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Thursday, January 20th, 2011
I was recently asked to litigate a breach of contract claim on behalf of a party who was wronged by the breach of another party to a contract. The kind of contract is immaterial for the purpose of this article. It could have been an independent contractor agreement, or employment agreement, or an asset purchase, stock purchase, non-compete, or non-solicitation agreement, or any one of a dozen other types of contracts. Regardless, as I have said previously in these posts, there are certain contractual provisions that should be found in just about every contract. What may be possibly be the single most important provision, from my perspective, happened to have been omitted from this particular contract, that is, a provision addressing the potential recovery of attorney’s fees resulting from litigation.
I say that this may be the single most important provision in a contract not in a substantive sense, as the material terms of the contract must of course be included with specificity. The services to be performed or the products to be sold are obviously vital, since without which there may be no meeting of the minds and thus no contract in the first place. And there are other material provisions related to the deal itself that must be included as well, ie the duration of the agreement, compensation, termination, etc.
But aside from the substantive points of the deal, there is not a more important procedural, boilerplate, provision than a provision addressing attorney’s fees. Why? Because in many cases, the lack of such a provision makes litigating over a contract a financially untenable idea. A party to a contract may have the facts and the law on its side. The case may essentially be a slam dunk, if such things exist. However, if at the end of the day, the damages available to the winning party only barely exceed the amount the party paid to its attorney’s to prosecute the case, then regardless of how great a case it is, the filing of a lawsuit or arbitration makes little sense from a bottom line perspective. None of us, clients or attorneys, litigate in order to achieve moral victories. If maintaining a lawsuit does not make sense from a financial point of view, then regardless of right and wrong and getting even, I always advise my clients to consider the case strictly from a business perspective, leaving aside emotion.
That is why it is such a huge benefit when a contract at issue contains a prevailing party clause with regard to attorney’s fees. This magic language allows a wronged party to sue with the understanding that if the facts and the law support her case, then she will be made whole in regard to not only the actual damages she sustained as a result of the breach of contract, but in addition, all costs, expenses and attorney’s fees she expended in litigating the matter. Please then, I ask you to review EVERY agreement your business has signed, as well as every agreement you sign from here on out, and prior to execution, include a provision similar to the following:
“In the event of litigation [or arbitration] for any matter arising out of or related to this Agreement, the party prevailing in any such action shall be entitled to recover from the losing party its reasonable attorney’s fees and all other legal costs and expenses, including filing fees, expended in the matter.”
The importance of this provision cannot be overstated, since attorney’s fees on even a fairly “routine” matter can easily run into the tens of thousands of dollars, and for more complex cases against defendants with deep pockets, it would not be a surprise to see attorneys’ fees in the hundreds of thousands of dollars.
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Tags: arbitration, arbitration clause, asset purchase agreement, attorneys fees, attorneys fees clause, breach of contract arbitration, breach of contract case, breach of contract lawsuit, business breach of contract, business contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, contract terms, corporate agreement, corporate litigation, covenant not to compete, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise law, franchise litigation, maryland breach of contract, maryland business, maryland business law, non solicitation agreement, operating agreement, partnership agreement, prevailing party, prevailing party clause, shareholder agreement, shareholder dispute, small business attorney, small business lawyer, stock purchase agreement
Wednesday, January 5th, 2011
In Flynn v. Everything Yogurt, et al., 1993 U.S. Dist. Lexis 15722 (D. Md. 1993), the Maryland Federal District Court granted a motion to dismiss a fraud claim for failure to state a claim under Rule 12(b)(6). The Court held that ““Projections of future earnings are statements of opinion rather than statements of material fact. Projections cannot constitute fraud because they are not susceptible to exact knowledge at the time they are made. Layton v. Aamco Transmissions, Inc., 717 F. Supp. at 371 (D. Md. 1989); See also, Johnson v. Maryland Trust Co., 176 Md 557, 565, 6 A.2d 383 (1939) (statement referring to value of securities representing collateral for the payment of trust notes was a matter of expectation or opinion). Thus, the Defendants’ projections can not constitute statements of material fact under § 14-227(a)(1)(ii).”
The Maryland Federal District Court also held in Payne v. McDonald’s Corporation, 957 F.Supp. 749 (D. Md. 1997) that claims of fraud against McDonald’s must be dismissed: “McDonald’s projections concerning the future building costs of the Broadway restaurant and concerning the impact of new restaurants on future sales of the Broadway facility are just as much predictions of ‘future events’ as are projections of future profits. Accordingly, this Court concludes that it was unreasonable for plaintiff Payne to rely on any of McDonald’s predictive statements as a basis for the assertion of fraud-based claims in this case.”
In addition to the McDonald’s case cited above, see Miller v. Fairchild Industries, Inc., Finch v. Hughes Aircraft Co., and Hardee’s v. Hardee’s Food System, Inc., all of which stand for the proposition that predictions or statements which are merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.
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Tags: arbitration, arbitration clause, breach of contract lawsuit, business breach of contract, business law, business litigation, Buy a Franchise, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise fraud, franchise law, franchise litigation, franchisee, fraud, fraud in the inducement, fraudulent, fraudulent representation, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law, maryland fraud law, shareholder dispute, shareholders' agreement, small business attorney, small business lawyer
Wednesday, January 5th, 2011
In the recent case of JM Vidal, Inc. v. Texdis USA, Inc., 2010 U.S. Dist. LEXIS 93564 (S.D.N.Y. 2010), the New York District Court held that the New York Franchise Sales Act is inapplicable to the sale of franchises by a franchisor based in New York where the franchisee resides outside of New York and the franchised business is based outside of New York. In Vidal, a franchisee located in Washington State brought an action against a franchisor that was incorporated in Delaware and maintained its principal place of business in New York.
The franchisee alleged that the franchisor violated the New York Act by: (i) selling a franchise before it registered the UFOC; (ii) failing to timely deliver the UFOC at or before the initial meeting; and (iii) misrepresenting the estimated future earnings of the franchised unit, among other claims.
The Court dismissed the franchisee’s New York Act claim by holding that the New York Act is inapplicable and unavailable in an action by an out of state franchisee in a claim against a New York-based franchisor. The Court determined that the principal place of business of the franchisee is the essential element in the analysis – so that if the franchisee is not based in New York, then the New York Act is not applicable.
In making this determination, the Court relied on previous New York decisions, including Century Pac, Inc. v. Hilton Hotels Corp., 2004 U.S. Dist. Lexis 6904 (S.D.N.Y. Apr. 21, 2004) and Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F. Supp. 186 (S.D.N.Y. 1984). Vidal stated that “only the franchisee’s domicile matters for the purposes of determining whether the statute applies.”
This case should be reviewed carefully by Maryland franchisors and franchisees, and their lawyers, since the specific jurisdictional language of the New York Franchise Act that was at issue in this case is nearly identical to that contained in the Maryland Franchise Act.
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Tags: Buy a Franchise, federal franchise law, franchise, franchise agreement, franchise arbitration, franchise dispute, franchise law, franchise litigation, franchise royalties, franchise your business, franchisee, franchisor, FTC Franchise Rule, maryland franchise disclosure, Maryland franchise law, Maryland franchise registration, maryland franchise registration and disclosure, New York Franchise Act, new york franchise disclosure, new york franchise law, new york franchise registration, sell your franchised business, selling a franchise
Tuesday, November 30th, 2010
For those of you interested in franchising, see the below link from the Gazette newspaper. It is a recent article on the state of franchising in Maryland, specifically, how local restaurant franchise chains like California Tortilla, Buffalo Wings & Beer, and Wings to Go are contemplating expansion due to a rebounding economy.
http://www.gazette.net/stories/11252010/businew172254_32545.php
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Tags: Buy a Franchise, buying a franchise, buying a franchised business, federal franchise law, franchise, franchise agreement, franchise law, franchise litigation, franchise royalties, franchise your business, franchisee, franchisor, FTC Franchise Rule, purchase a franchise, sell your franchised business, selling a franchise
Friday, July 9th, 2010
In representing franchisor clients against defaulting franchisees, it is imperative to give adequate thought to how the franchisor is going to prove its damages that resulted from a franchisee’s breach of the franchise agreement. When confronted with this issue, I most often utilize a financially competent representative of the franchisor to testify with regard to that amount of monetary damage suffered by the franchisor. The franchisor’s representative must be able to prove the damage by evaluating the franchisee’s financial statements, including revenues and/or profits, expenses, and royalties paid to the franchisor, and then determine what sums the franchisor would have earned either during and/or after the franchise term had it not been for the franchisee’s breach.
In order to testify convincingly and thoroughly, the franchisor’s representative must be able to analyze the franchisee’s financial numbers and draw a conclusion from such numbers. Therefore, a chief financial officer of a small franchisor, or an auditor or accountant of a larger franchisor, is an ideal representative in these instances, provided that the representative has been with the company long enough to be able to testify knowledgeably with regard to the details of the franchisor’s system.
Generally, a well-prepared franchisor representative will be permitted to testify as to the value or the projected profits of a franchised business provided the representative has a sufficient foundation for the analysis and opinion, including particular knowledge of the financial issues presented by virtue or his or her position in the franchisor company. This simply means that a franchisor representative may opine on the issue of lost profits where they know the franchisor and franchisee’s business and financial system intimately, and have the professional ability to analyze the franchisee’s financial statements.
To see how a franchisor SHOULD NOT approach the issue of proving its damages against a franchisee, see Lifewise Master Funding v. Telebank, 374 F.3d 917 (10th Cir. 2004), which in essence holds that a company’s witness as to damages must have personal knowledge of all items factored into his opinion in order for the opinion to be admissible. The court concluded that a business owner or executive may give “a straightforward opinion as to lost profits using conventional methods based on [the company’s] actual operating history.” However, because in this case the witness lacked personal knowledge of the factors used in the damages analysis, the opinion was inadmissible.
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Tags: arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise dispute, franchise future royalties, franchise law, franchise litigation, franchise royalties, franchisee, franchisor dispute, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law
Monday, June 21st, 2010
Below please find a link to the FTC “Buying a Franchise: A Consumer Guide,” which is a must read for all prospective franchisees. Here is the link: http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm.
While the information contained in the FTC Franchise Guide is no doubt basic to a franchise professional or franchisor representative, the Franchise Guide unquestionably provides useful information to prospective franchisees who often times know very little about the franchise sales process, federal and state franchise registration and disclosure laws, or the franchisor/franchisee relationship. Without a doubt it is an excellent foundation for a prospective franchisee’s due diligence.
Some topics addressed in the FTC Guide are: where to look for franchise opportunities, what makes up the Franchise Disclosure Document (FDD), to be aware of unauthorized financial performance representations/earnings claims from a franchisor if not found in the FDD, and where to obtain additional sources of information during the due diligence phase, including obtaining the assistance of experienced franchise counsel.
I strongly encourage any prospective franchisee reading this blog to click on the above link and download a copy of the FTC Guide.
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Tags: Buy a Franchise, buying a franchise, buying a franchised business, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise law, franchise litigation, franchise your business, franchisee, franchisor financial statements, FTC Franchise Rule, purchase a franchise, sell your franchised business, selling a franchise
Wednesday, June 16th, 2010
Case law on the subject of a franchisor’s ability to collect future royalties, that is, royalties for the remainder of the term of the franchise agreement, is conflicting. Courts across the country have been unable to agree on when a franchisor may collect future royalties.
While guaranteeing the collection of future royalties from a terminated franchisee is impossible, there is one obvious but often overlooked way to increase the likelihood that a court or arbitrator will find in the franchisor’s favor when faced with the issue. That is, to disclose to the franchisee in the FDD, and include language in the franchise agreement, stating with specificity the franchisor’s policy on collecting future royalties. State for what period of time the franchisee willl be responsible for such royalties, ie for a certain number of months, or until the end of what would have been the franchise term. Also include what amount the franchisee will be expected to pay, for instance the average royalties paid by the franchisee over the past 6 or 12 months, or whatever time period the franchisor seeks to use.
Including specific and detailed language in the FDD and franchise agreement will not guarantee that a franchisor prevails with regard to a future royalties claim. However, NOT including such language will in my view guarantee that the franchisor loses such a claim.
Posted in franchise law | 2 Responses »
Tags: FDD, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise dispute, franchise future royalties, franchise law, franchise litigation, franchise royalties, franchise your business, franchisor dispute, FTC Franchise Rule, future royalties, sell your franchised business
Tuesday, June 15th, 2010
A franchisor client recently asked me for clarification on the revised FTC Franchise Rule, specifically, whether audited financials are mandated by the FTC Rule in non-registration states, or whether less restrictive and less costly “reviewed” or “compiled” financials will suffice. The answer is clear that the revised FTC Rule does indeed require audited financials, with an exception for start-up franchisors:
Item 21: Financial Statements.
(1) Include the following financial statements prepared according to United States generally accepted accounting principles, as revised by any future United States government mandated accounting principles, or as permitted by the Securities and Exchange Commission. Except as provided in paragraph (u)(2) of this section, these financial statements must be audited by an independent certified public accountant using generally accepted United States auditing standards. Present the required financial statements in a tabular form that compares at least two fiscal years.
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Tags: FDD, federal franchise law, franchise agreement, Franchise Disclosure Document, franchise law, franchise your business, franchisor, franchisor financial statements, FTC Franchise Rule, sell your franchised business, UFOC
Monday, February 22nd, 2010
Last week I wrote Part 1 of this blog on the problems I have encountered with arbitration. Please see that post if you have not read it. What follows is Part 2 of the reasons that I advise my franchise and business clients why they should be wary of automatically including an arbitration clause in any franchise agreement or other contract that they execute:
4. Judges are generally more experienced, more versed in the law, and otherwise more qualified to hear disputes than most arbitrators. While not every judge is equally qualified, most judges have been vetted by their local and state bar organizations, and either elected by voters or appointed by politicians. Judges have a track record that can be reviewed and relied on. Judges in most courts serve on a rotational basis, hearing different types of cases and thereby gaining differing experiences. Judges have resources like law clerks to research the law for them. So while judges may lack technical expertise in a certain area, they make up for that my relying heavily on the attorneys and evidence presented in a given matter. Whatsmore, judges must construe existing law to base their rulings on, or else risk being overturned on appeal. Arbitrators, on the other hand, are in most cases practicing or retired attorneys with a specific area of expertise who have asked to be appointed to serve. Many times, an arbitrator will have only a peripheral knowledge of the subject of the arbitration, yet without the experience, knowledge of the law, or resources to ensure that his or her ruling is correct on the law. This set of circumstances can often times lead to inconsistent or downright baseless arbitrator’s decisions.
5. Judges produce formal opinions reciting the law relied on and applying the law to the facts to reach a decision. Many arbitrators, meanwhile, can issue awards without including their specific legal reasoning for an award. For purposes of appeal, judges are required to produce formal opinions citing the issues, facts, law and conclusion in an orderly fashion. This allows parties to focus many times on a distinct area for appeal, and allows appeals courts to easily review the court’s basis for a decision. Conversely, many arbitrators are required to issue only a narrowly written award unless otherwise agreed to by the parties. Even then, an arbitrator issuing a “reasoned award” may not satisfactorily explain the evidence relied on, the law used and how the arbitrator’s conclusion was arrived at. This not only makes it difficult for the parties to decipher how a particular arbitration award was arrived at, but more importantly, makes the record for appeal nearly impossible.
6. Even if an arbitrator issues a reasoned award, the right to appeal an arbitration award is extremely narrow when compared to a party’s ability to appeal a court ruling. In most instances, losers at trial have the right to appeal the merits of a court’s decision to a higher court “de novo”, using almost any substantive or procedural issue available to them. The basis of an appeal of an arbitration award however is severely limited, and many times requires the appealing party to clear such high hurdles as proving fraud, corruption of the arbitrator, or the arbitrator exceeding his or her powers. The difficulty of appeal, when combined with the erratic decisions of some arbitrators, is another reason to forego arbitration in favor of litigation, except in a specific set of circumstances discussed with and approved by my client.
Posted in business law, franchise law | 1 Response »
Tags: arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, corporate litigation, franchise agreement, franchise law, maryland breach of contract, maryland business, maryland business law
Saturday, February 20th, 2010
I frequently tell my franchise and business clients to be wary of automatically including an arbitration clause in a franchise agreement or other contract they execute. Several years ago it was savvy for a business owner or franchisor to include mandatory arbitration in their agreements. Now, many of the reasons that supported the inclusion of arbitration clauses have been diminished, making the inclusion of mandatory arbitration in many contracts a questionable strategy at best. I now advise my business and franchise clients against arbitrating disputes for the following reasons:
1. Arbitrations are not “cost-savers” like they used to be thanks to the multiple fees associated with the process. Unlike judges, arbitrators are paid by the parties on an hourly basis. It is therefore in an arbitrator’s financial interest for the case to reach a hearing, regardless of the claim’s merits. In addition, many hearings go on much longer than necessary, allowing witnesses and testimony with questionable relevance to be heard. As a result, arbitrator’s fees can be quite significant for even routine business disputes. The arbitrator’s fees are of course in addition to the fees that business clients pay to their own attorneys for handling the matter, plus the hefty filing fees that many arbitration forums charge as well. For example, the American Arbitration Association, the preeminent arbitration forum in the U.S., charges filing fees ranging from $300 to $2,500.00 for commercial arbitration disputes. Contrast these expenses with trials and other court hearings, where judges have no financial interest in prolonging a case, and filing fees are minimal.
2. The distribution of who pays the arbitrator’s and other fees can disfavor the party bringing the action. The filing party, known as the Claimant, will be responsible for paying not only the arbitration filing fees, but also its portion AND the other party’s portion of the arbitrator’s fees mentioned above should the defending party, called the Respondent, refuse to pay its share of such fees. In such a case, the Claimant must pay all fees in order for the matter to go on, yet the Respondent remains entitled to participate in the arbitration process. If the Claimant fails to pay all of the fees owed to the arbitrator, the arbitrator will likely suspend or dismiss the action entirely. Because there is no incentive for a Respondent to pay its share of an arbitrator’s compensation or other fees, the absurd ersult of the Claimant paying all fees happens more than one would think. Combined with the fees a Claimant must pay to its own attorney, it is easy to see why a business owner would question the use of arbitration in the first place.
3. Arbitrators have far more discretion to rule than judges, sometimes in spite of the evidence presented. The arbitration process is much less formal than a trial. While some informality saves the parties time and expense and speeds up the process, the biggest informality can alter the entire outcome, namely, the fact that the rules of evidence do not apply to arbitration. As a result, arbitrators are free to allow documents and testimony that is questionable as to veracity and authenticity into evidence, even though such evidence would not be permitted in a court of law. In plain terms, an arbitration hearing can literally turn into a free for all, with the arbitrator allowing all kinds of testimony and documents to be factored into an award. This sort of setting can severely hurt a business client who is relying strictly on the language of documents and the actions of the parties, while in turn favoring a party hoping for chaos, basing its case on hearsay and unsupported and unreliable accusations. [Tune in to PART 2 next week]
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Tags: arbitrate business disputes, arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, commercial arbitration, corporate litigation, franchise agreement, franchise arbitration, franchise law, litigate or arbitrate?, maryland breach of contract, maryland business, maryland business law, operating agreement, shareholder agreement, shareholder dispute
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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