Problem 1 ( 40 Points )
James Smith was interested in purchasing a Quiznos franchise. He entered into discussions with Quiznos but the only locations that were available would require him to relocate which he was unwilling to do. Several months later he learned that the owner of the local Quiznos franchise, Bethlehem Sandwich Shop, LLC, was interested in leaving the business. Bethlehem had only operated the franchise for 4 months and its owners were relocating for family reasons. Smith entered into negotiations with Bethlehem Sandwich Shop,LLC and the following provisions were agreed upon:
Smith would purchase the franchise agreement from Bethlehem Sandwich Shop, LLC for $75,000.
Smith would take over the lease of the premises. The landlord was not related to Quiznos. The lease, which had 3 years remaining on its term, required rental payments of $20,000 per year.
Bethlehem Sandwich Shop, LLC and its owners would execute a covenant not to compete with Smith that would prohibit them from owning or operating a fast food store within 2 miles of the Quiznos store for 2 years.
Smith would purchase all the equipment in the store from Bethlehem Sandwich Shop, LLC for $125,000.
The franchise agreement between Bethlehem Sandwich Shop, LLC and Quiznos was a standard franchise agreement. The franchisee ( Bethlehem Sandwich Shop, LLC ) paid Quiznos a lump sum payment of $65,000 and agreed to pay monthly royalties to Quiznos of 3% of sales. In addition, all food and non-food supplies were to be purchased from Quiznos at set prices. The franchisor ( Quiznos ) obligated itself to allow the franchisee to use its trade name, to provide on-going marketing and advertising support, and operational consulting to the franchisee. The franchise agreement contained a five year term and was automatically renewable for an additional five years unless either party gave at least six months notice of termination prior to the end of the term.
The franchise agreement also provided the following clause:
“Quiznos may terminate this agreement in the event the franchisee, in operating the franchise, fails to conduct operations in accordance with the standards set forth in this agreement and such failure results in a material impairment of the goodwill associated with the Quiznos brand and trade name. “
The franchise agreement also contained a liquidated damages clause. In the event of a breach by Quiznos damages to the franchisees were set at 12 months lost profits determined by the profits for 12 months preceding the breach. In the event a franchisee breached the agreement Quiznos would be entitled to the net present value of the lost royalties for the remaining term of the agreement based on the royalties paid in the 12 months preceding the breach.
Bethlehem Sandwich Shop, LLC obtained Quiznos permission to assign its rights and delegate its duties under the franchise agreement to James Smith for a $25,000 “release fee.” Two weeks later, Smith and Bethlehem Sandwich Shop,LLC executed their agreement. Smith borrowed $200,000 from Bank of Lehigh Valley to fund the purchase of the franchise agreement and the equipment.
Six months after Smith purchased the franchise, Quiznos instituted a new product that was advertised as offering “twice the meat of Subway.” In an effort to make sure that its franchisees were following instructions and to prevent a lawsuit by Subway, Quiznos instituted as “mystery shopper” procedure. Under this procedure, a Quiznos employee would visit various franchises and purchase the new product. The mystery shopper would then attempt to weigh the product to see if the product contained the amount of meat specified. Although Quiznos provided instructions to the mystery shoppers the weighing process was not very scientific.
If a franchisee was found to have underweighted the sandwich Quiznos would send one of two certified letter to the franchisee. The first letter was a warning letter and was used if the weight in the sandwich was short by 1 ounce or less and was believed to be unintentional. The second letter was used if the weight was short by more than 1 ounce or was found to be intentional. The second letter was a notice that the franchise was terminated pursuant to the “material impairment of goodwill” clause described above.
The results of the mystery shopper tests resulted in 74 franchisees nationwide receiving warning letters. In practice, Quiznos did not terminate any franchisees even if they were more than 1 ounce short unless it believed the underweighting was intentional after discussing the issue with the franchisee in question. However, in James Smith case, they did send a notice of termination. Apparently, Smith had annoyed several people at Quiznos because he was constantly calling them with suggestions for improvements.
After sending the letter of termination Quiznos stopped providing Smith with supplies, did not notify him of new products or information about possible problems with products, and ceased providing consulting support. After one month Smith was forced to cease operations. All told, Smith had operated the franchise for 8 months and earned nominal profits because the store location was new and had not had an opportunity to build a following in the community. Smith sunk $200,000 into the operation ( $75,000 for the franchise, $125,000 for the equipment ). Moreover, he is still liable for the $20,000 per month rent on the premises for the remaining term of the lease.
Smith filed suit against Quiznos for breach of contract.
QUESTIONS
1. a. Quiznos approved the transfer of the franchise agreement. Do you think this was necessary or could Bethlehem Sandwich Shop,LLC have transferred the franchise without permission ? Why?
b. Based on the facts above is Bethlehem Sandwich Shop, LLC still responsible to Quiznos after the franchise was sold to Smith? Why?
c. Bethlehem also transferred its lease to Smith. Do you think permission of the landlord was necessary? What additional facts do you need to make this determination?
2. Do you believe that the covenant not to compete between Bethlehem and Smith is enforceable? Why?
3. a. What arguments could Smith make that Quiznos was not entitled to terminate his franchise?
b. If, prior to the transfer of the franchise, Smith asked Quiznos what actions would constitute a “material impairment of goodwill” then would the details of that conversation be admissible in court?
4. If you were Smith’s attorney and were negotiating the terms of the franchise agreement what terms in the agreement would concern you and how would you try to improve them in Smith’s favor? I am not asking you to make the agreement more profitable. I’m asking if you see poor language or too much discretion in Quiznos’ hands. If you were purchasing the franchise what promises would you want Quiznos to make and what conditions would you like to see in the agreement?
5. a. With respect to Smith’s damages, how would damages be calculated under the standard “benefit of the bargain” or expectation measure?
b. Is there an alternative measure of damages that Smith should seek here? How would they be calculated?
c. How does the liquidated damage clause factor in? Does a court have to respect this clause?
NOTE: I am not looking for a dollar figure. I want to see “how” you calculate damages.
Problem 2 ( 20 points )
Sven and Helga are avid skiers. In fact, they are considered to be Olympic caliber. Speedo Corp. is a manufacturer of skis. They have made what they believe to be a major technological breakthrough in the design of skis. They have recently manufactured skis that use an extremely lightweight composite material that allow the ski to be much thinner than any ski presently on the market. Sven and Helga have read about the new ski in a trade magazine and purchase a pair. While skiing in Aspen on these skis Sven had a terrible accident. One of his skis snapped in two while he is traveling at a great speed. He was severely injured. Moreover, after the ski snapped in two one of the pieces went flying into the air and hit a bystander in the face, causing severe facial lacerations. The contract for the purchase of the skis contained the following clause:
” This product carries no warranties other than those expressly stated elsewhere in the contract.”
There were no warranties given elsewhere in the contract.
QUESTIONS
1. Under what theory or theories may Sven recover damages for his injuries and what is the likelihood of success? Be sure to make clear any assumptions you are making or additional information you may need.
2. Can the bystander who was injured recover damages? If so, under what theory or theories ?
Problem 3 ( 15 points )
Michael Peters, a minor, was diagnosed with clinical depression. His doctor prescribed an anti-depressant medication. The drug was approved by the FDA for use as an anti-depressant for minors. After taking the drug for about one year Michael committed suicide. His parents are considering a lawsuit against the drug manufacturer alleging that the drug their son was taking caused him to commit suicide.
QUESTIONS
As the Peter’s lawyer in a lawsuit based on strict product liability list the information about the product that you will need to gather for the lawsuit and why ? Be specific.
What type of breach of warranty actions are possible ? What additional information will you need ?
How does strict product liability differ from breach of warranty ?
What effect, if any, can FDA approval have on the ability to bring a state law product liability action or on the success of the lawsuit?
Problem 4 ( 25 points )
A handout posted on course site discusses the assignment of pension payments by retirees to investors in exchange for a lump sum payment. The Baby M case ( also on course site ) illustrates the difficulties faced by courts in dealing with broad public policy issues that are often implicated by controversial contracts.
You work for a boutique investment firm and your boss presents to you a proposal for an investment. The investment involves purchasing the right to all or some of retiree pension payments. Research has indicated that the economy, spiraling medical costs, and increased life expectancies have placed many retirees in difficult financial position and that the demand for lump sum payments by retirees is growing rapidly. The typical pension payment that would be purchased would be a monthly payment that the retiree is entitled to for life or for the joint lives of the retiree and his/her spouse.
QUESTIONS
1. What risks would investors who purchase such payments be taking on if they purchase the pensions? Can you come up with some ways that the risks can be contractually mitigated?
2. What risks would retirees who assign such payments be taking on if they sell the rights to the pension payments? Can you come up with some ways that the risks can be contractually mitigated?
Your boss would like to assess the risk that a court strikes down the contract on legality grounds because it violates the public policy of your state. Federal statutes and statutes in your state expressly prohibit the assignment of wages and the assignment of social security payments. No statute discusses private company pension payments in any way. You are familiar with the Baby M case and how the court decided the surrogate mothering contract in that case.
What are the similarities between this case and the Baby M case?
What factor or factors do you believe make this case different from Baby M?
Using the Baby M case as a model, how would a court likely approach this case? What factors would the court consider?
What are arguments in favor of these contracts? What are the arguments against these contracts?
Is there any reason, in your opinion, that the court should set aside people’s preferences and their voluntary choice to sell their pensions? Why did it do so in the Baby M case and do the issues in this case justify overturning people’s preferences?
How do you think a court would rule on this case?
