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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
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