A franchisee looking to transfer assets of a franchised business may be subject to the franchisor's right of first refusal, the franchisor's option to purchase the business, or both, depending on the language of a franchise or dealer agreement.

In a federal court in Pennsylvania, a franchisee of seven car dealerships prevailed against Audi of America, the franchisor of one of the dealerships. Audi claimed the franchisee breached Audi's dealership agreement and violated state dealer law when, subject to the franchisor's right of first refusal, the franchisee did not provide pricing and other terms to transfer an Audi dealership.

The dealership agreement and Pennsylvania dealer law granted Audi a right of first refusal if the franchisee attempted to sell its majority ownership interest in the Audi dealership. The franchisee found a buyer and entered into an asset purchase agreement which packaged all seven dealerships as an "auto multiplex" for $17 million. The agreement did not separately price the Audi dealership. Believing the franchisee was acting in bad faith in valuing the Audi dealership at $8 million, Audi sued to block the transaction. A court granted a preliminary injunction.

After Audi filed the lawsuit, the franchisee and buyer signed two addenda to the purchase agreement, seeking to remove the Audi dealership from the sale. The franchisee contended that Audi's right of first refusal ended because it was no longer selling the Audi dealership. The trial court sided with the franchisee, finding there was no breach of the dealership agreement because the second addendum removed the Audi dealership, and the terms of the dealership agreement permitted the franchisee to withdraw the proposed sale after Audi elected its purchase right.

The Court also rejected Audi's claim that the first refusal right ripened into an irrevocable option to buy the dealership. It was only a general right of first refusal, which Audi failed to exercise before the franchisee withdrew the Audi dealership.

While Audi claimed it was unable to exercise its right due lack of a good faith price breakdown, the dealer was free to withdraw the asset from the sale. Accordingly, the franchisor received the full benefit of its right of first refusal, and was not entitled to further rights after failing to accept the right of first refusal prior to the withdrawal.

Read: Audi of America, Inc. v. Bronsberg & Hughes Pontiac, Inc.