What’s the Value-Add of a “Full-Service” Law Firm?

August 7th, 2014
David Cahn

David Cahn

Over the past decade I have been a solo legal services provider, then managing member of a boutique firm, and then a part of a much larger firm, Whiteford Taylor & Preston, since 2011. So I have really seen the legal profession from all sides—and of course, like all lawyers, I have heard the grumbles from clients about “big law firms.”

So maybe my three-faceted experience in providing legal services will help you gain some perspective as well.

When I first joined WTP, I seemed to be “on an island” (or at least a skinny peninsula), receiving referrals from people in the franchising world, but not from within the firm. No one else at WTP did any franchising work, and at first it seemed as if none of the firm’s clients did either. However, three years later, the landscape has changed. I know my new colleagues and they know me, and the connections between us have grown stronger. As a result, I see the value of WTP’s attorneys for clients who originally hired me and my value for clients who originally hired other WTP attorneys.

Just in the past eight months, other WTP lawyers have provided the following services to clients who originally hired me:

 

In addition, senior WTP attorneys have provided me with valuable advice on issues such as the tax consequences of business entity structures and transactions, preparing agreements among owners of a company (such as an LLC Operating Agreement) and with key management employees, and handling disputes between majority and minority owners of companies. All of this insight has helped me provide more sophisticated and creative insights to clients.

On the flip side, on behalf of WTP clients who originally hired other attorneys of the firm, so far during 2014 I have worked on the following projects:

  • prepared wholesaler and retailer agreements for a consumer products manufacturer;
  • negotiated an exclusive North American distribution agreement with a European manufacturer of construction equipment;
  • prepared and negotiated an exclusive U.S. distribution agreement for the sale of a unique product in the precious metals industry;
  • advised national trade associations on antitrust law compliance in their dealings with members and outside suppliers;
  • advised a provider of online ordering services with the contracts necessary to expand into providing delivery of the ordered products;
  • negotiated the terms of terminating a franchise agreement, on behalf of an unhappy and struggling franchisee; and
  • prepared exclusive distribution and sales agency agreements for a European company entering the U.S. market.

 

The attorneys for whose clients I have provided those services have practice focuses in areas such as international trade, taxation, securities, intellectual property litigation, and business litigation.

The Takeaway: if you hire any of the attorneys of WTP, you have our team behind you with a wide variety of experience in working with clients on a wide variety of industries, as well as in virtually every area of the law that impacts business. We serve companies and entrepreneurs doing business between New York and Virginia, with connections to provide additional services as needed throughout the rest of the United States and in foreign countries. That is a long way from the boutique existence at Franchise & Business Law Group!

Enforcing Quality Standards in Hotel Franchise Agreements

August 6th, 2014
David Cahn

David Cahn

Take-away. A franchisor’s diligence in conducting and documenting quality assurance inspections is as important as ever, particularly if the franchisor seeks to exercise its ultimate weapon – termination of the franchise agreement. Prudent inspection and documentation practices are particularly crucial in the many U.S. states and territories that have statutes requiring a showing of “good cause” in order for a franchisor to terminate a franchise agreement. In such states, a franchisor must furnish evidence demonstrating that the franchisee failed to substantially comply with the material and reasonable franchise requirements; otherwise, a court may well restore the franchise rights and order money damages to the franchisee.

The Case.  Pooniwala v. Wyndham Worldwide Corp., a May 2014 decision by the U.S. District Court for the District of Minnesota, is an exemplary demonstration of how a franchisor establishes that one of its franchisees repeatedly violated quality assurance standards so that there was “good cause” to terminate the franchise agreement under state law. The franchisor’s in this case diligently conducted and documented regular quality assurance (“QA”) inspections.

The Facts. Minn. Stat. Section 80C.14, part of the Minnesota Franchise Act, allows a franchisor to terminate an agreement if the franchisor can show “good cause” for termination. Good cause means failure by the franchisee to substantially comply with the material and reasonable franchise requirements imposed by the franchisor, including “any act by or conduct of the franchisee which materially impairs the goodwill associated with the franchisor’s trademark, trade name, service mark, logotype or other commercial symbol.”

Pooniwala involved franchise agreements for two hotels, one a “Super 8,” and the other a “Travelodge.” The franchisee alleged that the franchisors, both of which are affiliated companies within the Wyndham Hotel Group, took retaliatory action against the franchisee because of a lawsuit between the franchisee and Ramada Worldwide Inc., its fellow Wyndham Group affiliate. The franchisors, for their side, argued that their attempts to terminate the franchise agreements were not retaliatory actions, but rather that the franchisee had repeatedly violated QA standards found in the respective franchise agreements, giving each franchisor good cause for termination.

The first attempted termination involved a Super 8 hotel facility in Roseville Minnesota. The franchise agreement for the Roseville Super 8 included quality assurance requirements, as well as provisions allowing Super 8 to inspect the facility to ensure that it was operating in compliance with Super 8’s system standards and QA requirements.  The franchisee had failed six consecutive QA inspections at the Roseville Super 8.  Each inspection was followed by a letter indicating that the franchisee had received a failing score on the QA inspections. The letters also gave the franchisee notice that it had sixty days to cure the QA deficiencies, the failure of which could result in termination of the franchise agreement. Finally in September 2013 Super 8 notified the franchisee that the franchise would terminate on December 29, 2013, unless the hotel passed a final QA inspection. The franchisee failed that final inspection, and shortly thereafter Super 8 informed the franchisee that termination would take effect on the originally scheduled termination date.

The second termination was for a Travelodge hotel facility in Burnsville, Minnesota. The Burnsville Travelodge agreement contained similar QA requirements, and the franchisee failed eight consecutive QA inspections, receiving letters documenting the failures following each inspection. Finally the franchisee received notice of termination for the Travelodge franchise. The notice described QA deficiencies, and stated that termination would take effect in ninety days, but that another inspection would be scheduled to determine whether the QA violations had been cured. The franchisee failed that inspection, and as a result Travelodge informed the franchisee that termination would take effect on the originally scheduled date.

Preliminary Injunction. It is not a wonder that motions for preliminary injunction are commonplace in hotel franchise termination cases. With the great potential for loss of good will among customers, employees and suppliers, franchisees will not want to give up their rights to franchise logos or their presence on a franchisor’s reservation system. In Pooniwala, the franchisee sought an order for preliminary injunction to stop the franchisors from terminating the franchise agreements before the court heard the case on its merits.

In deciding whether to grant a preliminary injunction, courts have to balance the harm to the two sides. They also consider the requesting party’s likelihood of success on the merits in the underlying claim–here, violation of the good cause requirement of the Minnesota Franchise Act.

In Pooniwala, the court denied the franchisee’s motion for preliminary injunction and ordered it to go ahead with its post-termination obligations, such as removing the franchised brands’ signage. The court found that, given the many QA inspection failures at the two hotels, and the fact that the franchisees had continuing franchise relationships with Wyndham Hotel Group affiliates at other hotel properties, the franchisee did not demonstrate an adequate likelihood of success of proving that the termination was without good cause. Further, the court held that, while the franchisee would suffer obvious harm through loss of the franchise rights, the franchisors were also suffering continuing, irreparable harm as long as the franchisee’s hotels continued to operate under their trademarks while not maintaining brand quality standards.

Conclusion. Hotel franchise agreements typically provide for substantial liquidated damages if the franchisor terminates for cause, meaning that the Pooniwala franchisees are likely to owe hundreds of thousands of dollars. In other franchise cases, the terminated franchisee may be forced to cease operating a similar business due to a covenant not to compete.

The stakes are high, and franchisors can expect a fight. So if they decide to take the drastic step of terminating for cause, they had better have their “ducks in a row.” In Pooniwala, the Wyndham Hotel Group franchisors showed how this is done.

 Nicholas Cintron, a law clerk at the firm and a 2016 J.D. candidate at Wake Forest University Law School, contributed to the preparation of this article.