Franchisor 101: Breaking Up Is Hard to Do

Lewitt Hackman

A federal district court in Nevada partly denied a franchisor’s summary judgment motion on claims brought by a franchisee.

IJL Midwest entered into several franchise agreements with a franchisor of a dating and match-making service, It’s Just Lunch Int’l (“IJL”). IJL asked IJL Midwest for financial records per the franchise agreements, to determine the amount of fees and royalties owed. IJL then determined the Milwaukee location underreported gross revenue, resulting in underpayment of royalty fees. While IJL continued to investigate underreporting, IJL Midwest requested an extension of its franchise agreements. IJL did not respond. IJL Midwest sued IJL for breach of contract and violations of multiple state franchise laws. IJL counterclaimed for breach of contract, breach of implied covenant of good faith and fair dealing, and declaratory judgment.

IJL moved for summary judgment on IJL Midwest’s claims. First, IJL argued that since IJL Midwest admitted to owing a large amount in fees, the court should determine the full amount of fees owed. IJL claimed it was owed over $1.1 million. Second, IJL argued that claims by IJL Midwest that IJL intended to cancel the franchise agreements was speculative and unripe for judgment.

The court granted summary judgment in part, holding IJL Midwest owed IJL $278,117, because it admitted owing that amount. The court held that any amount sought in excess of $278,117 had to be determined by a trier of fact. The court found IJL had not taken action to terminate or non-renew the franchise agreements, therefore, IJL Midwest’s claims regarding IJL’s future intent was speculative.

Franchisors should work with experienced counsel if a franchisee in default asks to renew the franchise agreement. In this case the argument was made that the franchisor’s nonresponse indicated intent to terminate or nonrenew. Counsel was able to show the court that the franchisor’s nonresponse to the franchisee’s renewal request did not show such intent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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