The study of pre-existing franchising court cases is a great way to learn about franchise law in action. There are three broad categories under which franchise court cases may be placed:
Cases Regarding the Franchise Regulation
State Oil Co. v. Khan (1997)
Key Takeaway: Max resale prices are unlikely to harm consumers and can, therefore, be scrutinized leniently by the court system.
This case overruled the decision reached in Albrecht v. Herald Co. (1968), which held that vertical maximum price restraints—an arrangement where competitors along the same supply chain agree to fix the price of goods/services—were classified as illegal. Until 1997, this was the standard upon which courts agreed.
However, with State Oil Co. v. Khan, the Supreme Court ruled that vertical maximum price restraints would no longer classify as illegal. According to Justice Sandra Day O’Connor, there was no evidence to suggest that these restrictions actually hurt consumers. Instead, maximum vertical price fixing would be scrutinized under the more lenient Rule of Reason, wherein judges consider various factors and justifications for the price fixing.
The main purpose behind the Sherman Antitrust Act is to guard competition between competing brands, ultimately benefiting consumers. Max resale prices, the court reasoned, were not likely to harm consumers or competition. The lenient Rule of Reason used in the State Oil case is how courts address price fixing today in our current world of franchise law.
Cases Regarding the Franchise Relationship
Bertico v. Dunkin Donuts (2015)
Key Takeaway: The franchisor monitors the performance of its franchisees for the benefit of the whole company.
In this case, the Quebec Court of Appeal found that Dunkin’ Donuts, the franchisor, was not only right in terminating certain franchisees but was actually obligated to do so. Unlike other cases, wherein typically courts find franchisors guilty of wrongful termination, here the franchisor failed to terminate underperforming franchisees.
According to the decision, the franchisor was responsible for monitoring the performance of franchisees. The franchisor, the court found, has the implied obligation to terminate underperforming franchisees, as it promises to promote the wellbeing of the brand. The underperformance of certain franchisees has the potential to harm other franchisees within the system. Thus, the franchisor is responsible for guaranteeing and ensuring the wellbeing of all franchisees.
7-Eleven v. Grewal (2014)
Key Takeaway: Improper use of a trademark can negatively impact an entire franchise system.
This case demonstrated the wide effects that improper use of a trademark can bear on an entire franchise system. After conducting internal investigations, 7-Eleven Corporation found that the defendants and former franchisees, Grewal Corporation, purposefully deprived the franchisor of large profits. In fact, the franchisor predicted that 18 percent of all transactions from January through June of 2014 were fraudulent. Even after the franchisor terminated the franchise, the Grewal corporation refused to leave the location and continued to operate the convenience store with 7-Eleven trademarks.
The court found that it was unlawful for the former franchisee to continue using the trademark after termination. Furthermore, the court questioned the likelihood of confusion amongst customers. Here the court found that customer confusion, due to the wrongful use of the trademark, was likely and therefore sided with 7-Eleven.
Key Takeaway: Franchisees are given employee status if the franchisor has the right and ability to control the manner in which they complete their work.
Among the most popular cleaning franchisors, Jani-King classifies its franchisees as independent contractors. Despite the status of the company’s franchisees, Jani-King nevertheless retains control over franchisee operations.
However, two franchisees claimed their status as independent contractors was a misclassification under Pennsylvania law. Rather, they believed their roles qualified them as employees and were therefore owed more wages. The court argued that employee status was given if the franchisor had the right to control the methods/practices with which the franchisees completed their work. As a result, the two franchisees pointed out various provisions in their Franchise Agreement, which gave Jani-King the ability to control the practices of the contractors’ daily work.
The court decided to affirm that the franchisees qualified as employees under Pennsylvania law. The Franchise Agreement between the two parties, which gave Jani-King control over the franchisees’ day-to-day work, was the deciding factor in this case.
Key Takeaway: A franchise relationship is to be regarded as a standard employment agreement.
In the state of Georgia, contracts that restrain trade are considered void, as they are contrary to the state’s public policy. The contracts at issue, in this case, were a non-compete franchise agreement between Atlanta Bread Co. International, Inc and Lupton Smith. After Lupton-Smith began operating a coffee shop in Atlanta, the franchisor and appellant, Atlanta Bread Co. International, sent a notice to appellees, believing them to be in violation of their contracts. Soon after, Lupton-Smith sued for the wrongful termination of the franchise agreements.
After this case was brought to court, the Georgia Supreme Court rejected that a franchise relationship should be regarded any differently than a standard employment agreement. The court also held that in-term covenants would be treated with the same strict scrutiny as applied to post-term covenants. These concepts are relevant for franchisors and franchisees to consider in the building of any agreements or contracts, as this standard is still upheld today.
Cases Regarding Disclosure
Key Takeaway: Financial projections are estimates of the performance that a franchise may have. They do not reflect the true results of the franchise.
Two former Ace Hardware Corp. franchisees were dismissed when they decided to take action against Ace Hardware Corp., alleging that Ace altered sales projections and manipulated past sales figures.
Ace Hardware Corp. argued, however, that the former franchisees could not allege the manipulation, as the projections were simply predictions and therefore qualified as opinions, which are not actionable. The court sided with Ace Hardware Corp., agreeing that the franchisees could not have relied solely on the projected reports due to the caution notes that Ace included.