Franchise 101: All-Franchisor-Can-Eat; and Lights, Camera, Jurisdiction

Franchisor 101: All-Franchisor-Can-Eat

A federal district court in New Jersey recently found that restaurant franchisor Golden Corral was entitled to nearly $1.2 million in consequential damages after terminating a franchised Golden Corral restaurant.

Golden Corral and a franchisee entered into a franchise agreement for the operation of a Golden Corral restaurant in New Jersey. Prior to expiration of the franchise agreement’s term, the franchisee stopped operating the restaurant and paying royalty and marketing fees to Golden Corral. Golden Corral terminated the franchise agreement.

The franchisee brought suit against Golden Corral alleging multiple claims, including breach of contract and violation of the New Jersey Franchise Practice Act (NJFPA).

Golden Corral filed a counterclaim for breach of contract, alleging the franchisee breached the franchise agreement by ceasing operations and failing to pay damages pursuant to the franchise agreement. Golden Corral moved for summary judgment on the franchisee’s claims for breach of contract, violation of the NJFPA and on Golden Corral’s counterclaim.

The franchisee alleged Golden Corral breached the franchise agreement by failing to (i) provide assistance and training; (ii) allow the franchisee to set its own menu prices; and (iii) conduct restaurant inspections at a reasonable time. The court agreed with Golden Corral and found no genuine dispute of material fact that Golden Corral provided the franchisee with assistance, did not violate the menu pricing clause and allowed the franchisee to set prices for their local market, and did not violate the inspections clause. Accordingly, the court found Golden Corral did not breach the franchise agreement.

The court also dismissed the franchisee’s NJFPA claim because the franchisee failed to establish a genuine dispute of material fact that Golden Corral imposed “unreasonable” performance standards, as required by the Act. The court found the franchisee’s allegations that Golden Corral imposed unreasonable standards of performance either did not implicate performance or were not unreasonable.

As to Golden Corral’s counterclaim, the court concluded the franchisee breached the franchise agreement by ceasing operations prior to the end of the term. Golden Corral was entitled to lost future profits under the franchise agreement’s damages provision, which authorized recovery of “all damages” from a franchisee’s default. The court calculated the damages based on the restaurant’s prior 12 months of sales and applied the agreed royalty and marketing fees over the remaining term of the franchise agreement, totaling $1,168,368.

Clearly delineated obligations of the franchisee under the franchise agreement can be the franchisor’s best defense and offense against a franchisee’s claims that contractual rights or a relationship law was breached. Franchise counsel can assist franchisors facing such claims to determine if the clear terms of the franchise agreement allow for defenses, as well as remedies above and beyond contract damages such as lost future profits.

Bank United, NA. v. GC of Vineland, LLC, No. 18cv12879 (EP) (CLW), 2024 U.S. Dist. LEXIS 55555 (D.N.J. Mar. 27, 2024)

Franchisee 101: Lights, Camera, Jurisdiction

A federal district court in Texas denied an individual defendant’s motion to dismiss for lack of personal jurisdiction, finding the defendant—the owner of the company that was granted a franchise—was bound in his individual capacity to a franchise agreement’s forum selection clause.

Alamo Intermediate Holdings, the franchisor of Alamo Drafthouse movie theaters, entered into a franchise agreement with an entity franchisee for the development of an Alamo Drafthouse in Alabama. Defendant Renfroe signed the franchise agreement as a representative of the franchisee entity, but not in his individual capacity. Renfroe was also named as the Operating Principal and Controlling Principal in the franchise agreement.

When development of the Alamo Drafthouse failed, Alamo filed suit in Texas asserting, among other things, breach of contract against both the franchisee entity and Renfroe for violating the franchise agreement.

Renfroe, individually, moved to dismiss for lack of personal jurisdiction, arguing he is a resident of Alabama, has no contact within the State of Texas to confer personal jurisdiction, and is not a party to the franchise agreement that contains the forum selection clause and waiver of jurisdiction that Alamo Drafthouse sought to enforce, and therefore, cannot be bound by the franchise agreement’s forum selection clause.

The court disagreed. While the franchise agreement does not define the term “party,” it indicated the entity franchisee is not the only party bound to its terms. Under Texas law, Renfroe is a “party” to the franchise agreement if he otherwise indicated his consent to be bound by its terms. The court concluded the franchise agreement bound Renfroe individually, having identified himself and signed as the Operating Principal and Controlling Principal of the franchisee entity.

The court also noted that, even if Renfroe was not a party, he would still be bound by the forum selection clause based on his close relation of the parties, his involvement in negotiating the franchise agreement, and his obligations under the franchise agreement which made it foreseeable that he would be bound by the forum selection clause.

To avoid future surprises, both individuals and representatives of a franchisee entity should consult with franchise counsel to assess their obligations and liabilities prior to executing a franchise agreement.

Alamo Intermediate II Holdings, LLC v. Birmingham Alamo Movies, LLC, No. SA-23-CV-01531-JKP, 2024 U.S. Dist. LEXIS 75339 (W.D. Tex. Apr. 25, 2024)