L. Michael Hankes  |  ATTORNEY AT LAW
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Developments In Contract Negotiations With Meineke

As all of you know from all the articles that have been written in recent months, representative Meineke Dealers and the MDA have been involved in contract negotiations with senior management at Meineke for nearly a year. As many of you also know, the current Meineke Franchise agreement was negotiated by a representative group of Meineke dealers in the 1999-2000 time period. Those negotiations took place following the reversal of the approximately $590 million judgment entered against Meineke and its then corporate parent by the case entitled Broussard et al. v. Meineke Discount Muffler Shops, Inc., et al., 155 F.3d 331(4th Cir. 1998). In the period of time since the current Meineke Franchise and Trademark Agreement (hereafter FTA) was rolled out in April of 2000, there have been very few revisions or changes made to the FTA.

We have been fortunate that each time Meineke has expressed a desire to review potential changes to the franchise agreement that almost all of the members of that 1999-2000 dealer negotiation team have volunteered to represent the dealership and participate in that process again. Not only have those individuals participated in the June 2006 negotiations that took place over two days in Philadelphia, Pennsylvania, but they have attended the negotiating sessions on October 22, 2009, December 9, 2009, and most recently on June 3, 2010. John Odom, Ron Soto, Rick Wright, and Mark Zuckerman have most recently been joined by Chris Schmitz, the current MDA president, and all of them deserve great credit for their commitment to the greater good of the Meineke dealership and for the skill and expertise that they are able to bring to the negotiating table.

As noted, there have been a number of articles already written about the negotiations that have taken place in Trenton, New Jersey and Charlotte, North Carolina over the course of the past year. One of the focal points of those negotiations has been the subject of blended royalty rates. The Meineke FTA is unusual because the same dealer negotiation team that remains in place today had the vision to anticipate changes in the automobile after market more than ten years ago when we were negotiating the terms of the current Meineke FTA. While it may be bothersome for those of you who are responsible for entering the appropriate royalty rate for each of the services which you deliver to the public, that royalty rate structure was not only ahead of its time but very likely enabled some Meineke owners to stay in business given the precipitous drop in the exhaust, brake, and shock components of the Meineke business model.

This article will focus on two of the subjects of the current negotiations which include the blended royalty rate issue and the subject of liquidated damages. We sought input from the dealer body as to important issues for discussion and the one subject that was on the minds of most dealers was the reduction of royalty and advertising fees. Liquidated damages do not currently exist in the Meineke FTA and would allow Meineke to recover royalty and advertising fees going into the future if a dealer is terminated or closes his Meineke shop prior to the end of the franchise term.

In June of 2006, our negotiating team spent two days discussing the concept of the blended royalty rate. At that time, Meineke was already experiencing a decline in exhaust, brakes, and shock service revenues. Tom Suhulnick, who worked with us as part of our team at that time, was able to review the numbers for us on his laptop. At the end of those negotiations, the dealer negotiating team offered to Meineke a blended royalty rate of 5% which Meineke declined.

In October 2009, when we began the most recent round of negotiations, Meineke asked us for a 5% blended royalty rate. Meineke also wanted to impose a 25% penalty for late payment. We asked Meineke for a separate consideration that would reduce the advertising contribution which was a burden for many dealers. We believed that a reduction in the advertising contribution coupled with some sort of spend back situation was warranted, especially given the necessary decline in historical spending in Yellow Pages advertising.

As the negotiating team was getting ready to board their flights to Charlotte, a last minute agenda was circulated. The agenda indicated that Meineke wanted to discuss the blended royalty rate but did not indicate what proposal Meineke would make1.

When we began our discussions on June 3, 2010, Meineke told us that it not only wanted the five percent blended royalty rate, but also wanted to impose a rate of 5.25%. The .25% could be credited back to the dealer upon timely payment. We had significant discussions during that day about an advertising spend-back program but we were impeded by the lists of Meineke’s demands about which Chris Schmitz has written, which included significant contract changes that do not benefit Meineke dealers.

During one of our breaks, our team began examining what they were actually paying in terms of a blended royalty rate and we concluded that the dealers on the negotiating team were already paying less than a 5% flat royalty rate. We then pointed out to Meineke that we had offered Meineke a 5% flat royalty rate in 2006 that was rejected by Meineke. We also asked Meineke’s representatives to separate the advertising spend-back issue from the blended royalty rate discussion, which they refused to do. We concluded by offering to Meineke a 4.5% blended royalty rate in return for the elimination of many of the contract demands on which Meineke was insisting. Meineke refused our offer, even though some of the dealers on our negotiating team were already at an effective blended royalty rate of 4.7%.

While there was limited discussion about the subject of liquidated damages, we include that subject here because of the dramatic change such a contract clause represents from the current Meineke FTA. As noted earlier, liquidated damages clauses provide for the payment of a sum certain to Meineke for future royalty and advertising fees should any of you be terminated or close your shop prior to the end of the term. Meineke intends to put such a clause into the franchise agreement being debuted in October 2010. That liquidated damages clause will award to Meineke future or prospective royalties for a three year period following the closure or termination by Meineke of your franchise agreement prior to the end of the term.

Meineke has lost at least three decisions on its attempts to seek prospective or future royalties and advertising fees in the United States District Court for the Western District of North Carolina on different grounds. In Meineke Car Care Centers, Inc. v. David L. Duvall, C.A. No. 3:06CV180W, 2007 U.S. Dist. Lexis 27120 at 2 (W.D. N.C. April 12, 2007), the court refused Meineke’s claim because it considered such damages to be too speculative. In another case, Meineke Car Care Centers, Inc. v. L.A.C. 1603, LLC, et al., C.A. No. 3:08CV83, 2008 U.S. Dist. Lexis 33566 at 2 (W.D. N.C. April 23, 2008), Meineke’s claim for future or prospective royalties and advertising fees was denied because there was no contract right to those fees.

Most recently, Meineke lost another such prospective royalty case on multiple grounds. Meineke Car Care Centers, Inc. v. RLB Holdings, LLC, No. 3:08CV240RJC, 2009 W.L. 2461953 at 5-7 (W.D. N.C. Aug. 10, 2009). Other cases in other Courts have denied such claims on other grounds. Most recently, a case entitled Medicine Shoppe International Inc. v. TLC Pharmacy, Inc. et al., C.A. No. 4:09CV00683 - AGF (E.D. Mo. July 12, 2010), the United States District Court for the Eastern District of Missouri denied a prospective and future royalty claim, even where the franchisee defaulted and did not appear for the hearing. We highlight this legal issue because of its Draconian nature and the message Meineke is imparting to the dealership by its insistence on such a contractual provision in the FTA going forward.

There are no further contract negotiations currently scheduled.

  1. That agenda also indicated that Meineke was putting liquidated damages back on the table. Liquidated damages had been briefly mentioned at our October 22, 2009 meeting and then dropped as a subject after our vigorous protest. Meineke told us at that time that it only wanted to "tweak" the contract, not make significant changes.

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.