Franchisees Bound by Arbitration Clauses
The U.S. Court of Appeals in Boston found that a group of janitorial business owners, who became franchisees as transferees of franchise agreements, had adequate notice of the arbitration provisions contained in those agreements prior to their transfer. Thus, the court ruled that the franchisees were required to arbitrate their myriad claims against the franchisor.
The transfer agreements executed by the franchisees incorporated the arbitration clauses by reference, and each of the franchisees had guaranteed the performance of “all responsibilities, duties, indebtedness and obligations of the [previous [f]ranchisee] under the [Franchise] Agreement.” While the franchisees argued that it would be unconscionable to bind them to arbitration clauses that they never saw, the court noted that Massachusetts law does not impose a heightened notice requirement for arbitration agreements. Furthermore, the court held, the Federal Arbitration Act would preempt any such notice requirement. As the court emphasized, Massachusetts law mandates that those who sign agreements are bound by their terms regardless of whether they have read them or not.
Awuah v. Coverall North America, Inc., No. 12-1301, 1st Cir., (December 27, 2012).
New Jersey Distributor Not Considered a Franchise
A federal district court in New Jersey ruled that an exclusive distribution arrangement did not qualify as a franchise relationship under the New Jersey Franchise Practices Act (“NJFPA”) because it did not include a license to use the manufacturer’s trademark or trade name. Therefore, the court ruled that the manufacturer’s termination of the distributor did not violate the NJFPA.
Under New Jersey law, a franchise relationship may exist where a party uses another’s trade name in such a manner as to create a reasonable belief among the public that there is a connection between the trade name licensor and the licensee by which the licensor vouches for the licensee’s activity. Here, although the distributor alleged facts suggesting that the public recognized a symbiotic relationship between the manufacturer and the distributor, the court held that the mere fact that the distributor had an exclusive arrangement with the manufacturer, or that the manufacturer allowed the distributor to use its trademarks in some circumstances, did not itself create a license.
McPeak v. S-L Distribution Co., Inc., CV No. 12-00348, D. N.J. (December 19, 2012).
Non-Compete Provision Discharged Through Bankruptcy
A bankruptcy court in Texarkana, Texas held that breaches by two debtor-franchisees of a non-competition covenant in their franchise agreement with a print shop franchisor qualified for discharge through bankruptcy. As the court noted, in addition to equitable remedies such as injunctive relief, Michigan law (under which the franchise agreement was governed) allowed for the award of monetary damages as compensation for violation of a non-competition agreement. Because monetary damages were an available remedy, the court reasoned, the breach of the covenant qualified as a dischargeable “claim” in a bankruptcy scenario.
Allegra Network, LLC v. Ruth, No. 10-50184, Bankr. Ct., E.D. TX (January 10, 2013)