Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—11th Cir.: PODS franchisees entitled to return of royalties, (Jul 9, 2015)

By Greg Hammond, J.D.

Moving and self-storage container solution company PODS Enterprises, Inc. must reimburse certain franchisees for royalties exacted based on cross-country revenues, the U.S. Court of Appeals in Atlanta has affirmed. The lower court properly determined the franchise agreements’ definition of “net sales” was ambiguous, and extrinsic evidence revealed representatives for both parties clearly intended that cross-country revenues be deducted from net sales prior to calculating PODS royalties (Coyote Portable Storage, LLC v. PODS Enterprises, Inc., July 8, 2015, Hinkle, R.).

PODS, or “portable on demand storage,” offers moving and self-storage container solutions. Three commonly-owned franchisees—including Coyote Portable Storage, LLC, Desert Portable Storage, LLC, and Cactus Portable Storage, LLC—filed suit against PODS, bringing claims for the return of royalties PODS exacted based on cross-country revenues; for two percent rebates Coyote and Cactus were supposed to receive under their franchise agreements; for declaratory judgment on these issues; and for attorney fees under the franchise agreements’ prevailing-party fee provisions. The district court granted summary judgment for the franchisees and awarded damages and attorney fees. PODS appealed.

Royalties. The court first noted that the franchise agreements contained two back-to-back definitions of “net sales,” which it said “could be exhibit A in a law-school class on bad drafting.” Specifically, the court found that the definitions were ambiguous, as they could be construed to mean that cross country revenues are deducted from net sales—as the franchisees claim—or that cross country revenues are added to net sales—as PODS contends. Royalties that PODS collects are calculated from “net sales.”

Due to the ambiguity of the “net sales” definitions, the court considered extrinsic evidence of the parties’ intent and concluded the record establishes beyond any dispute that representatives on both sides who negotiated the agreements and attempted to commit their agreement to writing intended to exclude cross-country revenues from the definition of “net sales.” There were emails confirming the parties’ intent, and PODS did not begin charging royalties on cross-country revenues until more than a year after entering into the agreements at issue. The district court therefore properly granted summary judgment in favor of the franchisees for the return of royalties PODS exacted on cross-country revenues.

Rebates. Coyote and Desert were also entitled to two percent rebates, pursuant to the terms of their franchise agreements, the court found. PODS admitted that the section entitled the two franchisees to the rebates, but claimed that the failure to delete the section was a scrivener’s error. The court rejected this argument, however, finding that the parties’ representatives that negotiated the addendum on both sides testified they intended to retain the two percent rebate provision. Without any contrary evidence, the court affirmed that Coyote and Desert were entitled to the rebates.

Procedural defenses. PODS claimed that Coyote and Desert are barred by releases they executed in June 2007. However, the language of the releases looked back, not forward, the court noted. Coyote and Desert were consequently entitled to rebates due for periods after the date of the releases, which is what the two franchisees are seeking.

Lastly, PODS argued that claims for payments due more than 12 months before the date of the franchisees letter giving notice of their claims are barred, pursuant to the agreements’ notice provision. At most, the notice defense would affect Cactus’ claim for a return of cross-country royalties for the period prior to January 2007, the court found. Although the notice provision was valid, the court did not enforce it, finding that PODS was not prejudiced by the alleged failure to give notice. Rather, enforcing the notice provision would give PODS an undeserved windfall, the court concluded. The lower court’s summary judgment order was therefore affirmed.

The case number is 13-14996.

Attorneys: Scott M. Ratchick (Chamberlain Hrdlicka White Williams & Aughtry), Christopher Scott Badeaux (The Badeaux Law Firm, LLC), and Irene B. Vander Els (Hartman Simons & Wood, LLP) for Coyote Portable Storage, LLC, Desert Portable Storage, LLC, and Cactus Portable Storage, LLC. Lewis Johnson Conwell (DLA Piper LLP), David A. Terry (Huff Powell & Bailey, LLC), and Laura Theresa VanderLaan (Littler Mendelson, PC) for PODS Enterprises, Inc.

Companies: PODS Enterprises, Inc.; Coyote Portable Storage, LLC; Desert Portable Storage, LLC; Cactus Portable Storage, LLC

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