The Federal District Court of Wisconsin, interpreting Minnesota law, recently held that an individual guarantor and a non-signatory corporation receiving benefits under a franchise agreement were both bound to a jury waiver provision in the franchise agreement under the theory of equitable estoppel.
The underlying facts of the case were not disputed. The franchisee, Superior Endurance Systems, Inc., executed a renewal to an automotive glass business franchise agreement with Novus Franchising, Inc in 2006. The franchise agreement was guaranteed by individual and Superior Endurance principal Knute Pedersen, also a defendant in the case. The third defendant, affiliate Superior Glass, Inc. was not a signatory to the franchise agreement but both companies were managed by Mr. Pedersen and shared some common ownership.
Under Minnesota law, a non-signatory may be bound to an agreement when a signatory relies on the terms of the agreement in asserting its claims against the non-signatory and when a signatory raises allegations of "substantially interdependent and concerted misconduct" by both a signatory and non-signatory.
The District Court described how Superior Glass acted as the "de facto franchisee" during the franchise term by operating the Novus Franchise, advertising under its logo, benefiting from the franchisor's training, and sending royalty checks to the franchisor.
Interpreting Minnesota law, the District Court ruled that it was reasonable to assume that these facts satisfied the test to apply equitable estoppel as a basis to bind Superior Glass to the franchise agreement.
We believe this decision correctly addressed the common situation where franchisees operate franchises under a two or multiple company structure. It is important, however, for franchisors to protect themselves from these types of issues by requiring, when possible, any affiliate company of a franchisee receiving the benefits of a franchise agreement to be a party to and execute all contracts with the franchisor.