Recent Trends In Franchise Law

There continues to be a significant amount of litigation involving franchisors and franchisees in a variety of areas, including, among others, contract termination, trademark violations, validity of arbitration agreements, and impact issues.

In Baber v. Quizno’s, 2006 WL 3072394 (Cal. App 2 Dist.2006), the Court of Appeals of California upheld the forum selection clause of the parties’ franchise agreement requiring arbitration in Denver, Colorado, rather than in California where the franchisee was located. In so holding, the Court of Appeals rejected many of the arguments franchisees use to defeat forum selection clauses, including, but not limited to:

                    Fraud in the execution of the agreement;

The agreement was illegal and void for failure to register under the California Franchise Investment Law;                    The agreement was unconscionable and unfair; and The agreement was contrary to California Business and Professions Code which generally requires that a provision in a franchise agreement restricting venue to a forum outside of California is void when involving a franchise business operating within California.The Court of Appeals in Baber reversed the decision of the trial court after finding that the forum selection clause was an enforceable term of the parties’ agreement and forum non-conveniens was not a valid ground to disregard the clause. This was an important decision for franchisors and emphasizes the need for franchisees to be aware of arbitration and forum selection clauses in their franchise agreements, prior to executing same.In Two Men & a Truck/International, Inv. v. Tatroe Transportation, LLC, Case No. 06-1646 (W.D. Mich. 2006), the franchisor has sued a former franchisee for continuing to use the franchisor’s registered service marks and advertise as Two Men & a Truck, despite acknowledging that the parties’ franchise agreement terminated on its own provisions two months earlier in 2006. The franchisor’s Complaint seeks injunctive relief and treble damages under the Lanham Act for willful and deliberate infringement of the franchisor’s trademarks. This lawsuit, which is ongoing, is similar to those commonly filed in the franchise industry, and, unless unusual circumstances exist, are usually decided in favor of the franchisor. This is an example of why it is critical, if you are a franchisor, that all trademarks, copyrights, and patents be properly registered and renewed, if necessary, to protect your business going forward. In the alternative, if you are a franchisee, it is imperative that you only use another’s trademarks with the express consent of the owner of the marks and cease and desist from using those marks immediately upon termination or other notice from the owners of the marks.In Gueyffier v. Ann Summers, Ltd., 2006 WL 3028272 (Cal. App. 2 Dist. 2006), the California Court of Appeal refused to uphold an arbitrator’s decision on the merits. This is extremely rate in arbitration cases, and thus this decision is substantial. In Gueyffier, the franchisor terminated the franchisee without following the notice-and-cure provisions of the parties’ franchise agreement. The arbitrator determined that the franchisee’s breach was incurable, and therefore, the notice-and-cure provisions were moot. The California Court of Appeals held that the arbitrator exceeded his authority because he disregarded the explicit terms of the parties’ franchise agreement requiring notice and an opportunity to cure prior to termination. If you are a franchisor, this case evidences why it is critical that you follow your procedures to ensure the best chance of being upheld by a court. If you are a franchisee, it is important that you understand and are familiar with the termination provisions of your franchisor has followed completely those procedures prior to termination.