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Minnesota Lawyer Selects Michael Dady And Michael Garner As Two Of It’s Ten Minnesota “Attorneys Of The Year” For 2000

J. Michael Dady and W. Michael Garner:
Local lawyers rope a landmark Internet case

By Michelle Lore
Date: January 15, 2001

When they started practicing law, the Internet was only in its infancy. But this past year, Minneapolis attorneys J. Michael Dady and J. Michael Garner won a landmark Internet battle involving the rights of franchisees.

The two local franchise attorneys convinced two members of a three-person arbitration panel that their clients — a group of drugstore franchisees — were being irreparably harmed by the franchisor’s encroachment into their territory through the Internet.

“One of the interesting things about Web commerce is that it’s ubiquitous, it’s everywhere,” Garner observes. “Even though the actual impact it that may have at any given time can be relatively small, the overall impact it has and the confusion it can have for bricks and mortar stores can be tremendous.”

Encroachment

The case began when Drug Emporium, Inc. and its subsidiary, DrugEmporium.com, began to market its drugstore products over the Internet.

Early last year, believing Drug Emporium had used to Internet to encroach on their respective territories, a number of Drug Emporium franchisees filed a claim against the franchisor. Having received representation from Dady in the past, the franchisees sought his assistance once again. This time, however, they received the added bonus of well-known franchise expert Garner as well.

Dady and Gardner represented 29 stores in all, located primarily in Texas — where the concentration of Drug Emporium franchisees are found — but which also spread out into Oklahoma, Arkansas, Louisiana, and Kansas.

The franchisees claimed that the operation of the online business was in breach of Drug Emporium’s commitment to provide its franchisees the exclusive right to conduct the business of drugstores in designated territories. Stated otherwise, they contended that Drug Emporium was unlawfully engaging in the same business as its franchisees in their territories, thereby violating the franchise agreement.

In July, after discovering that Drug Emporium intended to sell the online business to another company, the claimants moved for a preliminary injunction prohibiting the company from conducting the business of DrugEmporium.com. in their respective territories.

“Our clients became concerned because [a sale] conceivably could put the whole operation in the hands of somebody we hadn’t sued and could have any number of other consequences,” says Garner. “So we wanted to establish that our client’s territorial rights protected them from any kind of encroachment from this entity — no matter who owned it.”

Settlement attempts were made early on, Dady notes. “But they didn’t take us seriously. They thought the [agreement] permitted them to do what they were doing.”

The arbitration took place without an evidentiary hearing. Instead, both sides submitted witness testimony by affidavit, with the claimants including a report by an expert in Internet marketing.

Both Dady and Garner participated in the oral argument — which was held by telephone and lasted several hours. “It was longer than any judge would have allowed,” Dady jokes.

“We had very compelling franchisee affidavits,” says Garner, adding that the franchisees were bright, astute business people. They created charts comparing what they were selling their products for in their bricks and mortar stores with what the products were being offered for on the Internet, Garner explains.

The evidence must have been persuasive because in a 2-1 decision, the arbitration panel ruled in their favor, enjoining the franchisor and its Internet subsidiary from selling online merchandise to customers located in the franchisees’ territories.

According to Garner, the arbitrators implied that DrugEmporium.com’s actions were almost “predatory.” The arbitrators were not able to deny that this is an online store designed to compete with the bricks and mortar stores, and that the franchisor and its Internet subsidiary were going in there and underselling the franchisees, he explains.

Strategy

The primary issue in the case was whether when Drug Emporium started selling on the Internet to customers in the franchisees’ territories, it amounted to opening a store in their territories, Dady explains. “[The franchisor] advertised it as a virtual store, so we argued there is no difference between entering the store through the front door or entering through the window.”

The franchisor, on the other hand, argued that the word “store” does not include the Internet and therefore they can do what they want, says Dady.

They also argued that the actual impact of Internet sales in the franchisees’ territories was very small — an argument which they stumbled over repeatedly, Garner points out. The company had issued several press releases projecting how much their Internet sales were going to increase in the following year, he explains.

Essentially, the franchisees’ arguments were that the Internet isn’t a store, the Internet sells to different markets than bricks and mortar stores, and that there is no impact, so the franchisees have not been damaged, Dady sums up.

With respect to damages, Dady and Garner countered that while the damage was not huge yet, according to the franchisor’s own projections to the business press, the damage to the franchisees was going to increase in a short time.

Despite the potential widespread impact of the case in this computer age, Dady and Garner contend that their strategy was no different than in any other case.

“Our theme was to demonstrate to the arbitrators that what’s happening here really is unfair,” says Dady, adding that they also sought to show that it deserves a remedy and that there are plenty of cases supporting their position.

The approach worked. Two of the three arbitration panelists agreed with the franchisees, finding the virtual store to be the “functional equivalent” of a bricks and mortar store.

A little luck

While the arbitrators’ decision itself is novel, a couple of interesting things happened before and during the oral argument as well.

First, one of the primary cases upon which the franchisor relied was reversed just prior to the hearing. “The key case that they argued in their briefs — between the time they submitted their brief and the time of oral argument — was reversed in significant part,” Dady explains.

The case dealt with the right of a franchisor to infringe on a franchisee’s territory. On appeal from a decision from the Northern District of Illinois, the 7th U.S. Circuit Court of Appeals agreed that the franchise agreement in that case expressly gave the franchisor the right to infringe. It clarified, however, that franchisors who have this right must do it in a way that does not destroy the reasonable expectation of the franchisee.

Dady and Garner were able to point this out to the arbitrators during oral argument, significantly diminishing — or outright eliminating — the value of the case to the other side.

Also notable was the franchisor’s failure to cite the arbitrators to language in the franchise agreement that gave the franchisees exclusive rights in the name Drug Emporium. The franchisor quoted the paragraph in its brief, but intentionally left out this language.

At oral argument, Dady pointed this out, alerting the arbitrators to the fact that 36 key words were missing from the franchisor’s brief — words that showed the franchisees had these exclusive rights.

It was a dramatic way of pointing out what the franchisees’ rights were, as well as the fact the other side was trying to sweep that under the carpet, Garner observes.

Aftermath

The full implications of the decision are yet to be known, but both Dady and Garner are amazed at the amount of attention and press the case has received in the franchisee community.

“It’s gotten a lot of media play,” says Dady, undoubtedly because it is apparently the first decision in the country on Internet encroachment.

Moreover, he continues, the case underlines the principle that “if you treat franchisees unfairly, chances are that we are going to be able to establish that that unfair treatment is also unlawful treatment. If franchisors want to engage in lawful conduct — as they should in their relationship with franchisees — they should try and walk in their shoes once in a while and deal with them the way they want to be treated.”

More specifically, with respect to the Internet issue, Dady says, it is just a way of applying traditional principles to a new situation. “We don’t think it’s really new law; [rather], it’s just applying what we think is and should be existing law … in a new environment — the Internet environment.”

Garner adds that the case affirms the age-old principle that you can’t do indirectly what you can’t do directly.

“This case realizes and recognizes that the Internet is no different from any other method of marketing in terms of its business effect and its legal significance,” says Garner. “If the agreement says that the franchisee has a territory to do its business in, you can’t get around that by the Internet any more than you can get around it by putting another store across the street from the franchisee. In that sense it’s a well-grounded and practical decision.”

The arbitration panel’s decision last September was not the end of the matter, however.

In addition to all the media attention the case has received, the franchisor’s attorneys finally acknowledged that the franchisees were not off base in their complaint after all.

Dady notes, “Now Drug Emporium and their Wall Street lawyers are saying to these two lawyers on the prairie and their clients in Texas, ‘Hey, maybe you do have a point after all’ and ‘Can we negotiate a resolution that would allow you to be satisfied, but at the same time allow us to continue to operate on the Internet.’”

According to Dady, after much negotiating, the parties now have an agreement in principal — an arrangement that includes a restructured franchise agreement. In essence, he explains, the restructured agreement allows the franchisor to continue marketing in the franchisee’s territories, but allows the franchisee’s to participate in it and receive royalties.

“Our clients were never out to stop Internet marketing,” says Dady. “They just wanted to be treated fairly. But the franchisor and its online subsidiary were ignoring them — that’s what we objected to, and so now we have restructured the relationship in a way that allows the franchisor to continue to market on the Internet in a way that is fair to our clients.”

In the beginning

Between the two of them, Dady and Garner have been practicing franchise law for 52 years. They practice nationwide, representing franchisees in disputes with their franchisors and suppliers.

Dady started the firm in 1994, despite his unsuccessful attempts to recruit Garner at that time. Garner was working in a Wall Street law firm in New York City. Dady knew Garner to be the national expert on franchise law, so he encouraged Garner to “come out here on the prairie and partner up with [him].”

It took Dady a couple of years to convince Garner to come to Minneapolis, being careful to invite him to visit Minnesota in July, not January. “[Finally], he said yes,” Dady observes.

But Garner’s induction into our fair state was somewhat less than pleasant. Shortly after he moved here in January of ‘97, he came down with pneumonia. Then that spring, his house flooded. “He got everything but the locust plague for an initiation,” Dady quips.

“I got all that stuff up front,” Garner quips back. “That’s the way I look at it.”

Cowboys and beer

It is clear who does the decorating in the lobby of the Dady & Garner law firm. From the saddlebags and cowboy hat hanging on the coat rack to the saddle and rifle in the conference room, the office definitely has Dady’s touch.

In addition to being a trial lawyer, Dady is a cowboy through and through. His love of horses and all things Western undoubtedly stems from his upbringing in the small northeastern South Dakota town of Sisseton, where his parents still reside. The city is located on the northeast slopes of the Coteau des Prairie, a range of hills which rise over 800 feet just three miles west of the city limits.

Dady’s family was among the first non-Native American people to settle on the Sisseton-Whapeton Sioux reservation, which opened up to white settlement in 1892. By 1897, Dady’s family ran the general store and the local tavern.

As a cowboy and son of a beer distributor, many may wonder how Dady ended up working as an attorney in Minneapolis.

His early ambition was to become a priest. The ministry was not in the cards, however, and it did not take long for Dady to realize that was not his true calling.

“Relatively quickly I got knocked out by the one-two punch of Latin and celibacy,” Dady says laughing. “So I thought where else can I give a homily on a regular basis and pass the collection plate. And I said, ‘I know, be a trial lawyer.’”

In all seriousness, however, Dady explains that he was interested in being of service to people and helping others, yet still enjoyed public speaking. Ultimately he decided that being a trial lawyer “would be a good thing to do.”

Dady attended college at St. John’s University in Minnesota, remaining in the state during the summers to earn enough money to go to school and play basketball — with thoughts of returning home diminishing over the years.

“I had in mind going back to the small town, but as I lived here longer and longer, it became small enough where I was comfortable,” Dady explains. “I’ve been here … ever since.”

While his father initially hoped that Dady would stick around home and work on the beer trucks with him, he eventually came around and supported his son’s decision to pursue a legal education and career.

Just as Dady was graduating from law school, his father’s beer distributorship received a notice of termination from the supplier. Dady immediately stepped in and was successful in obtaining an injunction prohibiting the termination and keeping his father in business. Thirty-three other threatened distributors joined the suit as well, and Dady and his colleagues succeeded in reinstating their rights.

“That’s how I got into this business of representing franchisees — the family crisis,” says Dady. “In retrospect, [my father] is very glad I went to law school, but at the time, I think he had some hope that I’d come home and work on the beer trucks with him.”

While “the family crisis” may have started Dady representing franchisees, the enjoyment he derives from practicing in this area of the law and his belief in what he is doing are why he has continued.

“Life is short — why not do what you believe in,” says Dady. “[And] I prefer representing the little guys. … [plus] our clients love the fact that we won’t represent the other side.”

From Wall Street to Eighth Street

Like Dady, Garner was not raised in a family of attorneys. The similarities in their backgrounds appear to end there, however. A native of Cincinnati, Ohio, and a Wall Street lawyer in New York for 20 years, Garner’s past differs significantly from his partner’s.

Before he was born, Garner’s parents dabbled in show business. After settling down with their son, however, Garner’s father obtained a job as a salesman and his mother became a secretary.

Garner left Cincinnati in the early ‘70s to attend Columbia University and then New York University Law School, with the full support and approval of his family.

For 20 years following his law school graduation, Garner worked in a number of Wall Street law firms primarily doing franchise work and commercial litigation. He became interested in the area of franchise law as a young associate and has been practicing in it ever since. While his current practice consists of representing franchisees, Garner has worked on the franchisor side as well, representing large companies like Ford Motor Company, Rolls Royce, and American Motors.

In addition to practicing franchise law, Garner reads and writes extensively in the area, having authored a three-volume treatise on the topic.

Garner had been practicing franchise law for about ten years when he got the idea for the treatise. Recognizing that there were not any good treatises out there on the subject, Garner started writing articles and managed to get a few of them published. Eventually he approached a legal publisher and made a proposal to write a treatise on franchise and distribution law.

“They took me up on it,” says Garner. “I went to them in 1985 and finished the book in 1990.”

As if practicing law on Wall Street and writing a treatise weren’t enough, also during this time, Garner served as the editor of the American Bar Association’s Franchise Law Journal.

“I was always interested in writing,” Garner explains. “[Practicing law] was a way to have a profession and make a living while keeping that interest up. [It has allowed me to] be able to be at least moderately creative and keep my intellectual juices flowing and … have a comfortable life at the same time.”

When he’s not writing about franchise law or roaming about the country representing franchisees in legal disputes, Garner is roaming about the globe taking in the sights. He has traveled to more than three dozen countries over the years and just returned from a two-week tour of Cuba.

Reprinted with permission from January 15, 2001 Minnesota Lawyer

 

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