Making the world safe for franchising: Nieman v. Dryclean U.S.A.

• Author: Beyer, David A.
• Position: Florida

In the past year, Florida has served as the battleground for determining what rules apply for U.S. franchisors seeking to expand overseas. Fortunately, domestic franchisors can breath a collective sigh of relief, thanks to the 11th Circuit Court's decision in the case Nieman v. Dryclean U.S.A. Franchise Company, Inc., 178 F.3d 1126 (11th Cir. 1999), and the U.S. Supreme Court's decision not to review it. This case removed the burden of U.S. franchisors having to comply with U.S. franchise disclosure laws in dealing with overseas franchisees.

The facts underlying the Nieman case are unremarkable. Nieman, an Argentine citizen, entered into negotiations with Dryclean U.S.A. Franchise Company to open drycleaning franchises in Argentina.(1) Nieman and a group of Argentine businessmen wanted a master franchise agreement which would give them the right to sell and operate Dryclean USA franchises throughout Argentina. Nieman and Dryclean USA entered into a preliminary agreement pursuant to which Nieman paid Dryclean USA a nonrefundable $50,000 deposit in exchange for Dryclean USA's agreement not to negotiate with others concerning the Argentine master franchise agreement for 60 days. Nieman signed it in Argentina and mailed it back to Dryclean USA in Florida, where a Dryclean USA representative signed it.(2) Under the terms of the agreement, Nieman intended to use the 60-day period to secure financing. When Nieman ultimately failed to secure the necessary capital, Dryclean USA kept the $50,000 deposit. Dryclean USA never furnished Nieman with a franchise offering circular in accordance with the Federal Trade Commission's Trade Regulation Rule: "Disclosure Requirements and Prohibitions Concerning Franchise and Business Opportunity Venturers."(3)

Nieman sued Dryclean USA for the return of the $50,000 deposit.(4) Nieman argued that Dry Clean USA violated the Florida Deceptive and Unfair Trade Practices Act (DUTPA) by failing to comply with the FTC rule. A violation of the FTC rule is an automatic violation of DUTPA.(5) Dryclean USA defended on the ground that the FTC rule does not apply to foreign transactions since DUTPA and the FTC rule have no extraterritorial application. Both parties moved for summary judgment.

The U.S. District Court for the Southern District of Florida granted summary judgment in favor of Nieman.(6) The court held that DUTPA and the FTC rule applied to the transaction because "Congress has the power to prevent unfair trade practices in foreign commerce by citizens of the United States, although some acts are done outside the territorial limits of the United States."(7) Dryclean USA was ordered to refund the $50,000 deposit to Nieman. Dryclean USA appealed to the 11th Circuit.

The 11th Circuit reversed, holding that the FTC Act does not apply extraterritorially. The U.S. Supreme Court denied certiorari on January 18, 2000.

The...