Franchise 101: Finger Lickin’ Restrictions; and Til Expiration Do Us Part

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FEBRUARY 2018

IFA 2018 Convention

Barry Kurtz, Tal Grinblat and Matthew J. Soroky all attended the 2018 International Franchise Association’s annual convention in Phoenix earlier this month. The convention is geared to further expanding the franchise industry through educational and networking opportunities for legal and business professionals.

David Gurnick inValley Lawyer

David Gurnick reviewed “Legal Ethics and Social Media: A Practitioner’s Handbook” for the San Fernando Valley Bar Association’s Valley Lawyer Magazine. The tome addresses “the clash between the lawyer’s quest for professionalism and the public’s freedom of speech…” among other issues lawyers face when using social platforms. Read the review here: Legal Ethics and Social Media: A Practitioner’s Handbook

FRANCHISOR 101:
Finger Lickin’ Restrictions

Chicken Franchisee Marketing

Franchise agreements give franchisors nearly absolute, unfettered discretion to control advertising of their brands. Franchisors need not regard prior course of dealings with franchisees. An Illinois federal court dismissed a franchisee’s claim that KFC (known to many by its former name, Kentucky Fried Chicken) should not force the franchisee to stop advertising halal chicken at his franchised KFC locations simply because KFC in the past permitted, and assisted, in accommodating the franchisee’s religious practice. The court found KFC’s franchise agreement gave it express power to change advertising policies.

After opening his first franchise in 2002, the franchisee’s local marketing campaign emphasized that his restaurant’s chicken was halal-processed according to Islamic law. The strategy was so lucrative, the franchisee opened five more KFCs near mosques and Muslim communities.

For 14 years, KFC allowed the franchisee to market halal chicken. KFC allegedly helped the franchisee identify halal-certified processors and distributors. But then KFC revoked consent due to a new policy against franchisees making religious dietary claims. KFC became concerned about varying religious standards and compliance difficulties.

The plaintiff alleged that KFC’s prohibition on advertising dietary claims contradicted KFC’s earlier representations. But the court’s decision rested on the franchise agreements. The court observed that “failure, forbearance, neglect or delay of any kind or extent on the part of KFC” in enforcing and exercising its rights would not “affect or diminish KFC’s right to strictly enforce” the agreements. Given the franchisor’s unambiguous contractual right to control franchisee advertising, and the agreements’ integration clauses, the court would not consider evidence of KFC’s previous actions. The court also dismissed the franchisee’s promissory estoppel claim because Kentucky law, which governed, does not allow such claims when the parties have a contract.

The court dismissed KFC’s counterclaim for attorney fees because the franchise agreement allowed KFC to recover attorney fees only for suits it initiated and won, rather than suits started by the franchisee. The court interpreted the attorney fee clause narrowly, and concluded that KFC did not start the action; rather the franchisee did in filing his original complaint.

When drafting fee shifting provisions in franchise agreements, franchisors should give serious thought to what kinds of disputes are likely to arise for which attorney fee recovery would be a benefit or hazard, before using boilerplate attorney fee clauses (whether narrow or broad). Specific wording of these provisions can impact their application in a dispute.

Lokhandwala v. KFC Corporation, 2018 WL 509959 (N.D.Ill., 2018)

FRANCHISEE 101:
Til Expiration Do Us Part

Non-Signatory Operators Must Honor Franchise Agreements

Though an individual owner and operator of a formerly franchised Church’s Chicken restaurant in Texas was not a signer of the franchise agreement, a district court ruled the individual was subject to the agreement’s post-termination provisions. The ruling was based on assumption and equitable estoppel. The operator was enjoined from further use of the franchisor’s trademarks or any confusingly similar marks; from breaching the agreement’s non-competition provisions; and from taking actions violating the agreement’s post-expiration obligations. The court found the franchisor was likely to succeed on the merits for breach of the franchise agreement and trademark infringement against the restaurant operator.

Shortly after a third-party franchisee entered into the franchise agreement, the franchisee sold the restaurant to the operator without notice to the franchisor. The operator performed under the agreement for the entire ten-year term as if he was an authorized franchisee. When the agreement expired, the operator re-branded the restaurant as a competing quick-service restaurant specializing in the sale of fried chicken using a logo, marks and other décor similar to those used at the former Church’s Chicken restaurant. The franchisor demanded that the operator cease and desist and upon the operator’s refusal, the franchisor filed suit.

Assumption and equitable estoppel applied to prevent the operator from having it both ways. After ten years of performing and enjoying the benefits of the agreement, he could not repudiate the post-expiration obligations in the same agreement. The court enjoined the operator’s infringement and unlawful competition based on finding the operator’s continued operation was causing the franchisor irreparable injury.

Non-signatory operators who operate under and benefit from a franchise agreement for a long period should understand they cannot avoid post-term obligations simply because they did not sign the agreement. The non-signatory faces risk of being subject to the same injunction order as would an ordinary franchisee who signed the contract with the franchisor.

Cajun Global LLC v. Swati Enterprises, Inc., N.D. Ga., 16,118

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2018. All Rights Reserved.

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