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Motor Vehicle Manufacturer’s Performance Standard for Franchised Motor Vehicle Dealer Rendered Unfair Under New York Law: Case Summary

On April 27, 2011, Beck Chevrolet Co., Inc., (“Beck”), a franchised motor vehicle dealer, brought suit in New York state court against General Motors (“GM”), a motor vehicle manufacturer, alleging violations of the New York Franchised Motor Vehicle Dealer Act.  Beck Chevrolet Co., Inc., No. 11 CIV. 2856 (AKH), 2011 WL 13156875, at *2 (S.D.N.Y. June 15, 2011).

 The case was removed to the United States District Court for the Southern District of New York based on the parties’ diversity of citizenship.  Id.  The United States District Court for the Southern District of New York granted GM’s motion for summary judgment on the claims asserted against it, but declined to award attorney fees to either party.  Beck Chevrolet Co. v. Gen. Motors LLC, 787 F.3d 663 (2d Cir. 2016).  Both parties then appealed to the United States Court of Appeals for the Second Circuit.  Id.

 The primary issue on appeal related to GM’s use of a Retail Sales Index (“RSI”) to evaluate its dealers’ sales performance.  Id. at 667.  To arrive at the RSI value, GM would assign each dealer an “Area of Primary Responsibility,” and, in some cases, an “Area of Geographic Sales and Service Advantage (“AGSSA”).”  Id.

To determine an RSI for a Chevrolet dealer, GM would divide the dealer’s actual retail sales by its expected sales, calculated as:

 

Dealer’s Total Sales

___________________        X 100 = RSI

Expected Sales Based on

State Average

 

 Id.  Dealers were required to attain an RSI of at least 100, which was GM’s alleged “average” score.  Id. at 668.  “Total sales” measured all of a particular dealer’s actual sales in a certain period of time.  Id.  “Expected sales” was based on an adjusted statewide average market share for Chevrolet products by (1) taking into account all new motor vehicle registrations in the United States by segment (e.g., sport utility vehicles or mid-size sedans), and (2) taking into account the relative popularity of a particular segment.  Id.

Beck’s primary argument on appeal was that GM’s performance standard was “unreasonable, arbitrary or unfair” under the New York Franchised Motor Vehicle Dealer Act section 463(2)(gg).  Id. at 672.  Because no case had interpreted this section, the United States Court of Appeals for the Second Circuit asked the New York state Court of Appeals to answer the following question under New York law: “Is a performance standard that requires ‘average’ performance based on statewide sales date in order for an automobile dealer to retain its dealership ‘unreasonable, arbitrary, or unfair’ under New York Vehicle & Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?”  Id.

On May 3, 2016, the New York Court of Appeals answered responded to this question with a “yes.”  Beck Chevrolet Co. v. Gen. Motors LLC, 53 N.E.3d 706 (N.Y. 2016), reargument denied, 59 N.E.2d 1208 (N.Y. 2016).

First, the New York Court of Appeals reformulated the question to: “Is a performance standard that used ‘average’ performance based on statewide sales data in order to determine an automobile dealer’s compliance with a franchise agreement ‘unreasonable, arbitrary or unfair’ under N.Y. Vehicle and Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?”  Id. at 712.

To answer, the New York Court of Appeals looked at the language of the statute itself.  Id. at 713.  Although the statute does not define what constitutes “unreasonable, arbitrary or unfair” performance standards, the New York Court of Appeals determined that, at a minimum, the New York Franchised Motor vehicle Dealer Act section 463(2)(gg) forbids the use of standards not based in fact or responsive to market forces because performance benchmarks that reflect a market different from the dealer’s sales area cannot be reasonable or fair.  Id.

Second, the New York Court of Appeals noted that the standard employed by GM reflects its acceptance that market forces matter in assessing dealer sales performance.  Id.  The RSI is based on an equation (noted above) in which the market sets the foundation for measuring a dealer’s achievement.  Id.  Additionally, GM measured a dealer’s sales performance by “comparison to a statewide class of dealers, but adjust[ed] the standard to certain local market peculiarities with respect to one metric: local consumer purchasing preferences for certain vehicle types.”  Id.  Despite this, GM specifically chose to exclude from its measure the impact of customer brand preference on dealer sales.  Id. at 714.

The New York Court of Appeals explained that customer purchases are not solely influenced by preferences for a type of vehicle (which GM accounts for through its formula).  Rather, customers are also influenced by brand popularity and import biasId.  Further, the New York Court of Appeals noted that dealers, like Beck, are at an inherent disadvantage when assigned to service an area where Chevrolet is less popular, and then compared to those dealers assigned to service an area where Chevrolet is more popular.  Id.

Based on these considerations, the New York Court of Appeals determined:

Therefore, once GM determined that statewide raw data must be adjusted to account for customer preference as a measure of dealer sales performance, GM’s exclusion of local brand popularity or import bias rendered the standard unreasonable and unfair because these preference factors constitute market challenges that impact a dealer’s sales performance differently across the state. It is unlawful under section 463(2)(gg) to measure a dealer’s sales performance by a standard that fails to consider the desirability of the Chevrolet brand itself as a measure of a dealer’s effort and sales ability.

Id. (emphasis added).  In addition, the New York Court of Appeals stated that, in order to comply with the New York Franchised Motor Vehicle Dealer Act, “if a franchisor intends to measure a dealer’s performance based on a comparison to statewide data for other dealers, then the comparison data must take into account the market-based challenges that affect dealer success.”  Id. (emphasis added).

Because the RSI excluded such an important measure of comparability, the New York Court of Appeals rendered GM’s use of its RSI calculation to determine whether its dealers’ new vehicle sales performance was acceptable to be unreasonable and unfair under the New York Franchised Motor Vehicle Dealer Act.  Id.

After the New York Court of Appeals rendered this decision, the United States Court of Appeals for the Second Circuit reversed the federal district court’s earlier ruling on this issue in favor of GM and remanded with a direction to enter judgment for Beck.  Beck Chevrolet Co. v. Gen. Motors LLC, 845 F.3d 68, 71 (2d Cir. 2016).

Takeaway: If you are a franchised motor vehicle dealer subject to the protection of the New York Franchised Motor Vehicle Dealer Act, check to make sure your motor vehicle manufacturer does not impose upon you the same (or similar) type of “unreasonable and unfair” performance standard as Beck.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Obtaining an Attorney’s Lien in California: The Basics Behind Enforcing an Attorney’s Right to be Paid

Everyone desires to have an amicable attorney-client relationship.  The common attorney-client relationship in its simplest form is: the potential client signs a fee agreement retaining the attorney, the attorney performs the requested work, the client achieves an end result, and the attorney gets paid.  The unfortunate reality, however, is that sometimes a retained client fail to pay its attorney for some (or all) of the legal work that the attorney performed.  When this occurs, the attorney is left in a difficult divide between complying with the attorney’s ethical obligations and enforcing the attorney’s right to be paid.  So how can the attorney ethically enforce its right to be paid while still complying with the Professional Rules all attorneys are bound by?  Is it even possible?  The answer is in one small word “liens.”

An attorney’s lien (also termed a “charging lien”) is a lien that secures an attorney’s compensation “upon the fund or judgment” recovered by the attorney for the client.  Unlike most jurisdictions, where an attorney’s lien is established by operation of law in favor of an attorney to satisfy attorney fees and expenses out of the proceeds of a prospective judgment, in California, an attorney’s lien can only be created by contract.

An attorney’s lien is created and takes effect at the time the fee agreement is executed, and may be created without even using the word “lien” at all.  The determinative question is “whether the parties have contracted that the lawyer is to look to the judgment he may obtain as security for his fee.”  Although a notice of lien is not necessary to “perfect” an attorney’s lien, filing a notice of attorney’s lien “has become commonplace, and the courts have endorsed the practice.”

While an attorney’s lien may be used to secure either an hourly fee agreement or a contingency fee agreement, hourly fee agreements purporting to create an attorney’s lien must comply with Rule 1.8.1 of the California Rules of Professional Conduct.  Rule 1.8.1 requires that:

(a) the transaction or acquisition and its terms are fair and reasonable to the client and the terms and the lawyer’s role in the transaction or acquisition are fully disclosed and transmitted in writing to the client in a manner that should reasonably have been understood by the client;

(b) the client either is represented in the transaction or acquisition by an independent lawyer of the client’s choice or the client is advised in writing to seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and

(c) the client thereafter provides informed written consent to the terms of the transaction or acquisition, and the lawyer’s role in it.

Cal. R. Prof’l Conduct. R. 1.8.1 (emphasis added).

An attorney must bring a separate action against the client to: (1) establish the existence of the lien, (2) determine the amount of the lien, and (3) enforce it.

Takeaway: If an attorney wants to create a valid attorney’s lien under California law, the attorney will need to: (1) have an express provision in the fee agreement regarding the lien (express), or (2) have language in the fee agreement providing that the attorney will be paid for services rendered from the judgment itself (implication).  Should the attorney fail to do so, the attorney may essentially “miss the chance” to obtain one later on in the future should the relationship go awry.

The following cases were used in creating this blog, and are an excellent starting point for individuals wanting to learn more on the subject:

  • Fletcher v. Davis, 90 P.3d 1216, 1219 (Cal. 2004).
  • Mojtahedi v. Vargas, 176 Cal. Rptr. 3d 313, 315–16 (Cal. Ct. App. 2014).
  • Carroll v. Interstate Brands Corp., 121 Cal. Rptr. 2d 532, 534 (Cal. Ct. App. 2002).
  • Gelfand, Greer, Popko & Miller v. Shivener, 105 Cal. Rptr. 445, 450 (Cal. Ct. App. 1973).
  • In re Modtech Holdings, Inc., 505 F. App’x 668, 669 (9th Cir. 2013).
  • Plummer v. Day/Eisenberg, LLP, 108 Cal. Rptr. 3d 455, 464 (Cal. 2010).

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Does the California Franchise Investment Law Preempt Common Law Fraud?

There has been uncertainty in the preceding years surrounding whether the California Franchise Investment Law, Cal. Corp. Code § 31000 et seq. (“CFIL”) preempts common law fraud claims.  The relevant language of the CFIL provides:

 

Except as explicitly provided in this chapter, no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder.  Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect.

 

Cal. Corp. Code § 31306.  Some practitioners cite to Samica Enterprises, LLC v. Mail Boxes Etc. USA, Inc., 637 F. Supp. 2d 712 (C.D. Cal. 2008), for the proposition that the CFIL preempts common law fraud claims.  The Samica court determined that: “Section 31306 bars claims that may otherwise be brought under the CFIL—i.e., those claims alleging misrepresentations and omissions covered by such provisions as 31200 and 31201 . . . The [second sentence of Section 31306] is properly read as ensuring that any claims beyond the CFIL’s coverage may be brought independently.”  The court further stated in a footnote:

 

Whether section 31306 is read as preempting certain allegations of fraud, as this court finds, or merely limiting common law fraud by dispensing with common law tolling principles, as SpeeDee Oil [People ex rel. Dep’t of Corps. v. SpeeDee Oil Change Sys., Inc., 116 Cal. Rptr. 2d 497, 508 (Cal. Ct. App. 2002)] provides, it cannot be said . . . that all allegations of fraud are independently actionable under both theories-aside from the plain redundancy of such exercise.

 

(emphasis added).  In Anderson v. Griswold International, LLC, No 14-CV-02560-EDL, 2014 WL 12694138, at *1 (N.D. Cal. Dec. 16, 2014), however, the court determined that a franchisees’ fraud, negligent misrepresentation, and fraudulent concealment claims were not preempted by the CFIL.

 

In Anderson, franchisees filed suit against the franchisor alleging causes of action for both fraud and CFIL violations.  The franchisor cited Samica Enterprises for the proposition that the CFIL preempted the franchisees’ fraud claims because such claims were premised on the same alleged misrepresentations and false statements which the franchisees’ CFIL claims were based.

 

Nevertheless, the court found the franchisees’ argument persuasive that the phrase “‘[n]othing in this chapter shall limit any liability which may exist . . . under common law,’ allows Plaintiffs to bring ‘viable and independent claims from common law fraud, negligent misrepresentation, and fraudulent concealment that set forth plausible claims for relief independent of the CFIL.’”  Further, the “plain language of the statute preserves preexisting common law and statutes enacted before the CFIL that would apply if it had not been enacted.”  Therefore, the court allowed the franchisees to pursue both their fraud claims in addition to their CFIL claims.

 

Takeaway: Whether or not the CFIL preempts common law fraud claims is not firmly established.  Both Samica Enterprises and Anderson are still good law, and recent cases still cite to Samica Enterprises for the proposition that the CFIL preempts common law fraud claims—despite Anderson’s conflicting stance.  See, e.g., Flip Flop Shops Franchise Co., LLC v. Neb, No. CV 16-7259-JFW (EX), 2017 WL 2903183, at *8, fn. 7 (C.D. Cal. Mar. 14, 2017) (citing Samica Enterprises for the proposition that “under Section 31306 of the CFIL, claims alleging misrepresentations that fall within the scope of Section 31300 and 31301 can only be brought under the CFIL, and any other claims of fraud based on such violations are preempted.”).  That being said, franchisees should not be deterred from using Anderson when pursuing both fraud and CFIL violations.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Manufacturer or Distributor Cancellation of a Dealer Franchise: “Just Provocation” Under South Dakota Statute

Intro

If you are a franchised dealer, then odds are your contract contains terms regarding the circumstances under which your dealership may (or may not) be terminated.  But did you know that you may also have some statutory termination protection as well?  Many states have dealer protection laws which also contain the certain circumstances under which your dealership may (or may not) be terminated.  For purposes of this blog, we will be focusing on South Dakota law.

South Dakota Franchise Dealer Statute

Under South Dakota Codified Laws section 37-5-3, a manufacturer or distributor is prohibited from cancelling a dealer’s franchise “unfairly . . . and without just provocation.”  Any manufacturer or distributor who does so is subject to a Class 1 misdemeanor.

How Have the Courts Interpreted “Just Provocation?”

Although the statute does not define “just provocation,” there are some cases that shed light on what is meant by the phrase.

In Groseth International, Inc. v. Tenneco, Inc., 410 N.W.2d 159, 168 (S.D. 1987), the court held that “just provocation [under § 37-5-3] requires some sort of misconduct or shortcomings on the part of the dealer.”  There, Groseth International, Inc. (a family-owned corporation) entered into a franchise agreement with International Harvester Company (“IHC”) in which Groseth was a franchised dealer of IHC farm equipment.  Groseth abided by all the terms and conditions of the franchise agreement.  In December 1984, Groseth was notified that Case/Tenneco would be acquiring IHC and that in cities where Case and IHC dealers both existed, one dealership would be terminated.  Despite Case/Tenneco requesting information concerning Groseth’s business on December 14, 1984, which Groseth had responded to, the decision to close Groseth’s business had already been made by Case/Tenneco on December 6, 1984—eight days before!

What is even more concerning is that none of Case/Tenneco’s representatives viewed Groseth’s business operation, inspected the business premises, evaluated the financial aspects of the business, or performed any investigation concerning the nature of Groseth’s business as an IHC franchisee before making the termination decision.

On January 3, 1985, Case/Tenneco representatives informed Groseth that his current dealer agreement with IHC was terminated.  Contrary to the language of the IHC agreement, Groseth was not given six months’ notice of his termination and was denied information concerning why his franchise was terminated.

Based on the foregoing, the court determined that the record was devoid of any dealer misconduct or shortcoming, and remanded for a determination of the presence (or lack thereof) of any “just provocation,” as required by the statute.

In Diesel Machinery, Inc. v. B.R. Lee Industries, Inc., 418 F.2d 820, 826 (8th Cir. 2005), Diesel Machinery, Inc. (“DMI”) sued B.R. Lee Industries, Inc. (“LeeBoy”) alleging that LeeBoy unlawfully terminated DMI’s exclusive dealership agreement in violation of the South Dakota Dealer Protection Act.  In November 2000, LeeBoy entered into a dealership agreement with DMI that was effective through December 31, 2001 and would thereafter “automatically renew for successive one (1) year terms.”  The agreement also provided that either party could terminate the agreement upon sixty (60) days advance notice.  On July 12, 2001, LeeBoy called DMI’s president to cancel the franchise agreement and later confirmed DMI’s termination in writing.  LeeBoy’s recent acquisition of another product line was listed as the sole justification for the termination.

Prior to the termination, (1) LeeBoy never complained about DMI’s performance, (2) there were no problems regarding warranties, credit, sales performance, training, advertising, stocking requirements or quality of service, (3) LeeBoy admitted DMI had not breached or violated the dealership agreement or violated any program, practice, policy, rule, or guideline of LeeBoy, and (4) DMI performed significantly better than LeeBoy’s previous South Dakota dealer.  Because of these, the court found that there “was no evidence that the termination decision resulted from any misconduct or shortcomings on [the dealer’s] part.”  Therefore, the court found the termination was not “justly provoked.”

Takeaway

Courts interpreting the South Dakota Dealer Statute have rendered the statute’s requirement that a dealer be terminated for “just provocation” to mean that the dealer have some sort of misconduct or shortcoming to justify the termination.

If you are a terminated South Dakota dealer, or have recently been informed that your manufacturer or distributor intends to terminate your dealership, be sure that your manufacturer or distributor abides by its contractual and statutory obligations for termination.  If not, your rights may have been violated.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2014

And the saga continues . . .

In Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc., No. EDCV 13-00199 SJO, 2014 WL 7180549, at *1 (C.D. Cal. Dec. 16, 2014), plaintiff filed suit against defendants arguing that defendants violated Section 5 of the Illinois Franchise Disclosure Act (“IFDA”).

Section 5 of the IFDA provides a franchisee with the right to rescind an agreement when a franchisor fails to either register its franchise with the State of Illinois, or fails to deliver a disclosure statement.

There, plaintiff entered into a “Continuing Consultation and Compensation Agreement” (“Consulting Agreement”) with defendants. Under the terms of the Consulting Agreement, plaintiff was required to pay a $300,000 initial investment fee, royalties, and call center fees. In exchange, plaintiff was given the right to engage in the National Male Medical Clinic business. Although required under the IFDA, however, defendants did not provide plaintiff with a disclosure document prior to the execution of the Consulting Agreement.

The court stated that in order for the Consulting Agreement to be considered a franchise agreement, plaintiff must have been required to pay defendants a fee of $500 or more for the right to engage in the business. Since the parties had stipulated that plaintiff was required to pay an initial cash payment of $300,000, in addition to fees in excess of $500, this franchise fee requirement was easily met. Therefore, the court rendered the parties’ Consulting Agreement a franchise agreement. Because of this, plaintiff was entitled to rescission.

Takeaway: This case shows the consequences of a franchisor’s failure to comply with all the applicable sections of the state franchise act.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2013

And the saga continues . . .

In H.C. Duke & Son, LLC v. Prism Marketing Corp., No. 411CV04006SLDJAG, 2013 WL 5460209, at *1 (C.D. Ill. Sept. 30, 2013), a producer and distributor of a line of soft-serve ice cream machinery and equipment (“plaintiff”) filed suit against one of its distributors (“defendant”). The parties entered into an agreement whereby defendant agreed to distribute plaintiff’s equipment. Roughly eight years later, plaintiff notified defendant that it was terminating the agreement. After defendant disputed this termination, plaintiff filed suit seeking a declaration of the parties’ rights and duties under the agreement.

Defendant countered, arguing that it was labeled as a “franchisee” under their agreement and that plaintiff violated various provisions of both the Illinois Franchise Disclosure Act (“IFDA”) and California Franchise Relations Act (“CFRA”) during the course of their relationship. Plaintiff then sought dismissal on the grounds that no franchise existed because defendant never paid a franchise fee. As such, both the IFDA and CFRA were inapplicable.

  1. Illinois Franchise Disclosure Act

First, the court turned to the definition of a franchise fee under the IFDA. The IFDA defines a “franchise fee” as “any fee or charge that a franchisee is required to pay directly or indirectly for the right to enter into a business or sell, resell, or distribute goods, services or franchises under an agreement, including, but not limited to, any such payment for goods or services . . . .” In addition, “[a]ny payment(s) in excess of $500 that is required to be paid by a franchisee to the franchisor . . . constitutes a franchise fee unless specifically excluded by Section 3(14) of the Act.”

Second, the court turned to defendant’s specific allegations that it paid a franchise fee. Defendant argued that:

  • It was required to assume a prior distributor’s debt in order to enter the agreement;
  • It was required to purchase and carry an “ample stock” of plaintiff’s service and repair parts;
  • It paid plaintiff for advertising and promotional materials; and
  • It was required to pay a franchise fee of $500 or more.

Third, the court determined that “taken together, these allegations state a plausible claim that a franchise fee was paid, and therefore meet Rule 8(a)’s notice pleading standard.”

  1. California Franchise Relations Act

First, the court stated that the analysis for the existence of a franchise fee under the CFRA is similar to the analysis under the IFDA. The CFRA defines a “franchise fee” as “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement including, but not limited to, any payment for goods or services.” The provision also provides that “the payment must exceed $100 on an annual basis or it is not a ‘franchise fee.’”

Second, the court turned to defendant’s same allegations of the payment of a franchise fee under the IFDA and stated that these allegations “raise the reasonable inference that these putative franchise costs amounted to $100 or more annually.” Accordingly, defendant made sufficient pleadings under Rule 8(a).

Because defendant had sufficiently pleaded the existence of a franchise fee under both the IFDA and the CFRA, the court denied plaintiff’s motion to dismiss.

Takeaway: This case provides a great example of the interplay between different state statutes defining the “franchise fee” element. Although there were only relatively minor definitional differences, the largest difference was the portion on required payments. The IFDA required a one-time payment in excess of $500, whereas the CFRA required a payment in excess of $100 on an annual basis. Despite these differences, the court still found that defendant had sufficiently pleaded the payment of a franchise fee under both the IFDA and the CFRA. Another lesson of this case is that when you make a motion to dismiss, all allegations are deemed true. So, good pleading can win you your motion. If you are a defendant, you have to be careful about making a motion to dismiss if a franchise fee is properly pled.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

 

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2012

And the saga continues . . .

 

In BP West Coast Products, LLC v. Shalabi, No. C11-1341MJP, 2012 WL 441155, at *1 (W.D. Wash. Feb. 10, 2012), plaintiff filed suit against defendant alleging that defendant violated certain franchise agreements. Defendant counterclaimed, arguing that plaintiff violated the Washington Franchise Investment Protection Act (“FIPA”).

 

In its counterclaim, defendant argued that plaintiff used a zone price scheme to set the wholesale price of gasoline at a level intended to ensure that its franchisees would not make over a certain profit. Defendant also argued that plaintiff would “routinely and intentionally” speed up or delay its gasoline deliveries to certain franchisee stations depending on the gas price fluctuations—taking advantage of the fluctuations to the disadvantage of its franchisees.

 

After defendant filed these counterclaims, plaintiff moved to dismiss on the basis that FIPA was inapplicable to the relationship between the parties.

 

Zone Pricing Scheme

 

First, plaintiff argued that FIPA was inapplicable because defendant was never required to pay more than a bona fide wholesale price for gasoline. The court found this argument unpersuasive, stating that defendant made a showing that it had, in fact, been required to pay more than a reasonable wholesale price for gasoline because of the zone pricing scheme and faulty deliveries (mentioned above). “Similar allegations of purchasing gasoline and related products at inflated prices were sufficient to state a claim under FIPA in Blanton [Blanton v. Mobil Oil Corp., 721 F.2d 1207 (9th Cir. 1983)] and it is enough here.”

 

Ampm Store

 

Second, plaintiff argued that FIPA was inapplicable because defendant never paid a franchise fee. The court, similarly, found this argument unpersuasive. Because defendant was required to operate an ampm store—that had a $70,000 franchise fee—in conjunction with the gas station, and because one could not operate a gas station without also having an ampm minimart, defendant had paid a franchise fee to enter into the gasoline agreement and to operate the gas station. The court stated that “although the agreements are distinct, they are dependent agreements.”

 

Legislative Intent

 

Finally, plaintiff argued that dismissal was appropriate because the legislature did not intend for FIPA to apply to gas stations. The court similarly found this argument unpersuasive, stating that “whatever the legislature may have had in its ‘mind,’ it did not put into law.” Because there was no provision in FIPA precluding its application in the context of a gasoline station, the court rejected plaintiff’s argument.

 

Finding that defendant had stated sufficient factual allegations to sustain the FIPA counterclaim, the court ultimately denied plaintiff’s motion to dismiss.

 

Takeaway: Under Washington law, a franchisee has a cause of action under FIPA if it is required to purchase items at inflated prices, and if it is required to pay a franchise fee under one agreement that is dependent upon another agreement.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2011

And the saga continues . . .

In Roberts v. C.R. England, Inc., 827 F. Supp. 2d 1078 (N.D. Cal. 2011), independent contractors (“plaintiffs”) filed a putative class action against affiliated transportation industry companies (“defendants”) alleging, among other things, violation of the California Franchise Investment Law (“CFIL”).

 

There, defendants provided its customers with shipping services to transport goods. While some of defendants’ truck drivers were its employees, the majority of its drivers were those who purchased the “Driving Opportunity.” Plaintiffs, after seeing defendants’ Driving Opportunity advertised, contacted defendants, enrolled in its driving training school, and paid $3,000 each for training. Once plaintiffs finished the second phase of their training, they were formally offered a Driving Opportunity.

 

Although Plaintiffs wanted to be employees of the company, rather than independent contractors through the Driving Opportunity, they were informed that there were no positions currently available at the company and/or plaintiffs would need to purchase the Driving Opportunity for a minimum of six months to even be considered for a position at the company. Because of this, plaintiffs agreed to purchase the Driving Opportunity that was offered to them. A dispute later arose. Plaintiffs filed suit and defendants moved to dismiss the CFIL claim.

 

The court first looked at the definition of a “franchise” under the CFIL, which provides:

 

(a) “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(1) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and

(2) The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

(3) The franchisee is required to pay, directly or indirectly, a franchise fee.

In support of plaintiffs’ argument that they paid a franchise fee, plaintiffs pointed to the following payments for: truck rental, computer rental, operational equipment, insurance, signs, maintenance, gas, promotional materials, and other items that were required “for the right to enter the Driving Opportunities.”

The court, however, found this argument unpersuasive. Explaining that these fees merely appeared to be ordinary business expenses, which could not be franchise fees, the court ultimately dismissed plaintiffs’ CFIL claim.

 

Takeaway: Although it is important to know which payments have been found to satisfy the franchise fee requirement, it is equally as important to know which payments have not been found to constitute the payment of a franchise fee. Here, the court notes that “ordinary business expenses” cannot be franchise fees, and provides practitioners with a laundry list of payments to turn to which have been characterized as such. When evaluating whether or not a certain franchisee’s payments are franchise fees under the CFIL, it can be helpful to look at this case to ensure that such payments have not been characterized as ordinary business expenses—and if they have, whether certain additional arguments can be tacked on to turn the purported ordinary business expense into a franchise fee.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2010

And the saga continues . . .

 

In Bye v. Nationwide Mutual Insurance Co., 733 F. Supp. 2d 805 (E.D. Mich. 2010), an insurance agent (“plaintiff”) brought suit against the insurer (“defendant”) alleging it violated the Michigan Franchise Investment law (MFIL). There, plaintiff had been in defendant’s employ as an insurance agent for nine years. During such time, plaintiff had worked in various capacities, ranging from a Financed Community Agent to an Independent Contractor Agent.

 

Plaintiff expanded his business by acquiring existing agencies or opening new satellite offices, primarily in Michigan. Plaintiff took out considerable loans in order to fund such acquisitions. By 2006, however, plaintiff was continually operating at a loss. In an effort to “help with [their] future,” plaintiff’s wife opened an insurance business because it “would [have been] inappropriate based on [her] husband’s employment with [defendant] to start another company on his own.” After defendant learned of the business, defendant believed that plaintiff was referring its existing and potential customers to his wife’s insurance business. Defendant subsequently terminated plaintiff’s agency for breach of the exclusive representation agreement, and plaintiff filed suit.

 

On motion for summary judgment, plaintiff alleged defendant violated the MFIL by “employing devices, schemes and artifices to defraud in its sale or offer of a franchise.” Controlling on this issue was whether plaintiff paid a franchise fee. The MFIL defines a “franchise fee” as “a fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including but not limited to payments for goods and services.” Mich. Comp. Laws § 445.1503(1).

 

In support of its argument that it paid a franchise fee, plaintiff alleged “[d]efendant churns agents. When the agent fails . . . [defendant] takes the enhanced book of business, sells it for more than it credits the defaulted former agent and then makes more money off the same book with the new agent. The fee is the profit from the book obtained by [defendant].”

 

The court found this argument unpersuasive. Because the “profit” would occur after the agent had been churned, the alleged profit could not be for the right to enter into a business. This, by definition, needed to be paid at the outset of the agreement. The court then reiterated that it is the circumstances existing at the time of the offer or sale which determines whether an agreement is a franchise under the MFIL. Accordingly, because plaintiff did not provide sufficient evidence that it paid a franchise fee, the court rendered the MFIL inapplicable and awarded defendant summary judgment.

 

Takeaway: A franchise fee needs to exist at the outset in order for it to be for the “right to enter into a business” under the MFIL.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2004

And the saga continues . . .

 

In Home Pest & Termite Control, Inc. v. Dow Agrosciences, LLC, No. 8:02CV406, 2004 WL 240556, at *1 (D. Neb. Feb. 6, 2004), a trained pest control operator (“plaintiff”) filed suit against the manufacturer of a termite elimination system (“defendant”) after the manufacturer terminated the agreement between the parties. After plaintiff alleged violations of the Nebraska Franchise Practices Act, defendant moved for summary judgment on the basis that the agreement between the parties was not a franchise agreement. In support of this, defendant pointed to the following section of the agreement “[t]his Agreement is not, nor is it to be construed as, a franchise agreement.”

 

Although the agreement contemplated “a community of interest in the marketing” of the pest control system, thereby seemingly satisfying part of the definition of a franchise under the statute, the court ultimately rendered the relationship not a franchise because the Agreement “nowhere required [plaintiff] to pay a franchise fee in exchange for a license to use the [defendant’s] name or mark. None of the fees mentioned in the agreement are for a surety bond or deposit or for security; rather, they are connected to the purchase of the termite system components.”

 

Takeaway: Payments primarily for the purchase of components, rather than for the license to use a name or mark, have not been found to satisfy the franchise fee element of the Nebraska Franchise Practices Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.