Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Cal.: Former franchisee seeks relief from post-termination fees, (Jun 21, 2016)

By Michael Menzhuber, J.D., LL.M.

Fantastic Sams Salons was not entitled to any fees from a former franchisee or its guarantors after the franchisee ceased to operate because of continuing operating losses, according to a complaint filed in the federal district court in San Jose, California (Capelli Enterprises, Inc. v. Fantastic Sams Salons Corporation, June 17, 2016).

Capelli Enterprises, Inc. and it guarantors entered into a franchise agreement to operate a Fantastic Sams hair salon. The franchise agreement provided that Sams would receive a weekly license fee and weekly national advertising fee. Prior to the expiration of the ten-year term provided for in the franchise agreement, the franchise was closed because it was continually losing money. Shortly after closing the business, the plaintiffs received a written demand from Sams to collect the weekly fees purportedly owed under the franchise agreement.

The complaint alleges that Sams was obligated, under paragraph 8(d) of the franchise agreement, "to maintain and enhance the reputation and trade demand of the Fantastic Sams System" and "preserve and increase the goodwill inherent in the marks." The complaint also alleges that the majority of Fantastic Sams salon franchises in the area have closed since the plaintiffs entered into the franchise agreement and that Sams has failed to perform its mandatory reputation and trade/goodwill obligations.

The complaint further claims that Sams is not entitled to any weekly fees upon termination of the franchisee because the obligation to pay such fees, pursuant to section 12(d)(5) of the franchise agreement, continues for only as long as the plaintiffs continue to use Sam’s marks, which the plaintiffs stopped by closing the business, and Sams was in material breach of its mandatory reputation and trade and goodwill obligations.

The complaint seeks a declaratory judgment that the plaintiffs are not liable for any weekly fees: (1) based upon the unambiguous language of section 12(d)(5) and that any ambiguity in section 12(d)(5) be construed in favor of the plaintiffs; (2) because Sams breached the mandatory covenants of paragraph 8(d); or (3) because the measure of damages constituted an impermissible penalty, especially considering the numerous post-termination obligations imposed on the plaintiffs. The complaint also seeks a declaratory judgment that the plaintiffs’ claims fall within the broad exclusionary clause of the arbitration provision of the franchise agreement.

The plaintiffs’ prayer for relief seeks: (1) declaratory relief; (2) injunctive relief, enjoining Sams from instituting or maintaining an arbitral proceeding concerning the claims herein pursued by the plaintiffs; (3) attorneys’ fees and costs; and (4) any further relief that the court may deem just and proper.

The case is No. 5:16-cv-03401-NC.

Attorneys: Marc A. Eisenhart, James L. Dawson, and Nicholas G. Emmanuel (Gates Eisenhart Dawson) for Capelli Enterprises, Nameer Jalel, and Aseel Issa.

Companies: Capelli Enterprises, Inc.; Fantastic Sams Salons Corporation; Fantastic Sams Franchise Corporation

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