If a company intends to be unreasonable in enforcing its rights under a contract, it had better say that explicitly in the document. That's the lesson from a July 15 ruling from the U.S. Court of Appeals in Denver.
The immediate issue was what kind of rationale a franchisor had for refusing to let a franchise be transferred to a new owner. But the implications of the court's decision extend to almost any kind of business agreement.
The dispute came up when a couple who had purchased a 10-year Baskin-Robbins franchise wanted to sell their store. The original contract said there could be no such transfer without the consent of the area franchisor, and that firm twice refused to approve a sale. The couple sued, claiming that such an unreasonable refusal to permit a sale took away valuable property rights. The trial judge merely pointed to the contract the franchisee had signed and tossed out the case without a trial.
The appellate judge decided that the matter was not as easy as that. Not every contract gives the parties the right to be unreasonable merely because the language doesn't elaborate on the right to say "no." It is common, for instance, for courts to read a "reasonableness" requirement into an apartment rental contract, saying that a landlord cannot refuse to a sublet, say, without having some good reason for the refusal. The Denver judges decided that the contract between a franchisor and a franchisee called for similar treatment. The "relationship is one which requires the parties to deal with one another in good faith and in a commercially reasonable manner," Judge Monroe G. McKay explained in Lavese v. Creamland Dairies. The reason: A successful franchisee is building up good will both for his own business and for the brand name of the franchisor.
Yes, the judges said, the franchisor has some rights, and it should not be forced to deal with business owners that it does not like, but those rights have to be balanced against the rights of franchisees who want to sell out and get on to other projects. If a franchisor really wants to be able to pick and choose without reference to any objective standards -- to have an absolute right to say "no" to proposed transfers -- all it has to do is say so in the original contract. "The franchisor must bargain for a provision expressly granting the right to withhold consent unreasonably, to insure that the franchisee is put on notice," McKay ruled.
Of course, the judge may well have had his tongue in his cheek when he made the suggestion. Even franchisees who have no plans to step out of a business before the franchise runs out may have second thoughts about entering into a deal with a company that says up front it wants to announce that it may well decide to act unreasonably.
In another case, courts ruled that:
Lawyers can earn a bit more in handling bankruptcy cases. Federal law specifically tells courts to approve payment to lawyers for their work in bankruptcy cases, but insists that the lawyers keep meticulous records of the time spent and explain to the court just what they were doing in that time. The U.S. Court of Appeals in San Francisco now faced the question of whether the assets of the bankrupt can be tapped to pay attorneys for the time they spend keeping time records and drawing up their requests for payment. The judges decided the answer is yes. That work is as necessary to overseeing the bankrupt operation as any other, they reasoned, and Congress wanted to be generous with reimbursement in order to attract top-notch lawyers to the bankruptcy field. (In re Nucorp Energy, June 25)
Living in a private apartment can be part of the "treatment" employers have to pay for under workers' compensation laws. The New Jersey Supreme Court held that it would be an "unusual case" in which a company would have to pick up the cost of building an apartment for an injured worker, but then went on to decide that the case before it was just that unusal. The 28-year-old worker, made a quadriplegic by an industrial accident, dreaded living in an institution and had a great need for as much independence as possible. Living in his own place adjacent to his parents' home seemed the best solution, so the justices held it reasonable to expect the employer to provide such accommodations. (Squeo v. Comfort Control, July 3)
Government agencies cannot keep private publishers from competing with them. The U.S. Court of Appeals in New York cast a skeptical eye on a policy of the New York state legislature's Bill Drafting Commission to sell its data-retrieval system to anyone but commercial data-retrieval services. The judges, recognizing they were handling a pioneering case in applying First Amendment protections to advanced electronic publishing, said it would be unconstitutional to deny private data banks the right to retransmit information contained in official files. Whether the "no-sale" policy is invalid, however, depends on whether the commercial service that wants to subscribe can show it is harmed by being blocked from tapping into the legislature's service. The judges suggested that the legislature could charge a republisher a lot more for its data-retrieval service than it charges other customers. (Legi-Tech v. Keiper, July 5)