Please see Mr. Ismail’s post in the Maryland Appellate Blog on “Twombly-Iqbal ‘Plausibility’ and Maryland’s Pleading Requirements. https://mdappblog.com/2017/04/19/twombly-iqbal-plausibility-and-marylands-pleading- requirements/#more-3068
In marketing a franchise, Ms. Jones talks up the opportunity in glowing terms, using a spreadsheet that projects large profits after a minimal investment, and hands Mr. Brown a 75-page prospectus in small print. Sold on the idea, Mr. Brown signs a franchise agreement.
Struggling to stay afloat a year later, Mr. Brown takes stock of the situation, and realizes that his outlays have been far larger and his revenues infinitesimally smaller than Ms. Jones had projected. Worse, he learns from another angry franchisee that Ms. Jones had known all along that the projections were unrealistic. He pulls out his agreement, where his eyes fall immediately on the following:
Franchisee acknowledges that he has not received, and is not relying upon, any representations from Franchisor as to the capital or operating costs needed to operate a franchise, or of the amount of revenues or profits that a franchise may generate. Franchisee also acknowledges that he has received and read copies of this franchise agreement and the Franchise Disclosure Document.
It slowly dawns on Mr. Brown that he has probably signed away all recourse for the misleading projections from Ms. Jones. Right?
Not necessarily. Whether a claim might be viable could depend on both factual issues and what law applies. Maryland law, for example, states that:
As a condition of the sale of a franchise, a franchisor may not require a prospective franchisee to agree to a release, assignment, novation, waiver, or estoppel that would relieve a person from liability under [Maryland franchise law].
This means that Ms. Jones could not require Mr. Brown to give up his rights under franchise law as a condition of entering into a franchise agreement. This law has been held to trump contractual language in which a franchisee agreed that it had not received and was not relying on any representations or guarantees. The court held that the contractual language alone was not enough for dismissal of the case; instead, a jury would have to decide whether the franchisee had reasonably relied on the projections of outlays and revenues.
Another court went even further, applying this statute to override a choice-of-law clause in an agreement that – on its face – was governed by Texas law, with all disputes to be resolved in Texas courts. The plaintiff characterized the parties’ agreement as a franchise, for which he had paid a franchise fee. The defendants, on the other hand, argued that the arrangement was a distributorship, and that the payment was for merchandise ordered. Disregarding the venue provision, the plaintiff filed suit in Maryland.
Under Maryland law, the defendants’ failure to register franchise disclosure documents with state regulatory authorities was actionable. Texas law, by contrast, did not provide a comparable right of action. The court held that, “if enforced, the choice-of-law clause here would operate as precisely the type of waiver proscribed by the Maryland General Assembly.” It therefore rejected a motion to dismiss and a motion to transfer to Texas, holding that the choice-of-law provision was against Maryland public policy and unenforceable.
Not all states, of course, have anti-waiver provisions governing franchise agreements. Even where they do, courts don’t always apply them to trump choice-of-law clauses. In states that have such provisions, however, especially where they have been held to override choice-of-law clauses, these laws require careful analysis of franchise rights and liabilities – by both franchisees evaluating potential claims and franchisors defending against them.
 Md. Code Ann. Bus. Reg. § 14-226.
 Hanley v. Doctors Express Franchising, LLC, 2013 WL 690521 at *26-29 (D. Md. Feb. 25, 2013).
 Id. at *27. The disclaimer, thus, could still be relevant in the end; the question was whether the franchisee – as a factual matter – reasonably relied on the flawed projections while aware of the contractual language disclaiming them.
 Three M Enter., Inc. v. Texas D.A.R Enter., Inc., 368 F. Supp. 2d 450 (D. Md. 2005).
 Id. at 454, 457-60.
 See id. at 458-59.
 Id. at 459.
 See, e.g., JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734 (8th Cir. 1995).
 E.g., Three M, 368 F. Supp. 2d 450; Dunkin Donuts, Inc. v. N.A.S.T. Inc., 428 F. Supp. 2d 761, 767 (N.D. Ill. 2005). Non-waiver provisions were also enforced in Solanki v. 7-Eleven, Inc., 2014 WL 320236 (S.D.N.Y. Jan. 29, 2014); Randall v. Lady of Am. Franchise Corp., 532 F. Supp. 2d 1071 (D. Minn. 2007); Long John Silver’s, Inc. v. Nickleson, 923 F. Supp. 2d 1004 (W.D. Ky. 2013). Note that the federal Petroleum Marketing Practices Act also prohibits the conditioning of a franchise agreement on the release or waiver of any protected right. 15 U.S.C. § 2805(f)(1)(B); see also Coast Village, Inc. v. Equilon Enter., LLC, 263 F. Supp.2d 1136, 1178 & n. 38 (C.D. Cal. 2001).
Franchising and licensing disputes don’t typically end all that well for franchisees or licensees. The Federal Reporters and Federal Supplements are rife with reports of proceedings to confirm arbitration awards, or to enter default judgments, permanent injunctions and judgments for money damages in amounts that, one guesses, will probably never be satisfied in full. So it may come as a surprise that one such encounter, at least, ended with a more modest tab for the licensee.
Although Ledo Pizza System, Inc. is a franchisor, and the parties did have a licensing agreement, the dispute between Ledo Pizza System, Inc. and Ledo Restaurant, Inc. was not actually a franchise dispute. Rather, it involved some minor breaches of the licensing agreement and, more fundamentally, of a prior settlement agreement between the parties. But, first, a little background.
Ledo Restaurant, Inc. was the original Ledo Restaurant, formed jointly by members of the Beall family and the Marcos family in Adelphi, Maryland, in 1955. (It later moved a few miles to College Park, Maryland.) After decades of happy dough-making together, there was a falling-out between the families, and a lawsuit was filed. It was settled in 1994 under an agreement in which the Bealls obtained ownership of the Ledo Pizza® trademark (and franchising rights) and the Marcoses obtained full ownership of the original Ledo Restaurant, a license to use the Ledo name with certain restrictions, and the right to establish future restaurants or carry-outs in Bowie, Maryland. Things were again fine for the next 12 (or almost a baker’s dozen) years.
However, another dispute eventually arose between the Bealls and the Marcoses.  The Bealls sued the Marcoses and related parties in 2006, asserting breach of contract, trademark infringement and unfair competition. Among other things, Ledo Pizza System complained about the alleged use of its trademarks by Expressions Catering, a business owned partly by the Marcoses and partly by other investors. The dispute initially arose from a wedding party catered by Expressions at which eight pizzas from the Ledo Restaurant were heated and served. The dispute then expanded to encompass two or three other events catered by Expressions, including a bar mitzvah at which six pizzas from a Ledo Pizza® (franchise) location were served, and a church event which did not feature pizza but did involve “Ledo” lasagna and tiramisu.
As found by United States District Judge Deborah K. Chasanow, who presided over the dispute for six years, Ledo Restaurant supplied the eight pizzas on request for the wedding party but took no other part in the catering operation, which was, instead, handled solely by Expressions. (Tommy Marcos sent Deborah Hamann, the operator of Expressions, an open invoice for the eight pizzas.) Judge Chasanow concluded that none of the Marcoses directly infringed on the Ledo Pizza® trademark but, after the wedding party, Ms. Hamann apparently used the expression “Ledo Pizza” on some of the catering operation’s menus. After a full trial, Judge Chasanow concluded that the Bealls had established a breach of the settlement agreement, but that “it was totally inadvertent,” and that the Marcos brothers, while they owned a majority of the catering company that had infringed the mark, were not responsible for its day-to-day operations. Judge Chasanow found two minor breaches of contract for which the defendants were responsible. One of these resulted from the posting of a link to a Washingtonian magazine review that opined that the pizza offered “through the mediocre Ledo Pizza chain” did not “do justice” to the “real thing” available at the Ledo Restaurant. Judge Chasanow awarded nominal damages of two dollars, one dollar for each breach. So, first serving: to the plaintiffs. Tab to the defendants: two bucks.
On appeal, however, the United States Court of Appeals for the Fourth Circuit disagreed in part, holding that the Marcoses were also responsible for a breach of the settlement agreement in the use of the Ledo Pizza® mark by Expressions, the catering company. The Fourth Circuit vacated that portion of the District Court judgment and remanded it “to allow the District Court to consider damages on this claim.” On remand, Judge Chasanow carefully checked each item on the Fourth Circuit’s order – and added five dollars to the Marcoses’ tab on five other breaches.  (These included the use of the Ledo mark on the wedding party and bar mitzvah invoices.) There, after six years, the story pretty much ended.
To recap the courses: appetizer in federal District Court: tab of two dollars. Trip up to Richmond to the Fourth Circuit and back down for the main course: Five dollars more. Putting this another way – with the caveat that I have not actually checked menu prices – about the cost of one topping in Round One and maybe some garlic bread or mozzarella sticks in Round Three. No delivery charge, of course, because Ledo’s doesn’t deliver. (Hey! If it’s worth getting pizza, it’s worth going there in person!) As a cola, er, I mean, coda, to the story, Ms. Hamann of Expressions did not actually pay Mr. Marcos for the eight pizzas supplied by Ledo Restaurant at the wedding event. Instead, she “‘bartered’ with [him] by preparing desserts for the restaurant.”
In all seriousness, I should note that, while the facts here provide the ingredients for a rather entertaining story, violations of franchise and/or license agreements are not generally matters for comic relief. As the Ledo plaintiffs themselves argued to Judge Chasanow, “this case was never about damages, but rather about clarifying rights.” Fair statement. And that’s generally worth a lot more than a buck or two. But, after incurring over a quarter of a million dollars in legal fees, this case can also serve as a reminder that it is generally wise at the outset to carefully consider objectives, weigh all options and make a realistic assessment of what one stands to gain (or lose). Litigation is sometimes necessary, sometimes unavoidable, sometimes even beneficial, but it should never be approached as an All You Can Eat Buffet.
Are you ready to place your order now?
*The image pictured does not portray actual Ledo Pizza
 Not that disputes typically end much better for franchisors or licensors, either. They commonly face business disruptions and lots of attorneys’ fees, and may have to seek injunctive proceedings to protect trademarks, or accounting proceedings with only the prospect of uncollectible judgments at the end. But well-written franchise agreements and proper disclosure documents generally afford them more protection than their counterparties.
 At least in part, the dispute seems to have been fired by questions as to who was entitled to benefit from publicity stoked by a favorable review on the Oprah Winfrey Show. See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2010 WL 1328538 at *1 n.3 (D.Md. March 29, 2010) (Ledo I).
 Id. at *3.
 Id. at *4.
 Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 407 Fed.Appx. 729, 732 (4th Cir. Jan. 7, 2011) (Ledo II).
 See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 1247103 (D.Md. April 12, 2012) (Ledo III). Judge Chasanow did also award attorneys fees of $25,000 to the plaintiffs, less than one-tenth of the fees sought of $251,493.50. Id. at *6-8. She did later amend the fee award to include an additional amount of $4,620 in attorneys’ fees. Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 4324881 (D.Md. Sept. 18, 2012) (Ledo IV).
 Ledo I at *3.
 Ledo I at *9.
Maryland law generally prohibits an insurer from denying liability insurance coverage on grounds of late notice unless it can show that the untimely reporting caused actual prejudice.
Given the sense of dread that must come with being sued, it is amazing how often – and how long – defendants can sometimes delay in putting their insurance carriers on notice of claims. And yet, it happens time and again. These delays can run afoul of contract clauses inserted by carriers to facilitate prompt investigation of claims, which require prompt notice of accidents, occurrences and/or claims as “conditions precedent” to coverage.
In some states – and in Maryland before 1964 – courts strictly upheld these notice provisions as mandatory “conditions precedent” to coverage. In 1964, however, a carrier denied coverage on grounds that notice was given one month after an accident. This drew the “prompt and decisive”[i] attention of the Maryland legislature, which thenceforth prohibited insurers from disclaiming coverage on grounds of late notice (or lack of cooperation) unless the insurer could show actual prejudice from the delay.[ii] Thereafter, Maryland courts have construed notice provisions as non-obligatory covenants rather than strict conditions precedent.
At the time of enactment, most liability policies were written on an “accident” or “occurrence” basis. Since then, more policies were written on a claims-made basis, where risks could be more easily quantified and rated, and premiums calculated to match. Initially, it was an open question whether the statutory prejudice requirement would apply to these policies. Like bubblegum attached to the sole of a shoe, however, it soon became clear that the prejudice requirement could not be easily dislodged from a late notice disclaimer.
The prejudice requirement was applied very quickly to “claims-made” policies. This seemed logical. An occurrence policy provides coverage if there is bodily injury or property damage during the policy period; a claims-made policy provides coverage if there is a claim made against the insured during the policy period. Under either scenario, notice to the carrier is simply a subsequent requirement after coverage has already attached. But “claims-made-and-reported” policies seemed different. From the insurer’s viewpoint, coverage under these policies is not implicated until a claim is both “made” against the insured and “reported” to the insurance company; this provides predictability in anticipating claims, with corresponding benefits on premiums. Under these policies, the failure to timely report seemed not to be merely “late notice,” but an absence of the very event that implicates coverage in the first place. In other words, a “condition precedent” to coverage. Sound familiar?
So insurers continued to deny coverage under these policies for claims made against an insured during the policy but not reported to the carrier until after the policy period, despite the absence of actual prejudice. This rationale seemed to be supported by a pair of earlier decisions of the Maryland Court of Appeals.[iii] But all this changed on Feb. 24, 2011, when the court held that a showing of prejudice was required to deny coverage on late notice grounds, even under a policy that defined a “claim” to mean one made against the insured and reported to the insurer. [iv]
The full import of that case, Sherwood Brands Inc. v. Gt. Am. Ins. Co., is not yet clear; for now, this state-law question has generated conflicting authorities in the federal courts. Two federal trial judges have ruled that no showing of prejudice is required to deny coverage under a claims-made-and-reported policy. [v] In later affirming one of these rulings, the Fourth Circuit articulated and rested its holding on a quite different ground, namely, that actual prejudice had in fact been shown.[vi] Two other trial judges have held that the prejudice requirement does apply to claims-made-and-reported policies.[vii]
Overall, this may not bode well for the insurer’s position, and in handling claims or rating such policies in the future, a prudent insurer should assume that late notice alone is not enough deny coverage under a claims-made-and-reported policy, assuming the claim against the insured itself is within the coverage period. One day, this may all be clarified further. In the meantime, prejudice is the word of the day. Have you noticed?
[i] Sherwood Brands, Inc. v. Great Am. Ins. Co., 418 Md. 300, 311 (2011).
[ii] Md. Code Ann. Ins. § 19-110 (originally enacted in Chapter 185 of the Acts of 1964).
[iii] St. Paul Fire & Mar. Ins., Co. v. House, 315 Md. 328 (1989); T.H.E. Ins. Co. v. P.T.P. Inc., 331 Md. 406 (1993).
[iv] Sherwood Brands, 418 Md. at 333.
[v] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp.2d 647 (D.Md. 2012) (Bredar, J.); Financial Indus. Reg. Auth. v. Axis Ins. Co., 951 F.Supp.2d 826 (D.Md. 2013) (Grimm, J.).
[vi] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 531 F.App’x 312 (4th Cir. 2013).
[vii] McDowell Bldg., LLC v. Zurich Am. Ins. Co., 213 WL 5234250 (D.Md. Sept. 17, 2013) (Bennett, J.); Navigators Spec. Ins. Co. v. Medical Benefits Adm’rs of Md., Inc., 2014 WL 768822 (D.Md. Feb. 21, 2014) (Hollander, J.).