Home | Buying a Franchise | Finance | Operations | Marketing | Legal Corner | Free Newsletter
 
 

Precise Compliance With Notice Provisions Essential for Franchisors

By Craig R. Tractenberg, Partner, Nixon Peabody

Franchise agreements dictate the time and manner in which material information is to be communicated. Performance of the entire franchise enterprise, down to the performance of each franchisee, is directly related to the ability to communicate necessary information regarding new products and system standards. In Grosso Enterprises Inc. v. Domino's Pizza , Senior U.S. District Judge Jan E. DuBois of the Eastern District of Pennsylvania was called upon to determine whether Domino's educated its franchisee regarding its expectations sufficiently before seeking to terminate its franchise agreement.

Franchisors record their method of doing business in their operations manual. Franchisors possess certain proprietary and confidential information relating to the operation of their franchise system, which includes ingredients; formulas; recipes and methods of preparation; techniques; formats; specifications; systems; procedures; methods of business practices and management; sales and promotional techniques; and knowledge of, and experience in, the operation of the franchised business. Franchisors designate this information, this knowledge and these techniques as confidential. A copy of the manual is typically on loan to the franchisee for the term of the franchise.

As the franchise system evolves, the franchisor updates its manual to allow franchisees throughout the system to have the benefit of the new initiatives and best practices in its system. To avoid misunderstandings, franchisors typically have redundant systems of communicating changes to the manuals, such as hard copy mailing and e-mailing of the updated pages, and maintaining a reference copy on a franchisee intranet with a hard copy at corporate headquarters.

As the archive of the franchise system, the manual contains the competitive advantages of the system. Under the franchise agreement, a change in the manual modifies the expected performances of the franchisees, and effectively amends the franchise agreement.

Domino's Pizza, like most franchisors, routinely issues announcements through its broadcast e-mails educating its franchisees about new products, new marketing initiatives and new training requirements. The franchisee may receive this on its home computer, its terminal at work or perhaps on its personal digital assistant or telephone. The franchisee may read and delete, may print it out or may not even see the e-mail if it is intercepted by its spam filter. E-mail communications are efficient and reliable, but we do not read or preserve them in the same manner in which we read and preserve a letter. We may, for example, believe we have printed an e-mail and delete the message before we determine whether the printer was operating.

In the Grosso case, Domino's had mass e-mailed its franchisees notice of their obligation to comply with a new initiative, a criminal background check standard for new employees. Grosso was ultimately sent a written notice of default addressed properly in the notice provision of the franchise agreement, and the default was subsequently cured, according to the opinion. Domino's had also sent a notice of default regarding 13 different defaults in the standards, appearance, operations and cleanliness of the retail outlet and employees. This default letter, too, was timely cured, the opinion said. Domino's also sent a properly addressed written notice of default to Grosso for failure of Gregory T. Grosso, the franchise's owner, to attend a required "High Performance Franchisee" training class. Notice of this required class was first sent by mass e-mail in February 2009, with a reminder in August 2009, a certified mail notice in September 2009, and a final notice with a class schedule in January 2010. In March 2010, Domino's sent another written notice of default requiring attendance at the class to be held May 4-6, 2010. Grosso did not attend the class, according to the opinion.

Believing that Grosso Enterprises was a recalcitrant franchisee, Domino's issued a notice of termination for its repeated non-compliance with the franchise agreement. The franchise agreement permits a notice of termination to be issued where a franchisee receives three bona fide notices of default within a consecutive 12-month period, whether or not cured. The termination notice issued to Grosso allowed a short period of time to allow Grosso to sell the franchise to a third party and then imposed a deadline for when the termination would be effective and operation must cease, the opinion said. Grosso then filed suit against Domino's for breach of contract, among other things, for wrongful termination of the franchise. Grosso simultaneously sought a temporary restraining order prohibiting termination of the franchise.

DuBois granted the motion for a temporary restraining order. At the hearing, Gregory Grosso testified that he began working as a driver for Domino's at age 17, worked his way up to store manager and ultimately franchisee. He testified that he had never seen the e-mail notices and had always responded to the written notices to cure. With respect to the last notice to cure, requiring attendance at the High Performance Franchisee training class, he admits receiving the September 2009 notice of default, but claims to have been unaware of the actual requirements of the class and the deadline for attending it, the opinion said.

DuBois addressed each element necessary for the consideration of a temporary restraining order. The court determined that Grosso had demonstrated a high probability that he would succeed on the merits. The High Performance Franchisee Training Class requirement allowed attendance within one year. The court rejected Domino's argument that the one year commenced with the mass e-mail notice because the notice was not sent in compliance with the franchise agreement.

Grosso testified that he had not received other mass e-mail notices, which were the basis of the previous notices of default, the opinion said. Notice to the franchisee was required to be sent addressed as required by the franchise agreement and not blind courtesy copied to the franchisees. Apparently Domino's did not obtain a "read receipt" with its mass e-mails and had not conducted a forensic search of Grosso's e-mail to determine whether the mass e-mails had been read. As the September 2010 notice was the first notice of the training requirement, the court determined that Domino's had jumped the gun in issuing the notice of termination on May 5, 2010, as Grosso had until September 2010 to attend training. Despite Domino's extending the time for termination until February 2011 to allow a possible sale by Grosso, the court held that immediate and irreparable harm would be occasioned by the wrongful termination of a franchisee who had spent his entire adult life in the Domino's system, and in balancing the equities and in consideration of the public interest, a temporary injunction should issue to allow the default to be cured.

In my view, Domino's extended every indulgence to a franchisee it deemed unsalvageable, but was frustrated in its attempt to enforce its termination. The case demonstrates the need for precise compliance with the franchise agreement notice provisions not only for default and termination, but also for soft amendments of the franchise agreement through updates of the manual.

Craig A. Tractenberg, a partner with Nixon Peabody can be contacted at:

ctractenberg@nixonpeabody.com
212-940-3722
212-940-3722

Follow Franchise Know-How on Twitter


 
 

2015 home care franchise industry report

 

 

Privacy | Disclaimer

FranchiseKnowHow
PO Box 714
Stony Brook, NY 11790
631-246-5782
franchiseknowhow@gmail.com