Franchise & Distribution News - Thompson Hine LLP

Welcome 

Welcome to Thompson Hine’s newest publication, Franchise & Distribution News, a 

newsletter we will publish periodically for the benefit of our clients and contacts in the 

manufacturing, franchise and distribution sectors. In it we will focus on news and trends in 

these industries, relevant developments in the law and their implications for your 

business, and practical steps to stay ahead of the statutory and regulatory curve. 

In our first issue, we focus on several cutting-edge topics in this area of the law: 

• The shifting balance between trial venue selection and dealer protection. 

• The evolving treatment of noncompetition agreements in Georgia. 

• Changes to franchisee leases that franchisors can implement. 

• The risks of selling through agents and distributors under the Foreign Corrupt 

Practices Act (FCPA). 

• Recent cases showing continuing difficulties in terminating contractual relationships 

with franchisees and distributors. 

We also include some updates about our busy franchise and distribution practice. 

We hope you find the newsletter of interest and assistance. We are here to help, so if you 

have any questions or comments, please don’t hesitate to contact us. Your feedback and 

suggestions for topics you would like us to address in future editions will also be most 

welcome! 

Contractual Choice of Forum Trumps State Dealer 

Protections 

By Jen Roach 

Thanks to recent decisions in two states, 

manufacturers can increasingly rely on the 

forum selection clauses in their contracts 

with distributors. Both cases involve 

equipment dealer statutes with antiwaiver 

provisions, and both permit dealers to bring 

actions for violations of the statutes in a 

court of their choosing. In efforts to defeat 

motions to dismiss or change venue, 

distributors argue these statutes 

automatically invalidate forum selection 

clauses. However, these cases hold that 

forum selection provisions are not voided 

by the statutes and instead guide the 

analysis of where a case should be litigated. 

Franchise & Distribution News 

Summer 2012 

Contractual Choice 

of Forum Trumps 

State Dealer Protections .......... 1 

Georgia’s Restrictive 

Covenants Act: Putting 

the “Non” in Noncompete ....... 3 

Six Changes Franchisors 

Should Seek in 

Franchisee Leases .................... 6 

Selling Through 

Foreign Agents & 

Distributors: FCPA Risks ........... 8 

Recent Decisions 

Inhibit Franchisee, 

Distributor Terminations ....... 11 

Recent Activities .................... 13 

ATLANTA CINCINNATI CLEVELAND COLUMBUS DAYTON NEW YORK WASHINGTON, D.C. 

ATTORNEY ADVERTISING

Franchise & Distribution News Summer 2012 

Minnesota 

In a case of first impression, the 

District of Minnesota held that the 

existence of a forum selection clause 

is the principal factor in a multifactor 

analysis of venue under 28 U.S.C. 

§ 1404(a), and that equipment 

dealer statutes do not categorically 

void such clauses. 1 

In this case, equipment dealer 

Minnesota Supply Company (MSC) 

filed a nine-count complaint against 

manufacturers Jungheinrich Lift 

Truck Corp. and Mitsubishi 

Caterpillar Forklift America (MCFA). 

MCFA was represented by 

Thompson Hine lawyers Tom Collin 

and Jen Roach. Among other things, 

MSC alleged that MCFA and 

Jungheinrich had: 

Breached their respective sales 

and service and distribution 

agreements, 

Violated the Minnesota Heavy 

and Utility Equipment 

Manufacturers and Dealers Act 

(HUEMDA), and 

Violated the Wisconsin Fair 

Dealership Law (WFDL). 

MSC’s sales and service agreement 

with MCFA included a “Governing 

Law” section providing that “any 

action or proceedings pertaining to 

this agreement shall be in the Courts 

(U.S. or Ohio) of Cuyahoga County, 

Ohio….” Its Jungheinrich distribution 

agreement included a forum 

selection clause stating that the 

“exclusive place of jurisdiction for 

1 Minnesota Supply Co. v. Mitsubishi 

Caterpillar Forklift America Inc., et al., 2011 

U.S. Dist. LEXIS 113913 (D. Minn. Sept. 30, 

2011). 

any legal disputes” would be 

Richmond, Virginia. 

MCFA and Jungheinrich both filed 

motions to dismiss based in part on 

the forum selection clauses in their 

respective agreements with MSC. In 

response MSC argued, as have many 

distributors before it, that the 

antiwaiver provisions in the WFDL 

and HUEMDA void any contractual 

provision contrary to or inconsistent 

The parties’ agreement to a 

different forum is a primary, 

though not dispositive, 

consideration. 

with the statutes and the policies 

reflected therein. Because both 

statutes give MSC the right to file 

suit in a “court of competent 

jurisdiction” (i.e., a court it chooses), 

MSC argued the forum selection 

clauses were unenforceable. 

The District of Minnesota rejected 

this argument as untenable, holding 

that state policy contrary to or 

disapproving of forum selection 

clauses does not determine venue 

but is instead a subordinate factor to 

the parties agreed-upon forum in 

the required venue analysis under 

Section 1404(a). The court based its 

analysis on the Supreme Court’s 

decision in Stewart Org. v. Ricoh, 2 

which requires courts to engage in a 

multifactor balancing test under 

Section 1404(a) when adjudicating 

venue and transfer. 

2 Stewart Org. v. Ricoh, 487 U.S. 22 (1988). 

2 

The court noted that forum selection 

clauses “will be a significant factor 

that figures centrally in the district 

court’s calculus,” and that a 

plaintiff’s agreement to a different 

forum is therefore a primary, though 

not dispositive, consideration in the 

analysis. After weighing the other 

factors, the court determined that 

none of them weighed in favor of 

keeping the entire action, or any 

claim, in Minnesota and transferred 

the claims against MCFA and 

Jungheinrich to Ohio and Virginia, 

respectively. 

Wisconsin 

Wisconsin also has enforced forum 

selection clauses despite 

comprehensive provisions of the 

WFDL. The state’s most recent 

decision also followed Stewart, 

ruling that a forum selection clause 

“is neither dispositive nor void.” In 

Wins Equip. LLC v. Rayco Mfg., 3 the 

court noted that the forum selection 

clause and “the WFDL’s antipathy 

toward forum selection clauses” are 

relevant but not dispositive factors 

in the Section 1404(a) analysis. 

Implications 

Distributors with forum selection 

clauses in both Minnesota and 

Wisconsin cannot rely only on state 

policy in dealer statutes to defend a 

motion to dismiss or transfer for 

improper venue. Although 

manufacturers cannot neglect other 

factors relevant to a court’s 

consideration of venue, contractual 

choice of forum will be the primary 

factor in the court’s analysis. 

3 

Wins Equip. LLC v. Rayco Mfg., 668 F.Supp. 2d 

1148 (W.D. Wis. 2009).


Georgia’s Restrictive Covenants Act: Putting the “Non” in Noncompete 

By Russ Rogers & Anna Burns 

Georgia’s noncompete agreement 

law is in the throes of transition. 

Historically, the state’s constitution 

declares that “[t]he General 

Assembly shall not have the power 

to authorize any contract or 

agreement which may have the 

effect of … lessening competition…, 

which [agreements] are hereby 

declared to be unlawful and void.” 

Accordingly, Georgia courts had 

interpreted (e.g., W.R. Grace v. 

Mouyal) that provision as 

invalidating noncompete 

agreements that are not reasonable 

as to “duration, territorial coverage, 

and scope of activity.” And, in 1991, 

the Supreme Court of Georgia relied 

on the constitutional provision to 

rule, in Jackson & Coker v. Hart, that 

the statute providing for 

enforcement of noncompete 

agreements under certain 

circumstances is unconstitutional in 

its entirety. 

Put simply, as in Atlanta Bread 

Company v. Lupton-Smith, 

noncompete agreements 

traditionally have been “disfavored 

in [Georgia] as a matter of public 

policy.” 

Put simply, noncompete 

agreements traditionally have 

been disfavored in Georgia as a 

matter of public policy. 

Ramifications of Atlanta 

Bread Company 

Atlanta Bread Company, a 2009 

Supreme Court of Georgia decision, 

epitomizes the historic antipathy 

toward noncompete agreements in 

Georgia’s courts. In it, a franchisee 

sued its franchisor to prevent it from 

terminating a franchise agreement 

based on an alleged violation of an 

“in-term” noncompete agreement 

that kept the franchisee, “during the 

term of th[e] agreement,” from 

having any involvement with a store 

that competes with any of the 

franchisor’s stores. The trial court 

entered summary judgment in favor 

of the franchisee, invalidating the 

noncompete agreement; the Court 

of Appeals affirmed. 

The Supreme Court of Georgia began 

its analysis by observing that in 

Georgia, “contracts that generally 

restrain trade are void against public 

policy.” Noncompete agreements 

are “partial restraints of trade and 

must be reasonable as to time, 

territory and scope to be 

enforceable.” It stated that 

noncompete agreements in 

3 

franchise agreements must be 

accorded the same treatment they 

get in employment agreements and 

are therefore subject to strict 

scrutiny. 

The court also opined that in-term 

agreements should be treated the 

same as post-termination 

agreements, and that the clause at 

issue in Atlanta Bread Company was 

unreasonable because it lacked a 

territorial limitation. Furthermore, 

because it lacked authority to modify 

(or “blue-pencil”) the noncompete 

agreement to include a reasonable 

scope, the court struck it entirely. 

Atlanta Bread Company (2009) 

epitomizes the historic 

antipathy toward noncompete 

agreements in Georgia’s courts. 

Meanwhile, Back at the 

Georgia Assembly 

Shortly before the state supreme 

court announced its decision, 

however, the Georgia Assembly 

enacted the Restrictive Covenants 

Act (RCA), which enhances the 

enforceability of noncompete 

agreements and expressly gives 

Georgia courts authority to bluepencil 

otherwise unenforceable 

noncompete agreements.


Passed in 2009, the RCA provided 

that it would: 

• Become effective “on the day 

following” ratification of a 

constitutional amendment 

providing for the enforcement 

of covenants that limit 

competition. 

• Apply to contracts entered “on 

and after such date.” 

• Not apply to contracts “entered 

into before such date.” 

Voter Approval 

On November 2, 2010, Georgia 

voters approved, by a two-to-one 

margin, Amendment One, 

which effectively amends 

Article III of the Georgia 

Constitution, as quoted at the 

beginning of this article. The 

amendment creates an 

exception to the 

constitutional prohibition 

against contracts “defeating 

or lessening competition.” 

Specifically, Amendment One 

authorizes the state’s General 

Assembly to enact laws 

providing for enforcement of 

agreements that restrict competition 

between employers and employees, 

franchisors and franchisees, as well 

as among others. Based on its plain 

language, the RCA became effective 

on, and applied to contracts entered 

into on or after, November 3, 2010. 

Effective Date Issues 

Concerns arose about the RCA’s 

effective date, however. As noted 

above, the 2009 Act provided that it 

was to become effective the day 

after the enabling constitutional 

amendment was passed, which 

proved to be November 3, 2010. But 

Georgia law provides that 

constitutional amendments do not 

go into effect until January 1 of the 

year following their passage. 

Thus, based on its plain language, 

the 2009 Act went into effect nearly 

two months before the enabling 

constitutional amendment. 

Accordingly, the General Assembly 

substantially reenacted the RCA with 

modifications in 2011. The 2011 

iteration became effective on, and 

applies to contracts entered into on 

or after, May 11, 2011. 

Provisions 

A complete recitation of the RCA’s 

provisions is beyond our scope here, 

but highlights include: 

• “Reasonable” restrictive 

covenants protect legitimate 

business interests and create an 

environment conducive to 

attracting and retaining 

businesses in Georgia. 

• The RCA permits restrictive 

covenants that are reasonable in 

time, geographic area and scope 

4 

of prohibited activities, but they 

are enforceable only if the 

employee solicited customers, 

sold products or services, was in 

management or was otherwise a 

“key employee.” 

• No geographic limitation need 

be called out if the restrictive 

covenant prohibits, for a stated 

period of time following 

termination, solicitation of 

business from the employer’s 

customers with whom the 

employee had “material 

contact” while employed. 

• The RCA authorizes courts to 

blue-pencil restrictive covenants 

so long as the modified 

covenant is not more restrictive 

with regard to the employee. 

• In-term restrictive covenants are 

presumptively reasonable if: 

• Their duration is the same as 

the duration of the parties’ 

relationship; 

• The geographic scope 

includes areas in which the 

employer does business at 

any time during the parties’ 

relationship, provided the 

total area is reasonable 

and/or the covenant 

contains a list of particular 

competitors with which 

employment is prohibited; 

and 

• The scope of competitive 

conduct is measured by the 

business of the employer.


• Post-termination covenants are 

rebuttably presumed reasonable 

if their durations are: 

• Two years or less for former 

employees. 

• Three years or less for 

former distributors or 

franchisees. 

• Five years or less for sellers 

of a business. 

• Courts shall not enforce 

restrictive covenants that are 

not in compliance with the 

Official Code of Georgia 

Annotated (OCGA) § 13-8-53, 

though the courts “may modify” 

such covenants to make them 

reasonable and enforceable. 

Impact 

Relatively few cases have been 

decided since reenactment of the 

RCA. Most have merely confirmed 

that traditional principles will be 

applied to contracts entered into 

prior to November 3, 2010 (e.g., 

Clark v. Johnson Truck Bodies; 

Fantastic Sam’s Salon v. Maxie 

Enterprises; Paragon Technologies v. 

Infosmart Technologies; Murphree v. 

Yancey Brothers). 

The most revealing decision since 

May 2011 is Boone v. Corestaff 

Support Services. In Boone, the 

former CEO of one of the defendants 

and his new employer filed suit 

against his former employer to 

When transition questions are 

answered businesses will be better 

able to evaluate their rights and 

obligations. 

invalidate restricting covenants in his 

December 2008 employment 

agreement. The defendants filed a 

parallel suit in Delaware and moved 

to dismiss the action in Georgia. In 

June 2011, the district judge granted 

the defendants’ motion to dismiss 

based on his finding that because he 

was likely to enforce the Delaware 

choice of law provision, it made 

sense to allow the Delaware court to 

decide the case. In doing this, the 

judge ruled the restrictive covenant 

was not contrary to Georgia public 

policy as evidenced by the RCA. 

However, in an August 3, 2011 

order, the district judge granted the 

plaintiffs’ motion for 

reconsideration, denied the 

defendants’ motion to dismiss and 

entered partial summary judgment 

in favor of the plaintiffs on the 

enforceability of the restrictive 

covenant. 

The linchpin of the judge’s decision 

was his holding that consistency of 

the covenant with Georgia public 

policy must be evaluated based on 

public policy as it existed at the time 

the covenant was entered into, not 

at the time its enforceability is 

decided. Based on the conflict with 

5 

Georgia public policy, the district 

judge declined to apply Delaware 

law and applied Georgia law instead. 

Under Georgia law, the restrictive 

covenant was held unenforceable 

because it included a tolling 

provision that rendered its temporal 

duration unreasonable. And, 

because the court lacked authority 

to blue-pencil, the entire restrictive 

covenant was found unenforceable. 

Summary 

It now seems clear that contracts 

entered into before November 3, 

2010 will be decided under Georgia’s 

traditional legal principles. Just as 

clear, contracts entered into on or 

after May 11, 2011 will be governed 

by the RCA. But two critical 

questions remain: 

• Will contracts entered into 

between November 3, 2010 and 

May 10, 2011 be governed by 

traditional principles or the 

RCA? 

• Will restrictive covenants in 

agreements executed after 

November 3, 2010 (or May 11, 

2011) to replace older 

agreements be governed by 

traditional principles or the 

RCA? 

When these questions are answered 

the transition largely will be 

complete, and businesses will be 

better able to evaluate their rights 

and obligations under restrictive 

covenants governed by Georgia law.


Six Changes Franchisors Should Seek in Franchisee Leases 

By Steve Davis 

Let’s say you own a regional system 

of franchised stores. Your newest 

franchisee has just handed you a 

draft lease for the store he intends 

to operate. What are the six most 

important changes you can 

negotiate to protect your interest in 

the new location – and the 

associated goodwill – in case the 

franchisee defaults under the lease, 

the franchise agreement, or both? In 

order of importance, here are six 

critical goals to shoot for: 

1. Notice of default. Insist the 

landlord agree to give you written 

notice of any lease default by the 

tenant, even if the lease does not 

require that the tenant be notified. 

Keep in mind the lease may make 

certain events (e.g., nonpayment of 

rent or failure to maintain required 

insurance) automatic defaults 

without needing to notify the 

tenant. If the lease does require 

notice as a precondition to default, 

insist the landlord agree to copy you 

on the notice sent to the tenant. It is 

essential that you learn about your 

franchisee’s failure to pay rent (or 

otherwise perform under the lease) 

in enough time to decide upon – and 

implement – an effective response. 

Without this most basic of 

protections, the eviction process 

could be well under way or even 

complete before you learn of the 

tenant’s failure to perform. Although 

some landlords resist the 

administrative burden, a prudent 

one will recognize that bringing you 

into the process early on will 

enhance prospects of a quick 

resolution without substantial legal 

costs or prolonged interruption of 

the rental stream. 

2. Right to cure. Having the right 

(but not the obligation) to cure any 

lease default by the tenant goes 

hand-in-hand with the right to 

receive notice of that default. 

Ideally, the period permitted for 

your cure will exceed that allowed 

for the tenant’s cure; among other 

things, the lease may permit the 

tenant only a short period, or none 

at all, to cure matters such as a 

monetary default, failure to insure or 

a prohibited assignment. You can 

expect the landlord to try to limit the 

number of times you will be 

permitted to cure during the lease 

term; you can also expect the 

landlord to try to keep the cure 

period to 30 days or less. 

3. Consent to lease amendments. If 

the landlord and tenant are 

permitted to amend the lease 

without your consent, any 

protections you succeed in building 

into the lease can disappear with a 

stroke of a pen. Moreover, the way 

will be cleared for the tenant to 

6 

What are the six most important 

changes you can negotiate to 

protect your interest in a new 

location? 

leave your franchise system (or join 

a competing system) and retain 

control of the store by negotiating 

necessary lease changes (such as a 

modified use clause or rent 

structure) directly with the landlord. 

Having the right to approve any 

amendments to the lease (or, at a 

minimum, those that affect your 

rights and interests as franchisor) 

before they become effective is 

critical to your ability to protect your 

interests and preserve locational 

control. For similar reasons, you 

should seek to prohibit the tenant 

from having the right to renew or 

extend the lease term, assign the 

lease or sublease the premises 

without your consent; all are 

mechanisms for the tenant to 

attempt to exit your system, join a 

competing system or bring in a 

competitor to operate in the store 

location. 

4. Limit permitted uses. The uses 

permitted under the lease should be 

limited to operation of the 

franchised store under the 

parameters of the franchise 

agreement. Not only will this impede 

the tenant from assigning the lease


Consider requiring the tenant 

to conditionally assign the lease 

to you. 

to a competing operator (or anyone 

else who does not intend to operate 

the franchised store), it will also help 

ensure the lease can be transferred 

only to you or another franchisee in 

the event of the tenant’s 

bankruptcy. 

5. Conditional assignment of the 

lease. Consider requiring the tenant 

to conditionally assign the lease to 

you. Such an assignment would give 

you the option (but not the 

obligation) of taking over the lease 

and operating the store (or possibly 

transferring the lease and store to a 

another franchisee) in the event of 

the tenant’s default under the lease 

and/or the franchise agreement. 

Conditional assignment language can 

be inserted in the lease itself or in a 

separate document. However the 

assignment is documented, the 

landlord’s consent (given up front, 

upon execution of the lease) is 

essential. You can expect the 

landlord to seek your agreement to 

completely cure any existing default 

by the tenant if you choose to 

exercise your assignment rights. 

6. Cross-default with franchise 

agreement. Including a clause that 

makes a default under the franchise 

agreement an automatic default 

under the lease will give the 

tenant/franchisee another incentive 

to perform, and it will increase your 

leverage in the event of 

nonperformance. However, the 

landlord may be concerned about 

the risk of lease termination because 

of a technical default under the 

franchise agreement. Be prepared to 

identify which of the tenant/ 

franchisee’s obligations under that 

agreement are important enough to 

justify termination of the lease in the 

event of a violation. 

Be prepared to identify which of 

the tenant/franchisee’s 

obligations are important 

enough to justify termination. 

Better Protection 

Your financial standing and track 

record, the size and prominence of 

your franchise system, and the 

7 

importance of the lease to the 

landlord will all impact your success 

in securing these changes. Ideally, 

negotiated concessions are set forth 

in a rider or addendum to the lease, 

which you would sign as a party 

along with the landlord and tenant. 

Alternatively, language can be added 

to the lease naming you as a third 

party beneficiary of the negotiated 

concessions. This is a less desirable 

approach, however, because your 

rights to enforce the lease as a third 

party beneficiary may not be clear. 

In any event, obtaining these six 

changes – or most of them – will 

afford you much greater protection 

than the typical landlord form lease.


Selling Through Foreign Agents & Distributors: FCPA Risks 

By Tom Collin 

The Foreign Corrupt Practices Act (FCPA) imposes criminal 

liability for bribes paid to foreign officials by a company’s 

agents or distributors. U.S. businesses that sell goods or 

services into other countries need to be aware of their 

liability under the FCPA, which applies broadly to any 

company or firm: 

• Organized under the laws of a state, territory or 

possession of the United States or having a principal 

place of business in the United States, or 

• Whose securities are registered in the United States or 

which is required to file periodic reports with the 

Securities and Exchange Commission (SEC). 

The Who & What of It 

The FCPA prohibits the offering or payment of any money, 

and the offering or giving of anything of value, to any 

person while knowing that all or a portion of its value will 

be offered, given or promised to a foreign official for a 

prohibited purpose to obtain or retain business. Whether a 

payment constitutes an unlawful bribe thus depends on 

whether it is made to a foreign official and whether it is 

made for a prohibited purpose. 

A foreign official, for purposes of this description of conduct 

under the FCPA, includes: 

• Any officer or employee of a government or of any 

department, agency or instrumentality of a 

government; or any person acting in an official capacity 

for such government, department, agency or 

instrumentality. 

• Any foreign political party or official of such party. 

8 

U.S. businesses that sell goods or services into 

other countries need to be aware of their liability 

under the FCPA. 

• Any candidate for foreign political office. 

The FCPA describes a prohibited purpose in terms of 

influencing an official to act favorably to the person offering 

a bribe. It is unlawful to offer or give any money or thing of 

value to a foreign official to: 

• Influence any act or decision by him or her in an official 

capacity. 

• Induce him or her to do or omit to do any act in 

violation of a lawful duty. 

• Secure any improper advantage. 

• Induce him or her to exert influence to affect or 

influence any act or decision of a government or any 

instrumentality of a government. 

Given the law’s broad scope, decisions about product 

distribution must be made with the possible impact of the 

FCPA in mind. 

Careful Selection of a Foreign Agent or Distributor: Due 

Diligence 

To minimize FCPA risk, a business should exercise due 

diligence in selecting any agent or distributor. Due diligence 

entails several steps; the most important are these: 

• Identify your business objectives clearly before you 

appoint either a distributor or an agent. Consider 

these questions: 

• What are your business objectives in the country or 

region? Take into account the local business 

environment as reflected, for example, in the 

Corruption Perceptions Index maintained by 

Transparency International.


• Is the appointment for the purpose of new entry or 

to expand an existing customer base? 

• Decide whether to use a distributor or an agent. 

Consider these functions: 

• Distributors buy goods and resell them to dealers, 

retailers or end-users. 

• Commercial agents solicit orders for goods but do 

not take title to them and, typically, perform no 

warehousing, delivery, 

installation or service functions. 

• Thoroughly vet each candidate. 

Actions to take include: 

• Collect publicly available 

information on the candidate; the 

U.S. Embassy or Consulate 

database will be helpful. 

• Interview the candidate’s references. 

• Complete a detailed questionnaire on the 

candidate, filled out either by the candidate or with 

the candidate’s direct input. 

• Determine the form of business entity (i.e., 

corporation or partnership). 

• Identify who the owners and key managers of the 

business are. 

• Learn whether the candidate or its key personnel 

have close relationships with government officials 

or politically prominent individuals. 

• Discover whether the business is state-owned or 

-controlled. 

• Identify any affiliates it might have (e.g., subsidiary, 

common ownership, other ties). 

• Learn its financial status, including its ability to 

access credit. 

• Identify the banks with which it has commercial 

relationships. 

• Determine whether any other manufacturers use 

the candidate as a distributor or agent, and how 

long those relationships have lasted. 

The U.S. Department of 

Justice’s (DOJ) summary of the 

Foreign Corrupt Practices Act 

Antibribery Provisions is a 

helpful resource. 

9 

• Identify the managers who will have primary 

responsibility for the account. 

• Learn whether the candidate or any of its owners or 

key personnel have been charged with, or 

investigated for, violation of any laws or regulations 

bearing upon its fitness to serve as a distributor or 

agent. 

• Learn whether it will sign an agreement that 

requires it to comply with antibribery and 

anticorruption laws and regulations, 

including the FCPA, and whether it will 

consent to an audit of its books and 

records to ensure FCPA compliance. 

Above all, be alert. Take seriously any red 

flags that arise during the due diligence 

investigation. 

About those red flags. When negotiating the business 

relationship, you might discern red flags that should warn 

you to investigate more deeply. Some typical red flags 

include: 

• Unusual payment patterns or financial arrangements. 

• A history of corruption in the country. 

• A refusal by a foreign joint venture partner or 

representative to provide certification that it will not 

take any action to further an unlawful offer, promise or 

payment to a foreign public official and not take any 

action that would put you in violation of the FCPA. 

• Unusually high commissions. 

• Lack of transparency in expenses and accounting 

records. 

• Apparent lack of qualifications or resources on the part 

of a joint venture partner or representative to perform 

the services offered. 

• A recommendation from an official of a potential 

governmental customer on behalf of a joint venture 

partner or representative. 

The U.S. Department of Justice’s (DOJ) summary of the 

Foreign Corrupt Practices Act Antibribery Provisions is a 

helpful resource.


The Need for Effective Compliance Measures 

To minimize the risk of FCPA violations, companies not only 

should engage in thorough due diligence before appointing 

foreign agents and distributors, but they should also include 

explicit compliance representations and assurances in 

written agreements. In the DOJ’s deferred prosecution 

agreement with AGA Medical Corporation, for example, the 

defendant, a manufacturer of medical devices sold in China 

through an independent distributor, agreed to implement 

compliance procedures that included standard provisions in 

contracts with agents and other third parties designed to 

prevent FCPA violations, including: 

(A) anti-corruption representations and 

undertakings relating to compliance with the FCPA 

and other applicable anti-corruption laws; (B) 

rights to conduct audits of the books and records of 

the agent or business partner to ensure compliance 

with the foregoing; and (C) rights to terminate an 

agent or business partner as a result of any breach 

of anti-corruption laws, and regulations or 

representations and undertakings related to such 

matters. 

The importance of compliance provisions in contracts with 

agents and distributors is also highlighted in Daimler AG’s 

$185 million settlement of FCPA charges in 2010. In its 

sentencing memorandum, the U.S. government noted that 

among Daimler’s other remediation efforts, the “company 

now requires anti-bribery contract terms and audit rights 

for its intermediaries, including provisions that allow for 

unilateral termination by Daimler.” 

Written Agent & Distributor Contracts 

It is imperative to have a written contract with each agent 

or distributor, and each contract must contain a promise to 

comply with all applicable laws and regulations in the 

conduct of business. The contract should contain at least 

10 

It is imperative to have a written contract 

with each agent or distributor. 

the following explicit promises or representations and 

warranties by the agent or distributor: 

• To comply with local laws and regulations prohibiting 

bribery and corruption, including any laws 

implementing or in furtherance of the: 

• Organization for Economic Cooperation and 

Development (OECD) Convention on Combating 

Bribery of Foreign Public Officials in International 

Business Transactions, 

• Organization of American States Inter-American 

Convention Against Corruption, or 

• United Nations Convention Against Corruption. 

• To understand the antibribery provisions of the FCPA 

and to conduct its business in conformity with them. 

• To certify annually that it is in compliance with 

antibribery laws, including the FCPA. 

• To permit the manufacturer to visit its offices on an asneeded 

basis to conduct compliance due diligence. 

• To permit, in the event there is reason to believe that a 

violation might have occurred, an audit of its books and 

records by an accountant or other auditor of the 

manufacturer’s choosing. 

• To acknowledge that failure to comply with antibribery 

laws, including the FCPA, is good cause for immediate 

termination.


Recent Decisions Inhibit Franchisee, Distributor Terminations 

By Barry Block 

Several cases recently decided in 

different states illustrate how 

difficult it can be for a manufacturer 

or franchisor to terminate a 

relationship with a distributor or 

franchisee. The causes vary, but 

these cases illustrate three: broad 

interpretation of the coverage of 

distributor or franchise protection 

statutes, ambiguous contract 

language and difficulties of proof or 

procedure. 

Statutory Interpretation 

State statutes protecting distributors 

and franchisees come in a variety of 

forms. Some protect distributors in 

general; some protect franchisees 

and distributors classified as 

franchisees. Under the Wisconsin 

Fair Dealership Law, for example, the 

grantor of a dealership may not 

terminate a dealership without good 

cause. This provision applies only to 

a dealer with a “community of 

interest” with its supplier in the 

business of distributing goods or 

services. Wisconsin courts 

developed two “guideposts” and a 

nonexclusive list of 10 factors to help 

determine whether a dealership 

exists. 

With so many guideposts and 

factors, it is often hard to predict 

what a court will decide. One factor 

is the percentage of gross proceeds 

or profits the alleged dealer derives 

from a supplier’s products or 

services. In February 2012, a 

Wisconsin court of appeals decided 

in Kelley Supply v. Hansen that a 

community of interest existed 

between a distributor of food 

ingredients and its supplier, even 

though the supplier’s products 

averaged only 14 percent of the 

distributor’s overall sales. A 1987 

Supreme Court of Wisconsin 

decision had found a community of 

interest even when the percentage 

was only 8 percent or 9 percent. In 

that situation and in Kelley, the court 

cited other factors to support its 

decision. In Kelley, the other factors 

included significant capital 

investments by the distributor 

(although some investments might 

have been for the benefit of other 

suppliers as well) and a 26-year 

relationship. 

In February 2012, a U.S. federal 

district court in Washington state 

decided in BP West Coast Products v. 

Shalabi that a gasoline 

station/convenience store operator 

was properly classified as a 

franchisee and protected by the 

Washington Franchise Investment 

Protection Act. The operator met all 

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Poor contract drafting 

or mistakes in contract 

management can make 

termination difficult or 

impossible. 

of the definitions of a franchise, 

including payment of a “franchise 

fee.” The oil company did not charge 

a fee to be a gasoline station 

operator, but the court found a fee 

existed because the operator was 

required to pay more than a 

reasonable wholesale price for 

gasoline due to the oil company’s 

zone pricing scheme and faulty 

deliveries. 

Contractual Interpretation & 

Management 

Two recent cases illustrate how poor 

contract drafting or mistakes in 

contract management can make 

termination difficult or impossible. In 

a July 2011 case, Southern Wine v. 

Mountain Valley, the U.S. Court of 

Appeals for the Eighth Circuit upheld 

a jury verdict in favor of a 

terminated distributor on the basis 

that the distribution agreement 

granted the distributor a perpetual 

term. 

That distribution agreement 

provided the distributor relationship 

would remain in effect until 

terminated by mutual consent or for 

cause. The manufacturer argued it 

should be interpreted as having an 

indefinite term, allowing termination


at will. Interpreting Nevada law, the 

appellate court found that because 

the grounds for termination were 

stated, the contract should be 

regarded as perpetual unless either 

ground was met, even though the 

term perpetual did not appear in the 

distribution agreement. 

A second contract interpretation 

case, Husain v. McDonald’s, was 

decided by a California appellate 

court in April 2012. In this case, 

McDonald’s consented to a 

franchisee’s assignment of its 

franchise agreements to the Husains. 

The Husains argued that when 

McDonald’s consented, it agreed to 

“rewrite” the terms of the franchise 

agreements. A rewrite normally 

grants franchise rights for a 20-year 

term. 

No rewrite occurred, and 

McDonald’s allowed three of the 

franchise agreements to expire 

based on the Husains’ poor financial 

condition as reflected in a past 

failure to timely pay their debts to 

McDonald’s and a breach of certain 

contractual reinvestment 

obligations. The Husains then sought 

an injunction to prevent McDonald’s 

from removing them from the 

restaurants whose terms had 

expired. 

The assignment agreement between 

the selling company and the Husains 

stated that, “In consideration of 

McDonald’s consent to this 

Assignment and the issuance of a 

rewrite to Assignee, Assignor waives 

… any claim for a rewrite of the 

franchise” for a location that 

previously had been refused a 

rewrite. The court agreed with the 

Husains that by this assignment, 

McDonald’s had agreed to a rewrite 

of the franchise agreements. In 

addition to the ambiguous contract 

language, McDonald’s had a general 

policy, which had been 

communicated to franchisees, of 

providing new 20-year terms to 

franchise purchasers. McDonald’s 

also drafted the assignment 

agreement. 

Even when the bare 

facts support a case for 

termination, problems of 

jurisdiction and proof 

may prevent success. 

Procedural Issues 

Even when the bare facts support a 

case for termination, problems of 

jurisdiction and proof may prevent 

success. In the April 2012 case of 

Capriotti’s v. Taylor, the district 

court in Delaware enjoined the 

franchisor, Capriotti’s, from 

terminating the franchisee of one of 

its sandwich shops in Las Vegas. 

The dispute arose when Capriotti’s 

learned that Crazy Horse III, a 

Nevada “gentlemen’s club,” was 

offering a happy hour promotion by 

which customers could purchase a 

six-inch Capriotti’s sandwich and a 

beer for $5. A Crazy Horse flyer 

advertising the deal featured an 

exotic dancer along with one of 

Capriotti’s trademarks. It also 

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advertised the deal on its Facebook 

page and a local ESPN radio affiliate, 

and several Las Vegas-based blogs 

mentioned it. Capriotti’s determined 

the franchisee had, without 

authorization, teamed up with Crazy 

Horse to promote Capriotti’s 

sandwiches in connection with 

topless dancing. This gave rise to 

Capriotti’s cause of action. It sought 

an injunction to prohibit the 

franchisee from continuing to 

operate. 

Crazy Horse’s general manager 

signed an affidavit that the 

franchisee had fully approved the 

promotion, but the franchisee 

denied she had given Crazy Horse 

permission to advertise with the 

mark. The court denied Capriotti’s 

injunction on the basis that, in light 

of this dispute, the decision required 

the testimony of the general 

manager from Nevada, and the court 

was unable to exercise personal 

jurisdiction over this critical witness. 

Conclusion 

Difficulties in terminating 

franchisees and distributors are 

preventable by clearer contract 

language in many cases. But in other 

cases they are harder to overcome, 

particularly when applicable statutes 

protect distributors and franchisees.


Recent Activities 

A partner in our Cleveland office, Tom Collin leads Thompson Hine’s franchising and distribution practice. Chambers USA 2012 

names him one of the leading franchising lawyers in the United States and a leader in antitrust litigation in Ohio. Chambers also 

notes that clients view Tom as an “incisive, thorough and efficient attorney” who “understands how to effectively resolve a case 

either through litigation or settlement” and “knows the law very well but … also has a very good sense of balancing the practical 

considerations with the legal considerations.” 

Thompson Hine’s Jen Roach, Matt Ridings and Darcy Brosky spoke at a June 28, 2012 update of the Distribution and Franchising 

Committee of the American Bar Association’s Antitrust Section. The program summarized significant recent developments in 

antitrust, Foreign Corrupt Practices Act and consumer protection law relevant to distribution and franchising. 

Thompson Hine sponsors, and Barry Block moderates, the International Franchise Association’s Franchise Business Network 

meetings in Cincinnati, Columbus and Dayton, where franchisors, franchisees and suppliers exchange ideas and share business 

strategies. The June 13, 2012 program, “How to Grow Your Franchise Business,” featured presenter Jania Bailey, president and 

COO of FranNet LLC. 

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Franchise & Distribution News - Thompson Hine LLP

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