Franchisor 101: Romaine Rejection

Many will recall the 2018 national outbreak of E. coli bacteria linked to romaine lettuce. In April that year, an Ohio franchisor ordered its restaurants to stop serving romaine lettuce and dispose of any remaining romaine lettuce in stock. Despite several notices, one franchisee continued to serve romaine lettuce into May 2018.

In July 2018, the franchisor terminated the franchisee. The termination notice said that serving romaine lettuce was a serious violation of the franchise agreement that endangered public health and threatened the existence of the franchise system. The franchisee denied all accusations.

The franchisor sued to enjoin the franchisee from further use of its trademark and trade dress to operate the restaurant. Three days later, the franchisee filed a Chapter 11 bankruptcy petition. The franchisor moved to dismiss the bankruptcy, arguing no reorganization was possible since the franchisor terminated the franchise agreement.

The bankruptcy court disagreed and let the franchisee debtor proceed with his petition, finding the franchisor’s termination of the franchise agreement was invalid. The court agreed that serving romaine lettuce during the E. coli outbreak threatened public safety, and that the franchisee did not have the right to substitute its own judgment for the franchisor’s. The court interpreted the franchise agreement’s “public health and safety” clause as an “emergency” provision that could be invoked only while a threat or danger was ongoing. The court ruled the termination was invalid because the franchisor tried to terminate the franchise agreement after the threat passed.

An appellate panel upheld the ruling. It agreed that terminating a franchise agreement due to a current or ongoing threat or danger to public health and safety, without an opportunity to cure, was a reasonable reading of the clause, allowing termination without notice to avoid an immediate threat or danger. But the panel found that once the threat or danger passed, the franchise agreement required notice and an opportunity to cure before termination.

Terminating a franchisee without allowing an opportunity to cure is extreme, absent specific circumstances, especially in states with relationship laws. Prior to terminating a franchise, franchisors should consult franchise counsel to assess if an opportunity to cure must be provided and enforceability of post-termination provisions, especially when the franchisee may file for bankruptcy protection.

In re: Dan Mazzola, No. 19-8007, 2020 WL 529604 (B.A.P. 6th Cir. Jan. 28, 2020)

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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