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2019 Judicial Update

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2019 Judicial Update International Franchise Association 52nd Annual Legal Symposium May 5-7, 2019 Washington, DC 2019 Judicial Update Michael D. Joblove Andra J. Terrell Genovese Joblove & Battista Church’s Chicken/Texas Chicken Miami, Florida Atlanta, Georgia Mark T. Clouatre Meredith M. Barnes Nelson Mullins Focus Brands Denver, Colorado Atlanta, Georgia Jennifer L. Maffett-Nickelman Thompson Hine LLP Dayton, Ohio Robert M. Einhorn Zarco Einhorn Salkowski & Brito, P.A. Miami, Florida Deborah S. Coldwell Haynes and Boone, LLP Dallas, Texas Keri Williams Nixon Peabody LLP Washington, DC Table of Contents Additional State Law Issues .............................................................................................. 3 Mark T. Clouatre, Nelson Mullins No-Poaching Provisions in Franchise Agreement Under Fire from Private Class Action Plaintiffs and Government Enforcement Actions ....................... 9 Jennifer L. Maffett-Nickelman, Thompson Hine LLP Joint Employer Liability in the Franchisor-Franchisee Context .................................. 28 Robert M. Einhorn, Zarco Einhorn Salkowski & Brito, P.A. Encroachment .................................................................................................................. 37 Deborah S. Coldwell, Haynes and Boone, LLP Selected Termination and Bankruptcy Cases ............................................................... 63 Keri McWilliams, Nixon Peabody LLP Disclosure Violations ....................................................................................................... 75 Andra J. Terrell, Church’s Chicken/Texas Chicken Transfers ........................................................................................................................... 99 Meredith M. Barnes, Focus Brands International Franchise Association 52nd Annual Legal Symposium May 5-7, 2019 Washington, DC 2019 Judicial Update Additional State Law Issues Mark T. Clouatre Nelson Mullins Denver, Colorado 3 Introduction In the past year, franchisees have pursued various tort theories for recovery and relief against franchisors in traditional franchise lawsuits pertaining to terminations, establishments/encroachments, and relocations. This section highlights a few of those cases, several of which are from the automotive industry. To narrow the scope of this section and to focus on the state law claims which have universal, franchise-wide application, analyses of alleged violations of state statutes have been excluded. Caselaw Evaluation 1. Mercedes-Benz USA, LLC et al. v. Carduco, Inc. d/b/a Cardenas Metroplex, No. 16-0644, 2019 WL 847845 (Tex. 2018). In this case, the Texas Supreme Court considered reasonable reliance in light of a dealer agreement and also the fiduciary responsibilities, if any, that arise in a franchisor and franchisee relationship. Plaintiff/Respondent’s former owner, Rene Cardenes (“Rene”), owned and operated the Autoplex Mercedes-Benz dealership in Harlingen, Texas. Id. at 1. Defendant/Petitioner, Mercedes-Benz (“Defendant”), became dissatisfied with Rene’s dealership because it was outdated and had overall poor performance. Id. In discussing the possible termination of Rene’s dealer agreement, Defendant urged Rene “to invest in a modern ‘Autohaus’ dealership facility and showed [Rene] studies indicating that the optimal location for this facility would be near McAllen,” a town 20 miles to the west of Harlingen Id. Rene discussed relocating the dealership to McAllen with Defendant, and suggested that he would hire his father’s construction company to build the new dealership. Id. The parties never agreed on a site or plan for the relocation because Rene refused to sign an agreement to set a deadline for relocation. Id. After Rene’s dealership failed to improve its performance and Rene pled guilty to felony charges for failing to report a transaction, Defendant moved to terminate the dealer agreement. Id. In an attempt to avoid termination, Rene entered into an Asset Purchase Agreement (the “APA”) with his father for the dealership’s assets.1 Id. The APA stated Plaintiff was “only purchasing the right to conduct a Mercedes-Benz retail sales dealership at Purchaser’s present location in Harlingen, Cameron County, Texas.” Id. at *2. In addition, when Plaintiff submitted the APA and application to become a dealer to Defendant, the cover letter stated Plaintiff would “operate the franchise at its current location in Harlingen.” Id. At the same time, Defendant was negotiating with an existing, successful Mercedes-Benz dealer from another Texas city about opening a location in McAllen; Plaintiff was not aware, nor did Defendant make Plaintiff aware, of these communications. Id. Because Defendant practically had no choice under state law but to approve the APA, Defendant continued to negotiate and work with Plaintiff regarding an update to 1 The Plaintiff/Respondent is the result of Rene’s father buying the dealership from Rene, which is hereinafter referred to as “Plaintiff.” 4 Plaintiff’s facility in Harlingen. Id. Plaintiff met with two of Defendant’s representatives to survey the dealership’s condition and discuss what improvements needed to be made. Id. During the meeting, Plaintiff mentioned moving the dealership to McAllen, and Defendants’ representatives told Plaintiff it could submit two proposed facility plans: one for the Harlingen location and one for the McAllen location. Id. Plaintiff only submitted plans for a Harlingen location. Id. Several months later, Defendant’s representative met with Plaintiff and Rene, and Rene’s father asked the representative to accompany Rene to McAllen to look at two possible sites for future dealerships. Id. After observing the sites, Defendant’s representative stated the locations looked viable “but that any application to relocate would have to go through . the regional franchise manager,” as Defendant’s written approval was required prior to any relocation. Id. Plaintiff never submitted an application to relocate to McAllen. Two months after the acceptance of the APA, Plaintiff executed a dealer agreement (the “Agreement”) with Defendant. Id. The Agreement, in relevant part, identified Harlingen as the only authorized location for the dealership; prohibited Plaintiff from relocating the dealership without Defendant’s written consent; and permitted Defendant to add dealers into Plaintiff’s market area at its discretion. Id. A couple months later, Defendant announced that a new dealership would be opening near McAllen with another dealer, which prompted Plaintiff to finally submit a formal application to relocate to McAllen. Id. at *3. Defendant denied Plaintiff’s request. Id. Plaintiff subsequently filed suit against Defendant and its representatives, personally, stating they “fraudulently induced [Plaintiff] to believe that its bargain with [Defendant] included the opportunity to relocate to McAllen as the exclusive Mercedes- Benz dealership in the region.” Id. Plaintiff also asserted a breach of fiduciary duty claim. The jury found for Plaintiff, and awarded $15.3 million in actual damages and $115 million in punitive damages against Defendant and three of its representatives. Id. Defendant appealed to the Texas Court of Appeals, which affirmed the jury’s verdict and award generally.2 Id. Both parties then appealed to the Texas Supreme Court. Id. The Texas Supreme Court reversed and rendered a take nothing judgment against Plaintiff. Id. at *9. First, the Court found Plaintiff’s fraudulent inducement claim failed because Plaintiff could not have justifiably relied on Defendant’s representations that Plaintiff “could relocate to McAllen, Texas as the exclusive new Mercedes-Benz dealership in the region and that [Defendant] was not planning to put another dealer in the McAllen Area.” Id. at *3. The Agreement’s terms directly contradicted these representations. Id. at *5. 2 The Court of Appeals “suggested a remittitur of the punitive damages award [from $115 million] to $600,000”. Id. 5 The Court further found Plaintiff should have done more to protect its interests and insisted on terms in the Agreement for exclusive dealership rights in or near McAllen. Id. at *6. Because Plaintiff failed to do so, its reliance on Defendant’s conduct, statements and actions was unjustified as a matter of law. Id. at *9. “[T]he parties’ relationship and sophistication required greater diligence than the execution of a written contract that directly contradicted [Plaintiff’s] assumed bargain and assertion of fraudulent inducement.” Id. In addition, the Court made an important holding relative to whether a special, or fiduciary, relationship exists between a franchisor and franchisee. Id. The Court stated: “[a]s a general rule, a failure to disclose information does not constitute fraud unless there is a duty to disclose the information.” Id. at *8 (citation omitted). The Court went one step further and stated, generally, a franchisor and franchisee relationship is not special or fiduciary. Id. 2. Brooks Automotive Group, Inc. et al. v. General Motors LLC, No. 2:18-CV-00798, 2019 WL 452494 (W.D. Penn. Feb. 5, 2019). In this case, the federal District Court for the Western District of Pennsylvania focused on what could happen if a franchisor has unfettered discretion to approve decisions impacting a franchisee’s business. Plaintiff Brooks (“Brooks”) owned and operated Brooks’ Buick and GMC dealership in Connellsville, Pennsylvania. Id. at *1. Brooks decided to sell the dealership and began negotiations with Harper Autogroup (”Harper”), who owned and
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