Contact The Law Office of Jeff Vail LLC at (303) 800-8237 or jvail@vail-law.com

Thursday
Feb022012

Case Study: Franchise Dispute Arbitration

Major “bet-the-company” business disputes don’t happen that often.  Fortunately.  In fact, for most small and medium-sized companies, bet-the-company litigation may happen only once in a career.  But precisely because these disputes are not common occurrences, most business owners have little or no experience with them.  This post will examine one such bet-the-company case, including frank discussions of cost, timing, and other lessons, with the goal of raising the business owner’s awareness of these realities before they occur.  All business litigation is unique, but many of these same themes and concerns run through most complex business litigation.

Overview:  This firm represented a dental franchisee in a dispute with its franchisor.  Our clients (a partnership of two dentists) purchased a dental franchise and simultaneously signed a 10-year lease for a dental office owned by the same individual who owned the franchise company.  Our clients were skilled dentists but had little business experience and felt that the franchise was a good choice because it specifically promised hundreds of hours of training in clinic operations, a detailed franchise manual, and the loan of a handful of pre-trained employees, as well as participation in the franchise system’s advertising program.  Unfortunately, very little of what was promised was ever provided.  Our clients’ requests for these training and materials were refused, and when our clients’ eventually sent a written demand it was the franchisor that responded by terminating the franchise.  This placed our clients in a particularly precarious position because termination of the franchise placed them in breach of their 10-year lease and caused hundreds of thousands of dollars in personal guarantees for building improvements and equipment to become immediately due.

Arbitration:  After two months of investigation and efforts to negotiate a resolution, our clients began an arbitration proceeding through the American Arbitration Association on March 11, 2011.  Arbitration was required by the franchise agreement.  Our clients asserted claims of breach of contract and fraud.  Additionally, because the franchisor itself had very little assets, we also asserted an alter ego claim against owner of both the franchise company and the office building as an individual in order to ensure that, if we prevailed, we could collect against the owner’s personal assets.  After written discovery, disclosures of expert witnesses on the topic of franchise operations and financial damages, and five depositions, a two-week arbitration hearing was held from November 8-17.  The arbitrator issued an award overwhelmingly in favor of our clients on December 30th.  Our clients prevailed on their claims of breach of contract and fraud as well as on their alter ego claim, resulting in the entire award being enforceable against the owner of the franchisor and office building individually.  The arbitrator awarded $400,000 in damages, required the respondent to pay all of our client’s arbitration costs including attorneys’ fees and expert witness fees, required the respondent to pay off an equipment loan of approximately one hundred thousand dollars, and released our clients from their lease and personal guarantee.  Additionally, the arbitrator found in our clients’ favor and rejected a $4 million counter-claim filed by respondents.

Costs:  Complex business litigation is expensive.  Here, the case involved numerous entities, thousands of pages of documents, several interrelated contracts, required the deposition of 5 witnesses, and concluded with an 8-day hearing with 12 witnesses.  The fees paid by our clients to the AAA for management of the case and the arbitrator’s time totaled $23,750.00.  We also worked with a highly regarded expert witness to provide key testimony of franchise practices and financial damages, whose total fees for his analysis, report, critique of the opposing expert’s report, deposition, and trial testimony were $28,093.00.  Attorney’s fees from this firm for the entire matter totaled $73,732.00.  Including miscellaneous expenses and deposition costs, the case cost our clients a total of $129,255.72—all of which was awarded back to our clients by the arbitrator.  Without a doubt, this is a large expense for any business.  However, in light of the complexity of the case we believe these costs are significantly lower than what most firms would have charged -- and the results speak for themselves.  While it can be difficult to compare legal fees between different cases, here there is at least one clear comparison:  the Respondents’ total costs and fees on this very same matter were $190,161.40 -- 47% higher than our clients’ costs, despite the fact that respondents lost on all claims.

Comparisons with court proceedings:  one of the questions most commonly raised by business owners concerns the differences between litigation in courts and through binding arbitration.  Here, because this case was handled under the AAA’s large case commercial arbitration rules, there were relatively few differences between this arbitration and a court case.  Perhaps the largest advantage of arbitrating this matter was that it was resolved quickly:  a hearing was held less than 8 months from the initiation of the arbitration, with the award issued less than two months after the hearing.  Depending on the venue, this case could have easily taken 18 months or more to complete in the courts.  Another advantage of arbitration is that it is very difficult to appeal and prevail – the arbitrator’s award is essentially the last word.  One notable disadvantage of arbitration in this case was the cost—an additional $23,750 our clients had to pay for the arbitration itself.  In comparison, the expenses paid to the court are normally only a few hundred dollars in filing fees and jury fees.   There are numerous other differences between court and arbitration.  For example, while I often prefer to have a case decided by a jury, here it may have been useful to have the case decided by an arbitrator with extensive experience in franchise law.

There are a few important take-aways to highlight in this case.  First, while this arbitration represented a significant cost to our clients (about 10% of their annual revenue), their only other option was bankruptcy, both personal and for their business.  Bet-the-company litigation is rarely cheap, but it is often a bargain compared to the alternatives.  Second, some of the best money a business can spend is to engage a trial attorney as early as possible in a dispute.  Businesses often wait until they’re in over their heads before hiring an attorney, at which point many options are no longer available.  Even if you’re already working with your existing attorney who specializes in business formation or transactions, engaging litigation counsel long before a dispute actually turns into litigation will help you evaluate the true risks and costs of litigation in your decision making.

If you are currently involved in a business dispute and would like to discuss obtaining a case evaluation specific to your circumstances, contact us at (303) 800-8237 or jvail@vail-law.com

Tuesday
Jan032012

Franchise Dispute Victory

This firm represented a dental franchisee in a dispute with its franchisor in Denver, including claims of breach of the franchise agreement, fraud, and equitable relief.  After a two-week arbitration hearing through the American Arbitration Association, we obtained findings of fact overwhelmingly in our client's favor and on December 30, 2011 were awarded over a half million dollars in favor of our client, full release from the associated lease, loan, and personal guarantees, and successfully defended against the franchisor's four million dollar counterclaim.  

The Law Office of Jeff Vail leveraged expert witness testimony to establish that, despite being profitable nearly from its outset, the franchisee suffered $400,000 in damages on a "benefit of the bargain" theory because it did not receive the training, operations manual, or other support promised by the franchisor.  The award also included recovery of all legal fees, expert witness fees, arbitration fees, and other costs associated with the dispute, in total more than half a million dollars.

The Law Office of Jeff Vail LLC represents small and medium-sized business owners in litigation in Denver and throughout Colorado.  As a result of our innovation and efficiency measures, including our unique open-source litigation checklist, we are often able to offer flat fee, contingency fee, or hybrid fee arrangements in business disputes. 

Thursday
Jun232011

Mixed Martial Arts & Antitrust Law - A Primer on Zuffa, LLC's Purchase of Strikeforce

The recent purchase of Strikeforce by Zuffa, LLC (the UFC’s parent company) has, in the minds of many fans, created a monopoly in MMA.  Unfortunately, there is a great deal of confusion as to what constitutes a “monopoly” under the antitrust laws, and when such a monopoly is illegal.  Below I’ll provide a very brief introduction into the antitrust offense of illegal monopolization as it applies to the world of MMA in the hopes that this framework will help fans better understand the ongoing debate.

The phrase “antitrust” stems from the late nineteenth century when John D. Rockefeller’s Standard Oil Company used “trusts” to attempt to monopolize the oil industry in the United States.   The US passed the Sherman Act (and later the Clayton Act) in an effort to prevent the monopolistic actions and other anticompetitive behavior of these trusts, hence the term “antitrust.”  For non-US readers, most nations used the term “competition law” to mean the same thing as antitrust.

First, it’s important to understand that simply having a monopoly is not illegal.  Let’s assume for a second that Dana White & Co. do have a monopoly over MMA—that, by itself, is not an antitrust violation.  An antitrust violation only exists when (1) a party possesses monopoly power, AND (2) that party has acquired, enhanced, or maintained that power by the use of exclusionary conduct.  If the UFC/Strikeforce combination has monopoly power as a result of smart business practices and a superior product alone, then that monopoly is perfectly legal.  However, if they are using that monopoly power to exclude competitors then they are likely in violation of antitrust laws.

Second, there is a great deal of confusion about when a monopoly exists.  Contrary to the popular definition that a monopoly exists when there is only one provider in a market, a monopoly for the purposes of US antitrust laws exists whenever one participant in a market has the power to control prices or exclude competition.  A market share of more than 70% is generally enough to prove monopoly power.  Of course, the key in most illegal monopolization cases is this question:  “70% of what market?”  In MMA, for example, the relevant market might consist only of “televised professional MMA.”  Similarly, courts have held that the relevant market in a case involving professional boxing could be limited to only “championship boxing.”  Depending on the specific market definition accepted by the court, the UFC/Strikeforce combination likely possesses monopoly power.

Finally, it’s important to realize that both the Justice Department and private companies can sue to enforce the antitrust laws.  The Justice Department tends to use their limited resources to address mergers between major utilities, huge multinational corporations, and other instances deemed critical to the national economy.  As a result, most antitrust litigation is commenced by private companies—usually when one company feels it has been harmed by the anticompetitive actions of another.

If you have concerns about anticompetitive behavior in any industry sector, contact jvail@vail-law.com for a consultation on legal options including antitrust and other business claims.

Saturday
Nov132010

List of Potential Claims in Colorado Business Disputes

When a business dispute arises, it’s often best to work backwards from potential claims that could eventually be asserted in a lawsuit.  Below is a list of some of the more common claims that might apply to a business dispute:

-       Breach of Contract

-       Unjust Enrichment

-       Negligence (including professional negligence by attorneys, CPAs, engineers, etc.)

-       Negligent or Fraudulent Misrepresentation

-       Breach of Fiduciary Duty

-       Civil Conspiracy

-       Civil Theft

-       Theft of Trade Secrets

-       Intentional Interference with Contract (or Prospective Contract)

-       Libel or Slander

Less frequently, businesses may have viable claims under state or federal antitrust laws, the Colorado Consumer Protection Act, the Racketeer Influenced and Corrupt Organizations Act, or other statutes. 

Whenever a business dispute arises, business owners should consult an attorney to determine what viable claims the business may assert—or that may be asserted against it.  I’ve represented multiple start-ups and small businesses in a wide range of litigation, from breach of fiduciary duty and fraud to antitrust and RICO claims.  In some cases, I’ve represented businesses on a contingency-fee basis, allowing the business to pursue viable claims without paying tens or hundreds of thousands of dollars in attorneys’ fees up front.  Contact me at (303) 800-8237 or jvail@vail-law.com to discuss your situation and litigation options today.

Wednesday
Sep152010

"Facebook Torts" - Online Libel and Invasion of Privacy

The use of social networking services is exploding, with Facebook.com recently surpassing 500 million members.  While social networking websites like Facebook, Twitter, and LinkedIn play an increasingly important role in how we work and communicate, not everyone is using social networking for good.  Unfortunately, social networking users are increasingly causing harm to others through their online activities.  From school-aged children using Facebook to bully classmates to identity theft and impersonation, the abuse of social networking sites can cause very real emotional, social, and economic harm.  For example, I recently filed a lawsuit on behalf of a client whose name and identity were stolen from a social networking site and used to create false profiles on sex-related social networking sites.  You may have many options, including:

Injunctive Relief:  Often the first priority is to stop the abusive behavior, or to remove the damaging posting from the internet.  It may be possible to file for a temporary restraining order to put a stop to this kind of behavior immediately, and then to seek a permanent injunction to protect yourself or your children.  While lawsuits often take years to reach a final resolution, a temporary restraining order can go into effect within days.

Libel:  In some cases, it may be possible to sue for libel and collect monetary damages.  The Constitutional guarantee of freedom of speech creates a high bar for libel lawsuits, especially against "public figures."  However, because most social networking abuses target private citizens, it is often possible to sue for the publication of false and defamatory statements online.

Invasion of Privacy by Misappropriation of Likeness:  A common misperception is that once you post a photo of yourself on Facebook or other websites, anyone can take it and use it.  Not true.  In fact, in Colorado you can sue for the misappropriation of your likeness, so long as the other person used your photograph for their own gain and without permission.

Filing Anonymously:  In some cases, the last thing that a victim of online abuse wants is to increase the publicity of their abuse by filing a lawsuit.  In such cases, it is often possible to file a lawsuit anonymously--with "Jane Roe" or "John Doe" substituting for your real name.  While this isn't possible in most cases, I have succeeded previously in filing a lawsuit anonymously on behalf of a client who was the victim of online abuse.

Contact the Law Office of Jeff Vail LLC at (303) 800-8237 or email jvail@vail-law.com.