Franchisor 101: Successor Franchisor’s Territorial Takeover

Lewitt Hackman

A federal court in Connecticut ruled against an urgent care franchisor’s motion to dismiss, finding the plaintiff had standing to sue under Article III of the U.S. Constitution. The court still dismissed the plaintiff’s claims under the Connecticut Franchise Act (“CFA”) and the Sherman Act.

AFC Franchising (“AFC”), the successor-in-interest to Doctors Express Franchising, entered into a Master Development Agreement (“MDA”). The MDA granted the master developer exclusive rights to develop, open and operate franchises, assist with franchise sales, and provide franchisee support in several counties in New York and Connecticut. The master developer sued for damages and sought an injunction when AFC contracted to buy four franchisees in its Connecticut territory and turn them into corporate urgent care centers. The master developer alleged this violated its MDA. Previously, the court held the master developer could bring the claims in Connecticut despite the MDA having a forum selection clause in Alabama. The court ruled AFC was an unknown assignee of the prior franchisor and AFC’s enforcement of the forum selection clause was not foreseeable to the master developer.

AFC argued that the master developer lacked Article III standing because the alleged damages were too speculative. The court disagreed because AFC entered into contracts with franchisees in the master developer’s territory. If those franchisees turned into corporate units, the master developer would lose profits from the franchisees’ royalty payments in its territory. The master developer’s protected interests were particularized and actual, not conjectural or hypothetical.

The court ruled against the master developer’s CFA claim, because a master developer has a different business than a franchisee. The master developer agreed to find prospective franchisees for the franchise system and manage those franchisees. In contrast, by definition under the CFA, a franchisee is licensed the right to offer, sell or distribute goods or services from a franchisor. This master developer did not have a right to sell a franchisor’s goods or services under the MDA.

Finally, the court held the master developer’s claims under the Sherman Act were conclusory and inadequate and lacked antitrust standing. The master developer alleged AFC’s acquisitions in its market were an illegal restraint of trade or commerce to monopolize its territory. But the master developer did not define the urgent care market and the court found the contract dispute did not raise anti-trust concerns.

Franchisors, especially successor franchisors of another franchise system, must be aware of and discuss with franchise counsel provisions in the franchise agreements, master developer agreements and other agreements of the system it intends to, or does acquire. Agreements that the franchisor inherits can prevent encroachment on territories of master developers and franchisees. If disputes arise, enforceability of forum selection and choice of law provisions can be subject to challenge by virtue of being agreed to by a predecessor.

Danilo Purugganan, Plaintiff v. AFC Franchising, LLC, Defendant, U.S. District Court, D. Connecticut, ¶16,824, (Feb. 24, 2021)

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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