Source: https://www.goldlawgroup.com/franchisee-bill-of-rights/
Timestamp: 2019-04-19 14:36:26+00:00

Document:
A recent suit in the United States District Court for the Western District of New York resulted in the denial of a franchisee’s motion for a preliminary injunction to prevent the franchisor from requiring the franchisee to install a new computer system. JDS Grp. Ltd. v. Metal Supermarkets Franchising Am., Inc., No. 17-CV-6293 (MAT), 2017 U.S. Dist. LEXIS 94779 (W.D.N.Y. 2017). In JDS, the franchisee JDS brought a suit against its franchisor Metal Supermarkets Franchising America (MSFA) for violation of the Washington State Franchise Investment Protection Act (FIPA), which includes a Franchisee Bill of Rights, as well as for breach of the implied covenant of good faith and fair dealing.
The facts as found by the Court include the following. JDS owned two retail stores that sold metal components used in various industries. The stores were in Kent, Washington, and Portland, Oregon. JDS had been a franchisee of MSFA for approximately ten years. JDS used a software system called “Metal Magic,” that was provided by MSFA. In 2012, MSFA determined that Metal Magic was outdated, inefficient, and unable to accommodate anticipated growth and functionality changes. As a result, MSFA undertook development of a new, modern software system, called “MetalTech,” which cost over $1,000,000 and took three years to develop.
In 2015, MSFA began installing MetalTech at its franchisee locations. JDS did not want to use MetalTech in its stores, but instead wanted to keep using Metal Magic. Plaintiff maintained that MetalTech was unreliable and did not perform as required. Specifically, Plaintiff contended that “MetalTech was unable to generate accurate and reliable financial statements, readily calculate sales tax, “run more than a few checks at a time, ‘reliably generate invoices, or effectively transfer materials between co-owned stores, and that MetalTech makes it more time-consuming to perform simple tasks than Metal Magic did.’” Plaintiff also submitted declarations from six other MSFA franchisees, all of whom reported that using MetalTech negatively impacted their ability to do business.
Defendant denied the Franchisee’s contentions, and produced evidence that 78 of 86 Metal Supermarket stores were currently using MetalTech, and that none of the stores had been forced to close as a result of the new software. The Franchisor also argued that, contrary to Plaintiff’s accusations, those franchise stores that had converted to MetalTech had, on average, seen a 7.4% increase in sales following the conversion.
Further, shortly before filing the lawsuit, the Franchisee had signed a new franchise agreement that expressly provided that MSFA had the right to develop or designate computer software programs and require that Plaintiff use them. Even though JDS admitted that it understood the essence and scope of the planned computer software changes before it signed the renewal agreement, it nevertheless argued that it had been ‘forced’ to sign it. This argument apparently held little sway with the Court given that the Franchisee’s lawyer had negotiated the franchise agreement before JDS signed it.
The Court looked at the second prong (likelihood of success on the merits) first. JDS contended that it would likely succeed on the merits because MSFA’s actions violated FIPA §1, §2(b), and §2(h) of FIPA. The Court found that MSFA’s actions violated none of these provisions.
As there was no bad faith, (as required to find a violation of FIPA), the Court found that it was unlikely that JDS would prevail on the merits of a claim that MSFA had violated FIPA §1. The Court further explained that if there was no bad faith under FIPA, there could also be no breach of the implied covenant of good faith and fair dealing under the common law, as the standard was the same for both claims.
Finally, JDS brought a claim under FIPA §2(h). The language here is similar to the language in §2(b), and states that “’it shall be an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful’ for a franchisor to ‘impose on a franchisee by contract, rule, or regulation, whether written or oral, any standard of conduct unless the person so doing can sustain the burden of proving such to be reasonable and necessary.’” While there was no case law directly interpreting this provision, the Court found that Washington law was submissive to franchisors’ decisions generally. The Court explained that “courts generally give considerable deference to franchisors’ efforts to restructure, retrench, or wind down their franchise systems.” The Court also stated that §2(h) should not be interpreted “to undercut a franchisor’s business judgment in establishing standards for its franchise system.” As such, the Court refused to find a violation of §2(h).
Because JDS was unable to show that it was likely to prevail on the merits or that it would suffer irreparable harm if it did not obtain the preliminary injunction, its motion for a preliminary injunction was denied. Indeed, from the Court’s perspective, it would make little sense for MSFA to deliberately sabotage its franchisees’ business operations, thereby injuring its own revenue stream.
Although an applicable state franchise statute can sometimes provide a viable claim for an injured franchisee, the FIPA in this case clearly failed to do so, despite its Franchisee Bill of Rights. In essence, the franchisee attempted to thrust round pegs in square holes.
Making matters worse for JDS was that it chose to fight the battle in an emergency litigation context; a plaintiff seeking a preliminary injunction is required to make a very strong showing that absent the preliminary injunction it will suffer an immediate ‘irreparable harm.’ The Franchisee’s showing on this point was woefully inadequate legally and factually. Unable to marshal facts to show that it would be driven out of business as a result of being forced to use the computer system, the franchisee attempted to rely instead upon a litany of ‘problems’ with the software, few of which were articulated with sufficient particularity. The Franchisee’s lackluster showing on these points was topped off by an informal survey of a small number of franchisees showing only that the new computer system generally ‘made it more difficult’ to operate the business.
This case shows that while bad facts can make bad law, very bad facts can make very bad law. From a franchisee point of view, the decision in this case seriously, harmfully and unfittingly limits the reach of FIPA. More appropriate facts could have better developed the permanent boundaries of FIPA. Most important, this case also exposes the cruel underbelly of franchising, that franchisees have no legal right to competent franchisor decisions even though the free market cannot by itself effortlessly, consistently and readily ensure such expertise.

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