The Gpmemorandum, Issue 99
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The GPMemorandum, Issue 99 July 1, 2007 To view a PDF copy of this newsletter, please click here. 1.) FRANCHISE TRANSACTIONS Supreme Court Reverses Ban On Vertical Price Fixing 2.) RECENT CASES ■ Arbitration ■ Minnesota Federal Court Grants Order Staying Injunctive Claims And Compelling Arbitration ■ Michigan Court Confirms Arbitration Award In Favor Of Franchisor ■ Promissory Estoppel ■ Franchisor Not Liable For Agent's General Assurances That The Franchisee Would Be Given A Franchise ■ Jurisdiction/Venue/Choice Of Forum ■ Florida Court Holds That It Does Not Have Jurisdiction Over Indiana-Based Franchisee ■ New York Federal Court Holds That Franchisee's Parallel State Court Action Did Not Constitute Grounds To Abstain/Dismiss Franchisor's Federal Court Complaint ■ Trademark Infringement/Non-Compete Agreements ■ Tennessee Federal Court Enforces Post-Termination Non-Compete Agreement ■ Franchisee's Secured Creditor Not Permitted To Operate Business In Violation Of Non-Compete ■ Court Enjoins Former Franchisee's Continued Use Of Franchisor's Trademarks In Connection With Competitive Business ■ Federal Court Denies Franchisor's Motion For Preliminary Injunction Seeking Enforcement Of Post- Termination Covenant Not To Compete ■ Personal Injury ■ Court Dismisses Claims Alleging Health Problems Caused By Consumption Of Trans Fat In KFC Food ■ Damages/Attorneys' Fees ■ Minnesota Court Denies Request For Attorneys' Fees Under Minnesota Franchise Act www.lathropgpm.com ■ Class Actions ■ Illinois Federal Court Partially Dismisses Class Action Lawsuit Against McDonald's For Alleged Misrepresentations Regarding Ingredients In French Fries And Hash Browns ■ Franchise Associations/Terminations ■ Colorado Federal Court Grants Preliminary Injunction Allowing Quiznos® Franchisees To Continue Operating After Receipt Of Notices Of Termination FRANCHISE TRANSACTIONS This section of The GPMemorandum addresses non-judicial developments, trends, and best practices of interest to franchisors. SUPREME COURT REVERSES BAN ON VERTICAL PRICE FIXING For almost a century federal antitrust law has prohibited suppliers from setting minimum resale prices based on the 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (U.S. 1911). Last week the United States Supreme Court, in Leegin v. Creative Leather Products, Inc., 2007 WL 1835892 (U.S. June 28, 2007), reversed that long-standing precedent, ruling that all such agreements are now subject to the "rule of reason," a method of analysis under which the claimant must make the difficult showing that the arrangement harms competition substantially in the market as a whole. This decision will expand the ability of franchisors to design flexible pricing programs. Under Dr. Miles, it was per se illegal for a franchisor or supplier to enter into an agreement with a reseller over its minimum retail prices. Cases subsequent to Dr. Miles focused on whether the franchisor or other supplier met the technical requirements of reaching an "agreement." In order to avoid per se illegality, suppliers were permitted to "announce" their policy and decide to deal with those who complied with the policy. This created an artificial structure in which a supplier could establish a minimum price policy but could not reach or enforce agreements on the policy. The Supreme Court's decision in Leegin means it is no longer necessary for suppliers to engage in the appearance of suggesting but not agreeing. Under federal law, companies now can direct specific resale prices to be charged, need not utilize agency or consignment arrangements in order to direct prices, need not adopt cumbersome "minimum advertised price programs," and no longer need to exercise extreme caution to avoid "agreements" with franchisees (as opposed to unilateral actions) on the prices to be charged. Leegin was a typical minimum resale price case in which a discounting retailer was terminated for failing to abide with a resale price maintenance policy. In its 5-4 decision, the Supreme Court found resale price maintenance to be generally pro-competitive because: (1) it can help ensure that retail services that www.lathropgpm.com enhance interbrand competition will not be underprovided (e.g., because of free riding); and (2) it may facilitate market entry for new companies and brands. As the Court noted, similar justifications have justified "rule of reason" analysis for non-price vertical agreements (such as exclusive territories) for decades. Franchisors and system suppliers have worked under the limitations of the per se restriction on resale prices for years. Typically that has meant that franchisors have established some form of pricing policy while working through the convoluted legal environment to avoid any suggestion of an agreement between franchisor and franchisee. The Leegin decision may provide franchisors with a significant new tool for success in the marketplace. Greater freedom to establish resale prices may improve franchise operations by facilitating a greater level of service, enhancing brand value, and encouraging promotion efforts by franchisees. As the Court observed, these pricing policies may "encourage retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against manufacturers." Resale price restraints may prevent free-riding by those franchisors that may underprovide services. These price restraints may also facilitate entry into the marketplace by "induc[ing] competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer." Franchisors should be cautioned, however. Minimum resale prices can still be challenged under the "rule of reason." In those situations in which price limitations clearly harm consumers and the franchisor has market power, there may be competitive concerns raised. Moreover, while many state laws typically follow federal antitrust decisions, such as the Leegin decision, it remains to be seen whether states will continue to apply the per se rule to resale price maintenance. Finally, as the Court cautioned, resale price maintenance can be used as a tool to facilitate collusion among retailers or suppliers. The majority opinion cautioned lower courts "to be diligent in eliminating [the] anticompetitive uses" of resale price maintenance from the market. Thus, careful guidance in establishing resale price policies is prudent; collusion with competitors must be avoided. The decision in Leegin will, no doubt, help franchisors in many sectors and it provides an opportunity to reexamine distribution practices in light of this substantial change in the law. RECENT CASES Here are some of the most recent judicial developments of interest to franchisors: ARBITRATION MINNESOTA FEDERAL COURT GRANTS ORDER STAYING INJUNCTIVE CLAIMS AND COMPELLING ARBITRATION In Eco Water Systems LLC v. KRIS, Inc., 2007 WL 1321851 (D. Minn. May 4, 2007), the United States District Court for the District of Minnesota denied, without prejudice, a manufacturer's request for injunctive www.lathropgpm.com relief to enforce various post-term covenants, including removal of trademarks, against its former dealer. In reaching its decision, and granting a stay as to the manufacturer's claims for injunctive relief, the court found that the parties had agreed to arbitrate certain core issues that predominate over the non-arbitrable issues in the case. The underlying dispute arose out of a June 2006, letter in which Eco Water Systems ("Eco") terminated the parties' 17-year business relationship, citing unethical conduct by the dealer that "may impair the goodwill of [Eco's trademarks or trade name]." Following the termination, Eco demanded that the dealer comply with all post-termination obligations, including immediate de-identification of the business. When the dealer failed to act accordingly, Eco filed an action for trademark infringement, violations of fair trade practices, breach of contract, unjust enrichment, and unfair competition. The dealer countered with its own claims for breach of contract, unjust enrichment, and violation of state franchise laws. Contending that the provisions of the parties' Dealer Agreement required mandatory arbitration of the disputed issues, other than Eco's claims for injunctive relief, the dealer argued for a stay of the non- arbitrable, injunctive claims. In accepting the dealer's argument, the court found that the arbitrable issues predominated over the non-arbitrable issues and that the outcome of the non-arbitrable issues largely depended upon the decisions of the arbitrator. The court also found that the parties' Dealer Agreement did not include any qualifying language affording Eco a right to automatic injunctive relief without first addressing the merits of the underlying arbitrable claims. Accordingly, the court stayed the court proceedings pending completion of the arbitration. MICHIGAN COURT CONFIRMS ARBITRATION AWARD IN FAVOR OF FRANCHISOR In The Coffee Beanery Ltd. v. WW L.L.C., 2007 WL 1500533 (E.D. Mich. May 23, 2007), the underlying arbitration centered around the franchisees' ("the Welshans") allegations that The Coffee Beanery made false representations and failed to disclose material information concerning the earnings potential of its franchises. Shortly before the arbitration, the Maryland Securities Commissioner brought an administrative action against The Coffee Beanery. The franchisor subsequently entered into a