Ruling Protects Franchise Owners From Abusive Chain Practices

An 11-year legal battle by a former Long Beach franchise owner has led to a landmark federal appeals court decision that provides store owners protection against abusive franchise chain practices.

The Ninth Circuit Court of Appeals in San Francisco upheld a 1990 U.S. Bankruptcy Court ruling that awarded Debra Vylene Green, a Naugles Mexican restaurant operator, $2.8 million in damages.

“What is so great about it is that it’s going to make life so much easier for so many other franchisees,” said Green, who now lives in La Jolla.

Green, who filed for bankruptcy protection in 1985, contended that the restaurant chain harmed her business by opening a competing Naugles fast-food outlet 1.4 miles away.

She also contended that the chain refused to negotiate a renewal as spelled out in the franchise agreement she signed when she first went into business in 1975.

Phillip Fife, Green’s attorney, said Naugles engaged in a pattern of opening stores close to its franchise operators and beating their business down. The court stopped short of defining how close stores may operate to one another.

The complex litigation flowed back and forth over the years through Bankruptcy Court and U.S. District Court in Los Angeles, until last month’s appeals court ruling.

William Rintala, the attorney for Naugles Inc., now owned by Los Angeles-based Sizzler International Inc., could not be reached for comment. But he has already filed a petition asking the appeals court to rehear the case.

Franchisee activists called the decision a legal step forward for chain operators that could have nationwide implications.

“It may cause franchisers to act more reasonably and fairly with franchisees,” said Susan Kezios, head of the 7,000-member American Franchisee Assn.

Kezios said some franchise chains, in their efforts to expand, often set up stores in close proximity. Some franchise chains also persuade franchise operators to remodel and make improvements with the promise of a renewal, but then renege and seek instead to make money with a new operator at the same site who pays a new franchise fee.

The California ruling supports a 1991 federal court decision in a Miami lawsuit brought against Burger King. In that case, the District Court held that the franchise operator had infringed on a store owner by opening a competing restaurant nearby. Although subsequent rulings in other cases appeared to diminish the impact of that case, Kezios said the higher court decision in California reasserts those protections and sets a new precedent.

But Matthew Shay, general counsel for the International Franchise Assn., which represents franchise operators and the franchise chains, called the California ruling an aberration.

“It is a case that runs counter to a number of decisions that have been handed down over the past couple of years,” Shay said.

The decision demonstrates a lack of understanding of the franchise industry, Shay said. For example, he argued that franchise chains often knowingly reduce sales volume at individual stores when they open them near each other. But the reduction is only temporary and is part of an overall practice of market saturation that increases profit over time via brand-name recognition and image identification.

He also scoffed at the notion that franchise chains would favor inexperienced new operators over proven, financially sound owners.