Confiscation of franchisee’s stores

…cross-default provision, which also appears in the majority of franchise and dealership agreements in other franchise and dealer systems across the country, the franchisor or manufacturer is permitted to terminate every single outlet of a franchisee or dealer even though the alleged violation is associated with only one of the franchises or dealerships.

The Goldstein Law Group
November 15, 2005

Confiscation of franchisee’s stores
Press release

On November 10, 2005, the United States District Court for the Western District of Pennsylvania issued an Order prohibiting GNC from confiscating six GNC franchised stores owned by Sunil Masson, a GNC franchisee located in Long Island, New York.

Jeffrey M. Goldstein, the Senior Partner of The Goldstein Law Group, a Washington, DC-based litigation firm representing Masson, commented that “this ruling is a clear message to GNC that it can no longer continue to follow its normal procedure of confiscating the assets of franchisees around the country before allowing these franchisees an opportunity to argue their cases before a Court.”

The Federal Court’s ruling appears to be the first of its kind against the giant vitamin franchisor GNC, which, over the last 5 years, has repeatedly taken back for its own benefit many stores of its franchisees without paying any compensation to these franchisees. This “take-back” program not only directly enriches GNC’s coffers, but also indirectly props up its company-owned retail establishments that are in direct competition with its franchisees.

The dispute with Masson appears to have arisen when Masson approached GNC to obtain its approval for Masson to sell one of his stores to a third party. Immediately thereafter, GNC began to carry out a campaign of harassment against Masson by deluging him with unscheduled inspections of his stores. Although Masson had been a stellar franchisee for the ten years preceding the dispute, the GNC inspectors strangely allegedly found “illegal” product in two of Masson’s stores.

GNC then argued that, under its interpretation of the franchise agreements with Masson, GNC was entitled to immediately terminate Masson’s franchise agreements, without providing notice or an opportunity to cure. GNC further argued that it was entitled to take back from Masson all six of his stores, based on the “cross-default” provisions in Masson’s franchise agreements. Goldstein explained that under a cross-default provision, which also appears in the majority of franchise and dealership agreements in other franchise and dealer systems across the country, the franchisor or manufacturer is permitted to terminate every single outlet of a franchisee or dealer even though the alleged violation is associated with only one of the franchises or dealerships. Goldstein pointed out that “the cross-default provision, which is regularly upheld by Courts, is one of the most
Draconian and lethal legal weapons in a franchisor’s arsenal.”

In granting the Order preventing GNC from taking back Masson’s stores until after a full trial could be conducted, the Court also rejected GNC’s argument that Masson would suffer no irreparable harm if the Court denied Masson’s Motion and permitted GNC to confiscate Masson’s stores until after a trial. GNC had argued that if it later turned out following a full trial that GNC’s termination and “take-back” of Masson’s stores were wrongful, Masson could then, at that time, be compensated by a monetary award. The Court rejected this argument, instead appearing to embrace the one made by Goldstein that, in cases where very large amounts of money and long-standing business operations are involved – as in this case where Masson estimates his investment in the stores to be in excess of $2 million and where Masson had been operating for over ten years – irreparable harm, not compensable in damages, would result, absent an injunction.

Goldstein explained that the Masson case is a bit different than many of the others now pending against GNC. “Whereas Masson’s case focuses on claims that GNC improperly targeted his stores for termination based on the pretext of faulty inspection reports, the other cases arise out of predatory pricing and other marketing practices used by GNC to provide an unfair competitive advantage to its company-owned stores at the expense of its franchise stores.”

These predatory practices are the subject of two other lawsuits filed by The Goldstein Law Group over the last three months on behalf of other GNC franchisees.

With regard to the latter cases, Goldstein observed that “it is difficult to fully understand why GNC has for so many years chosen to engage in what amounts to economic cannibalism. GNC’s aggressive and predatory practices aren’t good for GNC; aren’t good for its franchisees; and aren’t good for its customers. It’s a “lose-lose-lose” proposition all around.” Goldstein concluded by suggesting that “Perhaps GNC will wake up and see these lawsuits not as a thorn in its side, but as a more endemic malignancy that has the potential to destroy its entire franchise system.”

The GNC-Masson case, although serious for the franchisee involved, is unfortunately only a small blip on the radar screen of current overall franchisee and dealer discontentment. “Although prevailing law in almost every state has a pro-franchisor bias,” stated Goldstein, “there are a few franchisees and dealers who have chosen to fight in court to prohibit franchisors' relentless pursuit of their franchisees’ and dealers' business without paying any compensation.” In this regard during the last year The Goldstein Law Group has been successful by using litigation to bring about favorable results for their franchisee clients in the Cendant Hotels, Choice Hotels, Val-Pak, Re-Bath, and H&R Block systems.

Contact: Jeffrey M. Goldstein, Esq.


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