Evidentiary & Trial Issues in Franchise Cases

Carmen Caruso Stahl Cowen

Chicago, Illinois

EVIDENTIARY & TRIAL ISSUES

in Franchise Cases

The Implied Covenant of Good Faith & Fair Dealing

Common Law Fraud

STRATEGIC QUESTIONS*

What is your trial theme?

What evidence will be the most persuasive?

How do we get that evidence admitted?

What is the most persuasive way to do it?

*Going beyond identifying the elements of the claim or defense, and what is the available evidence?

Franchisee seeks injunction against

terminationfor alleged QSC

violations

What evidencedo you most

want to have?

A TREE GROWS IN PARISDayan v. McDonald’s Corporation

60 trial days in state court

Lessons from Dayan v.

McDonald’s Corporation

Anticipate and Adapt

Challenge Assumptions

Turn the Tables

Raise the Stakes

Less May Be More

CREDIBILITY IS KEY

SYSTEM: A restaurant concept featuring Texas-style barbeque food presently including steaks, ribs, chicken, pork; with defined décor,service, theme, presentation etc.

FRANCHISOR MAY: Modify System from time to time in the exercise of reasonable business judgment, on reasonable notice to Franchisee.

FRANCHISEE SHALL: At all times comply with the System. Periodically remodel as Franchisor may reasonably require, and

prior to any transfer or renewal. Only purchase equipment and supplies from approved vendors,

which may include Franchisor or its affiliates.

Texas BBQ -- franchise agreement

Troubles at Texas BBQ

Sales go flat. Market share erodes. Lost customers flock to Brazilian-Style steakhouses featuring endless servings of meat.

BREACH #1: Franchisor does nothing. Franchisees allege that Franchisor has “slacked off.”

BREACH #2: Franchisor rolls out its own endless servings of meat menu -- Big Brazil. Franchisees allege improper, coerced “concept change.”

FRAUD CLAIM: A new franchisee just completed training and is ready to open when Big Brazil is announced.

WINNING THEMESin Fraud & Contract Cases

Freedom of Contract vs.Intent of the partiesReasonable expectationsBenefit of the bargainGood faith performanceFaithful to common purpose

Trusting? Naive?

OppressionBad faithOpportunisticTaking advantageAbusiveLyingUndeservingStealingReckless (arrogant)

UNIVERSE OF EVIDENCE

◄ Time ►

Franchise relationshipSystem historyMarket changes

▲Other Transactions

& Occurrences▼

Do You Suffer From Evidence Bias?

Direct Evidence

“proves the existence of a factwithout requiringany inferences”

Circumstantial Evidence “establishes the fact to be proved only through inference based on human experience that a certain circumstance is usually present when another certain circumstance or set of circumstances is present”

Searching for Admissions(the best direct evidence)

Written Statements: Correspondence. SEC filings. Press releases. Whereas clauses. Notes. Web Pages. FDD’s. Internal memos. Tax returns. Business plans. Bank applications. Financial statement (footnotes). PowerPoint slides at the convention.

Testimony from principals (officers, owners) or agents (disgruntled employees, brokers, reps). Previously recorded or live in cross-examination on a good day.

Ear Witness Testimony (not hearsay – FRE 801(d)(2)).

A tape of the company’s president at the convention two years ago, proclaiming “BBQ Forever -- We will never change!”

An internal memo from a company vice president discussing all the pro’s and con’s and warning that some franchisees will be unhappy with the Big Brazil roll-out?

Admissible? Persuasive?

The Little Boy Who Cried Wolf

UNDUE PREJUDICE

RULE 403:

“Although relevant, evidence may be excluded if its

probative value is substantially outweighed by the

danger of unfair prejudice, confusion of the issues, or

misleading the jury, or by considerations of undue

delay, waste of time, or needless presentation of

cumulative evidence.”

Surviving an Admission

“I was mistaken” (or “he/she was mistaken”)

“I was misunderstood”

“Judge me by my actions”

“I didn’t have all the facts” (relating to the past)

“Things changed” (relating to intent or future performance)

Alleged Serial Misrepresentations at “Introduction Day” to multiple franchisees on numerous occasions that: “Our concept Is proven … We will never change.”

Is Time On Your Side?

►In close proximity? ►More remote?

FRE 404(b): ‘other crimes, wrongs, acts … may … be admissible … as proof of motive, opportunity, intent, preparation, plan, knowledge, … or absence of mistake or accident …”

Texas Cookie Co. v. Hendricks & Peralta

Remote May Be Stronger

“Had [the earlier purchasing franchisee] testified to a past occurrence of unreasonably optimistic predictions followed by disappointing results, this may have been admissible to show that appellants were aware, at the time they represented the franchise potential to [the later purchasing plaintiff], that such predictions were likely to be wrong.”

ILLUSTRATIVE EVIDENCE

No specific Federal Rule Of Evidence governs

Offered as an aid to explain testimony or other evidence

Must be authenticated in order to be admitted

Must not be unduly prejudicial (FRE 403)

In the court’s discretion, may be used in closing even if not admitted

Is the subsequent roll-out (Case #2) admissible to prove “slacking off” (Case #1)

FRE 407: SRM generally not admissible to prove culpable conduct, but:

Subsequent Remedial Measures

Admissible for other purposes, e.g., to prove control or feasibility, if controverted, or for impeachment.

Arguably FRE 407 does not apply in contract cases – as an alleged breach of contract is not considered “culpable conduct.”

Do the market conditions demand change?

What has the competition been up to?

Franchisor due diligence or lack thereof? Mixed results from field testing?

Allegedly excessive (or reasonable) costs to the franchisee? Reasonable or unreasonable projected ROI? Bases for projections?

Hidden benefits to franchisor? Product/equipment sales?

Admissible? Persuasive?

Changes in subsequent Texas BBQ franchise agreements, expressly permitting change from “BBQ” to other restaurant concepts.

Franchisor has introduced a new Brazilian franchise concept that competes against Texas BBQ and was a cause of the sales problem in the first place?

A finding by a registration state official that Texas BBQ had violated the state’s disclosure laws by failing to disclose their intent to roll-out Big Brazil?

Admissible? Persuasive?

A franchisee-commissioned customer survey, showing that the public associates “Texas BBQ” with Texas heritage and American pride.

What if it is was a franchisor-commissioned study that reached an opposite conclusions

Until the last minute, Franchisor considered calling it “Big Texas” instead of Big Brazil.

What’s in a name, anyway?

Admissible? Persuasive?

“Life in all its fullness must supply the answer to the

riddle”

-- Justice Benjamin Cardozo

What evidence is the most persuasive?