No More Mr. Nice Guy When It Comes to Franchisee, Says the Court

October 26, 2017Articles The Legal Intelligencer

Do you think franchisees ought to have Miranda-type warnings before buying a franchise? Magistrate Judge Jonathan Goodman of the U.S. District Court for the Southern District of Florida suggests so in the case of Tim Hortons USA v. Singh,(No. 16-2304, Findings of Fact and Conclusions of Law after Bench Trial, Oct. 25). The case was tried by consent before Magistrate Judge Goodman, who is known for his frequent references in his opinions to rock music. Judge Goodman cited in the beginning of his decision lyrics from the Alice Cooper song, “No More Mr. Nice Guy,” from the “Billion Dollar Babies” album (Warner Bros. 1973).

Tim Hortons was a family-owned company that started in Canada franchising doughnut shops. Hortons’ has gradually expanded to the United States. This case involved a franchise in Rochester, New York. In late 2013, the Canadian franchisor was purchased by a Brazilian hedge fund that also owns Miami-based Burger King and now both franchises are operated out of Miami.

Tim Hortons’ Miami office terminated the franchisee on July 13, 2016, and filed its lawsuit in Miami on the same day. The court ruled in favor of the franchisor allowing the termination of the franchisee. But the court ruled in favor of the franchisee rejecting the franchisor’s inflated lost profits damages claims. The court recognized that its decision could be viewed as allowing the franchisor to take a very harsh position against its franchisee. The decision is instructive as a warning for franchisees and their counsel.

The franchise had been in operation for over four years and the franchisee had been in the Hortons’ organization for a decade. On July 7, 2016, an inspection found some violations of operational standards and the store was temporarily closed while repairs were made. Those repairs were successfully made within two days and the operational default was cured by July 13. But Tim Hortons still terminated the franchise because the franchisor demanded payment of about $59,000 by the end of the day on July 12, 2016, and the franchisee offered to make that payment less than 12 hours later on July 13, 2016.

Prior to trial, the court ruled that a five-day email notice that was given on July 7 was proper even though the contract did not allow email notice. The franchise agreement required notice be given by fax, hand delivery or overnight delivery to the franchisee. In contrast, the only means of notice for the franchisor was hand delivery, demonstrating that the franchise agreement was not even reciprocal with respect to notice. That pretrial decision on the adequacy of notice supported the franchisor’s claim that payment was owed July 12 instead of July 13, which was the date the franchisee claimed the payment was due based on an overnight letter that was received on July 8.

Nevertheless, the franchisee had other defenses. The franchisee argued that it should not be terminated for such a minor violation and that it would constitute an improper forfeiture of the franchisee that the law should not support. Many courts refuse to enforce a termination under such circumstances, including Florida state courts. But Judge Goodman interpreted the contract in a literal and unbending way and thus upheld this harsh decision to end this franchise. The court recognized that franchisees can be very unfair businesses and even cited to a criminal case to show that a franchisor needs to give Miranda warning to a franchisee: In large part, the results here (i.e., largely, though not completely, a victory for the franchisor) are merely a logical consequence of the nature of franchising. Indeed, one of the leading treatises on franchising urges counsel to give the prospective franchisee client a “Miranda warning” about franchising and then explain to the client that “the contract is probably one sided, enforceable and … entails risks that are different from and usually above and beyond the ordinary business risks associated with business ownership,” opinion at 5, citing “R. Barkoff Fundamentals of Franchising 333″ (4th Ed. 2015).

Tim Hortons was very aggressive in pursuing this termination. Hortons terminated the franchise on July 13, 2016, and sued the franchisee in Miami the same day. Then they claimed that they were owed lost profits as damages. Before trial they claimed almost $1 million and at trial attempted to prove $220,000. The franchisee objected to the claim for lost future profits because the sole witness called to testify by Hortons was not identified as an expert, and was ruled to be giving a lay opinion as to damages. The witness, a senior manager of finance with Hortons was competent to testify as to Horton’s lost profits, but was incompetent to testify to the franchisees’ lost sales by which Hortons was basing its damage model. Secondly, the witness had no personal knowledge of the franchisee’s business, and relied on an algorithm, which the witness could not explain and which denied the ability for cross-examination. The witness’ testimony was ruled incompetent and the franchisor was limited in damages to its unpaid receivable. This is the same receivable that the franchisee offered to pay in the first place.

At the end of the day, the franchisor drove the franchisee out of business, had this Rochester Hortons’ store closed for over 15 months and was only awarded the same $59,000 that it was owed in July 2016 and which the franchisee offered to pay at that time. The court reasoned that this is the harsh result under Florida law, which absent a statute or decision, compelled this result. My personal commentary is that Florida law does not have robust cases in this area to guide courts and allow the just result.

Tim Hortons has been challenged by franchisees in Canada and here in the United States for its strong-armed tactics so perhaps outcomes like this will become rare. Hortons may have successfully terminated this franchise, but it was at an extremely high cost in terms of legal expense, management time and lost ability to serve the franchisee’s former community. The franchisee lost a family business. Franchising as an industry lost good will, and is now a victim as well.

Reprinted with permission from the October 26 issue of The Legal Intelligencer. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.