Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—5th Cir.: Language in area development agreement raised fact question, (Sep 9, 2015)

By Michael Menzhuber, J.D., LL.M.

A district court’s decision to dismiss a franchise area developer’s claims against the franchisor, WOW Café & Wingery Franchising Account, LLC (WOW), was vacated and remanded by the U.S. Court of Appeals in New Orleans. The district court had concluded, as a matter of law, that the development agreement between the parties contained a typographical error that rendered the agreement absurd as written and it ordered rescission of the contract. In the absence of an enforceable contract, the district court entered summary judgment in WOW’s favor on all of Spencer’s claims. The appeals court, however, concluded that a factfinder should determine whether the development agreement meant what it said or whether there was an actual typographical error (Spencer Franchise Services of Georgia, Inc. v. WOW Café and Wingery Franchising Account, L.L.C., September 3, 2015, Per Curiam).

Background. Spencer Franchise Services of Georgia, Incorporated (Spencer) entered into a contract with WOW, a franchisor of chicken wings restaurants, to develop restaurant franchises in the state of Georgia. The Area Development Agreement (ADA) entered into by the parties defined Spencer as the “Developer” and WOW as the “Franchisor.” When, after a few years, Spencer failed to fulfill its contractual obligation to inspect franchise locations and furnish certain reports and data, WOW mailed Spencer a notice of default.

In response, Spencer accused WOW of breaching the ADA by failing to sell the minimum franchises specified in Article 4.2 and Schedule 2 of the ADA. Article 4.2 of the ADA stated that “. . . Franchisor shall, at a minimum, sell or cause some third party to sell the number of Franchise Units set forth on . . . Schedule 2.” WOW argued that the word “Franchisor” was an obvious typographical error and should, instead, be “Developer.”

The district court believed that the ADA would be absurd unless the parties intended the word to be “Developer,” such that Spencer—not WOW— had the obligation to sell a minimum number of franchise agreements under the ADA. The district court, therefore, concluded that the parties had committed a clear mutual error and ordered a rescission of the contract. Because, in the view of the district court, none of Spencer’s claims could proceed to trial in the absence of an enforceable contract, it entered summary judgment in WOW’s favor on all of Spencer’s claims.

Mutual error. On appeal, WOW raised mutual error as a defense to Spencer’s contractual claims. The appeals court noted that, upon proof the error is mutual, a court may either reform the contract to express the parties’ true intentions or rescind the contract. It further noted that a court may consider extrinsic evidence to determine whether mutual error occurred and also that mutual error is a factual, rather than legal, determination.

Based on the summary judgment record, the appeals court determined that the district court erred when it concluded, as a matter of law, that it would be absurd to read Article 4.2 as written. While it agreed with the district court that, because Article 4.2 was located in the paragraph of the ADA that described the developer’s obligations, it would be logical to replace the work “Franchisor” with “Developer”; it determined that Spencer’s interpretation was also plausible.

The appeals court found that a declaration from Spencer’s sole shareholder describing a discussion with a member of WOW, and that suggested that both Spencer and WOW understood that Article 4.2 placed the burden of selling a minimum number of franchises on WOW rather than Spencer, was competent summary judgment evidence that parties intended the ADA to mean what it said. The court also noted that Spencer provided evidence that: (1) during the five-year period after the ADA was entered into, WOW sold franchise agreements as contemplated by the written text of Article 4.2; and (2) the ADA was based on a template that WOW’s legal team had drafted, the template was used to create development agreements with other developers, and the template contained language that was identical to the disputed language of Article 4.2. The appeals court, therefore, determined that a factfinder should determine whether WOW, Spencer, or both entered into the ADA suffering from error, specifically that “Franchisor” in Article 4.2 should have read “Developer.”

The case is No. 14-31024.

Attorneys: Peter J. Butler, Jr. (Breazeale, Sachse & Wilson, LLP) for Spencer Franchise Services of Georgia, Inc. Christopher Michael Hatcher (Blue Williams, LLP) for WOW Cafe and Wingery Franchising Account, LLC.

Companies: Spencer Franchise Services of Georgia, Inc.; WOW Café and Wingery Franchising Account, LLC

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