A Washington-based franchisee recently brought suit in New York against its franchisor to resist installing computer software that the franchisee claimed was sluggish and inferior to the old software. JDS Grp., Ltd. V. Metal Supermarkets Franchising Am., Inc., No. 17-CV-6293 (MAT), 2017 U.S. Dist. LEXIS 94779 (W.D.N.Y. 2017). Metal Supermarkets Franchising America (MSFA) had spent three years and at least a million dollars developing a software called “MetalTech” to replace the “Metal Magic” software at its franchisee metal component stores. However, JDS, the franchisee, found the software bulky, inefficient, and time-consuming to use. JDS as well as 6 other stores claimed that the software lost them business. MSFA’s position was that 78 of its 86 stores that were currently using the software experienced a 7.4% average increase in sales following the adoption of the MetalTech software. JDS sent a formal complaint to MSFA about the software before negotiating a franchise agreement renewal that included a clause that gave MSFA the right to require JDS to use any software it designed or designated.
The lawyers for JDS filed a motion for preliminary injunction against MSFA based on alleged violations of the Washington State Franchise Investment Protection Act (FIPA). A preliminary injunction requires the movant to show that they would likely succeed on the merits of the case, and that they would suffer irreparable harm without an injunction, so JDS had to make a strong showing under FIPA to get its relief. JDS argued that it was forced to sign the agreement, that forcing them to buy from an approved source was unnecessary and unlawful, and that forcing them to adopt the MetalTech software was unreasonable and unnecessary, based on section 2(b) and 2(h) of FIPA. The judge dismissed each allegation, stating that unlawfully forcing a purchase from an approved source required violation of antitrust laws, and no evidence of that was shown to the court. Further, the court stated that although §2(h) made it unlawful to “impose on a franchisee…any standard of conduct unless [it is] reasonable and necessary,” it was not meant to force the court “to undercut a franchisor’s business judgment in establishing standards for its franchise system,” and refused to find a violation of §2(h).
By deferring to a franchisor’s business judgment, this case seriously limited the remedies a franchisee has to fight its franchisor’s incompetence. FIPA’s broad language allowing a franchisee to challenge “any standard of conduct” seems designed to prevent poor business decisions that were neither made nor approved by the franchisee from eliminating a franchisee’s investment. However, when the court held that FIPA requires deferral to the franchisor’s business judgment, they gutted the law of all purpose and effect. By closing its doors to a flood of litigation, the court made it more likely that small franchisees to go underwater.
JDS’s case was over when they signed their franchise contract, but the effect of their case will be felt by franchisees for years to come.