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IFA's preferred alternative to address employee health care issues is allowing small employers to band together through national associations or franchise systems to purchase health insurance.

Kumon Learning Centers Franchisee Sues in Newark, New Jersey

In an unusual twist in a franchisee termination lawsuit, a group of customers have petitioned the franchisor to reopen the operation under the ownership of the terminated franchisee. More than 35 families of children who took classes from Maria Wachtel, a franchisee of Kumon Learning Centers, signed a petition after Wachtel's franchise in Newburgh, NY, was terminated.

Wachtel has filed a lawsuit for $500,000 in damages and several million dollars in punitive damages for wrongful termination in Federal District Court in Newark, NJ (Wachtel v. Kumon North America, No. 2:11-cv-05164). Kumon is based in Teaneck, NJ.

“Maria made the Kumon center successful where two prior franchisees had failed,” said W. Michael Garner, who is representing Wachtel. He said that she took over the franchise in 2004 and raised attendance from about 35 students to more than 80 students in a year.

The lawsuit alleges that Kumon granted Wachtel a renewal franchise in November 2010, but less than six months later, summoned her to corporate headquarters. At the meeting, Wachtel was told her franchise would be terminated in 60 days. “Kumon's reasons for termination were 'repeated' failures to cure that took place prior to Kumon's issuing a new, renewal agreement. Therefore, the reasons were stale and superseded by the time they gave her a notice of termination,” Garner said. “[We believe the motivation is that] Kumon can take over her territory and operate it for itself.”

The petition by parents of students at Wachtel's franchise was circulated by Ninon O'Neill, one of the parents. “The petition doesn't carry any weight in court, but it should alert Kumon to the fact that it has terminated a teacher who was loved and respected by the students and teachers,” added Garner.

Kumon did not respond to e-mail requests for comment.

Firehouse Subs Loses Infringement Lawsuit

Sandwich chain Firehouse Subs lost a federal trademark infringement lawsuit that it had filed in 2008 against Calli Baker's Firehouse Bar and Grill in Myrtle Beach, SC. The jury trial in the U.S. District Court in Florence, SC, brought into question the validity of the franchisor's trademark registration of the word “Firehouse.” In the trial, Firehouse Subs asserted Lanham Act claims for 34 alleged violations of its “Firehouse” mark by Calli Baker's. The eight-person jury found that “Firehouse,” which was granted by the U.S. Patent and Trademark Office in 2003 for use in the category of restaurants, was “fraudulently obtained,” and it ruled against all of the claims by the franchisor. Potentially, the trademark could be canceled.

Given the court's ruling, the term “Firehouse” has basically been moved into the public domain, making it much more difficult for Firehouse Subs to challenge other restaurants and food-service operations from using the term. Other restaurants that use the term “Firehouse” in their title will have a stronger standing, especially if their operation predates the creation of Firehouse Subs.

In a prepared statement to FBLA, a Firehouse Subs representative wrote by e-mail: “Firehouse Subs proudly holds 110 trademarks nationally and internationally, and we passionately disagree with the Florence, SC, jury's verdict regarding one of our marks. We are a company of more than 200 small business owners who have invested their livelihoods in Firehouse Subs, and it is our obligation to protect them and our brand. A motion has been filed to overturn the verdict because there is no evidence to support it.”

While the court is considering the motion, the defendant can continue to operate under the name of Calli Baker's Firehouse Bar and Grill. He and his counsel have asked the court for reimbursement of legal fees, which are about $490,000.

Ice Cream Franchisee Sues Tamarac, FL, over Zoning Change

The prospective owners of a Bruster's Ice Cream franchise are suing the city of Tamarac, FL, for changing zoning for the proposed location. The lawsuit, filed in U.S. District Court for the Southern District of Florida, alleges that Tamarac government officials informed Carlos Frias and his father Fernando that the land they were purchasing was zoned for commercial use. However, the Friases claim that zoning was changed to mixed use after they purchased the property, and the proposed ice cream store did not qualify. The lawsuit is seeking $500,000.

“This was a family's dream. They mortgaged a second home and have lost at least $300,000, and maybe as much as $800,000, depending on how you do the calculations,” said Kenneth Eric Trent, an attorney in Fort Lauderdale, FL, who is representing the Frias family. “They did their homework and due diligence. They were told that the land had a future use designation as 'general commercial,' and that's why they bought it. Then, when they showed their plans for approval, the city rejected them and said it was becoming mixed use.”

Mixed use in Tamarac requires, among other things, that property be at least 1.5 acres. The proposed site of the Bruster's was 0.67 acres. Trent said that the city offered a variance, but it contained so many restrictions that it was impractical. For example, he said that the variance returned the property to mixed use if the ice cream store was sold ' clearly undermining the franchisee's ability to sell the franchise or turn it into another business if the franchise failed.

Ultimately, the Frias family sold the property to Tamarac at a large loss, and it lost a $30,000 franchising fee. The family is not seeking to open a Bruster's in another location because it lacks the funds, said Trent. He added that Bruster's “has been very supportive” of the prospective franchisee, but it is not a party to the lawsuit.

IFA Pushes Repeal of Health Care Law

The International Franchise Association (“IFA”) has announced a “renewed push” for legislation to repeal the employer-mandate provision of the Patient Protection and Affordable Care Act, the federal health care law that was passed in 2010. Specifically, IFA is supporting The American Job Protection Act (S. 20) to repeal the federal health care law. S. 20 is sponsored by Sen. Orrin Hatch (R-UT), and it closely matches H.R. 1744, which passed the U.S. House this year.

In September, IFA released the results of a study on the impact of the health care law, which will require that an employer with more than 50 full-time employees must offer affordable health insurance or pay a penalty of as much as $2,000 per employee, beginning in 2014. The study, conducted for IFA by the Hudson Institute, found that the mandate will put 3.2 million full-time jobs “at risk.” The health care mandate would affect large franchisors and multi-unit franchisees that exceed the 50-employee threshold.

The Hudson Institute report is based in part on detailed employment and insurance data from 15 franchise businesses, including six franchisors, eight multi-unit franchisees and one single-unit franchisee from a wide range of industries. It analyzes how a company might adjust its number of full-time employees to avoid hitting thresholds for mandated insurance and/or penalties. “[The] report shows how the health care law will force franchise small business owners to choose between reducing the number of full-time employees or downsizing their businesses or both,” said IFA President and CEO Steve Caldeira.

IFA's preferred alternative to address employee health care issues is allowing small employers to band together through national associations or franchise systems to purchase health insurance.