The Eleventh Circuit Court of Appeals reversed a district court’s summary judgement order, granting a chocolate shop franchisor’s breach of contract and unfair competition claims. The appellate court concluded there were genuine disputed issues of material fact concerning the materiality of a franchisee’s breach of contract.
Peterbrooke Franchising of America, entered into a franchise agreement with Miami Chocolates in 2007. Peterbrooke sued the franchisee for breach of contract in 2016 for failing to install a new point of sale system (POS) required of all franchises. In granting summary judgment, the district court agreed the franchisee’s breach was material. The franchisee appealed, arguing triable issues of material fact exist as to whether failure to install the new POS was material.
The Eleventh Circuit agreed, explaining that, while the franchisee breached the franchise agreement, termination is only allowed where the nonperforming party breaches a material term. Under Florida law materiality of a breach is generally a question of fact.
Based on Florida law, the terms of the franchise agreement, treatment of similarly situated franchisees, and evidence regarding the functionality of the old POS, the court held Peterbrooke failed to show the franchisee’s failure to update its POS was material to the parties’ contractual relationship. The appellate court noted certain provisions of the franchise agreement state that specific obligations are material while other provisions did not. This led the court to conclude that the use of “material” in certain places was intentional to delineate between material and non-material compliance. The provision of the franchise agreement that concerned updating the POS did not reference materiality. In addition, Peterbrooke’s representative testified that other franchisees in the system were permitted to continue to use the outdated POS until the equipment had been paid off or fully depreciated. Other evidence showed the older POS still allowed the franchisor to monitor and access the franchisee’s sales reports and did not cause any operational issues.
Determining whether a franchisee’s breach of a franchise agreement is material to support termination or nonperformance by a franchisor is generally fact specific. When materiality of a franchisee’s breach is not clear from the agreement or the parties’ course of dealing, franchisors should consult franchise counsel prior to stopping performance, terminating a franchisee, and/or bringing suit for breach of contract.
Peterbrooke Franchising of America, LLC v. Miami Chocolates, LLC, 2022 U.S. App. LEXIS 28222 (11th Cir. Nov. 10, 2022)
