L. Michael Hankes  |  ATTORNEY AT LAW
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What Was the Broussard Class Action About?

This article is one of a series of articles about the Meineke System that the MDA Board of Directors has asked its legal counsel, L. Michael Hankes, to write. Mr. Hankes was lead counsel for the team of Meineke Dealers that negotiated the Meineke FTA in 1999-2000.

In a number of our past articles, we have made reference to the Broussard class action which was based upon allegations that Meineke misused funds paid by Dealers to Meineke for advertising. It has now been 15 years since the conclusion of the Broussard case, but the lessons learned from that landmark litigation are as relevant today as they were when the case was concluded in 1998.

The purpose of this Article is to provide the background of the Broussard case so that those Dealers who have joined the Meineke System since its conclusion can more fully understand the reasons for the contractual protections present in the Meineke FTA. Your FTA is unusual in the franchise world because it was negotiated in the 1999-2000 time period as a means of helping to reduce and heal the impact of the Broussard litigation on the Meineke Franchise System.

The Class Action Judgment

The facts which resulted in the filing of the class action on December 27, 1993 came to light during discussions in 1992-1993 over a new Meineke FTA. The lawsuit was based upon Meineke's misuse of the Meineke Dealers' advertising funds and secret rebates being paid to Meineke for the purchase of certain advertising services. The 55 page Second Amended Complaint filed on October 3, 1994 with the United States District Court for the Western District of North Carolina alleged that Meineke had created a separate entity which was responsible for setting up and collecting the rebates. The Second Amended Complaint also alleged that Meineke used the Meineke Dealers' advertising monies to defray Meineke's own operating expenses. Moreover, Meineke kept the rebates secret and did not disclose their existence or use by Meineke to new or existing Meineke Dealers.

A jury trial which began on November 6, 1996 was concluded on December 18, 1996 with a jury verdict against Meineke, New Horizons Advertising, Inc., Meineke's corporate parent GKN and three individual defendants. Following the entry of the jury verdict, Senior United States Court District Judge Robert D. Potter entered a March 6, 1997 opinion affirming the jury's verdict, entering injunctive relief against Meineke and trebling the jury's verdict. Judgment was entered against all the defendants for $598,869,788.00 plus interest at the rate of 5.67%.

Findings Made by the Trial Court

In entering injunctive relief against Meineke and the co-defendants, the Court found the following facts based upon the evidence presented at that jury trial:

  1. Under the Franchise and Trademark Agreements governing the relationship between Meineke and its franchisees Meineke was obligated to purchase and place advertisement for the benefit of its franchisees in exchange for franchise and licensing fees paid by the franchisee class members.
  2. Meineke represented that the Weekly Advertising Account ("WAC") fund created by the FTAs was a trust fund operated solely for the benefit of franchisees and a fund from which Meineke derived no profit.
  3. Meineke held itself out as, and was in fact and law, a fiduciary of the franchisees with respect to the WAC fund. Meineke was also the agent of class members for the purpose of administering the WAC fund and purchasing and placing advertising.
  4. Meineke breached its FTAs and breached its fiduciary duty to the class members by setting up a corporation called "New Horizons" to purchase and place advertising for the franchisees and then charging additional fees and commissions against the WAC fund for performing tasks it was already obliged to perform under the FTAs.
  5. Meineke breached its FTAs and breached its fiduciary duty to the class members by breaking a contract with an advertising firm retained to purchase and place advertising at Meineke's expense and paying monies out of the WAC fund to settle the resulting lawsuit.
  6. Meineke, at the direction of Defendant Smythe, breached its FTAs and breached its fiduciary duty to the class members by purchasing and placing advertising based upon whether it generated high fees or recouped commissions for New Horizons rather than its efficacy in promoting sales so as to increase booked profits and bonuses for corporate executives.
  7. Meineke breached its FTAs and breached its fiduciary duty to the class members by using WAC funds to pay Meineke's business expenses.
  8. Meineke breached its FTAs and breached its fiduciary duty to the class members by taking interest earned on WAC funds for its own benefit.
  9. Meineke breached its FTAs and breached its fiduciary duty to the class members by keeping volume discounts on advertising costs for its benefit at the expense of the WAC fund.
  10. Meineke breached its FTAs and its fiduciary duty to class members by using WAC funds to purchase advertising designed to attract new franchisees rather than generate business for existing franchisees.
  11. Meineke made false and misleading statements to the franchisees with the intent to conceal these practices and the resulting drain on the WAC fund.
  12. Meineke's activities were unfair, deceptive, and oppressive such that its practices satisfy the definition of unfair and deceptive trade practices under N.C.G.S. § 76-1.1
  13. Meineke's actions have caused significant money damages to class members and will continue to do so unless that action is enjoined.

Broussard, et al. v. Meineke Discount Muffler Shops, Inc., et al., 958 F.Supp. 1087, 1107-1108 (W.D. N.C. 1997).

The judgment entered against Meineke was at the time, the largest judgment ever entered against a franchisor in the United States.

Meineke's EDP Program

One of the issues addressed by Judge Potter in his March 6, 1997 decision was the effect of general releases obtained by Meineke from certain Meineke Dealers under its Enhanced Dealer Program (hereafter “EDP”) while the class action was pending. Meineke had offered the EDP program in an effort to reduce the number of Meineke Dealers who were part of the class action. Those Meineke Dealers who accepted Meineke's EDP program received reduced royalties and other benefits in exchange for releasing their claims in the Broussard case. Although Meineke's EDP program did have the effect of reducing the number of Meineke Dealers in the Broussard class action, it sharply divided the Meineke Franchise System into EDP and Non-EDP Dealers and created substantial friction among those two divided Dealer groups and Meineke.

The Ruling by the Fourth Circuit Court of Appeals

Meineke appealed the judgment rendered against it and its co-defendants. On August 19, 1998 after settlement discussions were stalled by a group of intervenors, the United States Court of Appeals for the Fourth Circuit reversed the judgment against Meineke. Broussard et al. v. Meineke Discount Muffler Shops, Inc. at al., 155 F.3d 331, 41 Fed. R. Serv. 3d 1151 (4th Cir. 1998). In reversing the Trial Court judgment, the Fourth Circuit Court of Appeals found that the class action certification was flawed because of the many different versions of the Meineke FTA present in the class. The court also found fault with the proof presented on a number of class-wide issues including damages.1 However, the opinion by the Fourth Circuit Court of Appeals did not disturb the factual findings of misconduct made against Meineke and its co-defendants and left the door open for subsequent lawsuits by individual franchisees. Thus, after five years of litigation which had had a devastating impact upon the Meineke chain and its ability to grow and with a now sharply divided Dealer body, Meineke was left facing more potential litigation.

The Negotiation of the Meineke FTA

By early 1999, a new group of 110 Meineke Dealers represented by the undersigned attorney and others had agreed with Meineke to defer new litigation in exchange for the collective negotiation of what is now the Meineke FTA. The Meineke Dealers were represented by a negotiating team of three Non-EDP Dealers and three EDP Dealers. The negotiations were carried out over period of approximately 14 months with agreement being reached on the terms of the new Meineke FTA in March of 2000. A settlement to put the Non-EDP Dealers on the same footing as the EDP Dealers was also agreed upon.

The new Meineke FTA was rolled out in the Spring and Summer of 2000. Following a series of National in-person question and answer sessions attended by senior Meineke officials and the undersigned attorney, the Meineke Dealership accepted the negotiated Meineke FTA. The Meineke FTA remained unchanged until October, 2010, when modifications were made to the royalty structure and certain remodeling obligations.

  1. For those interested in reviewing all of the Court's reasoning, the discussion can be found at 155 F.3d 331 (4th Cir. 1998).

This article is intended for informational purposes only and is not to be relied upon as legal advice, as individual facts and circumstances may vary.