January 05, 2020

Litigation and Dispute Resolution Division

About the Division

LADR (the Forum’s Litigation and Dispute Resolution Division) presents the following case update so that Forum Members can stay current on important or interesting developments in franchise law.

We also want to invite you to connect with LADR’s Steering Committee for Breakfast on Thursday, October 11, 2018, at 7:00 a.m. at the ABA’s 41st Annual Forum on Franchising in Nashville, Tennessee. The substantive portion of the LADR Breakfast will discuss mediation best practices to follow and worst practices to avoid, with special guests and experienced Nashville-based mediators Marnie Huff and Matt Sweeney. Moderating will be our own John Gotaskie. Additionally, LADR is soliciting YOUR questions for our panelists to address. Those questions can be forwarded to John Gotaskie at jgotaskie@foxrothschild.com. We hope you will join LADR in Nashville for what promises to be an exciting and informative start to Thursday at the Forum. Learn more about the Forum here. http://fal.cn/VFi8

Legacy Acad., Inc. v. Doles-Smith Enterprises, Inc., 344 Ga. App. 805, 812 S.E.2d 72 (2018)

How a franchisor elects to deal with a franchisee’s anticipatory repudiation of a long-term franchise agreement can have a profound impact on the franchisor’s remedies. This recent case teaches that if a franchisee repudiates and the franchisor elects to stop performing, then the franchisor should seek to recover both past due and future fees in one action or risk foregoing the future fees altogether.

***

Six years into a 25-year franchise agreement for a daycare center, the franchisee gave notice of termination, said it would de-identify, and stopped paying monthly royalty and advertising fees. The franchisor immediately stopped providing services and support. The parties then engaged in serial lawsuits where the franchisor was barred from suing for future fees due under the remaining 19 years of the agreement.

The First Suit

The franchisee sued the franchisor for  negligent misrepresentation and violation of federal franchise rules. The franchisor counterclaimed for breach of the agreement, seeking all sums owed under the 25-year franchise agreement, including all unpaid fees. The franchisor characterized its claim as involving future damages and involving fees through the term of the agreement. When it became apparent that it might not be able to prove its claim for future fees, the franchisor abandoned its claim at trial. The court entered judgment for the franchisee on its misrepresentation and negligence claims and for the franchisor on its counterclaim for past unpaid fees.  Both parties appealed.

The Second Suit

While the appeals of the first suit were pending, the franchisor sued the franchisee claiming breach of contract for failure to pay royalty and advertising fees for two months. In a summary judgment motion, the franchisee asserted res judicata, contending the issue of future fees could have been litigated in the first suit but was abandoned by the franchisor and a final judgment entered. The trial court found an issue of material fact as to the franchisor’s choice of remedy.

After a bench trial, the court concluded that the franchisor had accepted the franchisee’s repudiation and elected to treat it as a breach of the entire agreement. Thus, in the first suit the counterclaim was for a breach of the entire agreement—including for all future monthly fees—and there was “nothing left after that lawsuit to sue under.” Res judicata barred the franchisor’s claim for future fees.

The Appeal Of The Second Suit

The franchisor appealed, but there was more than sufficient evidence to support the court’s finding.  Upon repudiation, the franchisor had three options: (1) rescind the contract altogether and recover the value of its performance on principles of quasi-contract; (2) treat the repudiation as a breach of the entire agreement and bring an action for damages; or (3) continue to fulfill its obligations while waiting for the franchisee’s time for performance and then bring suit after the time had arrived. If the franchisor chose either the first or second option, it would have been relieved of its obligation to continue performing under the franchise agreement. But, if it chose the third option, it would be required to continue performing, regardless whether the franchisee fulfilled its obligations.

The court concluded the franchisor chose the second option because it stopped performing and sued for all fees. The franchisor could not reverse or change its election by giving notice at trial in the first suit that it was not going to pursue the future fees.  Having accepted the franchisee’s anticipatory breach of the entire agreement, the franchisor should have pursued all the fees due under the agreement—both past and future—in the first suit or not at all.

Erica Calderas for LADR

Case Note from LADR

McDonald’s USA, LLC, et al. and Fast Food Workers Committee and Service Employees International Union, CTW, CLC, et al. Cases 02-CA-093893, et al. (December 12, 2019)

LADR (the Forum’s Litigation and Dispute Resolution Division) presents the following case update so that Forum members can stay current on important or interesting developments in franchise law.

On December 12, 2019, the National Labor Relations Board (“NLRB”) finally resolved the years-long McDonald’s joint employer dispute by directing an Administrative Law Judge to approve a settlement of the dispute. The essence of the litigation revolved around the employee’s theory that McDonald’s USA, LLC (“McDonald’s”), as a franchisor, was liable as a joint employer of its franchisees’ employees for alleged violations of unfair labor practices under the National Labor Relations Act.   The case did not involve allegations that McDonald’s independently violated the Act, but did involve allegations that McDonald’s “possessed and/or exercised” sufficient control over its franchisees’ labor relations policies that it should be held jointly and severally liable as a joint employer with the franchisees.  While the Administrative Law Judge initially had rejected the settlement in July of 2018, the Board directed the Administrative Law Judge to accept the settlement in light of the fact that any ultimate ruling would have limited precedential value due to the NLRB’s recent proposed rulemaking that would re-institute a finding of joint employer status only in situations where the employer/franchisor “possess[es] and actually exercise[s] substantial direct and immediate control over the essential terms and conditions of employment of another employer's employees in a manner that is not limited and routine” (i.e., the pre-Browning-Ferris test).

The Board determined that the settlement agreements met the “reasonableness” factors established in Independent Stave, 287 NLRB 740 (1987), including that the affected employees would be provided a full remedy under the settlement agreements.  Notably, the settlement agreements did not impose joint and several liability on McDonald’s as a joint employer, but did require McDonald’s to support the remedies agreed to by the franchisees and McDonald’s Restaurants of Illinois. 

Members Marvin E. Kaplan and William J. Emanuel joined in the majority opinion, and Member Lauren McFerran dissented. 

Division Leadership

Chair

Benjamin Reed, Chair
Plave Koch PLC
breed@plavekoch.com
703-774-1207

Steering Committee

Erica Calderas
Hahn Loeser & Parks LLP

Kristi Miamen
Dady & Gardner P.A.

Caroline Fichter
Bundy Law Firm PLLC

Nina Greene
Genovese Joblove & Battista

John R. Gotaskie, Jr.
Fox Rothschild LLP

Frank Sciremammano
Gray Plant Mooty

Related Links

Articles 

A Litigator's Perspective on Precision in Drafting: Expiration Versus Termination

Having It Both Ways: Can a Franchisor Insist on Arbitration and Litigation?

Litigator's Corner: They Are Violating the Injunction, Now What? Enforcement 


Publications

Franchise Litigation Handbook

Fundamentals of Franchising, Fourth Edition

Annual Franchise & Distribution Law Developments, 2014

Covenants Against Competition in Franchise Agreements, Third Edition

Franchising Cases, Materials, & Problems

Franchise Desk Book: Selected State Laws, Commentary and Annotations