Aggressive Defense in a Franchise Dispute may Create Opportunities for Favorable Settlement for Franchisors

09/20/2016 / James M. Susag and Bryan J. Huntington

A common franchisee tactic in litigation with franchisors is to assert all conceivable claims under a multitude of franchise and dealership statutes, even where it is appears that the statutes have no application to the franchise relationship. Franchisees plead these “kitchen sink” claims for a number of reasons. For one thing, a franchisor presented with a complaint containing a large number of claims may feel a heightened sense of urgency to settle. Additionally, a particular state franchise statute may allow the franchisee to claim entitlement to punitive damages and/or recoupment of attorneys’ fees. Even if the franchisee’s entitlement to such special damages is infinitesimally small, the franchisee still hopes the mere threat of such recovery will increase the likelihood of a colossal settlement.

 

Too often, the nuisance factor of time-consuming and expensive discovery – which may entail depositions for corporate officers or merit the examination of tens of thousands of pages of documents – is enough to persuade a franchisor to avoid the discovery process. This can be a grievous mistake. Instead, the best strategy may be an aggressive one entailing the franchisor’s early motion to dismiss most, if not all, of the franchisee’s claims. Though requiring higher litigation costs for the franchisor up front, knocking out a host of claims is likely to have numerous positive effects on the franchisor’s position in the litigation. These effects include narrowing the issues in the case, avoiding the need for costly and disruptive discovery, reducing the franchisee’s potential recoverable damages should it prevail at trial, and opening the door to an early pro-franchisor settlement that ultimately reduces the cost of defending the claim.

 

In Hales Machine Tool, Inc. v. Doosan Infracore America Corp., No. 15-3625, the dealer, Hales, brought a nine-count complaint against the manufacturer, Doosan, in early September 2015. Hales asserted causes of action under the dealership statutes of five separate states, and claimed entitlement to millions of dollars in lost sales. Larkin Hoffman, representing Doosan, immediately filed a motion asking for the case to be dismissed, arguing that the dealership statutes had no application and that Hales’s other claims were defective. Briefing and argument on that motion was complete by early February 2016. The federal magistrate largely agreed with Doosan’s arguments and, in an order filed in May 2016 (approximately eight months after the filing of the case and before any discovery ensued), dismissed eight of the nine counts in the complaint.

 

The magistrate’s decisive early ruling dramatically destabilized the franchisee’s case – suddenly the franchisee had no claim for punitive damages and no ability to recover damages for lost sales outside a single state. Needless to say, settlement was suddenly much more appealing for the franchisee. The franchisor achieved a quick and favorable settlement as a result.

 

The Franchise Litigation Department at Larkin Hoffman considers the full range of procedural options available to efficiently resolve every dispute, including, where appropriate, the pursuit of aggressive pre-trial motion practice.