Franchise 101: Lessons in License Agreements; and Operation Philadelphia

April 2019

Franchisor 101: Lesson in License Agreements

The U.S. Sixth Circuit Court of Appeals upheld summary judgment for franchisor Buffalo Wild Wings (“BWW”) rejecting a restaurant operator’s counterclaims for wrongful termination, malicious prosecution, and breach of contract. The operator, BW-3 Akron (“Akron”), operated under a license agreement signed in 1990. It was the sole location of more than 1,200 Buffalo Wild Wings that was not operated under a franchise agreement or owned by BWW.

BWW wanted Akron to comply with the agreement’s remodeling provisions. Akron refused. Following a default notice, BWW sued, seeking a declaration that it could terminate the license agreement due to Akron’s default. The same day, BWW notified Akron that it had the right to immediately terminate the license agreement, but would hold the termination in abeyance pending a declaratory judgment that termination was proper. In response, Akron closed and de-branded the restaurant, then re-opened under the name “Gridiron Grill.” 

One of Akron’s counterclaims was for wrongful termination of the license agreement, pointing to BWW’s filing of the lawsuit. The Court disagreed. The evidence showed Akron intended to abandon the license agreement by re-branding the restaurant. Another counterclaim asserted that BWW’s declaratory relief claim was malicious because the license agreement, in contrast to BWW’s franchise agreement, did not expressly mandate periodic remodels. BWW relied on a provision stating Akron would be in breach if it failed “to operate its stores using the system” developed by BWW or failed “in any other material way” to maintain BWW’s standard of quality and appearance. In the Sixth Circuit’s view, BWW’s interpretation of what the “system” comprised gave it a reasonable basis to bring the declaratory judgment action.

It is not uncommon for a large, experienced franchisor to have older, trademark license agreements in place that predate the franchisor’s formal launch of a franchise system. This case shows complexities that can arise from older licensing arrangements. Though BWW defeated Akron’s counterclaims, it incurred expenses because a pre-franchise license agreement was in play, and BWW had to rely on its terms to force a longtime licensee to comply with system requirements. If feasible, a franchisor should try to negotiate with pre-franchise licensees to sign the updated version of the franchisor’s franchise agreement to avoid ambiguities in older license agreements.

Read: Buffalo Wild Wings, Inc. v. BW-3 of Akron, Inc.

Franchisee 101: Operation Philadelphia

A 7-Eleven franchisee of more than 40 years brought claims that the convenience store franchisor engaged in a region-wide scheme, dubbed “Operation Philadelphia,” to force older franchisees to terminate their franchise agreements. The franchisee claimed 7-Eleven acted to enter into agreements with new franchisees on more favorable terms. A federal district court dismissed several of the franchisee’s breach of contract claims, but let some claims go forward.

The franchisee claimed 7-Eleven breached two franchise agreements several ways. He claimed 7-Eleven imposed unreasonable charges, interfered with store management, conducted unfair audits, failed to market the franchise and failed in its obligation to negotiate the lowest cost for products.

A breach of contract claim that survived dismissal was that requests to 7-Eleven to fix a leaky roof and potholes in the franchisee’s parking lot were ignored. The franchise agreement said 7-Eleven would repair the roof, parking lot, exterior walls, floor coverage and foundation “when considered necessary.” The franchisee alleged that he notified 7-Eleven of the need for the repairs, leaving for later determination what constituted a “necessary” repair.

The court also allowed a claim to go forward that 7-Eleven failed to treat the franchisee as an independent contractor by forcing him to sell products he did not order, interfering with management of his staff and communicating directly with them. 7-Eleven argued that it was not obligated to treat the franchisee as an independent contractor, just that the franchisee was obligated to hold himself out to the public as such, exercise his own full control over employees, conduct day-to-day management and adhere to other aspects of independent contractor status.

Finally, the franchisee alleged 7-Eleven failed to give written notice of its decision to impose credit card transaction fees, and, separately, that these charges greatly increased and diminished his profits. The lack of notice claim survived dismissal. But there was no allegation that credit card fees were calculated contrary to the formula in a credit card amendment to the franchise agreements, or that the fees exceeded amounts charged by credit card companies or otherwise breached the agreements. For this reason, the court prohibited the franchisee from pursuing any claim concerning the amount of credit card fees charged, noting that the significance of such a failure remains to be seen.

“Operation Philadelphia” was ultimately whittled down to specific claims. Franchisees alleging breach of a franchise agreement can benefit from not over-pleading their cases, but focusing on meritorious claims and provisions for which there is evidence the franchisor actually violated.

Read: Takiedine v. 7-Eleven, Inc.

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