Forklift Dealer Held to be a Missouri Franchise

A federal district court ruled that a forklift dealer’s relationship with its manufacturer constituted a “franchise” under the meaning of the Missouri Merchandising Practices Act (the “MMPA”), and that the manufacturer had violated the MMPA by failing to give the dealer only 22 days’ notice of termination, instead of the statutorily mandated 90 days’ notice.

In arriving at its decision, the court noted that a written agreement between the dealer and manufacturer granted the dealer a “nonexclusive privilege to identify itself as an Authorized Dealer, and to display, in the conduct of its dealership operations, the trademarks and service marks [that the manufacturer] uses in connection with [its] products.” The manufacturer’s marketing plan also imposed certain minimum sales requirements on the dealer. According to the court, these arrangements constituted the grant of a license by the manufacturer to the dealer to use its trade and service marks, and the existence of a community of interest in the marketing of goods and services, thus satisfying the definition of a “franchise” under the MMPA.

Lift Truck Lease and Services, Inc. v. Nissan Forklift Corporation N.A., E.D. Mo., No. 4:12-CV-153 CAS, September 7, 2012.

Arbitration Clause Valid Despite Claim of Economic Duress

Applying Connecticut law, a federal district court upheld the validity of an arbitration clause in an investment advisor franchisee’s arbitration agreement despite the franchisee’s claims of economic duress and unequal bargaining power.

As noted by the court, in order to demonstrate economic duress under Connecticut law, a plaintiff must prove: (1) a wrongful act or threat; (2) that such act or threat left the victim with no reasonable alternative; (3) that the victim acceded to this threat; and (4) that the resulting transaction was unfair to the victim. The franchisee had alleged that the terms of the franchise agreement were portrayed by the franchisor as non-negotiable, and that the franchisee feared that if he did not sign the agreement, he would ultimately lose his business. According to the court, however, economic necessity cannot be the sole basis for a claim of economic duress under Connecticut law. Rather, the franchisee was an educated business person with ample time (at least one month) to review the terms and conditions of the contract.

Ironson v. Ameriprise Financial Services, Inc., Dist. Court, D. Connecticut, No. 3:11cv899 (JBA), September 10, 2012.

System for Producing Hot Pizzas Not a Trade Secret

A federal court in South Dakota dismissed claims brought by restaurant franchisor Little Caesars seeking an injunction against a franchisee from offering “all day, every day ready-for-pick-up pizzas”. According to Little Ceasars, the franchisee was allegedly misappropriating the franchisor’s trade secret for “Hot-N-Ready” pizza for use in a non-franchised pizza parlor.

While the franchisor argued that its system for producing “Hot-N-Ready” pizzas constituted a trade secret under the South Dakota Trade Secrets Act, the court found that Little Ceasars had failed to demonstrate that information within the system was not “generally known” to the public. The “Hot-N-Ready” system, the court held, was too generic to amount to a trade secret, in part because there was evidence that numerous other proprietors of pizza restaurants utilized similar methods for preparing pizza. Furthermore, while the franchisor had required its franchisees to sign confidentiality agreements, this confidentiality did not extend to all of the franchisee’s employees. Thus, the court ruled that Little Ceasars had failed to show that they had taken reasonable efforts, under the circumstances, to maintain the secrecy of their “Hot-N-Ready” system.

Little Caesar Enterprises, Inc. v. Sioux Falls Pizza Company, Dist. Court, D. S.D., 4:12-cv-04111-KES, August 3, 2012.

Franchisors Liable for Criminal Acts at Franchised Stores

In a pair of recent decisions, California courts ruled that franchisors may be vicariously liable for criminal acts occurring at their franchisees’ stores.

In the first case, a California appellate court found that Domino’s Pizza could be vicariously liable for sexual harassment and assault inflicted on one of its franchisee’s employees by another employee. As the court noted, provisions in the relevant franchise agreement substantially limited the franchisee’s independence. For instance, Domino’s determined store hours, imposed advertising, signage and decor standards, handled customer complaints, and strictly regulated pricing. Furthermore, the Domino’s Manager’s Reference Guide set forth employment hiring requirements and detailed standards for employee behavior. Such requirements, the court ruled, raised reasonable questions regarding whether the franchisee was, in fact, an independent contractor, and remanded the case back to the trial court.

In a similar decision, a California appellate court found that the franchisor of Denny’s restaurants, as well as several affiliate corporate entities, could be liable for a criminal battery occurring at a franchised restaurant under a theory of “ostensible agency.” In order to recover on a theory of “ostensible agency” in California, the plaintiff must show that: (1) the plaintiff dealt with the alleged agent with a reasonable belief in the agent’s authority; (2) such belief was generated by some act or failure to act by the agent; and (3) the plaintiff was not itself guilty of negligence.

While the relevant franchise agreement specified that the franchisee was an independent contractor, the agreement did give the franchisor some control over the franchisee’s business practices. The court noted that there was no signage or other indication that the restaurant was operated by a franchisee, and that many Denny’s restaurants were, in fact, corporate-operated. Furthermore, the injured customer testified that he had seen advertisements identifying Denny’s as a restaurant where “a patron could enjoy a good meal in a friendly, safe, and secure environment.” The court therefore found that the elements of “ostensible agency” had been satisfied.

Patterson v. Domino’s Pizza, LLC, Cal. Ct. App., No. B235099, June 27, 2012.

Ford v. Palmden Restaurants, LLC, Cal. Ct. App., No. E053195, July 31, 2012.