October 30, 2005
Plaintiffs Need More Meat in "Cheeseburger" Lawsuit Against McDonald's
After the Second Circuit Court of Appeals reversed part of his dismissal of the case, the judge presiding over the closely watched obesity lawsuit pending in New York federal court granted McDonald's motion last Tuesday requiring plaintiffs to put more specifics in their complaint. According to one news source, Judge Sweet ruled that plaintiffs must provide more details about the alleged deceptive advertising practices and which advertisements they were complaining about and a connection between their injuries and eating McDonald's foods. The lawsuit, filed on behalf of two teenagers who claim that McDonald's uesd misleading advertising to lure them into eating fattening, unhealthy foods, has been the focus of the media since the House of Representatives passed the "Cheeseburger Bill" a few weeks ago banning similar obesity lawsuits against the food industry.
October 27, 2005
Krispy Kreme Seeks Dismissal of Shareholder Lawsuit
As its stock drops to $4.50 a share, Krispy Kreme and its executive officers moved to dismiss the class-action lawsuit filed against them by Krispy Kreme shareholders last year in federal court in North Carolina. The lawsuit alleges that the company and its top executives issued false and misleading statements about revenue and earnings forecasts and that the company improperly recorded revenue and violated accounting procedures. According to one news source, Krispy Kreme argued in its motion to dismiss that predictions of future financial performance did not constitute a sufficient basis for a securities fraud claim and that plaintiffs failed to show any fraudulent intent behind the company's accounting errors. Krispy Kreme also claims that its warnings to investors that potential business risks could alter the company's performance shielded it from legal liability.
October 24, 2005
7-Eleven Inc. Board of Directors Recommends Shareholders to Accept Tender Offer From Seven-Eleven Japan
7-Eleven Inc.'s Board of Directors recommended on Friday that its shareholders accept an offer from Tokyo-based Seven-Eleven Japan Co. Ltd. ("SEJ"), which already owns all but 27.3% of the Dallas-based convenience store conglomerate, to buy the remaining portion of 7-Eleven Inc. for $37.50 a share. According to one news source, the new offer came after 7-Eleven rejected SEJ's initial offer of $32.50 a share on September 22 as inadequate and "not in the best interest of shareholders." 7-Eleven operates or franchises approximately 5,800 convenience stores in the United States and Canada and licenses about 22,7000 stores worldwide.
Cendant Corporation to Split into Four Separate Public Companies
As reported by Forbes.com,Cendant Corporation announced today that it will split into four separate public companies next summer when the company spins off 100% of the equity of the three new companies to its shareholders. One of the new companies will take over Cendant's hospitality businesses, while the other three will focus on real estate, travel booking and car rentals. The company in charge of Cendant's real-estate services, which will include the Century 21 and Coldwell Banker brands, will take with it the largest share of the conglomerate's revenue — about 40%.
October 20, 2005
House Passes Bill Banning "Cheeseburger Lawsuits"
As reported by the Washington Times, the House of Representatives passed last week a bill banning lawsuits against food makers, sellers and trade associations for injuries related to weight gain, obesity or health conditions related to obesity. The nicknamed "Cheeseburger Bill" is the second bill Congress has tried to pass to ban obesity lawsuits; a similar bill stalled in the Senate last March. The Cheeseburger Bill, expected to be before the Senate next year, protects the food industry from an array of obesity-related lawsuits but does not ban lawsuits for violations of express warranties or violations of state or federal law that result in excessive calorie consumption.
A lawsuit pending in federal court in New York, in which two overweight teenagers claim that McDonald's violated New York's Consumer Protection Act through deceptive marketing practices, falls under the second exception of the Cheeseburger Bill. The Second Circuit Court of Appeals recently reversed a dismissal of the case and held that New York law did not require plaintiffs to show a link between their health problems and McDonald's food. The Court ruled that plaintiffs were only required to show that deceptive advertising was misleading and that plaintiffs suffered injuries as a result.
Burger King Corporation Reported To Have Severed Ties With the NFA
Two months after Burger King's National Franchise Association ("NFA") filed suit against McDonald's, Burger King appears to have severed relations with the franchisee organization. According to one news source, Burger King claims that although it is "clearly pro-NFA," the organization has failed to publicly back certain of the company's marketing campaigns and promotional initiatives. The source speculates that the rift between the company and the NFA may also be connected to Burger King's opposition to the NFA's lawsuit against McDonald's, which the NFA later withdrew. The NFA, which is believed to represent approximately 90% of U.S. Burger King franchisees, alleged in its lawsuit that McDonald's engaged in unfair competition through rigged promotional games, which ultimately led to convictions for employees of McDonald's advertising agency. McDonald's was never implicated in any problems with the promotions. Notwithstanding that, the NFA sued McDonald's, alleging that Burger King franchises lost customers as a result of the promotion.
October 17, 2005
Krispy Kreme Subsidiary Files For Bankruptcy
Krispy Kreme announced today that its wholly owned subsidiary in the Philadelphia area filed for Chapter 11 bankruptcy. Sales of Krispy Kreme's stock were halted this morning so that the company could prepare press releases explaining the bankruptcy filing. The company's stock, which traded for $105 in November 2000, closed at $4.60 today. The subsidiary, Freedom Rings LLC, operates six Krispy Kreme franchises in Philadelphia, Delaware and southern New Jersey, which the company explains is a very small number of its operating stores. According to Forbes, a significant portion of the subsidiary's debt is owed to Krispy Kreme itself. Freedom Rings' Chapter 11 petition claims a debt of less than $50 million, of which approximately $24 million is owed to Krispy Kreme.
October 14, 2005
Mail Boxes Etc. Franchisees Win Appeal Against UPS
More than 2 years after a group of 35 Mail Boxes Etc. (MBE) franchisees sued MBE's parent company, UPS, in California state court, the California Court of Appeals vacated a trial court order denying the franchisees' requests to consolidate their claims in arbitration. The Court of Appeals also struck down portions of arbitration clauses in the franchise agreements as "unconscionable" and held that some of the arbitration costs incurred by the independent trade association representing the franchisees could potentially be shifted to UPS. The franchisees alleged declining profits, loss of branding, as well as loss of franchise territorial protection as a result of converting their MBE stores into UPS stores.
In March 2001, UPS purchased The Mail Boxes Etc. Corp. for approximately $192 million. At that time, Mail Boxes Etc. comprised 3,400 U.S. franchise operations and about 1,000 units internationally, making it the largest consumer shipping and packaging network in the world. UPS launched The Gold Shield Program in early 2003 to convert Mail Boxes Etc. stores into UPS stores.
Cendant Completes Wyndam Acquisition
Cendant Corporation, a global provider of consumer and business services in the travel and real estate industries, completed the acquisition of the Wyndham brand and franchise system yesterday for $101 million. See September 19, 2005 blog entry. As reported by one news source, the newly renamed Wyndham Worldwide will operate as a separate entity within Cendant Hotel Group.
October 13, 2005
Krispy Kreme Stock Continues to Fall
Bloomberg News reports that shares of Krispy Kreme fell 13% yesterday as investors' concern intensified regarding the financial viability of the doughnut giant's largest franchisee, Great Circle Family Foods LLC. Great Circle filed a lawsuit against Krispy Kreme last week alleging that the company was trying to force it into bankruptcy with unreasonable charges for supplies and was preparing a similar involuntary bankruptcy filing against its Colorado, Wisconsin and Minnesota franchisee Glazed Investments. See September 30, 2005 blog entry. Amidst shareholder lawsuits and accounting probes, Krispy Kreme stock has dropped 62% this year.
Pet Hospital Franchisee Subject of Animal Mistreatment Lawsuit
Employees of a Banfield Pet Hospital in Tennesee filed a $5 million lawsuit this week against the franchisee alleging gross misconduct and mistreatment of animals. According to a local new source, the lawsuit alleges that the franchisee, also a veterinarian, mistreated the animals, consumed alcohol before operating on them and made death threats against any employee who reported his behavior. In response to the filing of the lawsuit, Banfield released a statement stating that the franchisee is a private franchise owner and not employed by Banfield. Thus far, there is no indication that plaintiffs intend to hold the company vicariously liable for the franchisee's conduct.
Medical Management International, which operates under the Banfield name, is the nation's largest vet hospital operator, providing veterinary medical services and procedures at more than 380 franchised locations in the US, UK and Mexico. As a result of a partnership with PetsMart, the nation's largest retailer of pet related products, Banfield franchises are located at PetsMart stores nationwide.
Talks of Spinoff Boost Value of McDonald's Shares
Less than one month after McDonald's announced its plan to spin-off its Chipotle chain of Mexican food restaurants, investment analysts are backing suggestions that the company spinoff a chunk of its company-owned McDonald's restaurants. According to MarketWatch, this speculation about a spinoff, which would make McDonald's Operating Company (McOpCo) a separately traded mega-McDonald's franchisee and the remaining portion of the company a franchisor and real-estate company, boosted the company's shares by more than 2% yesterday, at one point making the company the biggest percentage gainer in the Dow Jones Industrial Average.
October 12, 2005
Franchisees Get Beat On Access to Products
Beat the Bookstore is a franchise chain of bookstores specializing in the sale of college textbooks. The company is apparently facing challenges among academic institutions resistant to losing their target market. Five months ago, Beat the Bookstore filed a lawsuit against Utah Valley State College (UVSC) for refusing to provide the franchise company's founder, David Monk, its list of required textbooks. Now, its Colorado franchisee is facing a similar problem. As reported by one local news source, Colorado University (CU) has placed a $3,000 to $3,500 price tag on the list of books its students are required to buy this fall. The franchisee claims that the hefty price tag is unreasonable and violates Colorado law prohibiting public institutions from charging more than the actual cost of copying public information (such as the list) under the Colorado Open Records Act. CU officials, on the other hand, argue that the franchisee is not being treated any differently from other vendors, such as a competing bookstore owned by Barnes & Noble that pays more than $3,500 each semester for copies of professors' book requests. Although the franchisee is unsure whether he will take the dispute to court, he may be hoping that the resulting publicity will encourage CU to cooperate, just as UVSC did five months ago. No word yet on whether Beat the Bookstore plans to intervene on its franchisee's behalf.
October 11, 2005
Bidder Interest in Dunkin' Brands
After acquiring Allied Domecq this year, Pernod Ricard, a French wine and spirits manufacturer, is looking to divest itself of the Dunkin' Brands segment of the Domecq empire. The sale has generated interest among potential bidders despite an estimated sales price of $2.5 billion. This article from MSNBC.com suggests that potential bidders may include some very powerful names, including Triarc (owner of the Arby's system), Doctor's Associates, Inc. (Subway franchisor), Texas Pacific Burger (owner of the Burger King system) and some private equity groups. Pernod expects bids by the end of October and hopes to complete the sale by year-end.
October 06, 2005
More on Red Robin
Picurro Pizzeria Chain Sold and Name Changed
After the founder of Picurro Pizza was indicted for soliciting sex from a minor, sales at Picurro Pizza shops dropped off by 40% and franchisees sued for the right to terminate their relationship based on their interpretation of the "obey all laws" clause, which usually applies to franchisees only. On September 21, the chain was sold to the Fresco Group, whose shareholders included Mr. Picurro's ex-wife. Three franchisees agreed to continue with the group and have changed their business names to Fresco Pizza.
Krispy Kreme Pledges Vigorous Defense to Franchise Claims
Following up on the lawsuit filed on September 29 by the principals of its largest franchisee, Krispy Kreme issued a statement that it was served with the suit, which it intends to vigorously defend.
October 05, 2005
Supreme Court Set to Address Business Issues
This Inc.com article reports that the Supreme Court's current docket includes a review of decisions that may affect businesses. Of particular interest to manufacturers and distributors is Volvo v. Reeder-Simco, an antitrust case out the Eighth Circuit that may redefine the definition of competitors for purposes of the Robinson-Patman Act, which prevents price discrimination among competitors. The distributor claimed that Volvo repeatedly favored larger dealers in competitive bidding (even if they had larger bids) to the distributor's detriment. Volvo claimed that the distributor failed to demonstrate that the so-called "favored dealers" were its competitors because they were outside the distributor's geographic and operational boundaries set by Volvo. The federal jury awarded the distributor $1.3 million, which was trebled under the Robinson-Patman Act to approximately $4.3 million. The Eighth Circuit upheld the verdict over a vigorous dissent, finding that a reasonable jury could find that the distributor's profits which were consistently below those of the favored dealers, were the result of Volvo's discrimination. Oral argument is set to be heard on October 31. In addition, the Court will review Domino's Pizza v. McDonald, in which the principal of a defunct and bankrupt real estate company sued Domino's for race discrimination under 42 U.S.C. sec. 1981. Under this section, the Civil Rights Act of 1866, Mr. McDonald, an African American, claims that Domino's breached its real estate contracts with his company -- causing its bankruptcy -- because of Mr. McDonald's race. The Civil Rights Act of 1866 prohibits racial discrimination in the making or enforcement of contracts. Because Mr. McDonald was not a party to the contract and because Domino's settled the company's breach of contract claim, the district court ruled that Mr. McDonald lacked standing to bring suit under the Civil Rights Act. The Ninth Circuit reversed. This decision, which relied on a Tenth Circuit case, puts the Ninth Circuit in conflict with other circuits that have reviewed the statute and found that a party cannot assert a section 1981 claim unless it was a party to the contract in question. The Court's decision is expected to resolve the split among the circuit courts. Oral argument is scheduled for December 6.
October 04, 2005
Always Get a Receipt
This story from the Denver Business Journal reports that Red Robin continues to expand despite serious personal expense issues with its former CEO, ending in his ouster and at least two shareholder lawsuits. Apparently, an audit revealed that the CEO claimed $1.25 million in personal expenses, including chartered airplanes and entertainment expenses inconsistent with the company's policy. The company's CFO was also dismissed as a result of the CEO's expense issues.
October 03, 2005
The Finer Points of Arbitration
The Ninth Circuit Court of Appeals agreed to an en banc rehearing on a franchise dispute over the enforceability of an arbitration clause in Nagrampa v. Mailcoups. The plaintiff, a former Supercoups franchisee in California, argued that the agreement should not be enforced because it would be more expensive for her to arbitrate than sue in court and she would be required to travel to Boston for the arbitration. In its original decision, the Ninth Circuit ruled - "[i]n accordance with the convincing analysis of [its] sister circuits" - that an arbitrator, not a court, must decide whether an arbitration agreement is a contract of adhesion. The court held that this decision was based on the fact that the issue involved the enforceability of the contract as a whole, rather than just the arbitration provision, and it was supported by Congress's intent to move arbitration matters out of the courts as quickly as possible. This decision was withdrawn pending the decision of the en banc panel. The en banc hearing occurred last Tuesday. In this article on law.com, the author states that the judges' questioning at oral argument "seemed to signal Tuesday that when it comes to deciding if a mandatory arbitration agreement is fair, judges -- not arbitrators -- should have the last word." This ruling, if it comes as predicted by the author, would set the Ninth Circuit apart from its sister circuits in permitting courts to inquire into the enforceability of an agreement before compelling arbitration under the agreement. The Arbitration Blog last week posted a link to listen to the oral argument in the case.