Franchisor 101: Enjoined in Margaritaville

Lewitt HackmanEskimo Hut, a franchisor of convenience stores that sell frozen daiquiris-to-go, convinced a Texas appellate court that it would probably win on claims that South Plains, a franchisee using a nonconforming drink mix, breached the franchise agreement, as well as probable irreparable harm. The court in South Plains Sno, Inc. v. Eskimo Hut Worldwide upheld a temporary injunction prohibiting the franchisee from selling frozen drinks in any manner other than specified in Eskimo Hut’s operations manual.

Eskimo Hut showed that South Plains breached the franchise agreement by using less base-mix than required in the recipe or by not even buying base-mix. The franchisee admitted refusing to comply with Eskimo Hut standards, testifying to using only two ounces of base-mix in a drink batch rather than three gallons as Eskimo Hut specified. The franchisee claimed the franchise agreement was illegal because it required preparation of alcoholic drinks according to Eskimo Hut specifications. According to South Plains, this violated a Texas law saying control of alcoholic beverages must be by the permittee. The appellate court was not convinced.

Pointing to the franchise agreement’s provision for irreparable harm, the court found Eskimo Hut showed probable injury from violation of the provisions requiring compliance with brand standards. These contractual provisions are generally insufficient by themselves to obtain an injunction. But the court emphasized that brand recognition and uniform standards among franchisees are the core of the parties’ agreement. This supported the trial court’s conclusion that the franchisee’s actions placed Eskimo Hut at risk of irreparable injury.

The franchisee challenged irreparable injury claiming Eskimo Hut did not control the amount or type of alcohol added to daiquiris, making consistency of drinks sold by different franchisees impossible. Weighing Eskimo Hut’s testimony that the flavor for the frozen drinks comes from the base-mix, against the recipe South Plains used, the court found that South Plains was selling, as an Eskimo Hut branded daiquiri, a different drink than other franchisees. This allowed an inference that Eskimo Hut was suffering ongoing harm.

Government regulation in some industries, like alcoholic beverages statutes, pose a challenge to franchisor control over brand standards. This is because the standards may be illegal under the regulations. Here, Eskimo Hut acknowledged it did not control the wine or distilled spirits vendors, or the type or amount of alcohol to purchase for daiquiris, because such controls would be illegal. Franchisors seeking entry to highly regulated industries should understand the realities of franchisees trying to exploit these prohibitions and consult franchise counsel for proper enforcement planning to maintain system standards.

Source: South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd., Tex. App., ¶16,405

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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