Wiggin and Dana's Franchise Law Blog

...While Wendy’s Cuts Off Ties With Debtor Franchisee

As these two pieces report, Wendy's has terminated its franchise agreement with the owner of 13 franchises that closed abruptly in western Massachusetts last week, as the state Attorney General announced that it is investigating the closures to determine if any wage or fair labor laws were broken. Wendy’s says it is working with the AG’s office to pay back wages to some 350 employees of the restaurants left in the lurch by the closures.

Jury Sides With El Pollo Loco-Mexico Against U.S. Counterpart in Trademark Action

According to this release issued by US-based El Pollo Loco, Inc., a quick-service restaurant chain specializing in flame-grilled chicken, a jury in Laredo, Texas has awarded damages of approximately $22 million to El Pollo Loco-Mexico in a suit alleging that the US entity failed to exploit certain Mexican trademarks issued to it by El Pollo Loco-Mexico and to develop new restaurants in Mexico. Further post-trial briefing is expected in early August.

Every Dollar Counts: Dollar Financial Settles Litigation

Dollar Financial Corp (NASDAQ: DLLR) announced that on December 19, 2006, it settled its litigation with IDLD, Inc., the previous owners of DFC’s We The People legal document preparation service franchise. DFC purchased We The People in early 2005 and later sued IDLD alleging concealment of franchise sales and breaches of representations and warranties. DFC will, among other things, receive approximately $3.25 million of funds previously escrowed from the We The People acquisition, according to this article.

Call Dave Grohl: The Fu Fighters

Forty Mama Fu’s Asian House franchisees and investors files suit against Atlanta-based Raving Brands Inc. and its founder, Martin Sprock, according to this article. Raving Brands owns numerous restaurant concepts, including Mama Fu’s and Moe’s Southwest Grill, that collectively have more than 600 franchises. The lawsuit alleges that the three year old Mama Fu’s failed to provide the plaintiffs with promised support, committed fraud, required payments to third party vendors that benefited corporate officers and commingled personal and business funds. Raving Brands’ President and Chief Operating Officer, Steve Lamastra, said that the suit is without merit and that Raving Brands intends to defend vigorously.

To continue the quasi-musical theme, see our previous report on Raving Brands tussle with Jerry Garcia’s estate regarding the use of his lyrics and image in Moe’s locations.

$11 million -- That's a Lot of Pancakes!

IHOP Corp. announced that it has agreed to pay the IRS $11 million in taxes and interest, to settle a dispute about the company's federal income taxes from 2000-2003. The dispute involved the company's treatment of certain franchise fee income. As a result of this agreement, IHOP will also restate its income for 2004 and 2005, generating an expected tax refund of about $3.1 million, and thereby reducing the net cash impact of the deal to approximately $7.9 million.

Hooters Can't Move Liqour License, Sues for Denial of First Amendment Rights

The Hooters restaurant in Troy, Michigan has been operating for ten years, but when it tried to move to a new location and transfer the liquor license, the City Council balked, rejecting the transfer application by a 4-3 vote according to this article. Hooters, apparently convinced that this decision was motivated by the scanty garb of its waitresses, sued in federal court, alleging a discriminatory denial of the chain's constitutional right to free expression.

EEOC Files Complaint Against Hometown Buffet

NBC News in San Diego reports that the EEOC sued HomeTown Buffet for sexual harassment, claiming that at least four female employees at a El Cajon restaurant were repeatedly subjected to hostile work conditions, including lewd comments, inappropriate gestures and other forms of harassment. HomeTown Buffet declined to comment on the lawsuit.

Illegal Immigrants Sue Wendy’s For Lawyer’s Mistake

A group of 40 illegal immigrants sued Wendy’s after the company terminated their employment with Café Express, a Wendy’s subsidiary. According to this story, shortly after it acquired the Café Express chain, Wendy’s discovered that an outside law firm failed to complete paperwork necessary to allow the immigrants to apply for citizenship. When Wendy’s learned of the error, it was required by law to fire the employees. Wendy’s spokesman Bob Bertini called it an “extremely unfortunate situation” due to “the mistakes made by others” that began before the acquisition.

Ryan's Settles "Meritless" Shareholder lawsuit

Restaurant-chain operator Ryan's Restaurant Group Inc. announced that it settled a class action shareholder lawsuit involving the pending acquisition of Ryan's by Buffets Inc., owner of the Old Country Buffet. According to this report, Ryan’s contended that the South Carolina lawsuit was “without merit”, but agreed to settle in order to “avoid the expenses and distractions associated with litigation.” It is not apparent what price Ryan’s was wiling to pay to avoid this “distraction,” as settlement terms were not disclosed.

Denny’s Medical Leave Policy Under Fire

The Baltimore Sun recently reported the EEOC filed a discrimination lawsuit in a Baltimore federal court against Denny’s on behalf of former workers nationwide who have disabilities. According to this report, the EEOC claims that Denny’s violated the American with Disabilities Act by failing to provide reasonable accommodation for a former restaurant manager who suffered a leg amputation. The EEOC contends that Denny’s medical leave policy does not comply with the ADA because Denny’s limits absences to a maximum of 26 weeks, and in some cases 12 weeks, even when disabled workers are entitled to additional leave under the federal law.

Government Claims That Women’s Place Is In The Kitchen

According to this article, the EEOC has sued the Outback Steakhouse chain for denying women adequate opportunities and training to advance within the company. In an ironic twist, the government’s chief complaint is that female employees were passed over for assignments in company restaurant kitchens for less qualified male employees, which in turn hampered their career opportunities. In a statement about the dispute, Mary Jo O’Neill, Regional Attorney for the EEOC’s Phoenix District, commented that “[a]pparently, when being in the kitchen leads to a lucrative position, women suddenly no longer are welcome.”

Ice Cream Franchisees Sue Over Melting Sales

Two Montreal businessmen are suing one of the country’s largest fast-food franchisors for nearly $2.5 million, claiming they were duped into buying a La Cremieri ice cream and frozen yogurt franchise. As this article in the Montreal Gazette reports, Jerome Balaramanpillai and Sintram Royce-Mayo sued MTY Tiki Ming Enterprises Inc. in the Quebec Superior Court, claiming that MTY representatives made false and misleading statements about the past and the likely future sales of the La Cremieri outlet, and that MTY also failed to disclose that it was planning to open another La Cremieri outlet only 350 feet away from the plaintiffs’ store. MTY denied the allegations and filed a counterclaim, asserting that plaintiffs’ mismanaged the franchise to the point where it is worthless.

KFC/Taco Bell Franchisee Finds that Harrassment Hurts

The Equal Employment Opportunity Commission announced the settlement of a sexual harrassment case against a Sunnyvale, California Kentucky Fried Chicken/Taco Bell franchise. As detailed in this report, the suit alleged that the store's manager harrassed several Latina immigrant workers and created a hostile work environment. While denying liability, the franchisee agreed to settle the case for a payment of $349,800 and "significant injunctive relief", including implementing and distributing a sexual harrassment policy in English and Spanish to all employees, posting a notice outlining its complaint procedure, and requiring the manager to issue a letter of apology to each of the three plaintiffs.

Anxiety Doesn't Get Franchise Executive Out of Court

A Manhattan court has denied the request of the president of two companies that together own approximately 400 Blimpies restaurants to be excused from testifying in court in connection with a landlord-tenant dispute, notwithstanding his claim of severe anxiety. As this article in the New York Law Journal reports, the judge concluded that "[a]lthough testifying in court may be stressful for Mr. Lagano, as it may be for many witnesses, there is no testimony indicating that his appearance to testify in court is life-threatening or that [he] is 'incompetent.'"

Pizza Inn Pays Exec $2.8 Million To Stay Out

Restaurant chain Pizza Inn has agreed to settle a long-standing legal dispute with its former president and chief executive for $2.8 million. After Mr. Ronnie Parker was terminated in 2004, the company sought $9.4 million in an arbitration, and Mr. Parker counterclaimed for $5.4 million under the terms of his employment agreement. The company claimed that the reconstitution of its board in 2004 did not constitute a "change of control," which would have triggered substantial payouts under the agreement. The settlement resolves all pending litigation among the parties.

McDonald's Franchise Hit with Harrassment Suit

The EEOC has brought a sexual harrassment, retaliation and hostile work environment action against a Colorado McDonald's franchise, alleging that male managers and co-workers at the outlet repeatedly engaged in sexual acts targeted at a number of female employees. This article in the Durango Herald details some of the more egregious episodes, which occurred in late 2003 and early 2004, when the two victims named in the suit were 17 and 18 years old. The action seeks money damages and an injunction barring further violations and mandating sexual harrassment training for male managers and employees.

No Free Lunch Today

Two Red Lobster customers who sued the chain alleging racial discrimination -- claiming that an Iowa store deliberately laced their salads with fish tank cleaner because they are black -- have now dropped their case, this Iowa City Press-Citizen story reports.

Food Poisoning Allegations Filed Against Filiberto's . . .

Arizona restaurant chain Filiberto's is the subject of a lawsuit after at least 10 San Diego residents fell ill with food poisoning after eating there in August. According to this article, the San Diego County Health and Human Services Agency and the San Diego County Department of Environmental Health are working together to investigate the Shigella outbreak, while one alleged victim is seeking a legal resolution.

While Jury in Cracker Barrel Case Smells a Rat

In May 2004, Ricky Lee Patterson and his mother claimed to have found a dead mouse in their soup at a Virginia Cracker Barrel restaurant. They then attempted to extort $500,000 from the chain. Last week, they were both sentenced to 12 months in jail. See this article for the sordid details.

Wendy's and Hedge Fund Duke it Out Over Bankrupt Franchisee . . .

A South Carolina paper reports that a federal bankruptcy judge has agreed to the request of a Connecticut-based hedge fund, SPCP Group LLC, to appoint a trustee to run WenAmerica LLC, the owner of more than 50 now-closed Wendy's restaurants, but rejected SPCP's effort to force franchisor Wendy's International Inc. to continue to supply the franchised stores. SPCP claims that WenAmerica owes it about $3.1 million and wants the stores to reopen so that they can be sold as an 'ongoing business,' but Wendy's asserts that it officially terminated WenAmerica's franchise agreement before it went into involuntary bankruptcy, so that it has no supply obligations under the automatic bankruptcy stay.

Starbucks in Iced Water?

A 23-year old Starbucks regular who felt "betrayed" when the store refused to honor a free iced-drink coupon has sued the retailer, allegedly on behalf of the "thousands who were misled by the offer." The complaint seeks damages of $114 million, a number the plaintiff claims is meant to approximate the average cost of one cup of Starbucks coffee per day for each of the people allegedly refused use of the coupon. Starbucks circulated the coupon via email to selected employees and instructed them to forward it to "friends and family," but then backed out when they saw the breadth of the response, this article reports.

Wonder If He Paid Royalties...

As this story reports, the former chief manager of First Equity Ventures, LLC, a Tennessee Papa John's Pizza franchisee, has been charged with failing to remit collected sales tax totalling $1,078,392.27 in what is being called the largest state tax fraud in state history. If convicted, Malin could be sentenced to a maximum of 92 years in prison.

A Not-So-Sweet Tradition for Krispy Kreme: Another Franchisee Lawsuit Settled

As reported in this article, Krispy Kreme Doughnuts Inc. announced in an 8-K filing that it has reached another in a string of settlements of franchisee litigations, this time with Illinois-based franchisee Sweet Traditions LLC, with stores in St. Louis and Chicago. Sweet Traditions sued Krispy Kreme in July 2005 to force the franchisor to continue to supply it with doughnut mix and other necessary supplies, even though it owed Krispy Kreme more than $2.4 million and had stopped paying the franchisor. Early in the case, as noted in this article, an Illinois judge granted Sweet Traditions a temporary restraining order, finding that Krispy Kreme’s “severe mismanagement” contributed to the franchisee’s “perilous financial condition.” The case was later removed to federal court and then went into arbitration. In Friday’s announcement, Krispy Kreme said that that the settlement, which included the dismissal of the case with prejudice as of August 28, would not result in any accounting charges for the donut maker.

Fried Chicken Franchisor Family Plays Chicken

A Miami District Court judge has ordered that a family feud among the owners of the Pollo Campero restaurant chain must move to Guatemala, where many family members are from but where the plaintiff, Arturo Gutierrez, claims he will not receive a fair trial in light of other family members’ political power. For more information, see this article.

We’ll Ship It Our Way, Thanks

Over 130 Mail Box Etc. (“MBE”) franchise owners nationwide have sued UPS, which bought the system in 2001, for alleged “strong arm tactics” that reduce store profits. All other former MBE franchise owners “have either converted to the new UPS Store format, closed or ‘gone independent’.” Over 200 franchisees who converted to the UPS format have also sued UPS, alleging that the format has reduced their profits. For further details, see this article.

Wendy’s Cleared -- Federal Jury Finds No E. Coli Link to Illness

According to this article, it took only 30 minutes for a federal jury in Portland, Maine to reject a woman’s claim that she was hospitalized for 12 days due to E. Coli bacteria in a Wendy’s bacon cheeseburger. The jury heard evidence that the woman’s illness, which was serious, may have been caused by a pre-existing enzyme deficiency and apparently did not believe that the Wendy’s cheeseburger made her sick. The woman’s only expert was her treating physician. Wendy’s presented testimony from three out-of-state experts concerning the cause of the illness. Wendy’s spokesman Bob Bertini commented on the speedy verdict and stated, “We feel that our food safety procedures have been validated.” The verdict follows a highly publicized incident in which a Las Vegas woman fraudulently claimed that she had found a human finger in a bowl of Wendy’s chili, which resulted in prison sentences for her and her husband.

Krispy Kreme – the Great Circle Shrinks

According to this article, in what Krispy Kreme Doughnuts Inc.’s CEO called “another step in the turn around of Krispy Kreme,” Krispy Kreme settled litigation with its largest franchisee in Southern California, Great Circle Family Foods LLC. Great Circle sued Krispy Kreme, alleging that Krispy Kreme tried to force Great Circle into bankruptcy. Under the settlement, Krispy Kreme subsidiary Southern Doughnuts LLC will buy three Krispy Kreme franchises from Great Circle for $2.9 million, leaving Great Circle with 17 franchises. Earlier this year, Krispy Kreme revoked Great Circle’s license for failure to pay royalties and fees, but that aspect of the parties’ dispute settled quickly when Great Circle agreed to resume payment. Over the past year, Krispy Kreme has been reducing its number of stores in an effort to improve its performance.

No Control, No Liability

According to this article, the New Hampshire Supreme Court ruled earlier this week that McDonald’s was not liable for injuries suffered by an employee of one of its franchisees. In 2003, the employee was badly beaten by two men during an attempted robbery at the restaurant. The court held that, although McDonald’s oversaw some parts of the franchisee’s operation such as food safety, shift management and the “wholesome” appearance, McDonald’s was not responsible for the restaurant’s security. Security was the responsibility of the franchisee. McDonald’s, therefore, could not be held liable. The court compared the case to a similar one in Illinois where McDonald’s was held liable after another franchisee’s employees were injured during a robbery. In that case, however, McDonald’s had used its own staff to work as security supervisor and operations manager.

Super Dispute

In a lawsuit filed in Mississippi state court, Algernon Stamps Jr. is alleging that his father, Algernon Stamps Sr., is blocking him from using the name “Stamps Superburger.” Senior runs Al’s Deli, which has featured the giant burger for 20 years. Several years ago, Junior opened a second restaurant calling it “Stamps Superburger.” A third location is operated by another son in Houston, Texas.

Junior was interested in franchising the business but a dispute arose over what share his wife should get. Then, in March, Senior trademarked the name “Stamps Superburger” with the state just before Junior tried to do the same thing. Now, Junior can't pursue his franchising dream. Junior doesn’t dispute that his father invented the burger or the “Stamps Superburger” name, but he believes his location has been more successful than his father’s. “As far as I’m concerned, we have put this business on the map,” Junior stated.

Dropping a Dime

In March, we reported that a three-member panel of the American Arbitration Association entered an interim award against Thomas Kinkade Co., ordering it to pay $860,000 for defrauding the former owners of two failed Thomas Kinkade Signature Galleries in Virginia.
Last week, a judge in Michigan dismissed a lawsuit filed by Thomas Kinkade Co. that accused the former owners’ attorney of illegal eavesdropping during the arbitration hearing. The lawsuit, filed a week after the arbitration award was entered, alleged that the owners’ attorney improperly transmitted over the Internet a live feed of arbitration testimony to a witness. The witness allegedly used the instantaneously transcribed testimony to help the attorney devise questions for other witnesses. The judge rejected Thomas Kinkade Co.’s claim, finding that Michigan’s eavesdropping statute requires a private conversation and that the arbitration proceeding was not a private conversation.

Wal-MartAde

In this March 14, 2006 entry, we reported that independent Coca-Cola bottlers were seeking an injunction against Coca-Cola Co. and Atlanta bottler Coca-Cola Enterprises to stop plans to change how Powerade is delivered to Wal-Mart Stores. According to this report, Coca-Cola stated in a recent court filing that it felt “ominous” pressure that Wal-Mart would create its own private-label sports drink if delivery methods were not changed. Coca-Cola also stated in the filing: “This is no mere idle threat...[t]his is precisely what Wal-Mart has done with water sales in its stores where the two largest water products are warehouse delivered and Coca-Cola’s and Pepsi’s direct-store delivered water brands are left to fight for third place.” Apparently, even Coca-Cola fears Wal-Mart.

Bad Medicine?

According to this article in the St. Louis Business Journal, over 70 Medicine Shoppe franchise owners representing 82 stores filed for arbitration in Missouri against Medicine Shoppe International Inc. (MSI) and its parent company, Cardinal Health Inc. MSI has about 950 pharmacy franchises in the U.S.

The franchisees apparently believe that because of changes in the pharmacy industry and the franchise business, MSI’s royalty fee structure is overwhelming and makes it impractical to compete and survive. The franchisees seek to have their royalties reduced. The franchisees' Arbitration Demand includes claims for: MSI’s failure to provide accountings of, and failure to perform, marketing and advertising obligations; Cardinal Health’s “conflict of interest and anti-competitive” activities and encroachment.

In an e-mailed statement to the St. Louis Business Journal, MSI stated that: "MSI is committed to its System and franchisees. We will continue strong efforts toward offering the programs and services our franchisees want and need. This weekend, at our national meeting, we are announcing many new programs and services that will help our franchisees succeed in a changing retail pharmacy atmosphere. These announcements should address nearly every concern raised in the Demand for Arbitration- all without the expense and distraction of a legal proceeding.”

Trouble In The Den

Bear Rock Franchise Systems Inc., franchisors of the “quick-casual” restaurant concept Bear Rock Cafe, is facing two lawsuits in Wake County, North Carolina Superior Court. The first lawsuit, filed by Alabama franchisees Thomas and Julie Nicholson, alleges that Bear Rock and its CEO Gary Bryant provided them with intentionally or negligently misleading and false representations about owning and operating a Bear Rock franchise. The franchisees entered into an agreement in April 2002 and eventually closed their restaurant in May 2005. They contend that, despite Bear Rock’s projections on earnings, they lost money. In addition to the fraudulent and negligent misrepresentation claims, the complaint alleges breach of contract and unfair and deceptive trade practices.

In the second lawsuit, Merles Inc., owner of a Bear Rock Cafe franchise in Charlotte, NC, is claiming breach of contract and unjust enrichment by Bear Rock. Apparently, Bear Rock agreed to take over the management duties of Merles’ restaurant. Merles alleges that Bear Rock failed to manage and operate the restaurant "in a first class manner," which ultimately led to the cafe going out of business.

Krispy Kreme Settles

As a follow-up to this entry, Krispy Kreme announced that a proposed settlement has been reached in an ERISA class action filed last year in the U.S. District Court for the Middle District of North Carolina. The lawsuit alleged that Krispy Kreme and certain members of its Board of Directors, officers and employees breached duties with respect to the management and administration of Krispy Kreme’s 401k plan and profit sharing stock ownership plan. The settlement would include a one time cash payment of $4.75 million to be made by Krispy Kreme’s insurer to certain participants of the plans. Krispy Kreme and the individual defendants deny any wrongdoing and will pay no money in the settlement. The settlement still must be approved by the court.

D'Complaint

D’Mustard Co. Inc., a restaurant management and franchising company that describes its restaurant concept as “A Dog and Burger Joint,” was sued in federal court in Norfolk, VA by a South Carolina couple. Plaintiffs contend they paid thousands of dollars to open five d’Mustard restaurants in South Carolina, Georgia and Connecticut, but never received the assistance that d’Mustard agreed to provide. Consequently, Plaintiffs claim it was impossible to open any of the restaurants and they seek approximately $600,000 in damages for breach of contract and fraud. The fraud claim arose because d’Mustard allegedly failed to disclose in its franchise offering circular that J. Michael Gatchell, vice president for franchise development, sales and marketing, previously filed for personal bankruptcy five times. Gatchell apparently wasn’t aware of the lawsuit and was surprised, stating, “We were really looking forward to working with them.”

Bell Curve

A group of 79 independent franchise owners filed a lawsuit against Bell Canada over Bell’s alleged refusal to let the franchisees transfer their stores to an income trust. Canadian income trusts are business entities that buy assets, including various businesses that generate cash flow from operations or royalties. In late 2004, Owen Mitchell approached the franchisees, who operate Bell boutiques in Quebec and Ontario, about purchasing their stores to create an income trust. Bell objected to the deal at first, but then grew interested and even considered rolling corporate-owned boutiques into the income trust. Bell engaged in negotiations with the franchisees and Mitchell’s group throughout 2005. In January 2006, however, Bell allegedly told the franchisees that it wouldn’t participate or consent to them doing so.

The franchisees claim that their contracts with Bell stipulate that the company will not unreasonably withhold consent to the sale of their stores. As to the unreasonableness, the franchisees argue that the income trust conversion represented a major business opportunity that Bell had squandered in “a reprehensible and unprofessional manner.” The franchisees seek $135 million in damages- the difference between their anticipated earnings from the sale to the income trust and what Bell pays to purchase stores.

Bell allegedly ordered at least five franchisees to withdraw from the lawsuit or face reversal of Bell’s previous approval to expand or relocate their business. Bell spokesman Paola Pasquini said it did not use threatening language with the franchisees but agreed that Bell’s approach was to tell them: “We offer a choice: grow with Bell or remain in litigation.”

Pizza For Everyone

NPC International, Inc., Pizza Hut’s largest franchisee, settled with the U.S. Justice Department over alleged violations of the Americans with Disabilities Act at its restaurants. NPC operates 800 Pizza Hut outlets in 25 states. This article reports that the DoJ found ADA violations after conducting compliance reviews of the restaurants. Under the settlement, NPC agreed to modify its restaurants to accommodate people with disabilities including changes to parking lots, entrances, seating areas and restrooms.

Los Angeles Times Workers Fear Imminent Lightning Strike

Workers at the Los Angeles Times are rumored to be crippled by fear of lightning, locusts, plagues or other pestilence after the Times printed an article about Thomas Kinkade, the famous Christian-themed “Painter of Light.” According to this article, Kinkade’s Light doesn’t always shine on those around him. Kinkade may also be known one day as the Litigator of Light; he is, or has been, involved in nine arbitrations. Of the four claims that have been arbitrated, Kinkade has won three. While five more arbitrations are pending, a three-member panel of the American Arbitration Association last month entered an interim award against Kinkade’s company, ordering it to pay $860,000 for defrauding the former owners of two failed Thomas Kinkade Signature Galleries in Virginia. While Kinkade’s lawyer said he would seek to void the award (although the article doesn’t say on what basis), the claimants’ lawyer, Norman Yatooma, is quoted as saying that the award could quadruple when interest, legal fees and other costs are added. You do the math.

But no ordinary fraud claim involving an iconic Christian Light Painter this. In addition to finding that Kinkade’s company and one of its executives (not Kinkade) defrauded the claimants by withholding pertinent information that would have kept them from investing $122,000 to open their Gallery in 1999, the panel found that Kinkade and other company executives created a “religious environment to instill a special relationship of trust” -- a sort of faith-based fiduciary duty -- with the claimants. As evidence supporting this finding, the panel found that the company used terms such as “partner,” “trust,” “Christian” and “God” to convey a sense of a “higher calling.” More interesting, at least to yr crrspndt, are the allegations regarding Kinkade’s business and personal behavior made in this and other proceedings and in interviews. On the business side, lots of allegations about pressure on Gallery dealers to oversaturate their markets, Kinkade letting Gallery owners fail in order to drive down the company’s stock price so that he could take it private and Kinkade earning over $50 million for his work from 1997 through May 2005, while Gallery owners suffered financially. On the far more intriguing personal side -- allegations by former employees that they often went with Kinkade to strip clubs and bars where he frequently became intoxicated and out of control; that at one time he was so intoxicated during a performance of Siegfried & Roy in Las Vegas that people seated nearby moved away from him ( . . . at a Siegfried & Roy performance, Mr. Kinkade?); incidents in which Kinkade berated and shouted obscenities at a woman trying to help him to his feet in a bar and “ritual territory marking.” That’s right, ritual territory marking is what they call it -- one former Kinkade employee testified that during a trip to Orange County in the late 1990s, he and Kinkade returned to the Disneyland Hotel after a night of heavy drinking. “Thom wanders over to Winnie the Pooh and decides to ‘mark his territory,’” the employee testified. Guess how? Oh, Bother!

The article goes on to state that in a deposition, Kinkade alluded to his practice of urinating outdoors, saying he “grew up in the country,” where the practice is apparently common. Our nomination for best line in the entire article is this, “When pressed about allegedly relieving himself in a hotel elevator in Las Vegas (not exactly outdoors), Kinkade said, ‘there may have been some ritual territory marking going on, but I don’t recall it.’”

Kinkade and his lawyers deny the arbitration claimants’ allegations and attribute many of the above accusations to the rantings of disgruntled employees (except for maybe the ritual-urinating-territory-marking-thing). While not addressing specific incidents in his response to the Times’ written questions, (you really should read the whole article), Kinkade did sum things up nicely, “It does disappoint me when people who I have tried to help and befriend make crazy allegations about me. I am a big fan of imagination, but the specific allegations you have described to me are ridiculous and I feel like the victim of a legal stalker.”

Jury’s Breach of Fiduciary Duty Verdict Reversed

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The former owner of a Chevrolet dealership in West Babylon, New York, won a $2.3 million jury verdict against GM in 2004. The dealer alleged that GM breached its fiduciary duty to him by stopping him from disciplining employees whom he accused of stealing from the dealership. The U.S. Court of Appeals for the Second Circuit reversed the jury verdict, finding that there was “no cognizable theory underlying” the dealer’s fiduciary duty claim.

Discrimination Suits in the News

-Thanks for the Pepperoni

A white former employee of Uno Chicago Grill, owned by Uno Restaurants, who claims he was fired from his job as a server for reporting offensive sexual and racist comments allegedly made by restaurant managers, has sued Uno Restaurants. Plaintiff claims he was subjected to a hostile work environment and unlawful discrimination because of the race and colors of his family members, he is the legal guardian of a black teenager and his sister-in-law is black. In a previous administrative action, the New York State Division of Human Rights found “probable cause” to support plaintiff’s allegations and the EEOC issued a right to sue letter under Title VII of the Federal Civil Rights Act.

This article states that a former general manager of the restaurant where plaintiff worked admitted to state investigators that he had brought to work a book containing racial jokes. The former general manager also stated that he had been disciplined for this conduct. Uno Restaurants told the state investigators that it has established specific non-discrimination policies prohibiting unlawful conduct in the workplace and that it strictly enforces these policies and follows all federal, state and local rules and regulations.
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In September 2005, the EEOC filed suit against Lithia Cherry Creek Dodge, Inc. of Aurora, Colorado and its franchisor, Lithia Motors, Inc. on behalf of African-American former employees of the dealership. As reported in this article in the Portland Business Journal, the lawsuit has been settled for $562,500.00.

We're Fine, Thanks

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According to this article, 61 independent Coca-Cola bottlers are seeking an injunction against Coca-Cola Co. and Atlanta bottler Coca-Cola Enterprises to stop plans to change how Powerade is delivered to Wal-Mart Stores, Inc. Currently, independent bottlers deliver Powerade directly to Wal-Mart stores. Wal-Mart allegedly approached Coca-Cola and asked that bottlers make deliveries of the sports drink to its warehouses. Coca-Cola Enterprises, which is 38 percent owned by Coca-Cola and handles 80% of its U.S. sales volume, is set to test warehouse delivery in Texas on April 1.

Coca-Cola believes that this will lead to an increase of Powerade sales because Wal-Mart would give it better display. The independent bottlers disapprove of the change, claiming that the effective use of direct store delivery is superior to any other method. They also believe that this could set a precedent for future delivery of other Coca-Cola products and that a 1994 agreement prohibits warehouse delivery.

The independent bottlers filed two lawsuits-one in federal court in Springfield, Missouri and one in state court in Birmingham, Alabama. The injunction would prevent the warehouse delivery test from taking place on a national basis.

We're Back . . .

The blog has returned from its annual spring break hiatus -- refreshed and ready to bring you the latest in franchise law developments.

As reported in the Chicago Tribune, the Cracker Barrel restaurant chain has agreed to pay $2 million to settle a race and discrimination lawsuit brought by current and former employees of three Illinois restaurants. Fifty-one current and former employees of these Cracker Barrel restaurants will share in the settlement proceeds. Cracker Barrel also agreed to train workers at the relevant stores regarding harassment and to take other prophylactic measures.

Supreme Court Decides Domino's Pizza Case

As reported in this entry, on December 5, the Supreme Court heard argument in a case filed by John McDonald, a Nevada businessman seeking to sue Domino’s Pizza Inc. for racial discrimination under 42 U.S.C. § 1981. McDonald claimed that Domino’s breached contracts with his company, JWM Investments, Inc., because of his race. The issue before the Court was whether an individual can bring suit for a contract that his company had with Domino’s. On February 22, 2006, the Court issued an 8-0 decision holding that McDonald “could not state a claim under § 1981 unless he has (or would have) rights under the existing (or proposed) contract that he wishes ‘to make and enforce.’” In other words, a § 1981 plaintiff must “identify injuries flowing from a racially motivated breach of their own contractual relationship, not of someone else’s.” McDonald had no rights or responsibilities under the Domino’s contracts pursuant to general principles of corporate and agency law. Accordingly, the Court reversed the Ninth Circuit and upheld the District Court’s granting of Domino’s motion to dismiss.

Us Too?!?!

According to this Denver Business Journal article, Quiznos is being sued in New Jersey by another group of New Jersey franchisees. These plaintiffs claim Quiznos used “deceptive franchisee recruitment practices” and caused harm by its “failure to deal in good faith.” As noted in this previous blog entry, a similar suit was filed by other New Jersey franchisees in May 2005. That action was settled. In an enlightening statement about the new lawsuit, the franchisees’ attorney stated, “The Quiznos franchisees are taking this action because they have been financially injured.”

In other Quiznos news, two large private equity firms decided to pass on making an offer in the auction for the sandwich chain. According to this article, Thomas H. Lee Partners and Blackstone Group had initially been interested in the company, but declined to submit a bid. Based on the smaller pool of suitors, auction bids may not be as high as expected.

But The Police Told Me To Have It My Way

According to this article, a former Burger King employee is seeking $125,000 in a lawsuit against the owners of an Oregon Burger King franchise for emotional and mental trauma. The former employee claims that two years ago her supervisor ordered her to undress after accusing her of theft. The lawsuit claims false imprisonment, invasion of privacy, negligence and infliction of emotional distress. The supervisor, in his defense, claims that he was following the instructions of a caller who claimed he was a police officer investigating theft. Last year, police arrested a man in the case who is also suspected of pulling a similar scam on numerous other businesses across the country for a decade. The lawsuit claims that the supervisor did not trouble himself with petty details, such as obtaining the caller’s last name or attempting to verify with the police that the strip-search-ordering caller was actually an officer.

Finger Licking Good Redux

According to this story off the AP wire, the couple who planted a severed finger in a bowl of Wendy’s chili last March were sentenced to jail on Wednesday. Anna Ayala, who claimed to have bit into the finger, was sentenced to nine years. Her husband, Jaime Plascencia, was sentenced to more than twelve years. The couple pled guilty in September to conspiracy to file a false insurance claim and attempted grand theft with damages exceeding $2.5 million. The judge ordered the couple to pay about $170,000 in restitution for workers' lost wages. The judge also ordered them to pay nearly $21.8 million to Wendy's International and JEM Management, which owns the restaurant. However, both corporations agreed not to collect from the couple, so long as they never benefit from the scheme.

"Greed and avarice overtook this couple," said Superior Court Judge Edward Davila, adding that the pair had "lost their moral compass."

Those Are Good Burgers, Boyd.

In early January, Richard Boyd, In-N-Out Burgers’ vice president and a board member, filed a lawsuit in Los Angeles County Superior Court against the 23-year-old heir to the company, Lynsi Martinez, and corporate executives. Boyd, one of two trustees, claims that he is the lone impediment to an attempt by Martinez to engineer a coup and install new managers who would expand the chain too quickly. Boyd also accused Martinez and other executives of attempting to wrongly fire Boyd from his In-N-Out and trustee positions.

Last week, In-N-Out filed a lawsuit against Boyd accusing him of fraud and embezzlement. In-N-Out alleges that Boyd diverted construction materials and crews to his own property and charged the work to the company. It also alleges that Boyd gave business to a favored contractor without competitive bidding and overpaid for construction services then ordered the destruction of documents to hide his activities.

Shift_dismissed

The Aberdeen News reports that a federal judge in South Dakota ruled that Nissan North America, Inc. does not have to continue supplying its vehicles to a dealership that was sold without Nissan’s approval. Under the franchise agreement, the dealer, Krantz, Inc., was required to give Nissan advance notice and a chance to evaluate any proposed transfer. In 2002, Nissan informed Krantz that it could continue to operate its Watertown, S.D. dealership, but that Nissan wanted eventually to leave Krantz’s market and that it would not approve any transfer of the franchise. Krantz nevertheless sold its Nissan dealership to Billion Southtown, Inc. in 2004 without giving the requisite notice or getting Nissan’s permission. Nissan then terminated the franchise agreement and refused to honor the transfer of the dealership. The judge dismissed the lawsuit filed by Krantz and Billion, ruling that Nissan acted in good faith in terminating the franchise agreement and did not violate federal law.

This decision is consistent with several other recent decisions holding that a franchisor may refuse to approve a transfer if it acts in good faith and for legitimate business reasons. See e.g., Gabe Staino Motors, Inc. v. Volkswagen of America, Inc., 2005 WL 1041196 (E.D.Pa. Apr. 29, 2005) and Transamerica Services Technical Supply, Inc. v. General Motors Corp., 2004 WL 234684 (Ohio App. Feb. 6 2004).

I'm Your Ice Cream Man

Phyllis Schultz and Matthew Gromet recently filed a lawsuit in Mecklenburg County Superior Court, North Carolina against Ben & Jerry’s Homemade, Inc. and Ben & Jerry’s Franchise Inc. Schultz and Gromet own five Ben & Jerry’s shops in the Charlotte, North Carolina area. UK-based holding company Unilever owns Ben & Jerry’s and also owns the Good Humor, Breyer’s, Popcicle and Klondike brands.

Plaintiffs allege that Ben & Jerry’s sales of its pre-packaged products alongside Unilever’s less premium products in venues such as grocery stores, gas stations and video rental outlets is an improper use of the Ben & Jerry’s name to sell the other brands. Plaintiffs also claim that Ben & Jerry’s sales of its products in non-traditional venues such as the Charlotte Bobcats Arena and in video stores damages plaintiffs by reducing their sales and the value of their franchises.

Plaintiffs seek damages, attorneys’ fees and an injunction barring Ben & Jerry’s from activity infringing on plaintiffs’ exclusive rights to sell Ben & Jerry’s products in the Charlotte region.

Supreme Court Hears Argument in Domino's Pizza Case

On December 5, the Supreme Court heard argument in a case filed by John McDonald, a Nevada businessman seeking to sue Domino’s Pizza Inc. for racial discrimination. McDonald says Domino’s breached contracts with his company, JWM Investments, Inc., because of his race. The issue before the Court is whether an individual can bring suit for a contract that his company had with Domino’s. Interestingly, 17 state attorneys general filed amicus briefs—seven, and a coalition of civil rights groups, sided with McDonald; ten, and the U.S. Chamber of Commerce and the Equal Employment Advisory Council, sided with Domino’s.

Domino’s denies any racial discrimination, and its attorney, Maureen Mahoney, said that Domino’s had already paid $45,000 to settle a lawsuit brought by JWM over the contract dispute in bankruptcy proceedings.

See previous blog entries about Dominos here.

Best Buy Accused of Discrimination

Best Buy Co., Inc. has been sued in federal court in San Francisco by 6 former and current employees who allege the company purposefully excluded women and minorities from top-paying jobs. Plaintiffs seek class-action status to represent employees of Best Buy’s over 700 nationwide stores.

Let’s Just Wait and See What Happens

Three plaintiffs who sued Waffle House, Inc. and its Texarkana, Texas franchisee for alleged racial discrimination have agreed with the defendants to stay their action until other similar cases are decided. A motion filed in Texarkana Federal Court stated: “. . . certain representatives of the plaintiffs in various actions have mediated with representatives of the franchise affiliate defendants in these multiple actions and have agreed to a framework for a comprehensive resolution of the cases.” Who says lawyers bloviate? Waffle House has denied the discrimination allegations of discrimination and stated that its anti-discrimination policies, training on and enforcement of these policies are top corporate priorities.

Mercedes Dealer Sues Company For Violation of Right of First Refusal

The Ghesquiere family, owners of three Mercedes-Benz dealerships in Michigan, filed a lawsuit against the company in federal court on Monday alleging that Mercedes breached their right of first refusal when it granted another group the right to open a new dealership in their territory. According to one local news source, plaintiffs allege that they were granted a right of first refusal for an additional dealership in their 1999 agreement and that in the last several years, they asked Mercedes for permission to open a fourth dealership. Although plaintiffs' dealer agreement expired on May 31, 2003, they claim that Mercedes was planning to open an additional dealership before the contract expired. A Mercedes spokesperson stated that the company acted in good faith and that the lawsuit lacks merit.

Boston Market Settles Harassment Lawsuit

Boston Market, the quick-casual restaurant chain known for its home-style meals, recently agreed to pay $150,000 to settle a lawsuit filed by the EEOC two years ago on behalf of a former employee alleging sexual harassment and disability discrimination in connection with the company-owned store in Ronkonkoma, New York. According to Newsday.com, the lawsuit alleged that claimant, who was learning disabled, was taunted by her co-workers because of her disability and because she needed a coach for her position as greeter, cashier and server at the restaurant. One co-worker, who EEOC alleged touched claimant inappropriately, later pled guilty to criminal charges in connection with the harassment. As part of the settlement, Boston Market agreed to establish procedures for investigating employee complaints about harassment and discrimination and to provide prevention training for managers and employees.

Third Circuit Reverses Preliminary Injunction Against Lending Tree

The Third Circuit Court of Appeals recently lifted a preliminary injunction prohibiting Lending Tree from using certain brand names affiliated with Cendant Corporation in marketing its real estate broker network. As reported by one news source, Cendant brands, Century 21, Coldwell Banker and ERA, filed a lawsuit against Lending Tree in June 2003 for trademark infringement alleging that Lending Tree's use of the brand names on its website could lead to consumer confusion about the brands' affiliation with the website or with Lending Tree. See previous blog entries here. The New Jersey federal court enjoined Lending Tree's use of the Cendant marks on its site, but the Third Circuit Court of Appeals remanded with instructions to the lower court to decide whether plaintiffs met their burden of proving a likelihood of confusion and showing that Lending Tree intended the public to believe that the Cendant companies endorsed or supported its products or services.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Burger King's National Franchisee Association Sues McDonald's For Unfair Competition

More than a decade after McDonald's held its Monopoly promotional games, the National Franchisee Association, Inc. ("NFA") filed suit against McDonald's claiming that the games diverted business away from Burger King restaurants. The lawsuit, filed in the United States District Court for the Northern District of Georgia, alleges unfair competition in violation of the Lanham Act. While the Chicago Sun-Times reports that the NFA represents the owners of nearly 7,000 Burger King franchises in the U.S., it is unclear at this time whether an unincorporated association such as the NFA has standing to proceed against a competiting franchisor in connection with a marketing program that started back in 1995. In a press release, the NFA points to the U.S. Department of Justice's announcement in 2001 that the promotional games were "rigged" and claims that employees of Simon Marketing, Inc., which McDonald's contracted with to administer the games, denied McDonald's customers a fair and equal chance of winning by embezzling high-value game pieces. While the NFA claims that the games, implemented from 1995 through August 2001, improperly allowed McDonald's to generate windfall profits, customer loyalty and market share, it is unclear how the NFA will be able to link actions by Simon Marketing, Inc.'s employees to McDonald's and recover damages as a result.

Maris Family Settles Disputes With Anheuser-Busch

Anheuser-Busch has agreed to pay at least $120 million to the family of New York Yankees baseball legend Roger Maris to settle a defamation lawsuit filed by the Maris family in 2001 and a pending appeal of a $50 million jury award the Maris family won that same year for wrongful termination of its distributorship. The settlement was reached as jurors were about to announce a verdict in the defamation lawsuit. As reported in Business Week, the Maris family, who owns Maris Distributing Company, accused Anheuser-Busch of plotting to destroy their reputation in a scheme to seize the family's beer distributorship. The lawsuit sought between $2.75 and $5.25 billion in compensatory and punitive damages. Anheuser-Busch terminated Maris Distributing Company's distributorship contract in 1997, stating publicly that the distributorship was deficient and sold repackaged and expired beer.

Another Victory For Snap-On Tools Franchisees

First came the unlikely victory of the so-called Snap-On Wives, who managed to end-run arbitration clauses in their husbands' franchise agreements, by arguing that they were their husbands' creditors with direct fraud claims against Snap-On. Now, arbitrator and former California Superior Court Judge James M. Slater ruled that Snap-on franchisees themselves can bring a class action in arbitration against the company for alleged fraudulent practices. Judge Slater said that the franchisees "cannot meaningfully pursue their claims outside a class action" because the cost of litigation would cause "each case to be a negative return case even if successful."

Federal Appeals Court Affirms Award to Franchisee Against Paving Giant

The United States Court of Appeals for the Eighth Circuit held that B.R. Lee Industries Inc. ("LeeBoy") must pay more than $3.3 million dollars in actual and punitive damages after finding that the company wrongfully terminated a dealership agreement with Diesel Machinery Inc. ("DMI"), a South Dakota Company. LeeBoy terminated the dealership agreement just eight months after its execution because it planned to use another company (which it recently acquired) to sell its products. According to one news source, the Eighth Circuit rejected LeeBoy's argument that the South Dakota Franchise Statute did not apply because DMI's investment in LeeBoy was insufficient to trigger the statute. LeeBoy argued that the statute only protected dealers who make substantial financial investments in their franchises, but the court held that the statute applied to any dealer and was not limited to businesses that make large investments as part of their agreements with manufacturers. The jury originally awarded DMI $4.3 million in punitive damages, but the district court reduced the award. In affirming the reduced award of $2.66 million, the Eighth Circuit said that LeeBoy's conduct was "sufficiently reprehensible to justify the punitive damage award." Click here to view the Eighth Circuit's decision.

Federal Court Rules Krispy Kreme Not Required to Ship Ingredients to Franchisee

On July 28, 2005, the United States District Court for the Southern District of Illinois issued an order refusing to extend a state court order requiring Krispy Kreme Doughnuts to ship ingredients to its franchisee Sweet Traditions, LLC. Sweet Traditions recently filed suit against Krispy Kreme for allegedly charging high prices for supplies and equipment, undercutting retail shops by selling its doughnuts in convenience stores and supermarkets and engaging in suspicious business practices that over-inflated corporate earnings.

An Illinois state court issued an order today requiring Krispy Kreme Doughnuts to continue supplying a struggling mega-franchisee despite the franchisee's inability to pay amounts due under the franchise agreement. Sweet Traditions, LLC, a franchisee that operates numerous Krispy Kreme franchises in Illinois, Missouri and Indiana, filed suit in the Illinois Circuit Court for St. Clair County against the company, claiming that the company violated the franchise agreement by charging high prices for supplies and equipment, undercutting retail shops by selling its doughnuts in convenience stores and supermarkets and engaging in suspicious business practices that over-inflated corporate earnings. Specifically, as reported in New York Times reports that Krispy Kreme plans to appeal the order and to remove the case to federal court in Illinois.

Coverall Franchisees Allege Fraud

Just six months after Coverall settled a lawsuit in California brought by a group of franchisees alleging fraud, the New York Times reports that another group of Coverall franchisees have filed suit against the company for fraud, breach of contract and failure to pay the minimum wage. Specifically, the franchisee claim that Coverall took out improperly large commissions and did not have enough customers to supply the franchisees.