Significant recovery in a hidden franchise case

• Substantial seven-figure recovery for six licensed dealers in litigation against a European manufacturer of luxury consumer products and its wholly owned U.S. distributor, alleging claims intentional non-compliance with U.S. state and federal franchise registration and disclosure laws. The dealers’ claim under the Illinois Consumer Fraud & Deceptive Business Practices Act that the defendants violated the FTC Franchise Rule survived defense motion challenges prior to the settlement agreement.

System-Wide Impact Cases

• Representation of national independent association (and numerous state franchisee associations) of a major, well-recognized national food industry brand in litigation seeking declaratory and injunctive relief against “coerced concept change” whereby the franchisor seeks to require its franchisees to make investments that will arguably have the effect of converting their historic units into a new brand with consequently higher costs.
• Formation of an independent franchisee association and successful representation of multiple franchisees against a franchisor of patented “foundation walls” who breached the implied covenant of good faith and fair dealing by (a) failing to maintain its product in good standing with the national authorities that maintain building code standards throughout the United States; and (b) overcharging the franchisees for mandatory product purchases; and (c) retaliating against its franchisees for forming an independent franchisee association to challenge the franchisor’s conduct. The settlement of this arbitration included a new franchise agreement to be implemented on a system-wide basis, to prevent recurrence of the same harms.
• Formation of an independent franchisee association to challenge the “then current” franchise agreement that renewing lawn care franchisees will have to sign, which materially and adversely changes the terms of the parties’ relationship.
• Ongoing representation of multiple gas station dealers in pricing litigation against a major oil company, challenging the defendant’s business practices “east of the Rockies.”
• Successful defense of McDonald’s Corporation against a franchisee’s challenge to a regional directive requiring franchisees to reinvest in their restaurants
• Successful defense of a national pizza franchisor against bad faith claims related to unsuccessful roll-out of deep-dish pizza product, where the system’s largest franchisee, with more than 50 units, contended that the franchisor had failed to conduct reasonable due diligence in the product development phase, and had instead overreacted hastily to a competitor’s product
• Successful representation of the owners of all steakhouse franchisees in the entire Chicago market who alleged contract claims arising from changes in the restaurant concept.
• Successful defense of national retail franchisor in a putative class action on behalf of all persons who purchased a franchise in the last fifteen years, with underlying claims of fraud in the inducement of the franchise relationships.
• Defended association officers and other owners in an automotive aftermarket franchise system who were targeted for termination by the franchisor, including the defense against termination of multi-store owner on basis of cross-default clauses.
• As local counsel for a California law firm, Caruso helped to establish associational standing to sue on behalf of an independent franchisee association in federal court in Chicago.
• Representation of a group of franchisees who attempted to purchase their franchise system in a bankruptcy proceeding, followed by individual representation of individual franchisees who sought to leave the system

Fraud & RICO Claims In Franchising

• In the “hidden franchise” case cited above, the plaintiffs further alleged that the defendants had committed serious fraud in violation of the Illinois Consumer Fraud Act & Deceptive Business Practice Act, state franchising act and common law, in that the defendants made false earnings claims and overstated the merits of their “retail concept” in ways that would never have been approved by regulators if the defendants had lawfully franchised.
• Victorious in defending McDonald’s Corporation against alleged claims for fraud, RICO and antitrust violations arising from the termination of five franchised stores in New York City on the basis of quality, service and cleanliness (QSC) violations, after first obtaining a transfer of the case from Texas on the grounds of an inconvenient forum. The franchisee sought to argue that the franchisor had unlawfully precluded the franchisee from selling his units at desirable prices; and sought to argue that the failing QSC grades had been issued in retaliation for the franchisee’s protestations against a regional directive requiring franchisees to reinvest in their stores.
• Successful team defense of parallel state and federal cases against McDonald’s Corporation, which included a federal RICO claim and state court breach of contract action, arising out of the settlement of a $52 Million verdict that had been rendered in favor of an ice cream vendor in an earlier trial (in which our client had been represented by another law firm) after the plaintiff had been subjected to an involuntary bankruptcy filing; and where the settlement was alleged to have been the unlawful result of conspiracy with creditors and other unlawful conduct.
• Successful at a preliminary injunction hearing, and later at the summary judgment stage, in defending an international retail franchisor from claims of post-sale fraud in arranging the franchisee’s bank financing.
• Recovery by confidential settlement on behalf of a U.S. franchisee and area developer who alleged fraud based on the inclusion by a U.S. sub-franchisor in its offering circular of false and misleading financial statements from an Australian parent company.
• Successfully obtaining a confidential settlement for the franchisees that owned the entire Chicago market of a national steakhouse restaurant chain that alleged fraud in the inducement and failure to maintain system standards.
• Successful defense of underreporting claims lodged against franchisee, where the franchisor had attempted to prove fraud in part based on lifestyle audits and questionable surveillance methods, resulting in an agreement where the client was able to sell his franchise at a reasonable price

Franchise Terminations and Post-Termination Injunction Cases

• Winning a preliminary injunction in federal court on behalf of a franchisor against post-termination competition and trademark infringement by a franchisee, who had alleged that the franchisor was guilty of selective enforcement of its non-compete clauses; by presenting evidence that the franchisor had sound business reasons for its actions in each situation.
• In a separate federal court case, successfully blocking a franchisor’s emergency request for injunctive relief where the evidence showed that this franchisor had largely withdrawn from opening single brand stores and was selective in enforcing its non-compete clauses.
• Successful federal court enforcement of a post-termination non-compete clause in Puerto Rico against a franchisee who falsely claimed to have a verbal agreement giving it the right to remain open as a competitor.
• Defeating a requested federal court injunction for alleged trademark infringement against a voluntarily terminated franchisee from claims of trademark infringement, where the franchisor had deliberately set a “trademark trap” by announcing the sudden end to post-expiration, at-will relationship, knowing that the franchisee could not possibly stop its usage of the trademarks in time to comply with the franchisor’s mandate.
• Successful defense of a former high school ring distributor in a civil contempt proceeding, in which the distributor had been charged with violating an injunction that had previously been entered, to enforce the terms of a non-competition clause from a sale of business agreement. Caruso entered the case after the federal district judge had already held the client in contempt. Caruso persuaded the judge to give the client a new trial, which lasted four days, at which Caruso prevailed in vacating the contempt finding and the underlying injunction.
• Defending dozens and dozens of actual and threatened franchisee terminations over the years, most often obtaining for his clients the opportunity to sell their business instead of being terminated, and thus protecting the clients’ equity.

Other Good Faith & Fair Dealing in Franchising Cases

• Interim Health Care of Northern Illinois Inc. v. Interim Health Care, Inc., 225 F.3d 876 (7th Cir. 2000). Victory in the United States Court of Appeals on the questions of whether a franchisor had breached the implied covenant of good faith & fair dealing by withholding referrals of “national account” patients to the franchisee, and by deliberately encroaching the franchisee’s trade area, such that the franchisee defaulted in royalty payments – with the end result being that the franchisee was entitled to go to the jury on the issue of whether the franchisor had acted in bad faith, even though the franchisor had statutory “good cause” for termination.
• Defended a former franchisee of thirty-nine (39) branded gasoline stations against claims for de-branding fees with counterclaims against the franchisor for: (a) failing to meet designated contractual fuel supply commitments; (b) “brand damage” by failing to disassociate itself from highly publicized “hate speech” by Hugo Chavez, the president of Venezuela, who indirectly controls the brand. The district court rejected our client on its counterclaims but we nonetheless obtained a confidential settlement of the entire case.
• Successful arbitration hearing for a business opportunity investor on a breach of contract claim for failure by the promoter to fulfill its obligation to provide a suitable site

Supplier Litigation in Franchising

• Claims for breach of contract and fraud filed by a terminated supplier of uniforms to the McDonald’s system; where the supplier alleged that it had an oral agreement to serve to manage the production and sales of uniforms by several uniform suppliers, and claimed damages for “custom programming” new computer software for the management of uniform production and sales.
• Successful team defense against charges of theft of trade secrets filed by the owner of certain oven technology, who sought nearly $200 million in damages based on his allegation that McDonald’s Corporation had misappropriated the technology in rolling out its own oven product, and then cancelled the roll out after receiving a cease and desist letter. A substantial part of this defense was to prove that the technology was already in the public domain (both in the United States and abroad), and that it did not confer a competitive advantage, as it did not perform adequately in testing.

Antitrust Claims, Counseling & Dispute Resolution

• Pending Robinson-Patman price discrimination claims against oil company on behalf of gas station dealers.
• Successfully defending a restaurant franchisor against allegations that it unlawfully controlled the resale prices for its units (an alleged tying claim).
• Advising a national pizza franchisor whether its “spice supply” agreement would be an unlawful tying arrangement.
• Advising a local supplier as to whether a franchisor was seeking to violate the Robinson-Patman price discrimination act in demanding discounts for its company-owned stores and rebates for its franchisee’s purchases.
• Advising a national light bulb manufacturer on whether purchasing arrangements by a cooperative would violate the Robinson-Patman Act and assisting in-house counsel in negotiating more favorable, lawful arrangements.
• Group boycott claims on behalf of an excluded supplier to national retail system

Registration & Disclosure Violations

• Successful defense of a national health club system against charges of failing to properly register in the State of Illinois and dealing with mandatory rescission letters.
• Successful claims in the State of Michigan on behalf of California franchisees of a different health club system, where the franchisor failed to register properly in California.
• Successful negotiation with Illinois Attorney General for rescission letters and negotiations with franchisees on behalf of an unregistered franchisor.

Racial Discrimination in Franchising

• Recovery by confidential settlement on the eve of jury trial on behalf of an Arkansas franchisee who was denied the opportunity to purchase a Chicago franchise, in a civil rights action alleging racial discrimination in franchising, where the franchisor had taken race into account in assigning different Chicago communities (by zip code) into segregated territories.

National Conflict of Law Issues in Franchising & Dealership

• Establishing that dealers from Texas, Oregon, Washington, Indiana and Colorado had standing to sue under the Illinois Consumer Fraud & Deceptive Business Practices Act where the fraud scheme originated in Illinois and the prospective dealers were lured to Illinois for in person sales pitches by the defendants.

Loss Causation Issues in Franchising & Dealership

• Establishing at the summary judgment stage that representations to dealers relating to the status of a defendant’s retail concept and earnings projections were material to losses that the plaintiffs were claiming.

Lost Profit Claims in Franchising & Dealership

• Establishing at the summary judgment stage that defrauded dealers can claim lost profit damages based on the defendants’ earnings projections, by which the plaintiffs had been induced to invest.
• Overcoming a defense Daubert objection to an expert’s lost profit calculations based on future earnings in the Chicago market, where the plaintiff was denied the opportunity to purchase the market due to alleged racial animus.