A federal court in Wisconsin ruled that Dairy Queen did not breach a 1952 franchise agreement with a franchisee by requiring a prospective buyer of the franchise to sign an updated franchise agreement.
Dairy Queen and a franchisee operated under a two-page franchise agreement signed 70 years ago. The franchisee notified Dairy Queen of his intent to sell the franchise. The franchisee objected to Dairy Queen’s condition that it would only approve a transfer if the new owner agreed to sign an updated franchise agreement.
Dairy Queen brought suit for a declaratory judgment that it may condition approval of a sale of the franchise on buyer signing Dairy Queen’s then-current form franchise agreement. The franchisee brought counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the Wisconsin Fair Dealership Law (WFDL). Both parties filed motions for summary judgment.
The franchisee’s breach of contract claim failed because the franchise agreement specifically allowed Dairy Queen to condition approval of a transfer on a new owner signing a current franchise agreement. The court also rejected franchisee’s waiver argument that because Dairy Queen approved an unqualified assignment of the franchise agreement in the past, the current assignment must be permitted without conditions. The court noted that even if the parties’ past course of business were relevant, it would not support finding that Dairy Queen breached the contract.
Dairy Queen submitted undisputed evidence of legitimate business reasons to modernize its franchise agreements, negating franchisee’s counterclaim for breach of implied duty of good faith and fair dealing. The franchisee failed to explain why revisions in the new franchise agreement rendered Dairy Queen’s actions arbitrary or unreasonable.
The court held that Dairy Queen did not violate the WFDL because the requirements in the new franchise agreement were not a “substantial change” to competitive circumstances and Dairy Queen clearly established good cause for the need to update its franchise agreement.
Franchisors typically require buyers purchasing an existing franchise to execute the franchisor’s then-current form of franchise agreement, which may be significantly different than the franchise agreement the selling franchisee signed. Often times the franchisor’s current form of franchise agreement impose higher fees and operating requirements because times change and the system evolves. Franchisors should review their franchise agreements on an annual basis with counsel to determine which provisions should be updated to reflect current market conditions.
Am. Dairy Queen v. Wineinger, 2022 U.S. Dist. LEXIS 135908 (W.D. Wis. Aug. 1, 2022)
