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 Court recognized split in cases on issue  But court concluded that anti-waiver provision of MD Act precludes franchisor from avoiding statutory fraud claim as a matter of law  Cannot use integration clause to protect itself against fraud claim  Disclaimers can still be relevant for trier of fact to consider in assessing reasonableness of reliance and materiality of alleged misrepresentations 27

BROKER CLAIMS  Broker argued:  MD Act allows suit only against person “who sells or grants a franchise”  Broker did not “sell or grant” – only franchisor Grantor ≠ Broker 28

COURT’S ANALYSIS  Court rejects this interpretation  Each person who “performs similar functions as a person liable”  But broker can avoid liability if it can show it did not know or have reasonable grounds to know the facts on which liability is alleged “DNK” 29

Long John Silver’s Inc., et al., v. Nickleson, et et al. al. 923 F. Supp. 2d 1004 (W.D. Ky. Feb. 12, 2013) 30

FACTS  Franchisor sued franchisees for unpaid franchise fees and trademark infringement  Franchisees filed counterclaims for violation of Minn. Franchise Act and common law fraud  Alleged untrue information and omissions regarding estimated costs, revenues and profits (and financial state of other A&W franchises) 31

COURT’S ANALYSIS  Franchisor argued that claim under MFA requires reasonable reliance and disclaimers render any reliance unreasonable  Court, recognizing inconsistent treatment of disclaimers under Minn. Law, held:  MFA requires reasonable reliance  But cannot establish lack of reasonable reliance based on disclaimers as a matter of law  Aware of anti-waiver provision 32

 Court found that anti-waiver provision of MFA prevents franchisor from using a disclaimer to defeat a misrepresentation claim under the MFA  But jury can consider a disclaimer in assessing whether reliance was reasonable 33

 As to the common law fraud claim, court distinguished between general disclaimers and specific ones  If general, will not avoid fraud claim  If specific contradiction of alleged representation, would bar common law fraud claim General v. Specific 34

PRACTICE POINTERS  Include disclaimer clauses in franchise agreement  If information is a projection or estimate, state that and warn against it being a guaranty  Make disclaimers specific but inclusive  If later FDD contains changed, different information, be sure to have basis for the change  When choosing choice of law to govern, consider that state’s law on disclaimers 35

CURRENTLY SPEAKING Will a Covenant Not to Compete Be Enforceable John Dwyer Against a Competing Business Owned by a Nonsignatory? 36

Vict Victor ory y La Lane ne Quick Quick Oil Oil Cha Chang nge, e, Inc. Inc. v. v. Da Darwic rwich, h, et et al. al. 2013 WL 393020 (E.D. Mich. Jan. 31, 2013) 37

FACTS  Franchisor Victory Lane entered into a franchise agreement with Darwich Brothers, LLC  Magid Darwich signed the agreement as guarantor  Victory Lane alleged a breach of the in-term covenant due to the operation of two competing quick oil change centers  Magid Darwich claimed the centers were opened by his brother (Belal Darwich), and that he had no interest in the centers 38

FACTS  Victory Lane was not satisfied with the explanation regarding the two competing centers and terminated the franchise agreement  Darwich Brothers then sold the assets of the franchise to Balil Darwich, who formed a new corporation to operate a quick lube center at the former franchised location  Darwich Brothers intended to transfer the lease for the location to the new corporation but the landlord refused 39

CLAIMS  Victory Lane sued, alleging a violation of the post-termination covenant not to compete  The signatories to the agreement – Darwich Brothers and Magid Darwich (Guarantor) – claimed no interest in the competing business  The alleged owners of the business – Balil Darwich and the new corporation – were not parties to the franchise agreement 40

POST-TERM COVENANT  The post-term covenant provided: “The Franchisee, the Owners and the Personal Guarantors will not, for a period of two (2) years after termination or expiration of this Agreement for an Oil Change/Car Wash Center . . . on their own account or as an employee, principal, agent, independent contractor, consultant, affiliate, licensee, partner, officer, director or Owner of any other person, firm, Entity, partnership or corporation, own, operate, lease, franchise, conduct, engage in, be connected with, have any interest in or assist any person or Entity engaged in any Competitive Business which is located . . . .” 41

COURT’S ANALYSIS AND DECISION  The court granted summary judgment in favor of Victory Lane  The court based its decision on the fact that Darwich Brothers, LLC (the franchisee) was still the tenant on the lease  As the tenant, Darwich Brothers, LLC, allowed the new business to occupy the same location as the former Victory Lane franchise  The Court found that Darwich Brothers, LLC, was arguably “connected with,” had an “interest in,” or was “assist[ing] any person or Entity engaged in any Competitive Business” 42

PRACTICE POINTERS  Try to get facts before alerting franchisee to possible violation  Discover as many links as possible between signatories and the competing business  Draft non-compete clauses to cover broad range of involvement with competing business  But watch state law ( e.g. , “in any capacity”) 43

CURRENTLY SPEAKING Will Irreparable Injury Be Presumed from a John Dwyer Franchisee’s Continued Operation of a Competing Business Post-Termination? 44

Steak N Shake, Inc. v. Globex Company, LLC 2013 WL 4718757 (D. Colo. Sept. 3, 2013) 45

FACTS  Steak N Shake and Defendants were parties to franchise agreements and a development agreement for Steak N Shake restaurants; Defendants’ owners personally guaranteed the agreements  Defendants acquired two existing restaurants and agreed to develop a total of thirteen restaurants  Steak N Shake had established a $4 meal promotion; it set the $4 price in the POS system and provided menus and promotional materials to franchisees with the set prices  The franchise agreements gave Steak N Shake the right to terminate the agreements if the franchisee sold products in excess of the set maximum price 46

FACTS  Defendants created menus that looked like the menus provided by Steak N Shake but contained higher prices; Defendants did not use the promotional materials for the $4 menu items  Defendants changed the price in the POS system by charging for items a la carte, rather than at the set $4 meal price  Steak N Shake terminated the two franchise agreements due to Defendants’ failure to comply with the maximum pricing policy and the required promotions  Steak N Shake also terminated the development agreement due to Defendants’ failure to open a third restaurant  Defendants continued to operate as Steak N Shake restaurants and Steak N Shake sought a preliminary injunction to enjoin the infringement of the trademarks and to enforce the post-term covenant not to compete 47

COURT’S ANALYSIS  The court concluded that Steak N Shake properly terminated the agreements  The court found ample evidence that Steak N Shake set the price at $4 for the meals and instituted promotions for the $4 meals, and that Defendants failed to comply with the pricing and the promotions  The court granted the preliminary injunction as to the trademark infringement claim, finding that all of the elements for an injunction, including likelihood of success on the merits and irreparable injury, were met 48

COVENANT NOT TO COMPETE  The court then considered the post-term covenant not to compete  The covenant provided that franchisee would not have any interest in a competing business for two years after termination (1) at the location of the restaurants, (2) within 5 miles of the locations or (3) within 5 miles of a then-existing Steak N Shake restaurant  The court found a likelihood of success on the merits  But as to irreparable injury, it found that Steak N Shake failed to make a sufficient showing to fully enforce the covenant not to compete 49

LACK OF IRREPARABLE INJURY  After the termination of Defendants’ restaurants, there was just one Steak N Shake restaurant left in Colorado  The court agreed that due to Defendants’ former operation of Steak N Shake restaurants and access to confidential information, they would have an unfair advantage if allowed to operate a competing restaurant within 5 miles of the one remaining restaurant, or any other existing Steak N Shake restaurant  But the court found that Steak N Shake failed to show irreparable injury from Defendants’ continued operation of competing restaurants at the former locations or within 5 miles of those locations  Steak N Shake had not shown that it planned to resume expansion of its restaurants in the area or within the authorized locations of Defendants’ former Steak N Shake restaurants 50

PRACTICE POINTERS  Irreparable injury may not be presumed by a court even where the franchisee continues to operate a competing business at the former location  Franchisor must make an adequate showing as to how it will be irreparably injured  It must present evidence of injury from the operation of the competing business at the former location, near the former location and near other existing locations  Franchisor should also present evidence of other types of injury. For example, harm to the system from allowing a franchisee to continue to operate a competing business at the former location 51

CURRENTLY SPEAKING Is The Convenience Of The Parties Relevant To Assessing Whether To John Hughes Enforce A Forum Selection Clause? 52

Atlantic Marine Constr. Co. v. U.S. District Ct. for the W. District of Texas, et al., 134 S. Ct. 568 (2013) 53

FACTS  Atlantic Marine (a Virginia corporation with its principal place of business in Virginia) entered into a contract to construct a child- development center in Texas  Atlantic Marine entered into a subcontract with J-Crew Management (a Texas corporation)  Contract had a Virginia forum selection clause  Dispute over payment arose, and J-Crew sued Atlantic Marine in the Western District of Texas  Atlantic Marine moved to dismiss under 28 U.S.C. § 1406(a) and Rule 12(b)(3) or, alternatively, to transfer venue pursuant to 28 U.S.C. § 1404(a) 54

DISTRICT COURT/APPELLATE COURT  District Court denied both motions  Held that § 1404(a) is the exclusive mechanism to enforce a forum selection clause  Held that Atlantic Marine bore the burden to establish that transfer was appropriate and considered a list of public and private interest factors, including the forum selection clause  Atlantic Marine failed to carry its burden  Court of Appeals denied Atlantic Marine’s petition for a writ of mandamus  Agreed that § 1404(a) is the exclusive mechanism to enforce a forum selection clause, and held that the District Court did not abuse its discretion in balancing the interests and denying transfer 55

THE SUPREME COURT’S RULING  Section 1406(a): “The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer to any district or division in which it could have been brought”  Rule 12(b)(3): A party may move to dismiss for “improper venue”  Section 1406(a) and Rule 12(b)(3) only allow dismissal when venue is “wrong” or “improper”  Whether venue is “wrong” or “improper” depends exclusively on whether the court in which the case was brought satisfies the requirements of federal venue laws, which say nothing about forum selection clauses 56

THE SUPREME COURT’S RULING  Forum selection clauses should be enforced pursuant to § 1404(a)  Forum selection clause is to be given controlling weight in all but the most exceptional circumstances  Requires courts to adjust their § 1404(a) analysis in three ways  Plaintiff’s choice of forum merits no weight  Court should not consider arguments about the parties’ private interests  Any inconvenience was clearly foreseeable at the time of contracting  Court may consider public interest factors only  Transfer will not carry the original venue’s choice of law rules  Proper way to enforce forum selection clause pointing to state or foreign forum is through the doctrine of forum non conveniens 57

THE SUPREME COURT’S RULING - REMAND  District Court improperly placed the burden on Atlantic Marine to prove that the transfer to the contractually preselected forum was appropriate  J-Crew must bear burden of showing that public interest factors overwhelmingly disfavor a transfer  District Court improperly considered parties’ private interests  The fact that compulsory process would be unavailable for the majority of J- Crew’s witnesses and there would be significant expenses for those willing witnesses should not have been given any weight  Virginia court could apply Virginia choice of law rules 58

PRACTICE POINTERS  Include forum selection clauses in your franchise agreements and seek to enforce those provisions  A franchisee can no longer point to private interests in an attempt to avoid the enforcement of a forum selection clause  Only public interests can avoid the enforcement of a forum selection clause, and those interests will rarely rule the day  Public interests: Court congestion, local interests in having localized controversies decided at home, familiarity with the law 59

CURRENTLY SPEAKING Does The Natural End Of The Franchise Agreement Qualify As The “Termination” Of The John Hughes Agreement? 60

Hamden v. Total Car Franchising Corp., 2013 WL 6136436 (4th Cir. Nov. 22, 2013) 61

FACTS  Hamden operated a Colors On Parade franchise in Virginia and West Virginia pursuant to two agreements  Franchise Agreement  Non-Competition and Confidentiality Agreement  At the end of the 15-year term, Hamden continued operating as a franchisee  Hamden decided to pursue his own business  District court held that the restrictive covenants in the agreements did not bind Hamden because “termination” did not encompass an “expiration” brought about by the natural end of the term  TCF appealed 62

RESTRICTIVE COVENANTS  Franchise Agreement  Post-termination non-competition clause operational “for 2 years following the termination of this Agreement”  Other post-termination obligations (such as return of TCF property) upon termination of the Agreement “for any reason” 63

RESTRICTIVE COVENANTS  Non-Competition and Confidentiality Agreement  “If the Franchise Agreement is terminated before its expiration date , or if you assign or transfer your interest in the Franchise Agreement, to any person or business organization except according to Section 7 . . . Then You covenant for a period of 2 years after termination . . .”  “During the term of the Franchise Agreement and thereafter , you agree not to . . . use for your benefit . . . any trade secret . . . If there is any termination of this Agreement, You agree that you will never use our confidential information or trade secrets, in the design, development or operation of any business specializing in appearance technologies as Colors on Parade applies them.”  During the term of the Franchise Agreement and for 2 years after its termination . . . You will neither directly nor indirectly solicit . . . or take away any customer within the statistical marketing area in which the DMA is located where Hamden actually served during the term of this Agreement” 64

THE APPEAL  TCF argued that termination under the agreements encompassed the natural end of the contract and all of the restrictive covenants triggered upon termination of the agreements applied to Hamden  Issue may be resolved by application of dictionary definitions  Expiration is a form of termination  Language of contract presented expansive view of termination with use of broad modifier “any” when referring to termination  Hamden argued the terms are not necessarily analogous and the contract’s use of both terms indicated different meanings 65

THE COURT’S RULING  Mere use of both terms within the agreement did not necessitate a different meaning to each  According to the definitions, termination includes expiration and expiration is a type of termination  Section 8 indicated what events would constitute a termination  Termination occurs upon an action  Section 2 explained that renewal could occur if Hamden provided notice “before this Agreement’s expiration”  “Any” may broadly apply to any reason for an affirmative act of termination 66

THE COURT’S RULING  Court analyzed the use of the terms in the agreements and determined that the language contemplated two separate meanings  The restrictive covenants that were triggered upon “termination” were not enforceable  First clause of non-disclosure provision was enforceable because termination was not required to trigger the restriction 67

PRACTICE POINTERS  Say what you mean in the franchise agreements  If mean termination, say termination  If mean expiration, say expiration  If mean both termination or expiration, say both  Review language in franchise agreements for what events trigger the restrictive covenants 68

Will Your Class Arbitration Waiver Provision Be Enforced Even If The Expense Of Individual Arbitration Would Barry Heller Be Prohibitive? 69

American Express Co, et al., v. Italian Colors Restaurant, et al. 133 S.Ct. 2304 (2013) 70

FACTS  Merchant filed class action in court on antitrust claim against American Express  treble damages  Agreement required arbitration  Agreement barred class arbitration 71

 Merchant argued that cost of litigation (e.g., expert fees) would prevent anyone from filing individual arbitration  Expert estimated fees to be several hundred thousand dollars and might exceed $1M  Maximum recovery would be $12,850 (i.e., $38,549 when trebled) 72

THE ISSUE  Some interim decisions from the lower courts  Recognized “effective vindication exception”  Issue for U.S. Supreme Court  “whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery” FAA 73

THE DECISION  Arbitration is a matter of contract  FAA requires arbitration agreements to be “rigorously enforced” according to their terms  Antitrust laws do not guarantee an affordable procedural path to the vindication of every claim 74

 Court also rejects the judge-made exception to invalidate agreements that prevent the effective vindication of federal statutory rights  Right to pursue remedy v. expense in proving remedy AGREEMENT 75

 Adopting the “effective vindication exception” would require courts to assess the legal requirements for success on the merits, the evidence needed, the cost involved and the damages to be recovered  Inconsistent with the goal of arbitration – speedy resolution 76

PRACTICE POINTERS  Include class action waiver in franchise agreements  If select arbitration, include class waiver  Expand waiver to preclude any group, joint, common, consolidated, or representative action No Class Action 77

Can You Overturn an Arbitrator’s Determination That a Contract Authorized Class Arbitration Based on Barry Heller That Determination Being in Error? 78

Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) 79

FACTS  Agreement between pediatrician and Oxford Health Plans requires arbitration  No mention of class arbitration  No class arbitration waiver  Parties agreed that the arbitrator should decide whether the agreement authorized class arbitration 80

 Arbitrator concluded that the clause authorized class arbitration  Found that intent of the clause was to allow in arbitration the same form of action that could be brought in court 81

 Oxford, trying to avoid a class arbitration, moved in federal court to vacate the arbitrator’s decision  Argued that arbitrator “exceeded [his] powers” under §10(a)(4) of the FAA  District court denied motion and the court of appeals affirmed FAA §10(a)(4) 82

 Issue – does §10(a)(4) of FAA allow a court to vacate an arbitral award which may be erroneous  Section allows a court to set aside an arbitral award where the arbitrator “exceeded his powers”  Held: as long as arbitrator construed or applied the contract, decision will stand  Even if the arbitrator committed serious error  Section deals with arbitrator acting outside scope of his delegated authority 83

 Here, the arbitrator did analyze and interpret the language of the agreement  Parties bargained for arbitrator to construe agreement  As long as that is done, cannot overturn merely because interpretation is questionable 84

 As Supreme Court said:  “Under §10(a)(4), the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” 133 S. Ct. at 2071 85

PRACTICE POINTERS  Don’t choose arbitration if you want court to analyze correctness of decision  Bound by arbitrator’s decision, even if incorrect  Include class arbitration waiver  Consider contractual arbitration appeal panel  Must counterbalance against benefit of arbitration 86

Can You Be Held Liable On An Agency Theory If Franchisee Violates The Telephone Consumer Barry Heller Protection Act? 87

Friedman v. Massage Envy Franchising, LLC 2013 U.S. Dist. LEXIS 84250 ( S.D. Cal. 2013 ) 88

THE TCPA  The TCPA prohibits “persons” from  (1) making “any call” (without prior consent of called party)  (2) “using any automatic telephone dialing system or artificial or prerecorded voice”  (3) “to any telephone number assigned to a … cellular telephone service…”  A “text message” is a “call” within the Act 89

 The franchisor argued that it cannot be held liable under TCPA because it did not send the unsolicited text  Plaintiff claims it alleged an agency relationship between franchisor and the company that issued the text messages 90

 Held that allegations insufficient because did not assert facts showing:  That agent held power to alter legal relations between principal and third persons and between principal and agent  That agent is a fiduciary with respect to matters within scope of agency  That the principal has the right to control conduct of agent regarding matters entrusted to him  Factual allegations too speculative 91

 Plaintiff also argued that franchisor liable under TCPA “as a beneficiary” of the unsolicited texts sent by the third party  Court refused to extend liability to any beneficiary of the alleged unlawful actions “On whose behalf” 92

FCC DECLARATORY RULING  Other section of TCPA – regarding “do -not-call- provisions” – referred to “on behalf of” for liability  But section regarding “pre - recorded calls” did not  Bottom line: Sellers who did not place calls may only be “vicariously” liable and subject to damages for third -party TCPA violations if federal common law principles of agency apply 93

EXAMPLES FROM FCC  In its ruling, the Commission provided examples of situations in which vicarious liability might be imposed, including:  circumstances where a seller “allows the outside sales entity access to information and systems that normally would be within the seller’s exclusive control, including: access to detailed information regarding the nature and pricing of the seller’s products and services or to the seller’s customer information”  allowing an “outside sales entity to enter consumer information into the seller’s sales or customer systems, as well as the authority to use the seller’s trade name, trademark and service mark” (emphasis added)  situations in which a retailer “knew (or reasonably should have known)” that a third party was violating the TCPA on the retailer’s behalf and failed to act 94

PRACTICE POINTERS  Multi-million damage exposure  Be careful in guidance given to franchisees regarding TCPA  Don’t recommend company to assist with text/fax messages unless you check them out  Review your franchise agreements regarding independent contractor and indemnification provisions 95

CURRENTLY SPEAKING Does Retaining the “Right to Control” Make a Franchisor John Dwyer Potent Potentially ially Vicariously Vicariously Liable Liable for the for the Acts Acts of Its of Its Franchisees? Franchisees? 96

Peo People ple v. v. JTH JTH Tax Tax, , Inc. Inc. 151 Cal. Rptr. 3d 728 (Cal. Ct. App. Jan. 17, 2013) 97

FACTS  JTH Tax, Inc. (Liberty Tax Services) and its franchisees ran print and television ads regarding Liberty’s refund anticipation loans and electronic refund checks  California Attorney General sued Liberty, alleging that the advertising violated unfair competition and false advertising laws by inadequately disclosing debt collection procedures, costs, interest, the time to obtain the refunds and other matters  California Attorney General alleged that Liberty was vicariously liable for its franchisees’ advertising  Trial court found Liberty liable for ads run by the franchisees because the franchisees acted as Liberty’s agents 98

TRIAL COURT  The trial court determined that the focus must be on the extent of the franchisor’s right of control over the franchisee and whether those controls exceeded those necessary to police the marks  The trial court focused on Liberty’s operations manual, which it concluded went beyond what was necessary to police the trademarks  Liberty required certain banks for the loans and refund checks; mandated operating hours, computers, how to open the store and clean the bathrooms; reserved the right to intervene in customer disputes; mandated filing systems; controlled discounts franchisees could offer; and retained extensive control over franchisee advertising  The trial court found that Liberty’s controls went beyond those needed to protect its marks 99

COURT OF APPEALS  Liberty argued that the test for vicarious liability should be actual control over day-to-day operations, not merely the right to control to maintain uniformity of products and services  The court found Liberty’s arguments unpersuasive  The court concluded that it is the right to control the means and manner in which the result is achieved that is significant in determining a principal-agent relationship  The court concluded that the trial court applied the correct test 100