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Tyco International Inc. owes a Sharon, Pa., man $32.6 million in franchise leasing fees from one of the U.S. subsidiaries, Sensormatic, the 3rd U.S. Circuit Court of Appeals has affirmed in a non-precedential opinion. In a split decision, the court approved an earlier summary judgment by a Western District of Pennsylvania judge. The issue in Sensormatic Electronics Corp. v. First National Bank was one of bad timing. Sensormatic wanted to go ahead with a buy-back option at the end of its franchise lease from James Winner Jr., inventor of the anti-theft device The Club, the court said. It failed, however, to notify Winner of its intentions in the necessary amount of time outlined in the lease agreement, according to the opinion written by Senior District Judge John P. Fullam, who sat on the panel by designation. Because of that, the 3rd Circuit upheld the lower court’s decision to award Winner $32.6 million in franchise fees and interest. According to the opinion, Winner was granted rights in 1967 to the Pennsylvania franchise of Sensormatic, Fullam said. Shortly after granting those rights Sensormatic, a manufacturer of theft detection systems, decided franchising was not a profitable way to sell its product, Fullam said. According to the opinion, the company began a lease-back program from W&B, a corporation wholly owned by Winner. Under the terms of the franchise lease agreement signed by the two parties, Winner gave Sensormatic a 20-year lease beginning in Dec. 1, 1978, and ending Dec. 1, 1998, the opinion said. Part of the agreement offered Sensormatic the option to terminate the agreement 11 different times during the 20-year period as well as the opportunity to buy back the franchise after that period for a $1 million lump sum, the opinion said. Under the agreement, Sensormatic had to give 90 days notice to Winner if it wanted to buy back the franchise, Fullam said. The total value of the deal for Winner was $6.5 million, Fullam said. On Oct. 13, 1998, just 47 days before the lease was to conclude, Sensormatic sent notice of its intent to buy back the franchise at the end of the term to First National Bank, which was charged at the beginning of the term with collecting payments from Sensormatic, the opinion said. Winner was not a part of these proceedings, according to the opinion. In December, First National Bank informed Sensormatic that it was not comfortable moving forward without Winner, Fullam said. In January 1999, Sensormatic sent final releases to First National Bank and Winner, neither of whom responded, according to the opinion. A response came from Winner when he wrote Sensormatic “stating that Sensormatic was in default under the FLA for failing to tender payment by Feb. 28, 1999,” Fullam said. According to the opinion, Sensormatic filed suit in district court to compel Winner to sell back the franchise, the opinion said. The lower court, in a pair of decisions, awarded summary judgment to Winner, ruling that Sensormatic failed to begin the buy-back process in a timely manner, the opinion said. Sensormatic appealed, arguing that the wording in the agreement was such that the deadline for stating its intent to buy back the franchise was optional, Fullam said. According to the opinion, the agreement said that the “option shall be exercisable at the end of the term” and that the option “may be exercised by [Sensormatic] giving W&B not less than 90 days’ written notice.” Sensormatic argued that the use of the words “may” and “shall” are ambiguous and indicate that the written notice provision is optional, Fullam said. According to the opinion, the ruling was to be based on the intent of the two parties, and the best place to determine the intent was through the agreement. Fullam said the agreement was unambiguous. “Were Sensormatic’s position accepted, the requirement of written notice would be a nullity,” Fullam said. “If the parties intended any type of notice to suffice, there would have been no need to include the 90-day provision or the ‘in writing’ provision,” Fullam said quoting the district court. Sensormatic also argued that regardless of the late notice, it was ready and willing to go through with the proceedings by Feb. 28, 1999, the deadline for the last payment to be made, according to the opinion. The court disagreed. It found that there was no contract in existence at that time because the agreement expired on Dec. 1, 1998, according to the opinion. Sensormatic also disputed the lower court’s decision that Winner still owns the franchise and the rights to sell products that came into existence after the agreement was signed. The court ruled that this issue was also invalid, and Winner would continue to own the franchise. The court’s ruling, according to the opinion, compels Sensormatic to reimburse Winner for unpaid franchise fees and interest for December 1998 to March 2004, which totaled $32.6 million, according to the Associated Press. In a brief dissent, Judge Delores K. Sloviter said that she viewed the transaction differently. “In my interpretation of the documents, I view the franchise lease agreement, irrespective of its title, to be a contract with an option to purchase,” she said. In that instance, Sensormatic would be able to use as its defense the fact that it never missed a payment in the 20-year lease and was guilty of only a non-material breach, Sloviter said. Neither side’s attorney was available for comment. Fullam was joined by Judge Theodore A. McKee.

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