July 2021 Headnotes
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Dallas Bar Association HEADNOTESHEADNOTES July 2021 | Volume 46 | Number 7 Focus | Business Litigation/Franchise & Distribution Law Living Legends Focus Franchise & Distribution Law Avoiding the “Accidental” Franchise includes 23 disclosure items), and BY ERICA MAHONEY copies of the franchisor’s standard Franchise, distribution, and forms of agreement. Many states license agreements have signifi- have also enacted state franchise cant commonalities in their trans- laws, which may define “franchise” actional objectives: a person has more broadly than the federal fran- developed certain goods or ser- chise rule or impose additional vices under a trademark and seeks requirements on the franchisor. If to expand its revenue potential a state’s franchise laws apply, the by allowing another person to sell franchisor may be required to reg- these goods and services using the ister with the state. Failing to meet same trademark for a fee. This these requirements creates liability arrangement is particularly popular exposure. with businesses seeking to expand While no private right of action without the additional liabilities exists under the federal rule, many attributable to self-expansion, such states provide avenues for asserting as real estate and payroll. claims against a franchisor, whether On May 21, the DBA presented the next program in the DBA Living Legends series featuring Hon. Elizabeth Despite the overarching com- based on violations of state busi- Lang-Miers, of Locke Lord LLP, interviewed by Jennifer Ryback, McGuire, Craddock & Strother, P.C. Be on the monality in these agreements, the ness-opportunity acts or a state’s lookout for the next program. legal distinctions between them “little FTC Act.” In Texas, a fran- can have significant consequences chise will often constitute a busi- on the grantor’s obligations and ness opportunity under the Texas liabilities. Practitioners who are Business Opportunities Act. Texas faced with preparing such an agree- franchisors are exempt from com- ment should be familiar with these plying with this act if they com- Focus Business Litigation distinctions to ensure they provide ply with the federal franchise rule. the appropriate agreement and, if However, if the franchisor fails to necessary, appropriate disclosures. comply with the federal franchise A “franchise” is legally defined rule and the disclosure require- “Breaking Up is Hard to Do”: by federal rule. If the transaction ments under the Texas Business meets the definition of a franchise, Opportunities Act, the franchisee franchise laws and regulations will can potentially bring a claim under How to Settle Business Cases apply regardless of the agreement’s the Deceptive Trade Practices Act, name or the parties’ intent. A fran- possibly asserting treble damages. soned that the placement of “predecessors” among BY DAVID COALE AND BARIRA MUNSHI chise is defined under the amended Unlike franchise agreements, words like “officers, directors, shareholders, employ- Federal Trade Commission fran- distribution and license agree- “Breaking up is hard to do,” says the song. End- ees, agents … and representatives,” unambiguously chise rule as an arrangement that ments generally do not include sig- ing a business dispute is hard enough without trouble describes a corporate predecessor. includes: (1) the grant of the right nificant control or assistance. The caused by ambiguities in the settlement agreement The two cases remind us how important it is to to use a trademark, service mark, primary objective of a distribution about exactly what is being released. Fortunately, determine just what is in dispute between the parties, or trade name in relation to the agreement is for a manufacturer to two 2021 Dallas Court of Appeals opinions offer key and how simple changes in language can significantly offer, sale, or distribution of goods grant others the ability to sell the points to remember in drafting and litigating settle- affect the scope of a settlement. or services; (2) significant control manufacturer’s branded products. ment agreements. While Gharavi did not address the degree of rela- or assistance; and (3) the payment Usually, the distributor provides In Gharavi v. Khademazad, the court considered tionship an “indirect” claim must have to a settled of at least $615 to the franchisor other goods and services in addi- an agreement that released all claims “directly or indi- dispute to be released, it teaches that broad terms before or within six months after tion to the manufacturer’s branded rectly attributable to the transaction or occurrences” such as “indirect” can raise the risk of a party inadver- beginning operations. products. Additionally, the manu- involved in an earlier arbitration. The plaintiff subse- tently releasing tangentially-related claims that it may “Significant” control or assis- facturer generally has little or no quently sued for libel about a Yelp post in which the intend to pursue later. Conversely, by expanding the tance relates to the overall method control over the distributor’s busi- defendant voiced frustration over the unpaid arbitra- scope of a release, such phrases can “buy peace” for a of the franchisee’s business opera- ness or operations, although there tion award. The court found that, “[w]ithout question, client from a broader range of potential disputes. tion and has been determined to is some control over the quality the Yelp review was, if not directly, then indirectly Headington turned to traditional canons of con- exist when the franchisor requires and standards for distributing the attributable to [the] failure to pay” for services that struction to determine the meaning of an unclear participation in marketing cam- branded products. In some cases, gave rise to the arbitration. Thus, the court found that term in a release. While it reached an answer, a less- paigns; provides training or site the distributor may pay a fee to the release covered any claims related to the Yelp post, detailed agreement might be less instructive and could approval or design requirements; become a distributor. In other dismissed the libel claims, and entered judgment in lead to even more uncertainty about how to interpret dictates hours of operation, produc- cases, the distributor may only pay favor of the defendant. a release. In a complex multi-party setting such as the tion, or service techniques; or per- for the products the distributor pur- In Headington Royalty Inc. v. Finley Resources, Inc., one presented by that case, the opinion instructs draft- sonnel or accounting procedures. chases for distribution. an oil-and-gas case, the court addressed the meaning ers to carefully consider all potential claims and parties The term “payment” is construed Under a license agreement, a of “predecessors” in a release. One side asserted that contemplated by a release. The discerning drafter will broadly but does not apply to cer- licensor grants a licensee the right the term referred to anyone in the chain of title. The identify the claims or parties it seeks to either include tain inventory purchases. to use the licensor’s intellectual other claimed that it referred to predecessors in a par- within, or carve out from, a broad release and will If a transaction meets the defi- property, which may or may not ticular corporate composition or structure. negotiate terms using ordinary and specific language to nition of a franchise and an exemp- include a trademark. The licen- The court agreed with the latter position, relying ensure that its intent is unambiguously captured. HN tion or exception does not apply, sor retains some degree of quality on the so-called “associated words canon,” or “birds of the franchisor must provide a fran- a feather” construction rule, which means that words David Coale and Barira Munshi are attorneys at Lynn Pinker Hurst & Schwegmann LLP. chise disclosure document (which continued on page 22 are known by the company they keep. The court rea- They can be reached at [email protected] and [email protected], respectively. Inside Need Help? You’re Not Alone. Texas Lawyers’ Assistance Program…………...(800) 343-8527 14 Pretrial Rule Provides Alternative Procedure to Resolve “Legal Matters” Alcoholics Anonymous…………………………...(214) 887-6699 Narcotics Anonymous…………………………….(972) 699-9306 Al Anon…………………………………………..…..(214) 363-0461 19 Business Interruption Coverage for COVID-19 Mental Health Assoc…………………………….…(214) 828-4192 Crisis Hotline………………………………………..1-800-SUICIDE 23 Full Disclosure: Reducing Risk for LLC Managers Suicide Crisis Ctr SMU.…………………………...(214) 828-1000 Metrocare Services………………………………...(214) 743-1200 More resources available online at www.dallasbar.org/content/peer-assistance-committee 2 Headnotes l Dallas Bar Association July 2021 All CLE and Section programs are presented virtually. Check the DBA Online Calendar (www.dallasbar.org) for webinar links and the most up-to-date information. Calendar July Events Visit www.dallasbar.org for updates on Friday Clinics and other CLEs. Available, Strategic Considerations, and Potential Environmental Law Section Pitfalls,” Hon. Barbara Houser, Michaela Crocker, Topic Not Yet Available FRIDAY CLINICS and Mark Moore. (MCLE 1.00)* JULY 16 Intellectual Property Law Section Noon “Autonomous Vehicles,” Quentin Brogdon. (MCLE 1.00)* Friday Clinic “COVID-19 Vaccine Shortages: Are “Autonomous Vehicles,” Quentin Brogdon. Intellectual Property Waivers the Answer?” Real Property Law Section (MCLE 1.00)* Sapna Kumar. (MCLE 1.00)* Topic Not Yet Available THURSDAY,