The vast majority of franchisors have seen their share of complaints filed by franchisees that are anything but the "short and plain statement of the claim" mandated by the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 8(a)(2). Such complaints frequently contain numerous claims, many of which are precluded by the terms of the franchise agreement or by applicable law. A recent federal court decision Dunkin’ Donuts Incorporated v. N.A.S.T., Inc., No. 02 C 1272, 2003 U.S. Dist. LEXIS 9849 (N.D. Ill. docketed June 12, 2003), illustrates that there can be deterrents against lawyers who irresponsibly (and especially repeatedly) bring meritless claims against franchisors.
In N.A.S.T., the franchisee filed a counterclaim to the franchisor’s complaint for an asserted violation of the franchise agreement. The court characterized the franchisee’s filing as "an attack—a 96 paragraph, nine count Counterclaim." After Dunkin’ Donuts filed a motion for partial summary judgment, the franchisee sought to withdraw the aspects of its counterclaim that had been grounded in breach of fiduciary duty, conversion, negligence, and unjust enrichment. Dunkin’ Donuts responded by seeking attorneys’ fees and costs that it had incurred in defending against the claims the franchisee had withdrawn. Before considering the merits of Dunkin’ Donuts’ request, the district court found it worth repeating that the franchisee’s counsel "appears to have made somewhat of a career out of franchisee litigation against Dunkin’ [Donuts]."
The district court framed its inquiry as whether the four theories of counter-recovery "were not asserted in objective good faith (see 28 U.S.C. § 1927 (‘Section 1927’)) or were even advanced in bad faith (sanctionable under the inherent power doctrine articulated in Chambers v. NASCO, Inc., 501 U.S. 32, 43-51 (1991))." Before evaluating the claims, the court noted that it was not necessary to consider the "bad faith" standard in Chambers and that, in the interests of the attorney-client privilege, the court would not seek to determine whether sanctions would more appropriately be imposed on the franchisee or franchisee’s counsel, but would instead allow the franchisee and his counsel to determine among themselves the apportionment of any monetary sanctions.
Analyzing each of the four voluntarily dismissed claims separately, the court found that each of the claims did not satisfy the "objective good faith" standard of Section 1927, given that they were either expressly precluded by language contained in the franchise agreement or unquestionably lacked merit under governing legal principles. In reaching its determination, the district court discouraged blind reliance upon statements contained in a franchise treatise where there was no legal precedent supporting such statements. In evaluating the good faith of the conversion claim, the district court held that the key to the analysis was the governing law, not "what some commentator would like the law to be instead." Finding that each of the four withdrawn claims failed to satisfy the "objective good faith" standard contained in Section 1927, the district court awarded Dunkin’ Donuts the attorneys’ fees and expenses "that it incurred in seeking the defeat of those claims."
Although not a franchise case, the decision in Internet Law Library Inc. v. Southridge Capital Management, 01 Civ. 6600 (S.D.N.Y., verdict July 7, 2003), handed down less than a month after N.A.S.T., also may provide a basis for dealing with improper tactics by plaintiffs’ counsel who seek extensive discovery as to other franchisees for an inappropriate purpose. In that case, a federal court dismissed the plaintiffs’ claims in a securities lawsuit – with prejudice – based upon repeated discovery abuses by counsel for plaintiffs. Defendants initially sought a protective order, claiming that plaintiffs and their counsel appeared to be attempting to misuse the discovery process in order to look for new clients interested in engaging them to initiate new litigation against the defendants. Plaintiffs and their counsel suggested that they were seeking to establish "pattern and practice." The court initially denied the protective order, saying it "placed its trust in plaintiffs’ sense of restraint" and "indicated that any information gained in discovery was not to be used to identify new clients or initiate new litigation." It subsequently became clear to the court, however, that it was, in fact, plaintiffs’ and their counsels’ objective to misuse the discovery process to identify new clients and that plaintiffs’ counsel had also misrepresented to another judge the breadth of discovery permitted in this case. The court ultimately granted defendants’ motion for a protective order, admonishing plaintiffs and their counsel to discontinue this course of conduct or face dismissal of their action. Defying the court’s order, the plaintiffs again sought "pattern and practice" discovery regarding the identities of other prospective clients. The court then found it appropriate to impose the harshest sanction available - dismissing plaintiffs’ claims with prejudice based upon the actions of plaintiffs and their counsel, which the court found to be "willful and in bad faith."
While the facts in N.A.S.T. appeared to be particularly egregious and the tone of the opinion suggests that the district court judge may have lost patience with franchisee’s counsel in that case, the decisions in N.A.S.T. and Internet Law Library should give franchisee counsel some pause before they adopt the kitchen-sink approach in filing claims against a franchisor, particularly where the franchisee counsel has become a self-appointed watchdog of a particular franchise system.
This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.