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“MASS LITIGATION” BY FRANCHISEES

Presented by:1

W. Michael GarnerW. Michael Garner, P.A.222 South Ninth StreetSuite 2930Minneapolis, Mn. 55402Telephone: 612 259-4800Email: wmgarner@franchisedealerlaw.com

Stephen C. Hagedorn, General CounselJani-King International, Inc.16885 Dallas ParkwayAddison, Texas 75001Email: shagedorn@janiking.com

Leonard H. MacPheePerkins Coie LLP1900 Sixteenth Street, Suite 1400Denver, CO 80202-5255Telephone No. 303-291-2300Email: lmacphee@perkinscoie.com

1 The authors wish to acknowledge and thank Zane Gilmer of Perkins Coie for his assistance

in preparing this paper.

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“MASS LITIGATION” BY FRANCHISEES

I. INTRODUCTION: WHAT IS A “MASS FRANCHISEE” DISPUTE?

The term “mass franchisee litigation” conjures images of armies of angry franchisees storming the franchisor’s castle; memories of grueling and long litigations such as the Meineke2 advertising fund case some years ago that resulted in a massive jury verdict followed by a reversal on appeal; and a host of buzz words such as “class action,” “multi-party litigation,” and “test case.” “Mass franchisee action” is often perceived as a monolith. Close up, however, there are several types of actions that might be regarded as “mass franchisee actions” that have different characteristics. They can include:

Class actions, which are actions brought pursuant to federal or state rules permitting one or more named plaintiffs to represent the interests of a class of franchisees who claim to have been wronged by some conduct of the franchisor that is common to the class members.

Association actions, which are actions brought by an association of franchisees on their behalf and that typically seek forward-looking relief.

Multi-plaintiff actions in which a number of franchisees, in either a single action or a series of actions, seek similar relief based upon similar, although perhaps distinct wrongs.

Loosely coordinated but similar conduct by franchisees that may or may not amount to legal action, including non-payment or slow payment of royalties, slackening of standards, failures to report all revenues, and the like.

There is no single cause or characteristic that can be ascribed to these different types of actions. For the present discussion we would like to distinguish at the outset certain types of actions that will not be considered in this discussion. These include, principally, actions for misrepresentation, unlawful financial performance representations, or other violations of registration and disclosure laws involving relatively young or unsophisticated franchise systems. These types of actions are rooted in alleged wrongs committed by the franchisor in the franchise sales process; the allegedly wrong conduct, and any cure for it, focuses on the sales process, not upon the ongoing franchise operation.

Rather, the type of “mass” franchisee action on which this paper will focus is the type of action that arises in systems that are relatively mature; that concur ongoing operational issues; and that frequently have at stake, whether expressly or not, the issue of who will control some or all of the franchise system – the franchisor or the franchisees. Historically, these cases have turned on the meaning of the franchise agreement and have raised issues such as administration of the advertising fund, the

2 Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998).

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franchisor’s ability to set and enforce standards and institute changes, sourcing issues, and in limited contexts, pricing. Encroachment issues may also be implicated in mass franchisee litigation, but typically involve single units.

II. SOURCES OF MASS FRANCHISEE LITIGATION

Mass actions against franchisors typically are rooted in franchisee desire to change the economic or operational control bargain between the franchisor and the franchisee and often are fueled by perceptions of an imbalance in that regard. Consider some of the more notable examples of the issues that have been litigated in recent mass franchisee cases:

The KFC advertising litigation.3 In this case, the issue at stake was whether the franchisee-franchisor council charged with the advertising fund indeed had control over how the ad fund’s money was spent. The court held that under Delaware law, the ad council was governed by a board of directors, most of which were franchisees, and that the board therefore controlled the advertising plans.

The Quizno’s litigation.4 The recently-settled Quiznos class litigation had at its heart the issue of franchisor control over the source of supplies, the use of affiliates in connection with supplying through approved vendors, and the prices charged franchisees for these supplies.

The Burger King litigation.5 Franchisees in this system raised the question whether Burger King had the right to require franchisees to sell double cheeseburgers for a dollar under Burger King’s value menu program. The essence of the dispute was that franchisees contended that they could not be profitable if they followed the franchisor’s pricing requirements.

The Little Caesar’s litigation, which in federal court6 focused on sourcing issues, and which the franchisees lost; and, in state court7 focused on advertising fund abuses, but then resulted in a settlement that addressed the sourcing issues.

3 KFC Nat’l Council and Adver. Coop., Inc. v. KFC Corp., No. 5191-VCS, 2011 WL 350415

(Del.Ch. Jan 21, 2011).4 Siemer v. The Quizno’s Franchise Co. LLC, Bus. Franchise Guide (CCH) ¶ 14,446 (N.D. Ill.

2010); 2010 WL 3238840 (N.D. Ill. Aug. 13, 2010); See also Siemer at 2008 WL 9044874; Westerfield v. The Quizno’s Franchise Co. LLC, 527 F.Supp.2d 840 (E.D. WI 2007) on reconsideration 2008 WL 2512467 (E.D. Wis. Apr. 16, 2008); and Brunet v. The Quizno’s Franchise Co. LLC, No. 07-cv-01717 (D. Colo. 2007).

5 National Franchisee Ass’n v. Burger King Corp., 715 F.Supp.2d 1232 (S.D. Fla. 2010) and 2010 WL 4811912 (S.D. Fla. Nov. 19, 2010).

6 Little Caesar Enter. v. Smith, 172 F.R.D. 236 (E.D. Mich. 1997) (granting class certification) and 34 F.Supp.2d 459 (E.D.Mich. 1998) (granting summary judgment to Franchisor).

7 Hotchkiss v. Little Caesar Enter., Inc., No. 99-CI-16042 (Bexar Co., Tex. 2001).

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The Meineke class litigation relating to advertising fund challenges, particularly the use of an affiliate in connection therewith, which resulted in a judgment after a seven week jury trial of approximately $600 million (reduced to approximately $400 million) against not only the franchisor and its parent corporation, but also several corporate officers, but which judgment the Fourth Circuit reversed on the basis that the trial court erred in certifying the class.8

The Dominos’ multi-plaintiff action in which the franchisees claimed Domino’s violated antitrust laws by requiring franchisees to buy dough and other products only from the company.9

The UPS-Mailboxes, Etc. litigation10, which had, at its root, the issue whether the franchisor can require franchisees to change their business model which, the franchisees contended, made them less profitable.

The Dairy Queen class litigation,11 which again, involved sourcing issues and anti-trust claims with the franchisees claiming they should be permitted to buy certain products from sources unaffiliated with the franchisor as opposed to from only the franchisor’s designated sources.

The root issues of economic impact and control give rise to another characteristic of this type of litigation; the concerns underlying it are typically shared by many of the franchisees, and the litigation often is supported by many of the franchisees, including franchisees of long standing with substantial interests. This type of litigation, therefore, cannot easily be dismissed as the work of fringe groups or zealots with individual interests at stake.

Mass franchisee litigation of this type may be accompanied by other facts and characteristics. Indeed, the likelihood that franchisees will take action against a franchisor through litigation is increased substantially if there are any number of other factors involved, including ineffective or non-existent communications channels between franchisors and franchisees; antagonistic personalities at the franchisor or of the franchisee(s) leading the charge; franchisor insensitivity to the economic burden that franchisees take on, particularly when implementing franchisor initiatives or franchisees’ unwillingness to shoulder their share of the cost of necessary initiatives; a franchisor history of “bungling” issues that have resulted in franchisees losing money, such as new products that failed or poor advertising campaigns; franchisees’ inaccurate, unrealistic

8 Broussard v. Meineke Disc. Muffler Shops, Inc., 958 F.Supp. 1087 (W.D.N.C. 1997) rev’d155 F.3d 331 (4th Cir. 1998).

9 Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 922 F.Supp. 1055 (E.D. Pa. 1996) aff’d 124 F.3d 430 (3d Cir. 1997).

10 DT Woodard, Inc. v. Mail Boxes Etc., 2007 WL 3018861 (Cal. App. 2 Dist. Oct. 17, 2007); McDougal, Inc. v. MailBoxes Etc., 2008 WL 2152911 (Cal. App. 2 Dist. May 23, 2008); andSamica Enter. v. MailBoxes, Etc., 2010 WL 807440 (C.D. Cal. 2010).

11 Collins v. Int’l Dairy Queen, Inc., 939 F.Supp. 875 (D.Ga. 1996).

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or unreasonable expectations regarding the respective roles and/or nature of the relationship; franchisee disagreement with legitimate franchisor business decisions; and franchisee desire to control or profit from the system in greater measure than the franchise agreement provides.

III. CAN MASS FRANCHISEE LITIGATION BE PREVENTED?

Mass franchisee litigation is bad for both the franchisor and franchisees. It is far more distracting, expensive and time consuming than “one-off” franchisee-franchisor litigation. And, the litigation and the bad press that follows (regardless of merit) often harms the brand with consumers and with prospective franchisees. Further, given the fact that 98% of all civil cases settle, the issue whether mass franchisee litigation can be avoided before it starts is critical. We will consider the effectiveness of preventing mass litigation through various groups and contractual provisions from the perspective of a franchisee lawyer and a franchisor lawyer.

A. Franchisee Lawyer’s Perspective

The most effective way to avoid mass franchisee litigation is effective communication between the franchisor and franchisee. Contractual provisions, from requirements for mediation or negotiation to venue selection clauses and choice of law clauses ultimately all lead to the same destination: either the franchisor and franchisee will communicate and agree on a resolution; or they will communicate with a third party, who has no interest in the dispute, who will decide it for them. Avenues of communication can include franchise advisory councils, independent franchise associations, franchise conventions, and franchise advertising funds.

Bad communication is based on fear and laziness. It tends to be characterized by hidden agendas, unexpressed complaints and desires, and lack of flexibility. Franchisees may feel disempowered, fearful of reprisals, or locked into a hopeless and humiliating position. Franchisors may underestimate the value of effective communication with franchisees, or unfortunately, may feel that they have done enough for franchisees by simply giving them an agreement and that further action is unnecessary.

Good communication requires recognition of the fact that there are fundamental differences in the economic positions of franchisors and franchisees, and that resolving disputes requires bringing to the surface the differences that lurk under the surface of disputes and that may not be obvious. If there are serious differences, the parties should be ready to employ a professional mediator to assist in opening up the channels of communication.

We will consider here some of the traditional ways of facilitating communication and the ways in which they may be effective or not effective.

Franchisee Advisory Councils can play a meaningful role in facilitating communication, but it is critical that franchisors ensure that they reflect the views of a majority of the franchisees; that members of the FAC are not compromised by favoritism

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or apparent favoritism by the franchisor; that members of the FAC view themselves as representatives of the franchisees; and that members of the FAC in fact communicate with franchisees. A typical complaint of franchisees about FACs is that they pay lip service to franchisee representation in the halls of the franchisor’s offices but in fact neither represent franchisees nor have any power. Above all, the franchisor’s use of the FAC should and must be genuine: if the franchisor uses the FAC as a tool of manipulation, it is likely to fail as a communication channel. When mass franchisee action comes, a good franchisee lawyer will locate, expose, and exploit to the franchisor’s profound detriment, attempts to manipulate franchisee viewpoints or put words into franchisees’ mouths.

Independent franchisee associations, if they represent a majority or at least a strong plurality of franchisees, should be recognized by franchisors, whether or not there is a Franchise Advisory Council and should be given a seat at the negotiating table. The existence of an independent association, it must be understood, reflects a profound concern of franchisees about their businesses and the role of franchisees in the system. Franchisees typically work exceptionally long hours to make their businesses run; if they have put the effort into organizing an association, it shows a substantial investment in hours, resources, and psychological commitment. The FTC has recognized the legitimacy of independent franchise associations by requiring franchisors to include their identifying information in its offering circular.

From the franchisee lawyer’s perspective, refusing to recognize and negotiate fairly with an independent franchisee association is short-sighted and foolish. Franchisor refusals to talk with franchisees, or to recognize their organizations, are delicious morsels that can be thrown back at the franchisor in litigation or arbitration. The downside of talking to an independent franchise association is the loss of a few hours - or maybe a couple of days - and the upside is that the franchisor gains credibility in the franchisees’ eyes. But turning down the franchisees creates a record of treating franchisees as unworthy of discussion or attention when, in fact, franchisees are paying the franchisor millions of dollars of royalties and have millions of dollars at stake in their facilities. Recognition of an association not only can thwart mass franchisee litigation by defusing the issues well ahead of time, but can be a useful tool in the implementation of franchisors’ strategies that might otherwise encounter resistance. If, for example, a franchisor wishes to implement a new policy, product, or program, and gets the leadership of the association to buy into it, the association can help roll it out to franchisees without encountering resistance. If the association leadership resists an initiative, then the franchisor at least has an early warning that the price of proceeding most likely will be conflict.

Negotiation and mediation clauses in franchise agreements have become extremely popular in recent years. If used properly, they can facilitate avoidance of mass franchisee action. On the other hand, they can frustrate obtaining a resolution and in fact confound it.

An issue that remains unresolved in most jurisdictions is whether a mandatory mediation or negotiation clause – meaning a provision of the contract that requires

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negotiation or mediation prior to filing suit – can be enforced as a condition to bringing suit. Unlike arbitration, mediation does not have the force of a federal statute and a strong federal policy, as is the case with the Federal Arbitration Act. Mediation is strictly a creature of contract, and filing suit without mediating would at most be a breach of contract for which a franchisor would be unlikely to have damages.

A risk inherent in mediation provisions is that the franchisor may delay the mediation for an extended period of time and use it as a means of attempting to wear down the franchisee.

A strategic advantage for the franchisee in dealing with a mediation clause is that mediation of a dispute does not have to be disclosed in a franchisor’s offering circular. The prospect of bringing suit or arbitration and thereby creating a disclosable event –indeed one that might reflect a suit or arbitration brought by a substantial number of franchisees – can be a strong bargaining tool in a mediation session. On the other hand, a franchisor may use mediation to diffuse or exhaust franchisee efforts. Many mediation provisions require that the franchisee mediate individually and not on a class or group basis. While this may be effective at blunting mass franchisee mediation, it is more likely to frustrate franchisees and create more antagonism with the franchisor than is gained in the short term. A practical solution is for both parties to choose a representative case for treatment as a test case of sorts and to proceed with it with a view to using the results of mediation in an effort to resolve the entire controversy.

Although mediation has been relatively popular for the last two decades, its use in franchising has tended to be in limited single-party settings. Significantly, in other areas of the law, such as mass torts and complex securities cases, mediation has been used successfully for resolving these disputes. There is no reason why mass or class franchisee disputes cannot be mediated, and made subject to mandatory mediation clauses.

Arbitration

Arbitration clauses, from the franchisee’s standpoint, are probably the most effective deterrent to mass franchisee actions. Such clauses are typically enforceable in accordance with their terms in most jurisdictions, so that provisions requiring most franchisees to arbitrate claims individually, as opposed to a class-wide or mass basis, will be enforced.12 These types of clauses, have, however, been held ineffective in California, as have a number of other arbitration requirements.13 Nonetheless, a strong, mandatory arbitration clause may require franchisees to arbitrate on an individual basis and pay fees for arbitration, which drives up the cost of the dispute resolution.

While franchisors may regard the use of such a clause as effective in thwarting mass franchisee action, they do not diffuse mass franchisee discontent, nor do they

12 See Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S.Ct. 1758 (U.S. 2010).13 McGuire v. CoolBrands Smoothies Franchise, LLC., 2007 WL 2381545 (Cal. App. 6th Dist.

2007) (Unpublished).

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resolve the issue. Among other things, franchisees may proceed in jurisdictions such as California where such provisions have been held unenforceable. They may bring suit through an association that is not bound by the arbitration clause or, if they are well-organized and well-financed, may simply bring multiple arbitrations against the franchisor, creating a true “be careful what you wish for” nightmare for the franchisor.

In the end, contractual provisions should focus on the most effective way to resolve disputes, whether they be individual or mass franchisee actions. Such provisions can include provisions permitting mass mediation, complex mediation, and multi-party arbitration. The bottom line is that if there is a dispute involving many franchisees that reaches the stage of litigation or arbitration, then the objective must be to resolve the dispute, not to continue it indefinitely.

B. Franchisor Lawyers’ Perspective

Without a doubt, avoiding mass franchisee litigation is in the franchisor’s interest. As noted above, mass franchisee litigation is worse – usually far worse – for a franchisor and the entire system than the typical “one off” franchisee-franchisor dispute. Utilizing every avenue and all of the tools available for a franchisor to avoid mass franchisee litigation is, thus, essential. However, for some of the reasons that follow, avoiding mass franchisee litigation cannot trump the franchisor’s duty to the brand and system. And under some circumstances, working with hostile franchisees purporting to represent others does more harm than good.

In order for franchisors to protect, preserve and grow the brand, they must be able to effectuate changes to the system and model. This is critical to the brand to keep fresh and remain competitive. Further, franchisors must be able to rely on the deal that was originally struck with its franchisees and enforce the terms of the franchise agreement. Some mass franchisee litigation suggests that franchisees band together, form associations, and pursue litigation for purposes to harm, not help, the brand and the system. Indeed, there are examples of franchisees joining together for the express purpose of “taking down” the franchisor (this is a particular concern for franchise systems with a large number of inactive or former franchisees). Whether such a goal is explicit or more subtle, when franchisees band together to harm the system the franchisor may lose more than time if it legitimizes the association by recognizing , and communicating or negotiating with it.

That said, communication is essential to the relationship. One of the best ways to avoid mass franchisee litigation is for franchisors to communicate so that franchisees understand the direction of the brand, feel that their perspective is valued, and are informed with respect to the need for changes before the franchisor implements them. Imposing changes to the system which increase the costs incurred by franchisees will not be well received unless franchisees can also see the big picture and why the proposed change is necessary.

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Franchisee Associations

It is within this framework that franchisors should evaluate franchisee associations. There are examples of independent franchisee associations that perform a valuable role in the brand. Franchisee associations with a “big picture” perspective, that truly represent a significant portion of the franchisee population, and that have a constructive agenda or purpose can be a valuable tool within the system, particularly with respect to communication. In these scenarios, recognizing the franchisee association and working with it and its leadership is beneficial. Franchisee associations can serve as a sounding board and source of testing new products or marketing or design. And, Franchisors who are able to obtain agreement and buy-in to changes through franchisee association leaders will have a better time obtaining buy-in from the association members and the balance of the system. This communication flow can help prevent the misunderstandings that sometime build to the point of mass franchise litigation.

However, franchisee associations formed for an improper purpose or otherwise operating with a destructive mission, as well as those that do not represent a significant portion of the franchisee population, are unhelpful and frequently destructive and franchisors are better suited not legitimizing these associations by recognizing them. Franchisee associations with the mission to usurp the franchisor’s role, take over system and/or “take the franchisor down” fall into this category. It is common for franchisee associations to form for the express purpose of coordinating to advance mass franchisee litigation. Even if not solely for the purpose of advancing mass litigation, if the purpose of the association is to gain the added leverage through collective bargaining in order for the franchisees to change the deal in a way they have no legal right to do, franchisors must evaluate the circumstances carefully before agreeing to recognize the association. To negotiate with such an association can be a losing proposition from the start; particularly when the demands threaten the core of the business or amount to nothing more than a shakedown to extract a better deal than was originally struck.

Recognizing these franchisee associations necessarily amounts to a concession that the parties’ business deal will be changed. It also lends legitimacy to them which may increase the incentives for the members to pursue leverage gaining actions – like pursuing a mass action – and encourage more franchisees to join. Further, recognizing the franchisee association is inconsistent with the generally beneficially litigation position with respect to mass franchisee actions which is that franchisees have individual circumstances and should be required to bring any claims on an individual basis.

When confronted by a few franchisees purporting to be leaders of an association or their counsel, a franchisor should not outright refuse to speak with them. Rather, it is wise for a franchisor to offer to listen to the franchisee(s) in their individual capacity and agree to discuss and work with them with respect to any legitimate issues they may

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have; but also make clear that the franchisor is not agreeing that the franchisee represents others or that it recognizes the association.

Franchisee Advisory Councils

Franchisee advisory councils often can beneficially serve the communication function without the risk of legitimizing destructive efforts. The effectiveness of an advisory council is often times directly related to the perception in the franchisee community of independence – that is that the members on the advisory council are not the franchisor’s “stooges” and are able to voice franchisees concerns effectively.

Franchise Agreement Waivers, Bars and Arbitration

As discussed more specifically below, from a franchisor’s perspective, contractual provisions limiting the ability of franchisees to bring their cases collectively (in a class representative capacity, through multiple individuals joined together, or through an association), is a good thing. Thus, a bar/waiver in the franchise agreement whereby franchisees agree not to pursue claims collectively and expressly waive their right to do so are important provisions. As a drafting point, the greater specificity with respect to what is being waived or prohibited is essential, as courts will often resist enforcing such clauses and will look for opportunities in the drafting to do so.14 Thus, having the clause prohibit both bringing a claim in a “representative” capacity and alsoprohibiting one from being a member of a class, protects both circumstances. Likewise, prohibiting both joinder and consolidation covers both joinder of parties in the initial complaint and moving to consolidate.

The enforceability of such provisions is frequently an issue in mass franchisee litigation. While it is generally the case that waiver clauses are more likely to be enforced if the bar/waiver is included within an arbitration clause, this area of the law is unsettled and ever-shifting. This topic is addressed with greater detail below, and the recent confusion over whether an arbitration clause that does not provide for arbitration on a class basis allows a claimant to pursue a class action shows franchisors must be careful. For example, the AAA Commercial Rules set forth procedures for pursuing class actions and, therefore, even in the wake of Stolt-Nielson 15it is conceivable a court or arbitrator will conclude that the parties agreed that a franchisee may proceed on a class basis if the franchise agreement’s arbitration clause incorporates those rules even if the clause is otherwise silent as to class arbitration. And, as noted below, several

14 For example, courts have held that a franchise agreement prohibiting franchisees from

consolidating their claims does not prohibit them from bringing their claims together in one action as an initial matter. C.K.H. LLC v. The Quizno’s Master LLC, No. 04-CB-1164, 2005 U.S. Dist. LEXIS 42347 (D. Colo. Mar. 24, 2005).

15 Stolt-Nielson, 130 S.Ct. 1758 (holding that parties do not agree to arbitration on a class basis when the arbitration clause is silent on the issue).

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courts and jurisdictions have refused to enforce waivers on unconscionability and public policy grounds even within arbitration clauses.16

IV. STRATEGIC CONSIDERATIONS OF MASS ACTIONS

A. Franchisee Perspective

From the franchisee’s viewpoint, claims involving substantial numbers of franchisees raise significant strategic considerations, as set forth below:

First, the fact that there are numerous franchisees interested in creating or resolving a dispute with a franchisor means that the cost of doing so can be spread throughout them. The fact that there can be economies of scale then leads to the question of how those economies will be deployed. If multiple franchisees join in an action against a franchisor, the cost savings may be dissipated by the cost of having each franchisee in the litigation. A more efficient way of proceeding may be for the franchisees to select one franchisee as a test case.17 If the issues involving the franchisor are common to all of the franchisees, than a victory for one may effectively preclude the franchisor from relitigating those issues with respect to other franchisees due to principles of res judicata or issue preclusion. Other ways in which cost savings can be deployed include the use of an association to prosecute the franchisees’ concerns, as discussed below, provided that it can be done without undue complications.

Another aspect of mass franchisee actions that make them attractive to prosecute with multiple plaintiffs is the availability of cumulative and multiple evidence from different franchisees on the same topic. For example, if a number of franchisees testify about misleading conduct by the franchisor, not only will the cumulative evidence be more persuasive, but it may tend to create in the mind of the fact finder a pattern of deception, as opposed to a single misrepresentation. In cases involving single franchisees, evidence from other franchisees generally will be excluded unless it can be used to prove a particular cause of action that may depend upon multiple testimony, such as a pattern of racketeering or certain types of bad faith.18 On the other hand, regardless of the cause of action, if a number of franchisees are testifying to the same facts, the result will be a more persuasive and convincing case.

16 In re American Express Merchants’ Litigation, __ F.3d ___, 2011 WL 781698 (2d Cir. Mar.

8, 2011) (holding that notwithstanding the holding of Stolt-Neilsen, the class waiver in the arbitration clause of American Express’ merchant contracts was not enforceable as void under public policy).

17 But franchisees should be cautious to keep the statute of limitations and any shorter contractual limitations periods in mind – particularly outside the context of a class action.

18 See Beck’s Office Furniture and Supplies v. Haworth, Inc., 94 F.3d. 655 (10th Cir. 1996) (unpublished); but see Cohn v. Taco Bell Corp., 1994 WL 30546 (N.D. Ill. Feb. 3, 1994) (noting that evidence of treatment of other franchises may be relevant and discoverable); see also infra n. 21 - 23.

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Another issue with respect to multi-party franchisee litigations is the place of such an action in the constellation of the entire franchise system. If a group of franchisees has good claims, and other franchisees share the facts that support these good claims, then other franchisees are likely to want to participate in the litigation or commence their own litigation. This presents a number of strategic concerns to the franchisee lawyer: (a) Does the franchisor have sufficient resources to award damages to many franchisees? (b) Are there any differences between franchisees who have come forward to be litigants and those who are seeking to be litigants? (c) Is there a risk that the franchisee lawyer will prosecute the claims of a number of plaintiffs and that a number of other franchisees will then “free ride” on result? (d) The franchisor will have an understandable concern that if it reaches a resolution with a group of franchisees that the franchisor will then face additional claims from others. What assurances can the franchisees give the franchisor that once it settles, there will be no further actions?

Management of mass franchisee litigation may present substantial issues to the franchisee lawyer. Clients may have different and conflicting goals; some may want to get out of the system while others are willing to stay in it. Likewise, different franchisees have different levels of risk tolerance and different financial resources. The attorney representing a group of franchisees must be sensitive to ethical concerns in case there is a conflict between the clients that he or she is representing.

Another strategic consideration that franchisees need to take into account in advancing mass litigation is the likelihood of settlement. When large numbers of franchisees are involved in a case, there is more likelihood that some will want to settle, while others will want to hold out. This can put the lawyer in the middle, especially if he or she is dependent upon all the franchisees for fees, or if there is a contingency fee arrangement involved. This difficulty becomes particularly acute when franchisees with weak claims are the ones that want to hold out. For the franchisee lawyer, the most effective strategy for dealing with such differences is to establish, out the outset, that the entire group agrees to be governed by majority rule, whatever that may be - number of stores, number of franchisees, or size of business.

B. Franchisor Perspective

Franchisors also have a number of strategic considerations when confronting mass franchisee litigation and deciding how to respond to it once filed. Many of these considerations overlap with the considerations of the franchisees described above. And some considerations in some instances may go against the conventional wisdom and general franchisor position that mass franchisee litigation should be confronted with a "divide and conquer" mentality. Generally, however, these and other case-specific considerations will suggest that a franchisor should resist multiple franchisees joining in a single case (by opposing consolidation or joinder and moving to sever), oppose franchisee’s efforts to obtain class certification, and argue they do not have associational standing.

A significant factor for the franchisor to consider when facing mass franchisee actions relates to cost and management issues. Generally, given that the franchisees

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benefit financially through sharing the costs, the franchisor will be in a better strategic position if the franchisees are forced to pursue claims on an individual basis. And, the franchisor may be able to utilize efficiencies with respect to separate similar actions while the different franchisees will have less ability to do so. For example, research and motion drafting can be re-used in subsequent cases, as can document productions sothat the privilege, confidentiality and relevance review only has to be done once and then the same productions re-used in the subsequent cases.

The scope of discovery must be considered. If multiple franchisees from multiple regions are able to join in a single action, will this create a greater likelihood of increased discovery and discovery costs? It certainly could in at least two ways. First, multiple franchisees increase the scope of discovery because they increase the time, geography and subjects at issue in the case. Second, in the context of electronically stored information (ESI), which is often a major driver of the costs the franchisor will expend defending the litigation, the total value of the claims asserted may impact what costs a franchisor must expend. Under Rule 26(b)(2)(B) "[a] party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost." The total amount at issue can be a factor in whether the cost is unduly burdensome. If it is, the court can shift some or all of the cost onto the requesting party or prevent the discovery.19 The decision whether to require a responding party to search for and produce information that is not reasonably accessible depends not only on the burdens and costs of doing so, but also on whether those burdens and costs can be justified in the circumstances of the case.20 This includes the value of the claims at issue. If a franchisor can avoid harvesting, reviewing and producing large volumes of ESI on the basis that the cost to do so would be unreasonable measured against the amount at issue in a claim by a single franchisees but would not be able to establish unreasonableness if the franchisees combined to establish the value of the claims, it is in the franchisor's interest to resist different franchisees bringing their claims together.

The potential for the fact finder to hear otherwise inadmissible cumulative evidence in consolidated cases can be another major strategic reason the franchisor should resist consolidation or seek to sever various plaintiffs. Many times, evidence of a franchisor's dealings with and actions toward other franchisees will not be admissible

19 Fed.R.Civ.P. 26(b)(2)(B); Laethem Equip. Co. v. Deere & Co., 261 F.R.D. 127, 145 (E.D.

Mich. 2009) (quoting Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978)); see also Dahl v. Bain Capital Partners, LLC, 655 F.Supp.2d 146 (D. Mass. 2009). Backup tapes have been specifically identified as an example of devices that are not reasonably accessible. Laethem Equip, 261 F.R.D. at 145.

20 Major Tours, Inc. v. Colorel, Civil No. 05-3091 (JBS/JS), 2009 WL 3446761, at *2 (D.N.J. Oct. 20, 2009); see also Laethem Equip, 261 F.R.D. at 145-46; Zubulake v. UBS Warburg LLC, 217 F.R.D. 309, 319-20, 323-34 (S.D.N.Y. 2003).

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in a case brought by a single franchisee.21 However, if multiple franchisees' claims are tried together, this otherwise inadmissible evidence regarding other franchisees necessarily comes in and is considered by the fact finder. The cumulative effect can be very prejudicial to the franchisor.22 And, when franchisee counsel can pick and choose which "stories" to tell, he or she can emphasize the most egregious examples and ignore the weakest claims or witnesses and hope for a coat tail prejudicial effect for the outcome23.

The potential ramification of rulings or a judgment in a single franchisee case on future cases presents a risk to a franchisor that might suggest consolidated actions are better than multiple individual actions. Under most states’ laws,24 an adverse finding against a franchisor on an issue could have a collateral estoppel effect with respect to the same issue advanced by other franchisees in other cases. Likewise, there is also a risk of res judicata or claim preclusion being used offensively by franchisees in subsequent litigation if actions are tried separately.

Collateral estoppel is intended to prevent relitigation of issues that were actually litigated or decided in an earlier action between the same parties.25 The typical elements of collateral estoppel or issue preclusion are: (1) the prior decision must have resulted in a judgment on the merits; (2) the same fact issue must have been actually litigated; and (3) the disposition of that issue must have been necessary to the outcome of the prior litigation.26 It is not always necessary that both parties were parties to the

21 See, e.g., I’mnaedaft, Ltd. v Intelligent Office Sys., LLC, No. 08-cv-01804, 2009 WL

1537975, at *6, N. 1 (D. Colo. May 29, 2009) (“A franchisor’s treatment of other franchisees has repeatedly been held to be irrelevant to a breach of contract claim brought by another franchisee.”); Zeidler v. A&W Restaurants, No. 99 C 2591, 2001 WL 62571, at *11 (N.D. Ill. January 25, 2001) (holding that a franchisor’s “treatment of its other franchisees is irrelevant to its treatment” of a particular franchisee.); see also fn. 22, below.

22 See In re Consolidated Parlodel Litig., 182 F.R.D. at 447 (“A consolidated trial of these fourteen cases would compress critical evidence of specific causation and marketing to a level which would deprive [defendant] of a fair trial.”); see also Broussard, 155 F.3d at 341 (holding that “hodgepodge of factually as well as legally different plaintiffs, . . . should not have been cobbled together for trial”) (internal citation and quotation marks omitted).

23 See Broussard, 155 F.3d at 344 (reversing judgment against franchisor on basis that class should not have been certified and finding, among other things, that the franchisee "plaintiffs enjoyed the practical advantage of being able to litigate not on behalf of themselves but on behalf of the 'perfect plaintiff' pieced together for litigation. Plaintiffs were allowed to draw from the most dramatic alleged misrepresentations made to Meineke franchisees, including those made … with absent class members…And plaintiffs were allowed to stitch together the strongest contract case based on language from various [franchise agreements], with no necessary connection to their own contract rights.").

24 The elements vary from jurisdiction to jurisdiction and under federal law. Further, there are issues of which attorneys must be aware regarding applicable law between state and federal cases.

25 Gateway Equip. Corp. v. U.S., 247 F.Supp.2d 299, 321 (W.D.N.Y. 2003).26 Dahiya v. Talmidge Intern., Ltd., 371 F.3d 207, 213 (5th Cir. 2004).

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earlier action, so long as the party against whom it is used had a "full and fair opportunity to litigate their claims" in the earlier action.27

Res judicata bars parties from raising claims that were or could have been litigated in an earlier action.28 The typical elements of res judicata are "(1) the first suit resulted in a final judgment on the merits; (2) both suits involve the same parties (or those in privity with them); (3) both suits are based on the same claims or causes of action; and (4) the first suit was based on proper jurisdiction"29 Generally, to be precluded the claims must “arise out of the same nucleus of operative fact."30 Thus, if a franchisor has an opportunity to fully and fairly litigate an issue or claim advanced by a franchisee, and looses on that issue or claim, it may be precluded from litigating that same issue in a different case brought by a different franchisee.

These doctrines of preclusion are much less likely to apply to issues or claims when the franchisor wins a case or prevails on an issue because the franchisee in the subsequent case(s) will not be considered in privity with the first franchisee and will not have had an opportunity to fully and fairly litigate the issue or claim.31 Thus, when confronted with whether to seek to sever or oppose efforts to consolidate the claims or parties, a franchisor may have a strategic reason to avoid effectively giving the franchisees multiple "bites at the apple." It may only take one franchisee win for the franchisor to lose that issue in all the remaining cases, while the franchisor would have to win the issue in each case and, maybe, win every trial.

On the other hand, there is precedential value—even if only persuasive and not preclusive—to be considered. If a franchisor can posture the weakest franchisee case in the group to be tried first and wins, that can go a long way to favorable resolution either by gained leverage to obtain settlements or through use of the persuasive effect of the findings or result with subsequent judges.32

A related factor to be considered when formulating strategy on whether to resist multiple franchisees banding together is the judicial assignment process in a particular

27 Id.28 SDMS, Inc. v. Rocky Mountain Chocolate Factory, No. 08-cv-0833 JM (AJB), 2008 WL

4838557, at *3 (S.D. Cal. Nov. 6, 2008).29 Id.30 Id. (citing Regions Bank v. J.R. Oil Co., LLC, 387 F.3d 721, 732 (8th Cir. 2004)). 31 But see Samica Enter. LLC v. Mail Boxes Etc. USA, Inc., 2010 WL 807440, at *2 n.1 (C.D.

Cal. Feb. 26, 2010) (stating that the court’s prior rulings on summary judgment with respect to a handful of “representative plaintiffs” “would appear” to apply equally to the two hundred or so remaining plaintiffs because those plaintiffs acknowledged that they were “similarly situated”) relying on Bullard v. Burlington Northern Santa Fe Railway Co., 535 F.3d 759 (7th Cir. 2008) for the proposition that “in actions with numerous plaintiffs, district courts may proceed with representative plaintiffs and then apply issue or claim preclusion to the remaining plaintiffs.”).

32 See Burger King Corp., 715 F.Supp.2d at 1241-43 (following the Eleventh Circuit’s prior interpretation of the same contract clause in the Burger King franchise agreement allowing the franchisor to require franchisees to participate in the value menu program).

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court measured against any known relevant philosophy of judge(s) assigned to the case(s). In the situation where multiple franchisees have filed separate actions in one court and are seeking to have them consolidated, a franchisor should consider which judge is likely to preside over the cases if they are consolidated and/or whether the different cases are “related cases” in that court and, therefore, will be assigned to the same judge anyway.

The franchisor—like franchisee counsel—must also consider the various state laws that may be in play with different franchisees and evaluate the strategic impact and advantages and disadvantages with respect to the same. State specific relationship laws, business opportunity laws, "little FTC Acts," and other consumer protection acts, as well as differences in common law, may suggest a franchisor should not resist multiple franchisees bringing their cases together. For example, if the franchisees have ignored advantageous statutory claims applicable for only some the plaintiff franchisees (perhaps in order to increase the prospects of consolidation, to defeat severance arguments, or to more easily establish the commonality or predominance elements of Rule 23 to obtain a certified class), a franchisor may not want to sever or avoid class certification. And as referenced above, some jurisdictions are more likely than others to find favorable contract provisions unconscionable or otherwise unenforceable. The franchisor should consider where a mass action has been filed or where multiple actions raising the same issues/claims have been filed in considering the best response(s).

A related strategic consideration pertains to any choice of law and choice of venue clauses and the enforceability of the same. If, for example, some franchisees have state addenda or are in states with relationship laws that trump the franchise agreements' choice of venue or choice of law clauses, a franchisor should consider whether it can use these differences to its advantage. And, when different franchisees or groups of franchisees have filed similar actions in multiple jurisdictions, franchisors should also evaluate the advantages and disadvantages of seeking to transfer venue to a single jurisdiction (and then possibly consolidating the various actions33 for some or all purposes in one court). While keeping the various franchisees separate may be advantageous for a variety of reasons as set forth above, a franchisor is often better off litigating in its principal place of business and the failure to enforce a venue clause can appear inconsistent with efforts to enforce other provisions.

Other factors influence the franchisor’s thinking and evaluation of procedural options. When it is known or suspected that other franchisees are participating behind the scenes or watching the case to decide whether to pursue their own actions, how can a franchisor best posture the case to quash the potential follow-on cases? Obviously,winning the first case(s) is the best antidote. And, sometimes the threat or perceived risk of other cases motivates a franchisor not to settle if it believes its case is strong or that a settlement will be incentive for other franchisees to file such that the risk of loss is better than a settlement. This is particularly true given the difficulties of maintaining any confidentiality of settlement terms both practically and under Item 3.

33 The authors are unaware of any recent mass franchisee actions that have proceeded under the multidistrict litigation (MDL) rules.

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V. PROCEDURAL ASPECTS OF PROSECUTING MASS ACTIONS

For the franchisee lawyer, who is presented with a number of franchisees eager to press actions, a choice must be made in the form of action that the case takes. The form may largely be dictated by the franchise agreement – for example, arbitration clauses are typically enforceable in accordance with their terms – but other alternatives may be viable, including class actions, multi-plaintiff actions, and actions by associations. The franchisor lawyer, likewise, must consider the procedural tools available to a defendant to achieve the strategic goals. The relative merits of each of these types of actions are considered below.

Class Actions

Class actions are, in general, difficult to prosecute in franchise cases for a variety of reasons. A class action must pass a number of hurdles in order to be certified. Specifically, in order for a class action to be certified, it must be shown that: (a) the number of potential plaintiffs is too numerous to make adjudication of individual claims practicable; (b) there are issues of law and fact that are common to all class members; (c) the claims of the representative named plaintiff are typical of the class; and (d) the named plaintiff will adequately represent the class.34 In addition to these threshold requirements, it must be shown that “questions of law or fact common to class members predominate over any questions affecting only individual members” and that a class action is superior to other methods of adjudication.35

Further, in 2005 Congress changed the landscape by enacting the Class Action Fairness Act (CAFA).36 CAFA amended the federal diversity statute, 28 U.S.C. § 1332, by adding a subsection providing federal courts with original jurisdiction over class actions when “the number of plaintiffs in all proposed plaintiff classes exceeds one hundred;37 any member of the plaintiff class is diverse from any defendant;38 and the aggregate of the claims of individual class members exceeds $5,000,000.00, exclusive of interest and costs.”39 In addition to amending the general jurisdictional requirements for federal class actions, Congress also created 28 U.S.C. § 1453 to ease the

34 Fed.R.Civ.P. 23(a).35 Fed.R.Civ.P. 23(b). Plaintiffs may also try to satisfy Rule 23(b) through seeking injunctive

relief where “the party opposing the class has acted or refused to act on grounds that apply generally to the class” under subsection 23(b)2) or, less frequently, under subsection 23(b)(1) by establishing that the prosecution of separate actions would prejudice the defendant or class members because of the likelihood of different rulings establishing incompatible standards of conduct or by adjudicating the interests of absent putative class members or preventing them from protecting their interests.

36 2005 Acts. Pub. L. 109-2, § 9, Feb. 18, 2005, 199 Stat. 14. 37 28 U.S.C.§ 1332(d)(5)(b).38 Id. at (d)(2).39 Lowery, 483 F.3d at 1194; see also Lauren D. Fredricks, Developments in the Law: The

Class Action Fairness Act of 2005, 39 Loy. L.A. L. Rev. 995, 996 (2006) (discussing CAFA); 28 U.S.C. § 1332(d)(2), (6).

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requirements of removing a case to federal court.40 This new provision has made three major changes to the general removal provision, which are: (1) eliminating the one-year time limit on removing cases; (2) making a defendant’s citizenship in the forum state irrelevant; and (3) allowing any defendant to remove the case without the consent of any other defendant.41

Although CAFA extended federal subject matter jurisdiction, CAFA contains exceptions which enumerate circumstances in which federal courts should not exercise jurisdiction.42 Generally, these exceptions are “designed to keep purely local matters and issues of particular state concern in the state courts . . . .”43 These include the "home state" exception and the “local controversy” exception, where federal courts are required to decline to exercise jurisdiction over cases that meet certain elements showing primarily a state issue or state specific parties are in play. Under a third exception, federal courts can decline to exercise jurisdiction “in the interest” of justice when more than one-third but fewer than two-thirds of the aggregate class members and the “primary defendants” are citizens of the forum state.44

Ambiguities in the statute have created confusion regarding the way to compute the threshold amount45 and with respect to whether the federal court can, should or must retain jurisdiction after post-removal events change the landscape, like for example, after a denial of class certification or loss of diversity.

In franchise cases, the ones that have moved forward as a class action have typically been based upon contractual provisions that are identical across the class or that are based upon franchisor policies that have applied to all franchisees in the system.46

However, in recent years, most efforts to prosecute class actions on behalf of franchisees have failed at the class certification stage because of lack of commonality

40 See 28 U.S.C. § 1453; Lauren D. Fredricks, Developments in the Law: The Class Action Fairness Act of 2005, 39 Loy. L.A. L. Rev. 995, 996 (2006). Note that CAFA § 1453(b) also adopts the procedural requirements of the general removal statute, found at 28 U.S.C. § 1446.

41 See 28 U.S.C. § 1453; Lauren D. Fredricks, Developments in the Law: The Class Action Fairness Act of 2005, 39 Loy. L.A. L. Rev. 995, 996 (2006).

42 See 28 U.S.C. § 1332(d)(4), (5), and (9).43 Lowery, 483 F.3d at 1193-94.44 Robin R. Mocabee, Central Aspects of the Class Action Fairness Act of 2005, 86-Feb.

Mich. B.J. 30, 31 (2007); see also 28 U.S.C. § 1332(d)(3).45 Cappuccitti v. Direct TV, 611 F.3d 1252 (11th Cir. 2010) vacated by 623 F.3d 1180.

(Originally finding that there was no diversity jurisdiction because no individual claim exceeded the $5 million threshold but later vacated its decision in that regard.

46 See, e.g., Bird Hotel Corp v. Super 8 Motels, Inc., 246 F.R.D. 603 (D.S.D. 2007) (granting class certification when the class constituted 226 former and current franchisees because common issues predominated given the "standard form franchise agreements" and the courts finding that "proof of liability would be the same for every class member"); Little Caesar Enter. v. Smith, 172 F.R.D. 236 (E.D. Mich. 1997) (granting franchisees’ motion for class certification in anti-trust tying claims).

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or inadequacy of representation of the named plaintiff.47 Indeed, it is frequently difficult to establish commonality of legal and factual issues and predominance when franchisees have different types of contracts; franchisees are located in different states with different franchise statutes; and franchisees may have different financial situations48. In addition, when both current and former franchisees are included in the proposed class, franchisees have difficulty establishing that the name plaintiff(s) can adequately represent the interests of the entire class.

Even if the franchisees would appear to have a viable class action claim, they must be careful in selecting the class action as a method of proceeding. Bringing a class action exposes franchisees to a range of discovery and procedural motions directed solely at the class issues that will delay adjudication of the underlying claims. For that reason, the benefits of a class action should be weighed against available other alternatives.

But the leverage afforded to franchisee plaintiffs when they prevail in obtaining certification of a class is substantial. Generally speaking, a franchisor faced with the substantial economic and system-based impact of an adverse ruling in the class context will less frequently be willing to risk a loss and will be much more willing to settle.

Multiple-Franchisee Actions

Actions in which ten or more franchisees bring suit against the franchisor may typically have the characteristics of “mass franchisee litigation.” Actions with as many as five dozen franchisees have been carried out and resolved successfully.49 The principal advantages and disadvantages of multiple-plaintiff actions are quite different from those of class actions or association actions.

First, the prospect of multiple franchisees presents issues of jurisdiction and venue. If there is no forum-selection clause in the franchise agreement, the franchisees are free to pick a venue of their own, but in doing so, they may compromise the ability to sue all potential defendants by obtaining jurisdiction over them. Another factor that should be considered is whether the action can proceed in state or federal court. Some franchisees may share residence in a state with a franchisor, thereby making it possible to bring the action in state court without the franchisor having the ability to remove the

47 MMO Enter., Ltd. v. Baskin Robbins, USA Co., Bus. Franchise Guide (CCH) ¶ 11,732

(N.D. Ohio 1999); Aamco Automatic Transmissions, Inc. v. Taybre, 67 F.R.D. 440 (E.D. Pa. 1975); Thompson v. T.F.F. Companies, Inc., 64 F.R.D. 140 (N.D. Ill. 1974).

48 Further, the tendency for franchisees to assert pre-contract formation fraud and financial performance representation claims creates significant challenges to establishing these required rule 23 elements given that most claims with respect to these allegations involve highly individualized analysis, including reasonable reliance and specific alleged conversations.

49 See, e.g., Cottman Transmission Systems, LLC v. Kershner, 2008 WL 383380 (E.D. Pa. Feb. 11, 2008)(granting and denying motion to dismiss in action that consolidated cases brought against franchisor from around the country).

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case to federal court. This may have substantive or procedural advantages, depending upon the jurisdiction at issue.

Multiple-franchisee claims also raise the question of choice of law. While most modern franchise agreements contain provisions requiring application of the law of the franchisor’s principal place of business, state franchise laws may override such a choice of law. Often, these state’s franchise statutes will have causes of action not available to franchisees from other states. The result is that there may be similar claims under separate state statutes in the same action. This, in itself, is not a downside to the franchisee except that it makes prosecution of the claim more difficult and different state laws (including specifically those with pro-franchisee relationship laws and anti-waiver provisions) may compromise the ability to join or keep all the plaintiffs together such that a court may find the joinder of claims by non-resident franchisees to be subject to dismissal. The fact of different claims and the applicability of different law to different franchisee claims may greatly enhance the likelihood that the franchisor will be able to sever the claims or resist consolidation. Or, franchisees from those states may need to sacrifice those claims to stay together.

Procedural Rules

Franchisees and franchisors confronting multi-franchisee actions should be familiar with the rules of civil procedure providing for joinder of claims and parties, consolidation and severance. These tools governing when franchisees can join together and when franchisors are able to prevent them from doing so will dictate in many respects the options available to the parties to achieve their strategic goals. While one must look to the procedural rules of whatever court the case(s) are in, most state court rules are similar to the federal rules of civil procedure in this regard.

Federal Rule of Civil Procedure 20(a) governs what parties may be joined in an action,50 while Federal Rule of Civil Procedure 21 grants trial courts the power to add or

50 Federal Rule of Civil Procedure 20(a) provides:(a) Persons Who May Join or Be Joined.

(1) Plaintiffs. Persons may join in one action as plaintiffs if:(A) they assert any right to relief jointly, severally, or in the

alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences; and(B) any question of law or fact common to all plaintiffs will arise in

the action.(2) Defendants. Persons . . . may be joined in one action as

defendants if:(A) any right to relief is asserted against them jointly,

severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences; and(B) any question of law or fact common to all defendants will arise

in the action.

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drop a party, or to sever a claim from an action.51 Generally, Rule 21 is invoked to sever parties improperly joined under Rule 20. With respect to both rules, trial courts have broad discretion in deciding whether to permit parties to be added or to sever a party.52 Joinder is strongly encouraged to effectuate the purpose of Rule 20 – to promote judicial efficiency – but it is only appropriate if the requirements of Rule 20(a) are met.53 Those requirements are: "'(1) the plaintiffs have a right to relief arising out of the same transaction, occurrence, or series of transactions or occurrences; and (2) there exists some question of law or fact common to the'" parties.54 "Rule 20 does not require precise congruence of all factual and legal issues; indeed, joinder may be permissible if there is but one question of law or fact common to the parties."55 Meanwhile a trial court's discretion to sever a claim under Rule 21 is limited to claims that are distinct and separate from other claims.56

Federal Rule of Civil Procedure 42 allows a trial court to consolidate or join matters or actions that involve common questions of law or fact.57 Rule 42 has been characterized as the "'codification of the trial court's inherent managerial power to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.'"58 The trial court assesses factors such as:

51 Federal Rule of Civil Procedure 21 provides that "[m]isjoinder of parties is not a ground for

dismissing an action. On motion or on its own, the court may at any time, on just terms, add or drop a party. The court may also sever any claim against a party."

52 Servpro Indus., Inc. v. Schmidt, 905 F.Supp. 470, 473 (N.D. Ill. 1995); Jackson Hewitt, Inc. v. DJSG Utah Tax Serv., LLC, No. 2:10-cv-05108 (DMC)(JAD), 2011 WL 601585, at *3 (D.N.J. Feb. 17, 2011) (citing Boyer v. Johnson Matthey, Inc., No. 02-8382, 2004 WL 835082, at *1 (E.D. Pa. 2004)).

53 Id. (citing Hagan v. Rogers, 570 F.3d 146, 152 (3d Cir. 2009) and Lopez v. City of Irvington, No. 05-5323, 2008 WL 565776, at *2 (D.N.J. Feb. 28, 2008)).

54 Jackson Hewitt, 2011 WL 601585, at *3 (quoting Cumba v. Merck & Co., Inc., No. 08-2328, 2009 WL 1351462, at *1 (D.N.J. May 12, 2009)).

55 Mesa Computer Util., Inc. v. Western Union Computer Util., Inc., 67 F.R.D. 634, 637 (D. Del. 1975).

56 Directbuy, Inc. v. Next Level Marketing, Inc., No. 2:09 cv 84, 2011 WL 4852467, at *3 (N.D.Ind. Nov. 22, 2010) (citing Rice v. Sunrise Express, Inc., 209 F.3d 1008, 1016 (7th Cir. 2000)).

57 Federal Rule of Civil Procedure 42 provides:(a) Consolidation. If actions before the court involve a common question

of law or fact, the court may:(1) join for hearing or trial any or all matters at issue in the actions;(2) consolidate the actions; or(3) issue any other orders to avoid unnecessary cost or delay.

(b) Separate Trials. For convenience, to avoid prejudice, or to expedite and economize, the court may order a separate trail of one or more separate issues, claims, crossclaims, counterclaims, or third-party claims. When ordering a separate trail, the court must preserve any federal right to a jury trial.

58 L & D Ventures, LLC v. Garlic Jim's Franchise Int'l, Inc., Nos. 8:08-cv-1128-T-33TGW, 8:08-cv-2429-T-33EAJ, 2009 WL 331595, at *1 (M.D.Fla. Feb. 10, 2009) (quoting Hendrix v. Raybestos-Manhattan, Inc., 776 F.2d 1492, 1495 (11th Cir. 1985)).

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Whether the specific risks of prejudice and possible confusion are overborne by the risk of consistent adjudications of common factual and legal issues, the burden on the parties, witnesses and available judicial resources posed by multiple lawsuits, the length of time required to conclude multiple suits against a single one, and the relative expense to all concerned of the single-trial, multiple-trial alternatives.59

The manner in which the trial court ultimately balances these factors will dictate whether it will consolidate various matters either on motion or sua sponte. And, parties should also bear in mind the availability of consolidation or joinder for pretrial purposes and not trial, which can achieve many of the effectiveness without the impermissible prejudice. Another factor that can play into the equation is whether the fact finder will be a judge or a jury. Most judges believe the risk of prejudice to the franchisor of cumulative otherwise inadmissible evidence from different franchisees is much greater if the case will be tried to a jury. Thus, a franchisor intending to move to sever joined plaintiffs and to strike a jury demand needs to be mindful of the impact those motions may have each on the other.

In the circumstance when multiple actions have been filed in multiple jurisdictions, there is an added layer relating to venue. There are several procedural rules governing dismissal or transfer for improper or inconvenient venue. Generally, before consolidating cases, the cases must be in the same venue, so parties must satisfy those rules through motions practice in order to proceed with various cases together.

Contractual Waivers Bars and Arbitration

A significant procedural issue in mass actions, both multiple franchisee cases and class actions, is the effect and enforceability of waivers or bars. Many franchise agreements contain prohibitions on franchisees' bringing class actions or joining together to advance claims against the franchisor. The typical challenges to enforcement of these provisions include: ambiguity such that the franchisee did not agree to waive the procedural right; unenforceability based on unconscionability or public policy; and questions as to whether the clause improperly invades the court’s power to manage its docket. Several recent cases (both in the franchise context and in other contexts and in conjunction with an arbitration clause and not) have tackled these issues with varying results.

For example, two courts reached different results relating to the same class action bar in the Quiznos franchise agreement. In Bonanno v Quizno's Franchise Company60 the U.S. District Court for the District of Colorado denied class certification to a group of Quiznos franchisees by enforcing the class action bar and rejecting the various challenges to enforcement of the same. The franchisees argued against

59 Id. at *2.60 Bonanno v. Quizno’s Franchise Co LLC, 2009 WL 1068744 (D. Colo. Apr. 20, 2005).

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enforcement of the clause on numerous grounds, including unconscionability and public policy under the “small sum” theory and assertion that the franchisees were “consumers” entitled to greater protection, as well as an argument that the franchisees did not knowingly and voluntarily waive their right to proceed on a class basis under a subjective standard. The court rejected each argument and then sua sponte raised the question whether the clause improperly invaded the province of the court. She rejected this argument largely on the basis that courts lack the power to certify a class unless a party moves for class certification and because rule 23 is not compulsory.61

A few months later, the U.S. District Court for the Western District of Pennsylvania relied on this consideration and refused to enforce the same class action bar in the context of a motion to dismiss in Martrano v. Quizno's Franchise Company.62 While the Martrano Court elsewhere in the opinion indicated an unwillingness to enforce any contract limitation provisions on the basis that the allegations in the complaint, if true, could result in a finding that some or all of the franchise agreement was unconscionable, the court did not invoke this theory in refusing to enforce the class action bar. Rather, that court held that the enforceability of a class action waiver or bar is governed by Federal, not state law, and that under Federal law an agreement between the parties preventing the use of a procedure like a class action may improperly invade the province of the court to control its own docket. The Court compared such provisions to parties' venue agreements in the context of a motion to transfer venue, where federal courts are to consider the parties agreement as just one of several factors under the federal venue statute. And the Court concluded the weight a court should afford the parties' agreement is less than in the venue context; given the Court's fear that enforcing a class prohibition "could potentially force this and other courts to hold separate trials of dozens, or hundreds, or even thousands of cases involving extensively overlapping issues."

Enforcement of waivers/bars often turns on unconscionability analysis. Unconscionability is a well-established contract defense often invoked in the franchise context.63 The law relating to unconscionability depends on which jurisdiction's law governs, which can depend on many variables, including whether the case is in federal court under diversity subject matter jurisdiction or whether there is a choice of law

61 Id. at *8 (stating "there is nothing jurisdictional about Rule 23" and "by enforcing the class

action bar at issue, the Court will not improperly alter the procedural mandates, as would be the case if, for example, the question before the Court was the enforceability of a contractual bar on compulsory counterclaims").

62 Martrano v. Quizno’s Franchise Co. LLC, 2009 WL 1704469 (W.D. Pa June 15, 2009).63 Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir. 2006) (citing Indep. Ass'n of

Mailbox Ctr. Owners, Inc. v. Superior Court, 133 Cal.App.4th 396, 407, 34 Cal.Rptr.3d 659 (2005)); see also e.g. Sebascodegan Enter., LLC, v. Petland, Inc., 647 F.Supp.2d 71, 76 (D.Me. 2009).

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provision.64 The prevailing view of most jurisdictions is that a party challenging a contract provision must establish both procedural and substantive unconscionability in order for a court to find a contract or specific provision is unconscionable, although not to the same degree. 65 "'Procedural unconscionability concerns the formation of the agreement and occurs when no voluntary meeting of the minds is possible[,]' while substantive unconscionability 'goes to the terms of the contract themselves.'"66 Moreover,"[p]rocedural unconscionability involves 'oppression or surprise due to unequal bargaining power' while substantive unconscionability focuses 'on overly harsh or one-sided results.'"67 The very inconsistent results from cases evaluating unconscionability challenges show that it is difficult to predict the outcome in any given case and that this analysis is largely fact driven.

In addition to unconscionability, public policy is another available argument under most states and federal law against enforcement of a contract provision. An argument courts have found persuasive in refusing to enforce a class action waiver are so-called "small sum" cases. The basic premise in these cases is that if the circumstances make it such that enforcement of the clause will effectively preclude claimants from seeking to

64 Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir.

2010) (stating that a federal court sitting in diversity should apply the forum state's law relating to unconscionability and that California's law requires the court to apply California law even if there is a choice of law provision to the contrary if certain tests are met); but see Portnoy v. Dollar Financial Corp., Bus. Franchise Guide (CCH) ¶ 14,252 (C.D. Cal. 2009) (holding that court would apply the parties’ choice of law in analyzing plaintiff franchisee’s unconscionability challenge to an arbitration clause and finding that under Pennsylvania law, the arbitration clause calling for venue in franchisor’s home state of Pennsylvania was not unconscionable).

65 See Nagrampa, 469 F.3d at 1280; see also Roberts v. Synergistic Intern., LLC, 676 F.Supp.2d 934, 951-53 (E.D. Cal. 2009) (requiring both procedural and substantive unconscionability to be present for franchise agreement's mandatory arbitration agreement unenforceable); Sebascodegan., 647 F.Supp.2d at 76-77 (party alleging that franchise agreement is unconscionable bears the burden to establish both procedural and substantive unconscionability); Van Voorhies v. Land/home Financial Serv., No. CV095031713S, 2010 WL 3961297, at *4 (Conn. Super. 2010) (unconscionability has both a procedural and substantive component); but see R & L Ltd. Inv., Inc. v. Cabot Inv. Properties, LLC, 729 F.Supp.2d 1110, 1114-15 (D.Ariz. 2010) ("The Arizona Supreme Court has held that 'a claim of unconscionability can be established with a showing of substantive unconscionability alone, especially in cases involving . . . limitation of remedies.' Thus, a finding of either substantive or procedural unconscionability is sufficient to make the arbitration clause unenforceable.") (Internal citation omitted.).

66 Sebascondegan Enter., 647 F.Supp.2d at 76 (quoting Ball v. Ohio State Home Serv., Inc., 168 Ohio App.3d 622, 861 N.E.2d 553, 555 (2006)); see also Nagrampa, 469 F.3d at 1280 (stating that procedural unconscionability focuses on oppression or surprise, while substantive unconscionability focuses on whether the clause or agreement is overly harsh or creates a one-sided agreement).

67 Bridge Fund Capital Corp., 622 F.3d at 1004; see also Sebascodegan Enter., 647 F.Supp.2d at 76 (describing substantive unconscionability as contractual terms that "are unfair and commercially unreasonable").

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vindicate a statutory right, the court will refuse to enforce the clause.68 To date, thisargument has typically not been successful in the franchise context because the amount at issue in most franchise cases is not a “small sum.”69 However, practitioners should note the arguments and evidence that have carried the day in successfully resisting class waivers, which suggest that when a small amount is at issue, a statutory right/claim (like under anti-trust statutes) is in play, and the case will be very expensive to prosecute, a group of franchisees may be able to avoid a class action wavier.

Arbitration clauses add another variable. Generally, as noted above, arbitration clauses are enforced according to their terms, at least when they are governed by the Federal Arbitration Act (FAA), which almost all franchise agreement arbitration clausesare. The FAA, however, contains an express exception with respect to traditional grounds to revoke a contract or provision within a contract, “[an agreement to arbitrate] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.70 Therefore, if the parties agree in their arbitration clause that they will not proceed on a class wide or consolidated basis, courts will enforce that unless a recognized basis to revoke a contract exists.

At least until recently, whether an arbitration clause that is silent permits a claimant to proceed on a class or consolidated basis has been unclear. In 2003 the United States Supreme Court decided a case involving class-wide arbitration that left significant questions. The Court had indicated that the issue it would decide is "whether the Federal Arbitration Act, 9 U.S.C. S 1 et seq., prohibits class-action procedures from being superimposed onto an arbitration agreement that does not provide for class action arbitration."71 The court did not decide that issue, however, but rather ruled on the narrower issue of who should decide whether the parties had agreed to class arbitration and held this question should be decided by the arbitrator. But, the language and context created some confusion and some courts and the American Arbitration Association reacted in a way to suggest that silence in an arbitration agreement meant a claimant could pursue an arbitration on behalf of similarly situated persons.

Then in 2010 the Supreme Court ruled in Stoltz-Neilsen72 that under the FAA, an arbitration clause that does not expressly allow proceeding as a class action does not permit the use of a class action mechanism in the arbitration. The decision did not relate to and, therefore did not address, the question of whether a group of franchisees could proceed on a consolidated basis under the FAA if the clause is silent. But many have suggested that this ruling also signaled a favorable view of enforcing class action waivers.

68 Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006); American Express Merchants’ Litigation v. American Express Travel Related Services, ___ F.3d ___, 2011 WL 781698 (2nd Cir. March 8, 2011).

69 See, e.g., Bonanno, 2009 WL 1068744, at * 21. 70 9 U.S.C. § 2.71 Green Tree Financial Corp. v. Bazzle, 2002 WL 32101094 (U.S. 2002); see also 539 U.S.

447 (2003).72 Stolt-Nielsen, 130 S.Ct. 1758 (2010).

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Recently, however, the Second Circuit squarely rejected the argument that Stoltz-Neilsen impacted the analysis with respect to enforcing a class action waiver in an agreement to arbitrate. In American Express Merchants’ Litigation v. AmericanExpress Travel Related Services,73 the court repeated its earlier ruling that the class action waiver contained in the arbitration clause in the merchant contracts was unenforceable on public policy grounds. The court held that plaintiffs proved enforcingthe clause would effectively preclude any action seeking to vindicate the statutory right (under federal anti-trust law). The plaintiffs presented expert testimony to the effect that the costs to pursue made it unlikely any single merchant would pursue a claim on an individual basis.74

Association Actions

Actions brought by associations of franchisees in the name of and on behalf of franchisees can be effective ways for prosecuting claims for forward-looking relief, such as declaratory relief or injunctive relief.

Association standing is available under Article III of the U.S. Constitution and, if the elements are met, allows an association to bring a complaint on behalf of its members. Associations can have standing to bring actions on behalf of their members if the following requirements are fulfilled: (a) the members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the association’s purpose; and (c) neither the claim asserted, nor the relief requested requires participation of the members in the lawsuit.75

Thus, association actions have the advantage that they do not require franchisees to reveal themselves as members of the association; and the association may not be bound by mediation or arbitration clauses – although this requirement has not yet been litigated. Association actions are particularly useful when franchises are concerned that they will not be treated properly by the franchisor or that if it is discovered that they support the action, the franchisor will take retaliatory action.

73 ___ F.3d ___ 2011 WL 781698 (2nd Cir. Mar. 8, 2011).74 Id. The plaintiffs’ expert opined that the amount at issue per class member would be

$12,850 (trebled at $38,549) and even with fee-shifting provisions of the Clayton Act, this amount would be insufficient for a plaintiff or attorney to pursue the claims on an individual basis given the very significant costs to pursue the complicated anti-trust claims.

75 Burger King Corp., 715 F.Supp.2d at 1238 (quoting Hunt v. Washington State Apple Advertising Comm’n, 432 U.S. 333 (1977) and finding association of Burger King franchisees had associational standing to challenge franchisor’s authority to impose maximum prices for certain items).

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VI. OTHER CONSIDERATIONS

A. Ongoing Relations with Franchisees during Mass Franchisee Litigation and Continued Operation of the System.

A number of mass franchisee disputes will involve franchisees that continue to operate within the franchisor’s system. While this necessitates that regular interaction continue to occur with franchisees that are a party to the dispute, franchisors should take steps to make certain they do not make a bad situation worse.

Most if not all jurisdictions restrict communications by lawyers about the subject matter of a representation with a person the lawyer knows to be represented by another lawyer in the matter.76 Obviously, franchisor’s in-house counsel (and outside counsel, for that matter) should be aware that the franchisees who are parties to the dispute are represented by counsel and care should be taken to avoid even the appearance of impropriety in this regard. Counsel should be particularly aware of this prohibition subsequent to the certification of a class, when it is most likely that franchisees who have not been directly involved with a dispute will attempt to contact a franchisor’s legal department seeking clarification. Any such communication should be brought to the attention of the franchisees’ counsel, who could then contact the class members at their discretion.

Also, it is essential that the franchisor educate and instruct its personnel to not discuss a dispute with franchisees or attempt to influence franchisees’ decisions with regard to the dispute in any way. Further, the franchisor’s conduct toward the franchisees in their day to day operations should be strictly in accordance with the applicable franchise agreement and policies and procedures. A mass franchisee dispute is difficult enough without the added complication of claims of retaliation, discrimination, or lack of good faith arising during the dispute proceedings. Additional oversight of franchisor personnel in this regard is advisable.

B. Settlement Issues

Settlement of multi-franchisee actions presents several unique issues. For example, if the franchisor negotiates and agrees to settle for a lump sum to the entire group, how damages should be awarded between different franchisees can be complicated. The most effective method for allocating damages, short of a simple per-capita calculation is to provide the franchisees with sufficient information on theories of measure of damages; to have franchisee financials run through a single accountant to ensure consistency; and then to allow the franchisees to determine a formula for allocating damages. This formula has worked in the past.

76 American Bar Association: Model Rules of Professional Conduct, Rule 4.2.

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C. Press and Public Relations

David versus Goliath is a compelling storyline. The nature of the franchise relationship dictates that the franchisees will always play the role of David, and thus will typically hold the more sympathetic position for the media. A mass franchisee dispute that draws publicity can pose additional challenges for a franchisor, particularly considering the importance a franchisor must place on protecting the reputation of its brand. Of course, this challenge is only intensified by the fact that the internet makes it possible for a franchisee to greatly amplify its message. It is vital that a franchisor be prepared in advance to deal with media and public relations issues because 1) a franchisor typically will not have a long time between a request for comment and the publication of a story, and 2) once a statement is made to the press or public, it cannot be taken back. A franchisor’s goal should be to proactively protect its brand’s reputation while avoiding fighting the dispute in the media.

Unfortunately, a simple “no comment” likely does nothing more than invite suspicion and certainly does nothing to proactively manage the reputation of a franchisor’s brand. Clearly, each mass franchisee dispute will vary, but taking the following steps to managing media and public relations are generally advisable.

First, the franchisor needs to determine the message it wants to send. Making such a decision typically should involve the franchisor’s management, inside and outside counsel, and, if necessary or available, public relations specialists. It is advisable to avoid relying on public relations specialists for “spin” because the public is rather adept at recognizing it as such. However, much can be lost in translation from the time a statement is made until a story is published, and a public relations specialist may be helpful in that regard, if the need should arise.

Second, it is advisable to appoint one or more “point persons” to deal with all media and public relations requests. Such person(s) will need to have a thorough understanding of the issues underlying the dispute and have the ability to stay on the message. It should go without saying that such person(s) should never make admissions or attempt to argue the dispute in the media.

Finally, franchisor personnel need to be instructed, early and often, to direct all requests for comment or communication to the point person(s). This includes franchisor management, employees, and outside counsel (including local counsel, if applicable).

Converse to the challenge that press and public relations pose to a franchisor is the leverage or opportunity they may provide to franchisees. Franchisee counsel should certainly give thought to using the media to the advantage of their clients. However, franchisee counsel should contemplate the timing of taking such action. Frequently, the leverage of bad press for a franchisor is expended once that course is pursued and sometimes the threat is worse than the actual damage.