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1 J. F. Comm. Franchising 1 (1980-1981)

handle is hein.journals/fchlj1 and id is 1 raw text is: Volume ~ ~ ~ ~ ~ ~ ~ ~~~1 1,K Numbe 1IBIouICmiteo!Faciig itr18 Survey of Private Remedies by Harold Brown Boston, Massachusetts In the multi-party relationships of franchising, there are unlimited opportunities for, and risks of, S private litigation. To allay the ap- * prehension of both laymen and ' their counsel, it should be noted that all marketing methods carry with them the risk of private suits. Perhaps the very nature of fran- chising makes that risk a standard component of the system. Much of this arises from the fact that franchising involves so many categories of independent C preneurs. While franchising should provide the fran- cui.ee with a reasonable opportunity to succeed, there can be no guarantee either immediately or for the indefinite future. Ultimately, there will predictably be some percentage of failures. Given the substantial investment required in many Yranchised businesses, it is foreseeable that such losses will lead to litigation. The two most ordinary causes for complaint will be fraud or contract. The former may be grounded in the ex- aggerated pitch in the sale of the franchise, while contract matters will usually arise from gross deficiencies in the franchisor's performance of express covenants or of the , implied covenant of good faith and fair dealing.' However unspectacular such litigation may appear, it can be severely ,compounded by the risk of punitive damages,2 collateral estoppel,3 repercussions among other franchisees, registra- tion disclosure requirements,' and geographic debilities. Substantively, there has been considerable expansion in ,the law of deceit, contract, and equitable claims. During the early part of the decade, there were numerous attempts to have a franchise classified as an investment contract ,so that the liberal anti-fraud provisions of the Securities Act would apply.5 Except for pyramid selling schemes, that effort failed.6 The alternative has been a federal disclosure regulation by the FTC' and pre-sale registra- tion laws in twenty states, with more in the offing. With , y state now having some form of little FTCA,9 both teuLeral and state law declare illegal all commercially un- fair or deceptive acts or practices.' All of those statutes provide a radical expansion of the substantive law govern- ing deception, trickery, schemes, predictions, and non- disclosure.' Similar efforts were made to recognize the many fiduciary aspects of the franchise relationship.'2 However varied acceptance there has been for that concept, a similar standard of conduct arises from the implied covenant of good faith and fair dealing3 as well as in the FTCA's declared illegality of unfair acts or practices.'4 In the private remedy authorized by the little FTC Acts,'5 the Massachusetts Supreme Judicial Court has found an un- fair practice where a licensor required a minimum fee for the transfer of a tenancy in a mobile home park.'6 In con- demning the charging of a fee for no service what- soever, the court relied on a common law decision of the New Jersey Supreme Court holding invalid a contract in which although the purchaser received something of value, the value received was unconscionable dispropor- tionate to the price paid.'7 In one of the first reported cases of its kind, that concept has been used by New York's Attorney General in the attack on Carvel Corpora- tion, asserting that the franchise fees are grossly dispropor- tionate to the value of the services provided to the fran- chisees.' Since no court will essay an advance definition of good faith or unfair practices, 9 there is an unlimited opportunity for judicial reyiew of the entire range of fran- chise misconduct both at the inception and during the en- tire relationship. (continued on page 4) Elsewhere in This Issue Trademark Licensing and the FTC Franchising Rule ..................................... 3 Negotiating and Protecting the International Royalty ................................. 5 Franchising Currents ................................. 9 (Including: FTC Franchising Rule; McDonald's Required Deposit Not An Illegal Tying Arrangement; Arbitration Clause Enforced; and others.) 'Copyright © 1979 American Bar Association R RRQ ee ZZZ Volume 1, Number 1 ABA Forum Committee on Franchising Winter 1980 Produced by the ABA Press

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