L. Michael Hankes  |  ATTORNEY AT LAW
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How Franchisors Attempt to Use Operations Manuals to Alter Fundamental Contract Rights – Safeguards Present in the Meineke FTA

Over the course of the past year there have been numerous publications issued by Meineke signaling its desire to make significant changes to the Meineke System which will impact the independent businesses owned and operated by Meineke Dealers. As most Meineke Dealers now know, the majority of Meineke's current senior management have backgrounds in the hamburger/fast food industry and more specifically with the Burger King chain.

We have been approached by a number of Meineke Dealers who have expressed concerns to us about the litigation that took place in the Burger King System over Burger King's imposition of the $1.00 Double Cheeseburger upon its franchisees. One key to what occurred in that case was Burger King's contractual ability to change the fundamental legal rights of Burger King franchisees under their franchise agreements by simply amending the Burger King MDD Manual and/or its standards, specifications and procedures.

In the $1.00 Double Cheeseburger case, Burger King mandated that its franchisees offer a $1.00 Double Cheeseburger, which caused those franchisees to sell that menu item at less than cost. The Burger King franchisee organization brought suit against Burger King in a federal case entitled National Franchise Association v. Burger King Corporation, 715 F. Supp. 1232 (S.D. Fla. 2010) to stop this marketing concept that hit the Burger King franchisees in the bottom line. Unfortunately, Burger King's ability to alter fundamental contract rights of its franchisees, however wrongful it may have been, was upheld by the Florida federal court.

Based upon the Burger King v. E-Z Eating, 41 Corp., 572 F. 3d 1306 (11th Cir. 2009) case, the United States District Court for the Southern District of Florida ruled that the Burger King franchise agreement unambiguously conferred on Burger King the right to require franchisees, without their consent, to offer designated items as part of its Value Meal menu and therefore to set unilateral maximum prices for those items. National Franchise Association, et al. v. Burger King Corporation, 715 F. Supp 2d at 1243-1244.

In reaching the conclusion that Burger King could force its franchisees to sell products at a loss the Florida Federal trial court not only relied on the Burger King v. E-Z Eating, 41 Corp. ruling by the 11th Circuit Court of Appeals, but also referred to the language in Section 5 of the Burger King franchise agreements.

The Florida Federal trial court noted specifically that Burger King was granted the right under Section 5 of the Burger King franchise agreements to amend its "comprehensive restaurant format and operating systems, including product specifications." Id., 715 F.Supp. 2d at 1244. (Emphasis added). Moreover, the court also found that "…each Franchisee who signs the Agreement also agrees to accept and comply with additions to the MDO Manual and any such changes communicated in writing." Id.

Unlike the Burger King agreements, the Meineke FTA does not allow Meineke the same kind of control over the Meineke Dealers' profitability.

By contrast, the Meineke FTA contains limitations on the ability of Meineke to require that the franchisee comply with its amendments to standards, specifications and procedures. Sections 7.6 and 7.7 of the Meineke FTA were meant to be read together and contain limitations on Meineke's ability to create new standards which would be a burden for a Meineke Dealer. The provisions of Sections 7.6 and 7.7 as they appear in the 05/2013 Meineke FTA are set forth below:

7.6 Specifications and Standards

You acknowledge that each and every aspect of the operation of your Center is important to us and is subject to our specifications and standards. You agree to comply with all mandatory specifications, standards and operating procedures and other obligations that are contained in the Operations Manual relating to the development and operation of a Meineke Center, including: (a) all aspects (other than prices) of Authorized Products and Services offered by your Center and the manner in which they are promoted and sold; (b) sales procedures and customer warranties and services; (c) advertising and promotional programs; (d) appearance and dress of employees; (e) safety, appearance, cleanliness and standards of service and operation of your Center; (f) days and hours of operation; and (g) accounting and recordkeeping systems and forms. Mandatory specifications, standards and operating procedure and other obligations set forth in the Operations Manual constitute provisions of this Agreement.

7.7 Changes to Specifications and Standards/Days and Hours of Operation

We may modify the Operations Manual to reflect changes in standards, specifications and operating procedures and other obligations, provided no addition or modification may alter your rights, and fundamental status, under this Agreement. We agree to consult with DAAC with respect to any material changes to mandatory standards in the Operations Manual. If DAAC recommends that we not make any material change to required days and hours of operation for Meineke Car Care Centers, we agree not to make such change unless: (a) at the time we propose such change, all Meineke Car Care Centers located in the U.S. owned by us and our Affiliates operate during such days and hours (except to the extent prohibited by applicable law) and at least 33.3% of all Meineke Car Care Centers in the U.S. (other than those owned by us or any of our Affiliates) operate during such days and hours; and (b) we give at least 6 months' prior notice to any such change.

(Meineke FTA §§7.6 and 7.7) (Emphasis added).

Thus, the Meineke FTA does not allow any additions or modifications to the operations manual that would "alter your rights and fundamental status under this agreement." By way of example, the imposition of a standard that eliminates the right of a Meineke Dealer to use any "parts that meet the original equipment manufacturer's standards" in the operation of their Meineke Car Care Center would violate Section 7.7 of the Meineke FTA.

Moreover, Section 17.12 of the Meineke FTA requires the consent of a super majority of all Meineke Dealers to any contractual amendment of the Meineke FTA. Section 17.12 states:

17.12 Modification

This Agreement may not be amended except: (a) as noted below; (b) by written agreement signed by both parties; and (c) as otherwise provided herein with respect to the Operations Manual.

This Agreement may be amended at any time whenever we and a super-majority (as hereinafter defined) of Meineke Dealers agree to any such amendment. We agree to provide you, at least ninety (90) days prior to the date such amendment is to be effective, a copy of the proposed amendment, together with a brief statement explaining the reasons therefore. A "super-majority" of Meineke Dealers shall consist of the owners of at least seventy-five percent (75%) of all franchised Meineke Car Care Centers in the United States of America. Whenever a super-majority of Meineke Dealers approve an amendment in the manner provided for herein, such amendment shall be binding on all Meineke Dealers, including you, to the same extent and in the same manner as if the amendment was unanimously approved by all Meineke Dealers, and regardless whether you may or may not desire to be bound by the amendment. By signing this Agreement, you appoint any of your officers as your attorney in fact with irrevocable power and authority to execute any such amendment so approved.

Like all legal rights, however, fundamental contract rights must be safeguarded and require that the holders of those contract rights act to protect them if and when those rights are abridged. Vigilance often requires the ability to maintain attention and alertness to repeatedly changing events and communications over prolonged periods of time.

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.