Words Matter: Federal Court Dismisses Case Against Franchisor Based on Clear FDD and Franchise Agreement TermsJanuary 6th, 2021
A Franchise Disclosure Document (FDD) drafted by the Larkin Hoffman franchise and distribution team recently helped its client, Tim Hortons USA, Inc., defeat claims alleging unfair and predatory business practices brought by an association of Tim Hortons franchisees. The United States District Court for the Southern District of Florida dismissed the claims, determining that the franchisee association could not state claims for relief when the practices alleged to be unfair and deceptive were clearly disclosed in the FDD and permitted by the plain terms of the franchise agreements.
The opinion highlights the importance of franchisors working closely with counsel to draft disclosures and franchise agreements that comprehensively and accurately describe the franchisor’s current business practices while also allowing the flexibility for franchisors to make updates to the franchise system to remain competitive.
In Great White North Franchisee Association-USA, Inc. v. Tim Hortons USA, Inc., No. 20-cv-20878-BLOOM/Louis (S.D. Fla. Dec. 21, 2020), the franchisee association brought 2 claims against Tim Hortons under Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA).
The first claim, seeking declaratory and injunctive relief for alleged franchise disclosure violations, was dismissed for lack of associational standing.
The second claim sought monetary damages under FDUTPA and alleged Tim Hortons engaged in unfair trade practices by:
- obligating franchisees to purchase certain supplies only from Tim Hortons or one of its affiliates from which the franchisor earned a profit
- enacting an “equity-stripping strategy” by requiring rights of first refusal to the franchisor
- failing to use the advertising fund in a manner that provided a direct benefit to the franchisees in the plaintiff association
In dismissing the second claim, the United States District Court for the Southern District of Florida held that the plaintiff franchisee association could not state a claim for relief under FDUTPA when Tim Hortons acted within the express terms of the contract. The court examined the franchisor’s disclosures in the FDD and the relevant provisions of the franchise agreements and found that each and every act complained of by the association was plainly and clearly permitted under the franchise agreements, and properly disclosed in the FDD. For example, with respect to the associations’ supply chain complaints, the court pointed to a provision in the franchise agreements stating:
[T]he Franchisee specifically agrees that the Franchisor may require that any and all Items, including ingredients...be purchased solely from the Franchisor, [its affiliates] or a third party.
It is hereby acknowledged by the Franchisee, that in purchasing such Items, the Franchisor [or its affiliates] may make a profit or may receive an allowance, commission, rebate, advantage or other benefit on the price of Items sold to the Franchisee.
The federal court declined the franchisee association’s request for leave to amend its complaint, determining the clear terms of the franchise agreements would continue to refute any restated allegations of unfair practices. This case marks the end of the line of the association’s claims against Tim Hortons and serves as a reminder to all franchisors, particularly in the midst of franchise renewal season, to ensure their franchise agreements comprehensively reflect their ongoing business practices.