Franchise 101: My Dog Ate My Franchise Agreement; and Franchisor’s Impact Study Fails to Influence Court

FRANCHISOR 101: My Dog Ate My Franchise Agreement

A Louisiana appellate court affirmed a trial court’s finding that there was a signed franchise agreement between the parties even though the franchisor could not produce the signed original.

Brooke and Michael Hyde decided to franchise their snowball business, Miss Bee’s Snoworld. Kaci Guidry expressed interest in the franchise opportunity. Guidry received the completed Franchise Disclosure Document (FDD). Guidry claimed she never signed the franchise agreement. Brooke Hyde claimed she (Brooke) received a signed copy of the franchise agreement and stored it in a filing cabinet. The relationship broke down, and the file, with the signed franchise agreement, was allegedly taken by Guidry’s sister. Soon, Guidry and her sister opened a competing snowball business at the location originally proposed for the franchised business.

The franchisor sued Guidry for unlawful use and disclosure of confidential information and breach of contract. The trial court ruled in favor of the franchisor, even though the franchisor could not produce the signed franchise agreement. The court concluded that other evidence, including testimony, could prove the existence of a contract if the original was lost, stolen, or destroyed.

The franchisor introduced an unsigned copy of the franchise agreement and related documents it alleged were executed by the parties. An employee of the franchisor testified she saw the fully signed copy of the franchise agreement and that the contract in evidence was the same as the one signed by the parties. The trial court found the testimony satisfactory to determine Guidry signed the franchise agreement; that her sister took the agreement; and that Guidry’s operation of a competing business was a breach of contract and unlawful use and disclosure of confidential information. The appellate court agreed, and held the trial court had a reasonable factual basis to find the parties executed the franchise agreement and that the original was lost, destroyed, or stolen.

A robust electronic document management system is vital for franchisors. While the franchise agreement was found valid and enforceable in this case, the franchisor could have avoided the headache of litigating the existence of a valid agreement if it had an electronic copy of the signed franchise agreement.

FRANCHISEE 101: Franchisor’s Impact Study Fails to Influence Court

A federal district court denied KFC’s defensive summary judgment motion, enabling its franchisee to go to trial on claims against KFC for breach of the implied covenant of good faith and fair dealing by opening a competing restaurant near the franchisee’s existing restaurant.

The franchisee operated a KFC in Colorado. The franchisor explored opening a restaurant near the franchisee’s location, notified the franchisee about the potential new restaurant and, pursuant to the franchisee’s request and the franchisor’s guidelines, commissioned an impact study to determine the impact on the franchisee’s restaurant. Under the franchisor’s guidelines, it would either (i) permit development of the location if the potential impact was less than 10 percent on the existing location; (ii) conduct further review if the potential impact was between 10 percent and 15 percent on the existing location; or (iii) not permit development if the potential impact was more than 15 percent on the existing location.

A company called JAG performed the study. The JAG report concluded that the proposed restaurant would impact the franchisee’s restaurant by 13.4 percent. The franchisee believed the study was invalid and commissioned his own, which concluded that the proposed restaurant would hurt the franchisee’s restaurant by 33 percent to 36 percent. The franchisor decided to move forward with opening the new restaurant, without doing further review.

The court ruled a jury could find circumstantial evidence that the franchisor knew the JAG study was flawed and accepted it regardless. Virtually every study JAG completed for the franchisor resulted in finding low impact and meeting KFC’s criteria for a new restaurant, suggesting the study could be designed against existing franchisees by underestimating impact. In addition, KFC ignored the franchisee’s suggestion to use a bilingual surveyor. That could imply ambivalence by KFC about getting accurate survey data. A jury could find KFC considered no new information after its initial approval, and thus did not conduct “further review” that its own guidelines required for the establishment of new franchises within the 10 percent to 15 percent impact range upon existing franchises.

Franchisors generally have the right to open new franchised businesses near an existing franchisee’s business. Many franchisors have internal processes to determine potential impact of the new business on a current franchisee’s business. However, a franchisor’s determination of an acceptable impact is not necessarily acceptable to a franchisee. Franchisees should have counsel review their FDD, franchise agreement, and ancillary documents, including any impact study guidelines, to help determine territorial rights if the franchisor decides to open a new location near the franchisee’s business.

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