Business Law

Case Report – December 2021

Ariz. Family Florists LLC v. 1-800-Flowers.com, Inc., 2021 U.S Dist. LEXIS 206449 (E.D.N.Y., October 26, 2021, 16-CV-2638 (JMA) (AYS)

The District Court largely adopted the Magistrate’s Report and Recommendation concerning cross-motions for summary judgment in which the Magistrate denied franchisee plaintiffs’ motions in their entirety and denied in part and granted in part franchisor defendants’ motions. The Court modified the Magistrate’s report pertaining to franchisees’ claims under New York’s Franchise Sales Act (“FSA”). The Magistrate had denied the cross-motions pertaining to the FSA claims on the basis that disputed material facts existed. The Court granted franchisor’s motions for summary judgment as to franchisees’ FSA clams on the basis that the franchisor was exempt from registration and, therefore, as a matter of law, did not fail to disclose any information.

Procedural and Factual Background

Two sets of franchisee plaintiffs, located in Arizona and Florida, assert claims against franchisor defendants, who assert counterclaims. Defendant and counterclaimant 1-800-Flowers.com, Inc. franchises both retail stores that sell flowers and retail stores that sell “fruit bouquets” through various subsidiaries and related entities. “1-800 Flowers” or “Franchisor” shall refer to the various corporate defendants. The plaintiffs from Arizona will be referred to herein as the “Arizona Plaintiffs” or the “Arizona Franchisees,” depending on context.

The Arizona Plaintiffs were in the retail flower business before becoming franchisees. In 2007, the Arizona Plaintiffs entered into a fulfillment agreement with 1-800 Flowers, wherein 1-800- Flowers agreed to use commercially reasonable efforts to provide the Arizona Plaintiffs a minimum of $1 million in orders annually to fulfill. The written fulfillment agreement expired by its own terms in 2014, but Franchisor continued to send fulfillment orders to the Arizona Plaintiffs.

In 2010, the Arizona Plaintiffs entered into a franchise agreement with 1-800-Flowers. In 2011, at a meeting in Las Vegas, the Franchisor introduced fruit bouquets to all the franchisees and represented that fruit bouquet orders would be “incremental,” meaning the fruit business would not cannibalize the flower business. Thereafter, the Arizona Franchisees purchased a “starter kit,” constructed a fruit kitchen, underwent training, and then sold the fruit bouquets.

Between 2010 and 2016, 1-800-Flowers provided the Arizona Plaintiffs with over $3 million per year in fulfillment orders. In October 2016, 1-800-Flowers faxed a letter to the Arizona Plaintiffs, stating it would stop sending orders for fulfillment to the Arizona Plaintiffs after December 1, 2016. The franchise agreement did not expire until 2020. The Arizona Plaintiffs took the position that 1-800-Flowers no longer sending the fulfillment orders constituted an anticipatory breach of the franchise agreement, and in December 2016, the business relationship between the Arizona Plaintiffs and 1-800-Flowers ended.

Litigation ensued, with the parties asserting approximately twenty claims against each other based on breaches of the various contracts, misrepresentations concerning the fruit bouquet business, and violations of the FSA.

Analysis

As is relevant to this report, the Arizona Plaintiffs moved for summary judgment on two of their three FSA claims. As a threshold issue, the Court found that even though the Arizona Plaintiffs never signed a fruit bouquet franchise agreement, the Arizona Plaintiffs met the definition of a

franchisee under the FSA, because some sort of agreement existed between the parties, and the Arizona Franchisees paid fees in the form of royalties and of purchasing the starter kit.

The Arizona Plaintiffs’ complaint alleged that seven particular items of disclosure were required but not made, and that Franchisor failed to include representations in their disclosures about data methods and about computations regarding the fruit bouquet business. The Magistrate found that the Arizona Plaintiffs’ FDD registration and disclosure claims turned on the date when the Arizona Plaintiffs became fruit bouquet franchisees, and that this date presented a material issue of fact precluding summary judgment for either party. The Magistrate’s report also stated that “additional material issues of fact exist as to whether Defendants were exempt from registration at the time period alleged.”

The District Court took issue with the Magistrate’s finding that material issues of fact existed as to whether Franchisor was exempt from registration. The Arizona Plaintiffs argued that Franchisor could not avail itself of the statutory exemptions on two grounds: (1) Franchisor’s prior registrations with the State of New York from 2010 through 2015 now precluded it from claiming it was exempt all along, and (2) even if exempt, Franchisor was still required to provide all of the disclosures mandated by N.Y. Gen. Bus. Law § 683(2), and (8), which would have included many of the disclosures plaintiffs assert were not made.

The District Court disagreed on both grounds. First, the Court held that Franchisor’s prior registrations did not preclude Franchisor from now relying on the exemption, concluding that “[t]he statute does not state that registration precludes a defendant from subsequently invoking this exemption provision if, as occurred here, the defendant’s registration and disclosures are subsequently challenged in litigation as inadequate.” (Id. at * 6.)

Second, the Court held that because Franchisor was exempt from registration, Franchisor as a matter of law did not fail to make any disclosures. In arguing that even if Franchisor was exempt, Franchisor still needed to provide the additional disclosures set forth in Section 683(2) and 683(8) of the FSA, Arizona Franchisees relied on Olivieri v. McDonald’s Corp., 678 F. Supp. 966, 988 (E.D.N.Y.), which held that the disclosures in Section 683(2) and Section 683(8) had to be provided to a franchisee, even when the franchise was exempt from registration. (Id. at *7.) The Court disagreed, noting that Sections 683(2) and 683(7) required certain information to be disclosed only for franchises “subject to registration,” and concluding that if a franchise is exempt from registration, then it is not “subject to registration.” The Court also noted that Olivieri did not analyze the express language of the statue and instead relied on a Practice Commentary Note concerning the statute, and that the Practice Commentary Note had recently been updated to be consistent with the Court’s holding. The Court also cited to Dunkin’ Donuts, Inc. v. HWT Assocs., Inc., 181 A.D. 2d 711, 712 (N.Y. App. Div. 2d Dep’t 1992). In Dunkin’ Donuts, franchisee argued that franchisor failed to include the locations of competing franchisees in a list supplied to franchisee before the parties entered into the franchise agreement. (Id. at 712.) Dunkin’s Donuts held that since franchisor provided financial information proving they were exempt from the specific disclosure requirements of Section 683, they were “thus not required to furnish the location of competing franchises…” (Ibid.) Perhaps Dunkin Donut, a 1992 case, had been overlooked by practitioners (as apparently the Practice Commentary Note did not change until recently), because Dunkin’ Donuts also held that the franchisees failed to establish that they were damaged by the existence or nondisclosure of competing franchises in the vicinity of their shop. (Ibid.)

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in business disputes.


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