Regardless of whether you're in the hotel industry or in the restaurant or foodservice industries, it is critical to have a handle on the risks and potential pitfalls associated with the relationship between the franchisor and franchisee. Among the risks that a franchisor faces is the possibility that a franchisee will stop working to promote and support the franchisor's brand, and turn around and use the valuable industry insight that was gained while operating the franchise in order to compete with the franchisor. This risk is especially acute when a former franchisee attempts to compete by using a product or brand that is confusingly similar to that of the franchisor.
Such were the facts in the case of Mister Softee, Inc. v. Tsirkos, 14-Civ-1975 (S.D.N.Y. June 11, 2014), where the defendant, a former New York City area franchisee of the popular Mister Softee ice cream trucks, stopped performing under his franchise agreements with the plaintiff-franchisor, and started competing with Mister Softee in the same geopgraphic areas where he had previously operated as a Mister Softee franchisee. Further complicating matters for the franchisor, the defendant deployed "Master Softee" trucks trucks that were almost identical to the familiar Mister Softee trucks.
The franchisor commenced its action and immediately asked for preliminary injunctive relief based on trademark infringement and breach of a restrictive covenant (non-compete) in the parties' franchise agreement. As to the latter, the defendant's attorneys presented the novel and admittedly creative argument that the non-compete was invalid because the franchisor had failed to "provide" the defendant with a copy of the Mister Softee prospectus at the time of the agreement's execution, as is required by New York's Franchise Sales Act. The Court rejected the argument and found that that the franchisor had, in fact, offered the prospectus to the defendant at the time of signing, but that the defendant had declined to take it because he felt assured in his knowledge of the mobile soft-serve ice cream business. Based on these facts, the Court found that the franchisor had complied with New York's Franchise Sales Act requirement that the franchisor "provide" the franchisee with a prospectus at the time the parties enter into a franchise agreement.
Given the facts and outcome of this case, franchisors are clearly well-advised to comply with all formal requirements of the Franchise Sales Act. Such compliance may come in handy if the relationship with a franchisee goes sour, as was the case in the Mister Softeedispute.