Tuesday, May 1, 2012
Franchise Agreement Not Personal Service Contract, C.A. Rules
Justices Uphold Injunction Barring Restaurateur From Terminating Relationshop
By a MetNews Staff Writer
The allegedly personal nature of the relationship between a restaurant franchisor and its franchisees does not convert the franchise agreement into a personal services contract, so the franchisee may seek an injunction to prevent the franchise from being terminated, the First District Court of Appeal ruled yesterday.
Div. One affirmed a preliminary injunction issued by a Marin Superior Court judge, allowing a Northern California couple to continue operating three McDonald’s Corporation restaurants in Marin County.
Syed and Khursheed Husain have been in litigation with McDonald’s since 2009 over the company’s efforts to force them to sell the three locations. The Husains, who have operated McDonald’s franchises in the Bay Area since the 1980s, contend that the company is contractually obligated to offer them new 20-year terms for the locations, while McDonald’s contends otherwise.
The dispute arises from the assignment agreement under which the Husains purchased seven Marin County franchises from the previous owners, subject to McDonald’s approval. Because six of the seven locations had less than five years remaining on the lease terms, however, the Husains asked for rewrites of the franchise agreements under the company’s “Plan to Win” program.
The program provides that if one operator agrees to transfer his or her franchise to another, and the existing agreement—which is usually for a 20-year term—has 10 years or less remaining, McDonald’s will grant a new 20-year lease term in exchange for a prorated franchise fee.
With respect to the three contested franchises, the Husains contend that they timely accepted the corporation’s offers of new 20-year lease terms. The corporation contends that it received no timely acceptance, and that a postal certificate of mailing, supposedly obtained from a post office in Burlingame, may have been fabricated, and that the acceptance could not have been mailed on the indicated date because the post office was closed that day.
Also at issue is the interpretation of a provision in the agreement assigning the Marin franchises from the former owners to the Husains, with McDonald’s approval. The paragraph states:
“In consideration of McDonald’s consent to this Assignment and the issuance of a rewrite to Assignee, Assignor waives, releases, and disclaims any claim for a rewrite of the franchise for the Corte Madera ... location.”
The Husains assert this to be a promise that the corporation will rewrite the existing agreements for all six of the franchises that would otherwise expire within a few years; McDonald’s insists that it only promised a rewrite for the Corte Madera franchise, as to which it had previously denied a rewrite to the former owners.
Marin Superior Court Judge James R. Ritchie found there to be sufficient evidence to support the issuance of a preliminary injunction. McDonald’s argued on appeal that its franchise agreements are in the nature of personal services contracts, which can only be enforced through an action at law.
The company cited language in the contracts to the effect that the maintenance of a “close personal working relationship” with McDonald’s is “the essence” of the franchise.
Justice Sandra Margulies, however, noted the company’s significant control over how franchises are operated, contrary to the normal personal services contract.
A “close personal working relationship” does not automatically equate to personal services as defined by law,” the justice wrote. “That depends on the nature and substance of the relationship. Here, the Husains are not providing personal services to McDonald’s except in the limited sense that they are expected to work in the business rather than be passive investors. Although they are providing their services to McDonald’s customers, they do so in a manner McDonald’s strictly controls. From the perspective of McDonald’s, the Husains are primarily providing a flow of income to the corporation.”
The case is Husain v. McDonald’s Corporation, A131235.
Copyright 2012, Metropolitan News Company