago Sun Times, McDonald's expects to launch the IPO in the first quarter of 2006 and invest $1.8 billion in capital expenditures. McDonald's also intends to open 850 additional McDonald's restaurants in 2006.

Curves Franchisees Fight State Tax Assessments

An Iowa news source reported this week that the Iowa Department of Revenue and a group of Curves franchisees are locked in a legal battle over whether the franchisees are required to pay more than $500,000 in sales in sales taxes that were never charged to their customers. At the crux of the dispute is the issue of whether the services provided by Curves constitute "instructional services," which are exempt from Iowa sales tax, or fall under the same category as membership fees at health clubs, which are taxed. A spokeswoman for the franchisor, Curves International, stated that while the company is "not in the business of providing legal or tax advice" to its franchisees, it requires its franchisees to comply with all applicable federal and state laws. This standard franchise agreement requirement may subject any franchisee who does not pay the outstanding taxes to possible termination if it is determined that Curves' products are subject to Iowa sales tax. With over 9,000 locations worldwide, Curves is the largest fitness franchise in the world and is dedicated to providing fitness, exercise and nutritional information and programs for women.

Debate Over Rising Gas Prices

Unlike the 1970s, there doesn't presently appear to be a gas shortage pushing gas prices over the $3.00/gallon mark. This San Jose Mercury article posits that the hikes mean nothing but profits for Big Oil. As for little oil - or the gas station franchisees - some claim that their manufacturers increased prices are pushing them out of the market. In this Philadelphia Inquirer story, Wiggin and Dana's Joseph Schumacher joins other experts in considering the issue of a Lukoil franchisee protesting the company's prices. Schumacher argues "Just to say 'I'm being priced out of the market' is not sufficient. There has to be some violation of the law."

Federal Judge Annuls Windshield Doctor Trademark in Glass Doctor's Trademark Infringement Action

A judge in the United States District Court for the Eastern District of Virginia entered summary judgment yesterday against Virginia businesswoman Jody Korman, finding that her 2003 "Windshield Doctor" trademark violated Texas-based Synergistic International LLC's "Glass Doctor" trademark. Synergistic, which owns the "Glass Doctor" trademark affixed to over 1100 glass repair and replacement stores in the United States and 24 foreign countries, sued Korman in January for trademark violation. According to one local news source, Synergistic also claimed that Korman was unjustly enriched by "riding the coattails" of the company's success. Finding that there was a likelihood of confusion between "Glass Doctor" and "Windshield Doctor," the court annulled Korman's 2003 trademark and ordered the parties to reach an agreement on payment arrangements for damages.

Cendant Corporation Buys Wyndham Brand

Cendant Corporation, one of the world's largest franchisor of hotels and residential real estate brokerage offices, announced last week that it has agreed to buy the Wyndham brand and franchise system for $100 million. The deal, which covers 100 hotels in the United States, Mexico and the Caribbean, will transform Cendant from a pure franchising entity into a diversified management and franchise company for the first time in its 15-year history. The deal also includes the worldwide rights to the Wyndham brand for time-share development and sales. As reported in its own press release, Cendant will acquire franchise agreements for 82 hotels and management contracts for 29 hotels from Wyndham International Inc., an affiliate of The Blackstone Group. The transaction is scheduled to close next month and is subject to the satisfaction of certain closing conditions, including regulatory approvals.

Krispy Kreme's Jack McAleer Retires

John N. "Jack" McAleer, Krispy Kreme's executive vice president, retired last week after 24 years with the company. McAleer, the son of a Krispy Kreme mega-franchisee who bought the company in 1981, follows six other executives that left Krispy Kreme in the last three months. Although the company's spokeswoman could not be reached for comment about McAleer's departure, some speculate that McAleer's decision to retire may be linked to the SEC's investigation into Krispy Kreme's accounting practices and the company's internal probe, which resulted in the discharge of six executives in June.

Franchisee Advocate Group Claims GNC Thwarted Prospective Members

As reported by a local Pittsburgh newspaper, a newly-formed General Nutrition Operators Association ("GNOA") claims that health food and supplement giant GNC has been undermining its efforts to form a franchisee association. The GNOA claims that vendors who agreed to contribute free products and offer discounts for new members were "warned off" by the company. GNC denies the claim. Although GNC has approximately 1,241 domestic franchised stores, the GNOA has signed only a small number of members, and GNC denied that it even knew of the new association's existence. While certain state laws prohibit a franchisor from preventing or interfering with a franchisee association, the franchisor is under no obligation to deal with the association, once formed. In a statement, GNC announced its policy that it does not endorse independent associations.

GNC has recently been working through litigation with 400 franchisees over the company's marketing practices. The case was scheduled for mediation on Friday. For more about franchisee associations generally, click here.

Justice Department Sues National Association of Realtors

The Multiple Listing Service, familiar to any home buyer or seller, allows real property information to be available to realtors, even if their office or their real estate chain is not the listing agent. The Justice Department, however, has argued in a recent lawsuit that the National Association of Realtors' new policy restrains competition by allowing traditional brokers to block access to their clients' listing to the detriment of web-based brokers. The government claims that this policy often works against the broker's clients' interest in selling their homes by depriving non-traditional brokers access based on their business model. The DOJ press release can be viewed here.

White Hen Pantry Sued For Attack At Franchised Store

White Hen Pantry, Inc., a franchisor of over 200 convenience stores in Illinois, Indiana, Massachusetts and New Hampshire, was named in a lawsuit last week brought by the family of a teen who was allegedly raped by a store employee in July. According to NBC's Chicago news affiliate, the suit named White Hen Pantry, Inc., as well as the franchisees of a store located in the North Shore, Illinois area where the alleged incident occurred. The victim's family claims that despite the employee's frequent and inappropriate behavior toward female customers the store manager failed to terminate or discipline him. Additionally, while plaintiffs appear to be suing White Hen Pantry, Inc. for direct negligence, the issue for the company may be whether the court will find an agency relationship between White Hen Pantry and its franchisees to implicate liability on White Hen Pantry for the criminal actions of a store employee. The suit seeks unspecified damages in excess of $250,000.

Hardee's Settles Discrimination Lawsuit

Hardee's Systems, Inc. agreed yesterday to pay $34,000 to settle a job applicant's lawsuit alleging that a Hardee's restaurant in Missouri repeatedly refused to hire her because she was facially disfigured. In addition to the monetary aspect, the settlement requires the company to apologize in writing and train its managers and human resources employees regarding employment discrimination. According to one news source, the applicant, who has Treacher Collins Syndrome, alleged that she applied more than once for an entry-level position at the restaurant but was never hired and that others with no better qualifications were hired instead. The EEOC claimed that the discrimination constituted a violation of the Americans with Disabilities Act.

In & Out House More or Less Out

This article updates the September 8 blog entry below. In & Out House has tentatively agreed to change its name in an agreement with California franchisor, In-N-Out Burger.

Sex Charges Against Franchisor's Founder Prompts Franchisees to Sue

Three Picurro Pizzeria franchisees filed suit this week seeking to dissolve their franchise agreements after Peter Picurro, the founder of Arizona's Picurro Pizzeria franchised restaurant chain, was arrested on August 21 and accused of luring a minor for sexual exploitation based on communications he had on the Internet with an undercover police detective posing as a 14-year-old girl. According to one local news source, since Picurro's arrest, the franchisees have experienced a sharp decline in sales, some as much as 40%. While franchise agreements often permit the franchisor to terminate the relationship if its franchisee engages in conduct that harms the reputation of the franchise name, it is unclear whether franchisees have the same right when the franchisor's conduct is at issue. In their lawsuit, the franchisees rely on provisions in the franchise agreements requiring them to possess "good moral character and reputation" and forbidding franchisees who commit a felony, fraud or any acts that adversely affects the goodwill of the Picurro name from operating a franchise. The franchisees argue that these provisions, although geared towards franchisees, should apply equally to Picurro.

Is That Near the In-N-Out Burger?

An Aspen restaurant called the In & Out House may soon be faced with a name change (which might be a blessing given that the word outhouse is part of the restaurant's name) based on pressure from California-based In-N-Out Burger, a burger franchise with units in California, Nevada and Arizona. In-N-Out Burger was founded in 1948, while the In & Out House has operated in Aspen for two decades. The parties are presently negotiating over the name although In-N-Out Burger has no plans to expand into Colorada at present. And yes, Donnie, it's near the In-N-Out Burger.

Mister Softee Investigates "Rip-Off Trucks"

Policing your marks can be difficult and expensive, particularly when the infringers are on wheels. This New York Times report follows the efforts of Mister Softee, the largest franchisor of soft ice cream trucks in the United States, to shut down infringing trucks. The company hired private investigators to identify independent ice cream trucks that resemble the Mister Softee vehicles in their color scheme, logos or jingle. The investigation turned up hundreds of operators who paint their ice cream trucks blue and white and create menu boards and logos identical to Mister Softee's, including the company's famous cone-head trademark. According to the investigators, they have gathered enough evidence against 30 operators of "rip-off trucks" in New York City and on Long Island for Mister Softee to bring trademark and copyright infringement lawsuits against them.

Quiznos and Franchisees To Arbitrate over Exclusivity

A Los Angeles County judge told Quiznos last week that it could not shut down two franchises in Long Beach, California and ordered the parties to arbitrate their dispute over the franchisees' exclusivity rights. The franchisees of the Long Beach stores claim that the company's opening of two new stores less than two miles away siphoned customers from their two franchises and caused a one-third drop in revenue. According to one news source, although the Quiznos franchise agreements do not restrict the company from opening franchises close to existing locations, the franchisees claim that the company breached the implied covenant of good faith and fair dealing by "dump[ing] competition on top of . . . existing franchisees." Although the franchise agreements provided for arbitration in Colorado, the court denied Quizno's motion to compel arbitration in Colorado and ordered arbitration to occur in Los Angeles County instead, where the franchises are located. This decision was a clear departure from federal policy enforcing forum selection clauses in arbitration as part of favoring arbitration under the Federal Arbitration Act.

Burger King Sues Metal Band Over Cease and Desist Letter

In a preemptive strike, Burger King recently sued heavy metal band Slipknot after the band claimed that the company unlawfully copied its act in ads featuring a fictitious rock band. Slipknot is made up of nine masked men from Iowa. Filed in the Southern District of Florida, the lawsuit seeks a declaratory judgment that the company's depiction of a six-member masked rock band "Coq Roq" in its Chicken Fries ads does not violate Slipknot's rights. Burger King filed suit after receiving a cease and desist letter from Slipknot demanding the removal of the ads and threatening suit for trademark infringement, unfair competition and violation of right of publicity. Burger King has also launched a Coq Roq website as part of the campaign.