Franchise Litigation

Chicago Tribune Reports on Litigation Arising Out of Bankruptcy of Giordano’s Pizza Franchisor

August 14, 2011 | Peter S. Lubin and James V. DiTommaso

The Chicago Tribune has recently reported on two lawsuits arising out of the bankruptcy of the franchisor for the Giordano’s pizza chain.

In one suit the bankruptcy trustee has sued franchisee for failing to use the the required pizza dough thus allegedly harming the quality and uniformity of Giordano’s pizzas. This type of lawsuit often arises in the franchise setting the article explains. The article states:

It’s common, especially in the restaurant business, for a franchisor to dictate suppliers in their franchise agreements.

“If a customer does not receive essentially the same product, same quality and same experience, the brand image is tarnished and the customer less likely to patronize the franchise in the future,” said Christian Burden, a Quarles & Brady LLP partner focusing on disputes involving distributors and franchises. “To use the quintessential example of the Big Mac, from the franchisor’s perspective, a Big Mac in Chicago must taste and appear generally the same as a Big Mac in Los Angeles, Toronto, Brazil, and so on.”

But it’s also not unheard of for franchisees such as those at Giordano’s to look for alternative sourcing. …

You can read the full article by clicking here.

The other Tribune article details a lawsuit filed by the former Giordano’s franchisor claiming that the franchisor’s lender-banks, former lawyers and other franchisees conspired to rob them of the business. You can view a copy of the complaint in this lawsuit by clicking here. The article describes the lawsuit’s claims as follows:

The lawsuit said that the men enlisted Fifth Third Bank, Giordano’s chief lender, as well as Chicago lawyer Michael Gesas and several Giordano’s franchisees “to participate in the scheme” in which they’d push the Apostolous out and take over the company. Secret meetings were held from September 2010 to February 2011, the lawsuit said. Gesas didn’t respond to a request for comment.

First, they intended to weaken the Chicago-based deep dish pizza chain financially, the suit said. Then, the Apostolous “were fraudulently induced” into signing agreements in August 2010 and October 2010 that worsened their lending terms with Fifth Third, which is owed more than $40 million in the bankruptcy.

Fifth Third threatened to “throw the family in the street” if they didn’t go along with the new terms, the lawsuit said. Aynessazian, who also owns eight Giordano’s franchises, Roche and Gesas made “material omissions” to the Apostolous and failed to represent the interests of the Glenview family, the suit said.

Before the execution of the October 2010 deal with Fifth Third, Apostolou had a heart attack, leaving him even more dependent on his lawyers and Aynessazian. The stress also prompted him to see a psychiatrist, the lawsuit said.

“The final step of the scheme involved seizing control of (Giordano’s) by pressuring the Apostolous into filing a Chapter 11 bankruptcy by which the assets and value of (Giordano’s) could be usurped for the benefit of Fifth Third, and the Apostolous’ ownership interests could be purchased at a materially deflated price for the benefit of the franchisee takeover group,” the lawsuit said.

You can read the full article by clicking here.

Illinois’ Franchise Act Does Not Require Manufacturers to Extend Contractual Agreements that Grant Exclusive Sales Territory

July 7, 2011 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin has clients that operate a variety of businesses all across the state of Illinois. While there are common laws and legal principles that apply to all companies and corporations, there are other Illinois statutes that apply to specific types of businesses. Our Elgin business attorneys came across Clark Investments, Inc. v. Airstream , Inc., which is an Appellate Court of Illinois case involving laws that govern motor vehicle dealerships.

Clark Investments, Inc. v. Airstream , Inc. is a dispute between a Recreational Vehicle (RV) manufacturer and an RV dealer over a contractual agreement between the two companies. Initially, the Plaintiff car dealer contracted with Defendant manufacturer to have exclusive rights to sell Defendant’s RV’s in the state of Illinois. The initial contract was for a period of approximately two years, and shortly before the end of that contract Defendant proposed to renew the agreement with different terms. Defendant’s new contract contained no expiration date and gave Plaintiff no exclusive sales territory. Plaintiff rejected this contract and proposed the same exclusivity terms as the first contract, but Defendant rejected Plaintiff’s proposed changes. Shortly after these negotiations, the initial contract expired, but Defendant continued to supply Plaintiff with merchandise and service and Plaintiff continued to operate its business for almost nine months. The parties then entered into a new contract that contained no exclusive sales region for Plaintiff but allowed Plaintiff to sell more types of Defendant’s RV’s. After this new contract was signed, Defendant entered into an agreement with another RV dealership located ninety miles from Plaintiff’s business. This agreement authorized that dealership to sell some, but not all of the same products contained in Plaintiff’s agreement with Defendant.

Upon learning of this new agreement, Plaintiff filed suit against Defendant alleging violations of the Franchise Act and the Franchise Disclosure Act. Defendant then filed a motion for summary judgment on both causes of action, and the trial court granted the motion as to both claims. Plaintiff appealed the court’s ruling as to the Franchise Act claim only, alleging that Defendant’s had violated section 4(e)(8) of the Act by granting an additional franchise within Plaintiff’s relevant market area and refusing to extend the first contract that granted Plaintiff all of Illinois as its exclusive sales territory. The Appellate Court rejected this argument by citing language from the Act that defines the relevant market area as the fifteen mile radius around Plaintiff’s principle location. Because the other franchise was located further than fifteen miles away, there was no violation of the Act.

Plaintiff also argued that Defendant violated section 4(d)(6) of the Act by refusing to extend the first contract that granted Plaintiff an exclusive sales territory of the whole state. The pertinent part of the Act makes it unlawful for a manufacturer
“1) to cancel or terminate the franchise or selling agreement of a motor vehicle dealer,
2) to fail or refuse to extend the franchise or selling agreement of a motor vehicle dealer upon its expiration, or
3) to offer a renewal, replacement or succeeding franchise or selling agreement containing terms and provisions the effect of which is to substantially change or modify the sales and service obligations or capital requirements of the motor vehicle dealer.”

The Court disagreed with Plaintiff’s claim that Defendant’s actions fell within the first category of conduct. The Court explained that Defendant’s conduct fell under the third category because Defendant offered Plaintiff a new contract with different terms before the initial contract expired. They held that the changes in the new contract did not substantially change the sales and service obligations or capital requirements of the Plaintiff, and upheld the lower court’s ruling.

Small Entrepreneurs Turn to Litigation After Falling Victim to Alleged ‘Franchise Fraud’

April 22, 2009 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin has an active practice in franchise litigation, especially representing franchisee in disputes with franchisors they believe have not been completely honest. Because we work in this area, our Chicago franchise litigation attorneys were pleased to see a cover story on just that situation in the March/April 2009 issue of Mother Jones magazine. The article discusses allegations of “franchise fraud” — the practice by franchisors of cheating the franchisees they sign up by failing to disclose important information, writing onerous financial requirements into contracts and adding after-the-fact legal requirements franchisees didn’t agree to and can’t refuse without being sued.

The article focuses on the Coffee Beanery, a chain of cafes, and one Maryland couple’s experience when they started a Coffee Beanery franchise in Annapolis. At their initial meeting with the franchisor, Coffee Beanery vice president Kevin Shaw allegedly told them they could clear $125,000 a year in the right location. Not only did this allegedly violate a federal law that forbids franchisors from predicting future earnings, but it wasn’t quite true — the magazine said 40 franchises had already failed at the time. Another 60 have since died.

But a bigger problem was the expense of the equipment that the Coffee Beanery said they were contractually obligated to accept. The franchisor allegedly sent them expensive equipment that didn’t work, was unnecessary or wasn’t appropriate for their business. It also allegedly demanded that they abide by contractual obligations they didn’t remember signing up for, such as a gift card program. All of this cost tens or even hundreds of thousands of dollars — and refusing would have opened them up to a lawsuit.