Franchisor’s “Lewd” Advertising Not a Breach of Franchise Agreement

A federal district court in Missouri ruled that Hardee’s Food Systems, Inc., a fast food franchisor, did not breach the implied covenant of good faith and fair dealing in its agreement with a franchisee. The franchisee had alleged that two of the franchisor’s television ads were “lewd” and had resulted in lost profits and other damages to the franchisee. As evidence, the franchisee cited numerous complaints from its “predominantly agricultural and union-oriented community, about the unacceptable nature of these ads.”

The relevant provision in the franchisee’s agreement stated, in part, that Hardee’s would “direct all advertising, marketing, and public relations programs and activities…with sole discretion over the creative concepts, materials and endorsements used in those programs and activities…” Under Missouri law, where a contract leaves a decision to the discretion of a particular party, that party breaches the covenant of good faith and fair dealing only if it exercises its judgment “in a manner that evades the spirit of the agreement and denies the movant the expected benefit of the agreement.” The court held that there was no evidence demonstrating that the challenged conduct was arbitrary and capricious, opportunistic, or evaded the spirit of the franchise agreement. Instead, the court found that Hardee’s decisions were made in what it believed to be the best interests of the Hardee’s brand.

Hardee’s Food Systems, Inc. v. Hallbeck, D.C. Mo. No. 4:09-cv-00664-AGF, February 28, 2012.

Franchise Renewal Provision Upheld in Favor of Franchisor

A California appellate court found that the former franchisor of Mail Boxes, Etc. (MBE) stores and its parent company, United Parcel Service (UPS), did not breach the renewal provision in a franchise agreement by requiring the franchisee to renew its MBE franchise on the same terms and conditions as contained in the current franchise agreement for the sale of The UPS Store franchises.

While the provision at issue specifically provided for renewal of the agreement “on the same terms and conditions as are contained in the then current Franchise Agreement for the sale of new MBE Centers,” the court refused to interpret the language literally, noting that such interpretation would result in an existing franchisee having no rights of renewal at all since the franchisor no longer sold new MBE Centers. Instead, the court held that the franchisor could renew the franchise agreement on the same terms and conditions contained in the then current franchise agreement for The UPS Store franchises.

G.I. McDouglas, Inc. v. Mail Boxes Etc., Inc., Cal. Ct. App. No. B226112, January 12, 2012.

Illinois Court Disregards Choice of Law Provision

A federal district court in Illinois ruled that a choice of law provision in a franchise agreement was voided by the Illinois Franchise Disclosure Act. The agreement between a Chicago television station and its franchisee selected California as the exclusive forum for adjudicating disputes. Applying the reasoning of the Seventh Circuit in the case of Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128 (7th Cir. 1990), the court noted that public policy favors the application of Illinois law in disputes involving Illinois franchisees, and thus denied the defendant’s motion to dismiss for improper venue

Korean American Broadcasting Co., Inc. v. Korean Broadcasting System, D.C. Ill No. 09-cv-06665, March 29, 2012.