Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Franchisor did not have to refute franchisee’s affirmative defenses in premature termination claim, (Mar 14, 2014)

By Edward L. Puzzo, J.D.

In an action against a hotel franchisee that prematurely terminated its franchise agreement, the franchisor was not required to refute affirmative defenses prior to moving for summary judgment, the federal district court in Newark, New Jersey has ruled (Days Inn Worldwide, Inc. v. Khan Group, LLC, March 12, 2014, Debevoise, D.).

In September 2006, Defendant Khan Group entered into a personally guaranteed franchise agreement with plaintiff Days Inn, allowing it to operate a hotel in Sweetwater, Texas for 15 years using the Days Inn trademarks and logos in exchange for certain periodic payments. In May 2010, Khan Group advised Days Inn that it was unilaterally terminating the agreement effective immediately. Days Inn responded by making a demand for over $258,000 in unpaid obligations owed to it under various provisions of the franchise agreement.

Liability. The court noted that, upon its unilateral premature termination of the franchise agreement, the provisions of the agreement called for Khan Group and its personal guarantors to pay as liquidated damages an amount equal to the sum of accrued royalties and service charges over the 24 month preceding the agreement termination, plus additional default charges.

Khan, citing California and Florida state law, responded that summary judgment on liability should not be granted before addressing various affirmative defenses it offered, alleging that Days Inn materially breached the agreement, fraudulently induced Khan into entering into the agreement and guaranty, and breached the implied covenant of good faith and fair dealing.

The court responded that neither California nor Florida state law carried authority in this matter. Under the federal summary judgment standard, the court continued, it was not the burden of Days Inn, the party moving for summary judgment, to specifically negate any and all affirmative defenses that Khan Group, the non-moving party, might have set forth in an answer. Rather, it was Khan Group’s burden to set forth specific facts suggesting that a dispute of material fact existed with respect to a claim or defense. Khan Group failed to meet that burden, the court ruled.

Khan Group recited various allegations in support of its affirmative defenses that Days Inn materially breached the agreement, and that they were fraudulently induced into entering into the agreement, but under the federal summary judgment standard, mere recitations of allegations from the pleadings do not create a dispute of material fact. The court further found that the fraud allegation failed to indicate a material misrepresentation of a presently existing or past fact, which is the first element of fraud under New Jersey law. Thus, the court granted Days Inn’s motion for summary judgment.

Damages. The court stated that it was undisputed that Khan Group owed over $70,000 in recurring fees under the agreement, and further entitled to liquated damages of over $258,000 based on a formula set forth in the agreement. Thus, the court granted Days Inn judgment of those sums, plus costs and attorney’s fees as provided for collection actions under the agreement, plus an award of prejudgment interest.

The case is Civil Action No. 11-4575 (KM).

Attorneys: Paul R. Marino (Day Pitney LLP) for Days Inns Worldwide, Inc. Philip L. Guarino (Mavroudis, Rizzo & Guarino, LLC) for Khan Group LLC.

Companies: Days Inns Worldwide, Inc.; Khan Group LLC.

Cases: FranchisingDistribution NewJerseyNews