Franchising, Dealership & Distribution Cases

Significant Recovery in a Hidden Franchise Case

Carmen obtained a substantial seven figure recovery for six former licensed dealers in litigation against a European manufacturer of luxury consumer products and its wholly-owned U.S. distributor, alleging claims intentional non-compliance with U.S. state and federal franchise registration and disclosure laws. The dealers’ claim under the Illinois Consumer Fraud & Deceptive Business Practices Act that the defendants violated the FTC Franchise Rule survived the defense motions to dismiss at the pleading state and later motion for summary judgment, prior to the settlement agreement. Further, the plaintiffs presented evidence that the defendants’ violations were willful as the defendants had explored franchising options by attending franchise association meetings, but then elected not to franchise, in order to save money.

System-Wide Impact Cases

Defense of national retail franchisor in a putative class action on behalf of all persons who purchased a franchise in the last fifteen years, with underlying claims of fraud in the inducement of the franchise relationships.
Formation of an independent franchisee association and representation of multiple franchisees against a franchisor of patented “foundation walls” who breached the implied covenant of good faith and fair dealing by (a) failing to maintain its product in good standing with the national authorities that maintain building code standards throughout the United States; and (b) overcharging the franchisees for mandatory product purchases; and (c) retaliating against its franchisees for forming an independent franchisee association to challenge the franchisor’s conduct. Settlements were reached prior to schedule arbitration hearing in Washington, D.C. The settlements include a new franchise agreement to be implemented on a system-wide basis, to prevent recurrence of the same harms.
Representation of national independent association (and numerous state franchisee associations) of a major, well-recognized national food industry brand in litigation seeking declaratory and injunctive relief against “coerced concept change” whereby the franchisor seeks to require its franchisees to make investments that will arguably have the effect of converting their historic units into a new brand with consequently higher costs. The federal court dismissed the complaint (without prejudice) for lack of standing to sue. However, while the franchisees lost a battle, they did not lose the war. The federal judge suggested that the franchisees could pursue test cases for individual franchisees. That strategy had been pursued and has led to substantial relief for the franchisees in actual practice.
Successful defense of a national pizza franchisor against bad faith claims related to unsuccessful rollout of deep-dish pizza product, where the system’s largest franchisee, with more than 50 units, contended that the franchisor had failed to conduct reasonable due diligence in the product development phase, and had instead overreacted hastily to a competitor’s product introduction.
Defended multiple lawsuits in defense of association officers and other owners in an automotive aftermarket franchise system who were targeted for termination by the franchisor, including defense against termination of multi-store owner on basis of cross-default clauses.
As local counsel for a California law firm, Carmen helped to establish associational standing to sue on behalf of an independent franchisee association in federal court in Chicago.
Refusing to back down to threatened defamation claims after filing a system-wide lawsuit and speaking to the press, where the defendant in the case demanded that we dismiss our lawsuit in exchange for being released against the potential defamation claim.

Good Faith & Fair Dealing in Franchising Cases

Interim Health Care of Northern Illinois Inc. v. Interim Health Care, Inc., 225 F.3d 876 (7th Cir. 2000). Victory in the United States Court of Appeals for the Seventh Circuit on the questions of whether a franchisor had breached the implied covenant of good faith & fair dealing by withholding referrals of “national account” patients to the franchisee, and by deliberately encroaching the franchisee’s trade area, such that the franchisee defaulted in royalty payments – with the end result being that the franchisee was entitled to go to the jury on the issue of whether the franchisor had acted in bad faith, even though the franchisor had statutory “good cause” for termination. When this case was decided, franchisor attorneys quickly advised their clients to rewrite their contracts Carmen, in turn, has been repeatedly asked to write on issues related to good faith and fair dealing for the franchise law bar.
Defended a former franchisee of thirty-nine (39) branded gasoline stations against claims for de-branding fees with counterclaims against the franchisor for: (a) failing to meet designated contractual fuel supply commitments; (b) “brand damage” by failing to disassociate itself from highly publicized “hate speech” by Hugo Chavez, the president of Venezuela, who indirectly controls the brand; and (c) alleged Petroleum Marketing Practices Act violations.

Serious Fraud & RICO Claims

In the “hidden franchise” case cited above, the plaintiffs further alleged that the defendants had committed serious fraud in violation of the Illinois Consumer Fraud Act & Deceptive Business Practice Act, state franchising act and common law, in that the defendants made false earnings claims and overstated the merits of their “retail concept” in ways that would never have been approved by regulators if the defendants had lawfully franchised.
Victorious in defending McDonald’s Corporation against alleged claims for fraud, RICO and antitrust violations arising from the termination of five franchised stores in New York City on the basis of quality, service and cleanliness (QSC) violations, after first obtaining a transfer of the case from Texas on the grounds of an inconvenient forum. The franchisee sought to argue that the franchisor had unlawfully precluded the franchisee from selling his units at desirable prices; and sought to argue that the failing QSC grades had been issued in retaliation for the franchisee’s protestations against a regional directive requiring franchisees to reinvest in their stores. The manner in which the reinvestment demand led to litigation with a seasoned franchisee illustrates the difficulties faced by mature brands.
Team defense of parallel state and federal cases against McDonald’s Corporation, which included a federal RICO claim and state court breach of contract action, arising out of the settlement of a $52 Million verdict that had been rendered in favor of an ice cream vendor in an earlier trial (in which our client had been represented by another law firm) after the plaintiff had been subjected to an involuntary bankruptcy filing; and where the settlement was alleged to have been the unlawful result of conspiracy with creditors and other unlawful conduct.
Successful at a preliminary injunction hearing, and later at the summary judgment stage, in defending an international retail franchisor from claims of post-sale fraud in arranging the franchisee’s bank financing.
Recovery by confidential settlement on behalf of a U.S. franchisee and area developer who alleged fraud based on the inclusion by a U.S. sub-franchisor in its offering circular of false and misleading financial statements from an Australian parent company.
Successfully obtaining a confidential settlement for the franchisees who owned the entire Chicago market of a national steakhouse restaurant chain who alleged fraud in the inducement and failure to maintain system standards.
Defense of underreporting claims lodged against franchisee, where the franchisor had attempted to prove fraud in part based on lifestyle audits and questionable surveillance methods, resulting in an agreement where the client was able to sell his franchise at a reasonable price.

Franchise Terminations and Post-Termination Injunction Cases

Winning a preliminary injunction in federal court on behalf of a franchisor against post-termination competition and trademark infringement by a franchisee, who had alleged that the franchisor was guilty of selective enforcement of its non-compete clauses; by presenting evidence that the franchisor had sound business reasons for its actions in each situation.
In a separate federal court case, successfully blocking a franchisor’s emergency request for injunctive relief where the evidence showed that this franchisor had largely withdrawn from opening single brand stores and was selective in enforcing its non-compete clauses.
Successful federal court enforcement of a post-termination non-compete clause in Puerto Rico against a franchisee who falsely claimed to have a verbal agreement giving it the right to remain open as a competitor.
Defeating a requested federal court injunction for alleged trademark infringement against a voluntarily terminated franchisee from claims of trademark infringement, where the franchisor had deliberately set a “trademark trap” by announcing the sudden end to post-expiration, at-will relationship, knowing that the franchisee could not possibly stop its usage of the trademarks in time to comply with the franchisor’s mandate.
Successful defense of a former high school ring distributor in a civil contempt proceeding, in which the distributor had been charged with violating an injunction that had previously been entered, to enforce the terms of a non-competition clause from a sale of business agreement. Carmen entered the case after the federal district judge had already held the client in contempt. Carmen persuaded the judge to give the client a new trial, which lasted four days, at which Carmen prevailed in vacating the contempt finding and the underlying injunction.
Defending dozens and dozens of actual and threatened franchisee terminations over the years, most often obtaining for his clients the opportunity to sell their business instead of being terminated, and thus protecting the clients’ equity.

International Claims and Arbitration

International arbitration against a U.S. client’s Master Franchisee in Chile, South America, seeking damages and contract termination.
Rendered expert witness opinions to an arbitration panel in Singapore to refute the opinions of another U.S. lawyer as to the application of Illinois law with respect to the termination of an Asian licensee of an Illinois distributor.
Representation of U.S. franchisees and dealers against U.S. distributors and sub-franchisors of foreign parents.

Supplier Litigation in Franchising

Claims for breach of contract and fraud filed by a terminated supplier of uniforms to the McDonald’s system; where the supplier alleged that it had an oral agreement to serve to manage the production and sales of uniforms by several uniform suppliers, and claimed damages for “custom programming” new computer software for the management of uniform production and sales.
Defense against charges of theft of trade secrets filed by the owner of certain oven technology, who alleged that McDonald’s Corporation had misappropriated the technology in rolling out its own oven product, and then cancelled the roll-out after receiving a cease and desist letter. A substantial part of this defense was to prove that the technology was already in the public domain (both in the United States and abroad), and that it did not confer a competitive advantage as it did not perform adequately in testing.

Franchise Attorney Liability and Ethical Issues

Successful defense of an out-of-state law firm that was charged with legal malpractice in preparing franchising agreements and disclosure documents for their client, a local business that sought to launch a national franchising program, leading to a ‘cease and desist’ and mandatory rescission offerings to franchisees. The plaintiffs claimed upwards of $20 Million in damages including lost profits.
Pursuit of discovery against U.S. counsel who structured a North American licensing program which created hidden franchises under U.S. state and federal law based on hidden fees that were built into the dealership program.
In pursuing claims on behalf of a multi-state territory developer against the U.S. sub-franchisor of an Australian franchisor, the key to success was the service of a subpoena on the law firm that had represented the U.S. subsidiary, with the argument being that communications from the law firm to the Australian parent were not privileged since the U.S. firm was not representing the Australian parent. This case illustrates the perils to counsel and their clients in becoming too cozy in parent/subsidiary representation.
Successful defense against claims for threatened “Rule 11” allegations against a client’s in house legal department where those corporate attorneys had brought suit against a New Jersey construction firm with reputed ties to organized crime, alleging that there had been a scheme to defraud their company, an international restaurant franchisor, with respect to the remodeling of its rest rooms.

Antitrust Claims, Counseling & Dispute Resolution

Successfully defending a restaurant franchisor against allegations that it unlawfully controlled the resale prices for its units (an alleged tying claim).
Advising a national pizza franchisor whether its “spice supply” agreement would be an unlawful tying arrangement.
Advising a local supplier as to whether a franchisor was seeking to violate the Robinson-Patman price discrimination act in demanding discounts for its company-owned stores and rebates for its franchisee’s purchases.
Advising a national light bulb manufacturer on whether purchasing arrangements by a cooperative would violate the Robinson-Patman Act and assisting in-house counsel in negotiating more favorable, lawful arrangements.
Group boycott claims on behalf of an excluded supplier to national retail system.

Registration & Disclosure Violations

Defense of a national health club system against charges of failing to properly register in the State of Illinois and dealing with mandatory rescission letters.
Successful claims in the State of Michigan on behalf of California franchisees of a different health club system, where the franchisor failed to register properly in California.
Successful negotiation with Illinois Attorney General for rescission letters and negotiations with franchisees on behalf of an unregistered franchisor.

Racial Discrimination in Franchising

Recovery by confidential settlement on the eve of jury trial on behalf of an Arkansas franchisee who was denied the opportunity to purchase a Chicago franchise, in a civil rights action alleging racial discrimination in franchising, where the franchisor had taken race into account in assigning different Chicago communities (by zip code) into segregated territories.

National Conflict of Law Issues in Franchising & Dealership

Establishing that dealers from Texas, Oregon, Washington, Indiana and Colorado had standing to sue under the Illinois Consumer Fraud & Deceptive Business Practices Act where the fraud scheme originated in Illinois and the prospective dealers were lured to Illinois for in person sales pitches by the defendants.

Loss Causation Issues in Franchising & Dealership

Establishing at the summary judgment stage that representations to dealers relating to the status of a defendant’s retail concept and earnings projections were material to losses that the plaintiffs were claiming.

Lost Profit Claims in Franchising & Dealership

Establishing at the summary judgment stage that defrauded dealers can claim lost profit damages based on the defendants’ earnings projections, by which the plaintiffs had been induced to invest.
Overcoming a defense Daubert objection to an expert’s lost profit calculations based on future earnings in the Chicago market, where the plaintiff was denied the opportunity to purchase the market due to alleged racial animus.

Bankruptcy & Reorganization in Franchising & Dealership

Credibly threatening Chapter 11 reorganization on behalf of a family that owns numerous franchised national brand pizza restaurants, which faced defaults and termination due to non-payment of royalties; and thereby obtaining a significantly better deal for our clients, enabling them to keep many of their units.
Representation of a group of franchisees who attempted to purchase their franchise system in a bankruptcy proceeding, followed by individual representation of individual franchisees who sought to leave the system.

Employment Disputes in Franchising & Dealership

Conducted internal corporate investigation following allegations of quid pro quo allegations against a franchisor’s key executive which demonstrated that a female subordinate had presented her allegations as a preemptive strike when she concluded that she faced termination or demotion for poor performance; and then obtained a nuisance value settlement which protected the company and its valued executive.
Successfully terminated employees of a franchisor client for misconduct or poor performance.

Governmental and Constitutional Challenges in Franchising & Dealership

Successful “Dormant Commerce Clause” challenge under the United States Constitution to a local ordinance that favored local suppliers at the expense of a client’s national distribution system, causing the local municipality to repeal its ordinance
As amicus counsel for the American Association of Franchisees & Dealers, Carmen wrote the amicus brief in support of a Petition for Certiorari to the United States Supreme Court in a case involving a denial of access to a lucrative airport opportunity.

Real Estate Disputes in Franchising & Dealership

Resolving a lessor’s objections to having a client’s business located in a mall, where another tenant was claiming an exclusive right to a certain business category.
Successfully obtaining zoning approval for a franchised location despite initial protests by the municipality and the suspicion that bribes were being solicited.

Tort Claims in Franchising & Dealership

Defense of alleged assault, battery and false arrest charges against a franchisor, stemming from the forcible removal of a disgruntled former franchisee who attempted to enter the Annual Convention, which was a private event; and coordination of the defense with local law enforcement officials.