L. Michael Hankes  |  ATTORNEY AT LAW
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Meineke Officials Seek a Free Pass in the Latest
 Version of the Meineke Franchise & Trademark Agreement
 (Part 2 of 2)

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 our last newsletter article, we discussed the amendment of Section 16.2 of the Meineke Franchise and Trademark Agreement (hereafter “FTA”) in the Form 4/2015 Meineke Federal Disclosure Document (hereafter “FDD). As noted in the first article discussing amended FTA Section 16.2, this amendment came immediately on the heels of the sale of Driven Brands, Inc. (hereafter “Driven Brands”) and Meineke Car Care Centers, LLC (hereafter “Meineke”) by Harvest Partners, LLC (hereafter “Harvest”) to the Roark Capital Group (hereafter “Roark”) on about April 27, 2015.

For purposes of discussion in the second installment about amended Section 16.2, we have included the new language in this article as well. Excerpted below is the prospective general release/covenant not to sue added to Section 16.2 of the Meineke FTA in the Form 4/2015 version:

…    You acknowledge and agree that except as provided under an applicable guarantee of performance, none of our past, present or future directors, officers, employees, incorporators, members, partners, stockholders, subsidiaries, affiliates, controlling parties, entities under common control, ownership or management, vendors, service providers, agents, attorneys or representatives will have any liability for (i) any of our obligations or liabilities relating to or arising from this Agreement, (ii) any claim against us based on, in respect of, or by reason of, the relationship between you and us, or (iii) any claim against us based on any of our alleged unlawful act or omission.

This Section 16.2 will continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement.    …

(Form 4/2015 Meineke FTA § 16.2)(Emphasis added).

In this article, we will review some of Meineke’s alleged justifications for insisting upon a prospective general release/covenant not to sue, for which there is no legal consideration and which we believe is unlawful.

Meineke’s Additional Excuses for including the “Free Pass” in Amended FTA Section 16.2

In addition to claiming that the “Free Pass” of Amended Meineke FTA Section 16.2 is in every franchise agreement of every Roark franchise system, Meineke has offered up other excuses for wanting the “Free Pass.” For instance, Meineke also claims that it wants to protect its officers and employees from lawsuits.

Meineke’s Town Hall Responses Regarding Section 16.2

In its June, 2015 responses to the written Town Hall Questions presented to Meineke at the Meineke Dealer Association’s (hereafter MDA), San Antonio, Texas Convention in May, 2015, Meineke mirrored its desire to protect its corporate officers. In its answer to the question posed by the MDA, Meineke first denied that the amendment to Section 16.2 was a general release/covenant not to sue and then provided its explanation for demanding such a one sided, exculpatory provision from its Franchisees. The complete question and answer appear immediately below:

5. Why did Meineke put a general release/covenant not to sue in Section 16.2 of the new 2015 Meineke FDD?

  • We did not amend Article 16.2 to include a general release not to sue. There is a provision that prevents legal action being initiated against shareholders, officers and directors and this provision is consistent with other franchise agreements in many other systems. A franchisee can sue the franchisor ­ the added language did not change that.

(June, 2015 Meineke Town Hall Response No. 5).

In trying to bootstrap its arguments for such protections, Meineke has referred to the use of corporate entities by Dealers in their own businesses to limit exposure to vendors and customers in the operation of their individual Centers. However, use of a corporate entity does not insulate officers, directors, employees, or even attorneys from their individual wrongdoings. Fraud committed by individuals is actionable regardless of whether those persons are employed by a corporate entity when they act. Broussard et al. v. Meineke Discount Muffler Shops, Inc., et al., 958 F. Supp. 1087 (W.D. N.C. 1997) (Reversed on other grounds) 155 F. 3d 331, 41 Fed. R. Serv. 3d 1151 (4th Cir. 1998). Some states, such as New Hampshire, consider it a violation of public policy for wrongdoers to try to contract their way out of fraud. Van Der Stok v. Voorhees, 151 NH 679, 682-684, 866 A. 2d 972, 975-976 (2005)(New Hampshire law will not allow a covenant of immunity to be drawn that will protect a person against his own fraud). Moreover, many states have passed statutes which make unlawful deceptive and/or unfair acts and practices. These statutes are sometimes referred to as “little FTC acts.”

Under the Massachusetts Unfair and/or Deceptive Trade Practices Act, individual corporate officers are responsible for their violations of the Act. Community Builders, Inc. v. Indian Motorcycle Association, Inc., 44 Mass. App. Ct. 537, 560, 692 N.E. 2d 964, 979 (1998) (Corporate officer and director is responsible for acts he committed personally, including Mass G.L. c. 93A violations); Mass. G. L. c. 93A §§§ 2, 9 and 11. North Carolina’s Unfair and/or Deceptive Trade practices statute also reaches the conduct of individuals. (N.C.G.S. § 75-1.1; (Broussard et al. v. Meineke Discount Muffler Shops, Inc., et al., 958 F. Supp. 1087 (W.D. N.C. 1997) (Reversed on other grounds) 155 F. 3d 331, 41 Fed. R. Serv. 3d 1151 (4th Cir. 1998).

The Choice of Law Made by Meineke for the FTA

The Meineke FTA contains a paragraph entitled “Governing Law.” (Form 4/2015 Meineke FTA § 17.1). Section 17.1 of the Meineke FTA states:

17.1 Governing Law

Except as otherwise provided in Section 17.2 with respect to the United States Arbitration Act (9 U.S.C. § 1, et seq.), this Agreement and all issues arising from or relating to this Agreement will be governed by and construed under the laws of the State of North Carolina, provided the foregoing does not constitute a waiver of your rights under any applicable franchise registration and disclosure or franchise relationship law of another state. Otherwise, in the event of any conflict of law, North Carolina law will prevail, without regard to the application of North Carolina conflict of law principles.

(Emphasis added)(Form 4/2015 Meineke FTA § 17.1).

Except in cases where North Carolina law is prohibited by other individual states’ laws, North Carolina law will generally be applied to the Meineke FTA. This would include the North Carolina Unfair and Deceptive Trade Practices Act. N.C.G.S. § 75-1.1.

Adequate Consideration is Required for a Contract to Be Valid

Every state has general common law principles relating to the validity and construction of contracts. One of the Hallmarks of North Carolina state law related to the elements of contract validity is that a contract cannot exist if there is no consideration for the promise made in the contract. Home Electric Co. of Lenoir, Inc. v. Hall and Underdown Heating and Air Conditioning Company, 86 N.C. App. 540, 542, 358 S.E.2d 539, 540 (N.C. App. 1987)(A contract, to be enforceable, must be supported by adequate consideration).

Consideration which is sufficient to support a contract “consists of ‘any benefit, right, or interest bestowed upon the promisor, or any forbearance, detriment, or loss undertaken by the promisee.’”

Id., (Supporting citations omitted).

What this last quote means in English is that in order for the promise which Meineke added to Section 16.2 to be enforceable, there must be what is known in the law as adequate consideration. For such consideration to exist, the Dealer, as the promisor, must receive a benefit, right or interest as a result of making the promise. Alternatively, Meineke, as the promisee benefiting from the promise, must suffer some sort of forbearance, detriment or loss in exchange for the promise being made by the Dealer.

In this writer’s opinion, there simply is no consideration for the broad general release/covenant not to sue now contained in Section 16.2 of the Meineke FTA. It has thus far been a non-negotiable contract of adhesion that could only operate to benefit the persons and entities which Meineke seeks to protect. Not only does Section 16.2 seek to exempt Meineke’s corporate officers and employees, past, present and future, from their legal responsibilities, but it also seeks to discharge vendors and even attorneys from their legal responsibilities. In other words, the Dealers get nothing in exchange for the “Free Pass” demanded by Roark, Driven Brands and Meineke.

Perhaps there might be consideration for Meineke’s “Free Pass” if new and existing Meineke Dealers were permitted to operate as corporations without executing a personal guarantee. Or, maybe Meineke might permit a corporate franchisee’s performance to be guaranteed by another corporation, in the same manner that Driven Brands guarantees the performance of Meineke? Then when the Dealer goes Bankrupt or closes early and can’t finish out the franchise term, Meineke could only look to the corporations for its future royalty and advertising claims.

For renewing Dealers, the disparity is even worse. Renewing Dealers are contractually entitled to renew their franchisees. Not only that, but the Renewal/Resale Mutual Release, which is signed by the Dealer and Meineke, is part of the renewal process. Meineke is already getting a release from renewing Dealers, who in return, get a release from Meineke.

Yet Roark, Driven Brands and Meineke are unilaterally imposing an unforeseen, self-serving condition of renewal by adding amended Section 16.2, which is more than unreasonable. In some states such as New Jersey, the imposition of unreasonable conditions of franchise renewal is prohibited by statute. N.J.R.S. §56:10-7e. New Jersey also recognizes a cause of action for constructive termination of a franchise agreement. N.J.R.S. § 56:10-5.

And consider this, where will the Dealers be when in the ordinary course of their businesses, they have no recourse against one of Meineke’s approved vendors?

Roark, Driven Brands and Meineke Seek to
Limit the Application of the Law Meineke Chose to Govern the FTA

Having chosen North Carolina law to apply to the Meineke FTA, Meineke’s inclusion of the new exculpatory language in amended Section 16.2 would not appear to pass muster under basic principles of North Carolina contract law. It is also significant to note here that although Meineke wants North Carolina law to apply to the Meineke FTA, it wants to eradicate the portions of the North Carolina Unfair and Deceptive Trade Practices Act that would apply to its parent companies, affiliates, corporate officers, directors, employees, attorneys or even vendors. Put another way, Meineke wants that part of its North Carolina Choice of Law clause to be rendered meaningless. (Form 4/2015 Meineke FTA § 17.1).

Meineke not only agreed to, but insisted upon certain legal principles in the Meineke FTA and now Roark, Driven Brands and Meineke are trying to work their way around those very same legal principles, to the detriment of the Dealers.

The extent of Meineke’s demand that it be entitled to back door the Dealers’ legal rights, especially those legal rights that exist outside the Meineke FTA, is underscored by a closer look at the language contained in the Choice of Law cause found in the Meineke FTA. The Meineke FTA expressly provides for the application of any and all “franchise regulation and disclosure or franchise relationship law of another state.” (Form 4/2015 Meineke FTA § 17.1). This means that for Meineke Dealers who live in states which have franchise statutes, those legal protections should still be applied for the benefit of those individual Dealers living in those states. We will discuss these principles next.

Franchise Registration, Disclosure or Relationship Laws

It would not be possible to review all of the statutes of all of the states which have passed laws regulating the conduct of franchisors in those individual states. However, we will highlight a few of those states here in this article to illustrate the degree of offensiveness of Meineke’s recent amendment to Section 16.2. One key theme in many of the individual franchise statutes passed by states other than North Carolina, which as noted above has its own Unfair and Deceptive Practices Statute, N.G.S. § 75-1.1, is that many of these statutes explicitly impose liability on all actors and participants in all unlawful misconduct and absolutely prevent the waiver of the protections of those statutes.

In order to understand what the amendment of Section 16.2 is really driving at, the reader should compare the amendment of 16.2 with corresponding provisions from Michigan and New York franchise statutes. For instance, both Michigan and New York prohibit a franchisor’s demand of a release or waiver as a condition of entering into a franchise agreement. Excerpted below are the applicable excerpts from the Michigan and New York Statutes. Michigan prohibits:

A requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act. This shall not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims.

MI ST § 445.1527(b).

The New York statute provides that:

Any condition, stipulation, or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law, or rule promulgated hereunder, shall be void.

It is unlawful to require a franchisee to assent to a release, assignment, novation, waiver or estoppel which would relieve a person from any duty or liability imposed by this article.

NY GEN BUS LAW § 687, 4 and 5.

Just as significant are the sections of the Michigan and New York statutes which impose liability on all entities or persons participating in unlawful conduct. While the wording of these statutory sections from states which are more than 600 miles apart in distance was generated by two different legislatures, the thrust in both states is the same. Joint and several liability is imposed on all participants in the unlawful conduct.

The definition of joint and several liability varies from one state to another. Generally speaking however, joint and several liability is a legal concept used in civil cases which allows a successful plaintiff to collect damages from all responsible defendants. The winning plaintiff may collect the entire judgment from any one of the defendants, or from any and all of the responsible defendants in varying amounts until the judgment is paid in full.

In other words, if any of the defendants do not have enough money or assets to pay an equal share of the award, the other defendants must make up the difference. Thus, if a Dealer was awarded a judgment against Meineke and other responsible defendants and Meineke were to go Bankrupt, the Dealer could still collect the full amount of the judgment from the other defendants, whom Roark, Driven Brands and Meineke seek to “protect.”

The statutes in Michigan and New York imposing such joint and several liability are set forth below:

A person who directly or indirectly controls a person liable under this act, a partner in a firm so liable, a principal executive officer or director of a corporation so liable, a person occupying a similar status or performing similar functions, an employee of a person so liable who materially aids in the act or transaction constituting the violation, is also liable jointly and severally with and to the same extent as the person, unless the other person who is so liable had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability is alleged to exist.

MI ST § 445.1532.

A person who directly or indirectly controls a person liable under this article, a partner in a firm so liable, a principal executive officer or director of a corporation so liable, a person occupying a similar status or performing similar functions, and an employee of a person so liable, who materially aids in the act of transaction constituting the violation, is also liable jointly and severally with and to the same extent as the controlled person, partnership, corporation or employer. It shall be a defense to any action based upon such liability that the defendant did not know or could not have known by the exercise of due diligence the facts upon which the action is predicated.

NY GEN BUS LAW § 691, 3.

Other states such as Iowa, Maryland, Minnesota and New Jersey also forbid the inclusion of a clause which would waive the protections of the franchise disclosure, registration or relationship laws existing in those states. States such as California, Indiana, Iowa, Maryland, and Minnesota expressly impose joint and several liability upon all participants in unlawful conduct. As noted above, this Article does not pretend to be a law review treatise on all of the franchise statutes passed by individual states. What the reader should understand, however, is that Roark, Driven Brands and Meineke’s attempt to absolve all parent corporations, affiliates, officers, directors, employees, attorneys and vendors from past, present and future liabilities is in itself an unlawful act in many of the United States.

Although in its answer to the Town Hall Question relating to Amended Section 16.2 of the Meineke FTA, Meineke denied that it had amended Section 16.2 “to include a general release not to sue,” the language, if legally binding, would in fact accomplish that end. Indeed, if as Meineke claims, “this provision is consistent with other franchise agreements in many other systems,” one wonders how the various attorneys’ general, regulatory and legislative authorities in the individual United States will react when this language is brought to their attention.

This is the second part of a two-part article. For part one, please click here.

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.