Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Or.: Vet franchisor shakes off breach of contract claims, (Apr 20, 2015)

By Greg Hammond, J.D.

A full-service veterinary hospital franchisor successfully evaded a franchisee’s breach of contract claims arising from the termination of a franchise agreement. The federal district court in Portland dismissed the claims with prejudice, finding that the franchisor properly refused to renew the parties’ franchise agreement when its original term expired in 2014 (Robinson v. Charter Practices International LLC, April 16, 2015, Papak, P.).

Background. James W. Robinson is veterinarian who entered into a franchise agreement with Charter Practices International LLC, Medical Management International, Inc., and MMI Holdings, Inc. for a Banfield Pet Hospital in 2004. The parties modified the 2004 agreement to state that Robinson’s ownership and operation of another animal hospital would not be deemed to violate the agreement, which otherwise prohibited Robinson from owning or operating any competing veterinary hospital. However, two years later, Robinson and a partner applied for another Banfield Pet Hospital franchise and entered into a Charter Practice Agreement. The latter agreement contained provisions expressly prohibiting Robinson from owning or operating any competing veterinary hospital.

After learning that the defendants would not renew the 2004 Franchise Agreement, Robinson attempted to sell the franchise, but the defendants refused to approve the sale. Robinson filed suit, alleging that the defendants’ decision to deny renewal of the franchise agreement was motivated by an intent to capture profits by taking over the plaintiff’s operations and operating it directly, or by an intent to terminate the franchise program generally.

The defendants moved to dismiss Robinson’s complaint, which brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional interference with economic relations, and for disregard of defendants’ corporate formalities.

Breach of contract. The first issue the court was required to decide was whether the defendants’ partial waiver of the non-competition provisions of the 2004 Franchise Agreement necessarily bound defendants by operation of contract to offer a renewal agreement that likewise exempted Robinson’s continued affiliation with the Robinson Animal Hospital from its non-competition provisions. Robinson argued that the 2004 Franchise Agreement bound defendants to offer a charter practices agreement substantially similar to the original franchise agreement as modified by the parties. The court was not persuaded by this argument, finding that the renewal provisions of the 2004 Franchise Agreement stated that renewal would be conditioned on Robinson’s execution of the defendants’ “then-current form of the Charter Practice Agreement” and that the terms of that form of agreement could differ in both specified and unspecified ways from the terms of the original agreement.

Second, Robinson could not state a breach of contract claim based on a theory that the defendants’ partial waiver was irrevocable, because the defendants did not manifest an intention to effect an irrevocable waiver, they lacked the capacity to bind themselves to such a waiver, and the defendants provided Robinson with reasonable notice of their intent not to waive the non-competition provisions of the 2014 Charter Practices Agreement. The breach of contract claim also could not be based on a theory of promissory estoppel, the court found, because the renewal provisions of the 2004 Franchise Agreement clearly stated that no franchisee could reasonably expect that any particular provision of the renewal agreement would be identical to the analogous provision the parties agreed on.

Lastly, the breach of contract claim could not be deemed unenforceable as a matter of Oregon law because the requirement for Robinson to devote his full-time professional efforts to the franchise rather than a competing veterinarian hospital would be deemed reasonable under state law. The breach of contract claim was therefore dismissed with prejudice.

Good faith, fair dealing. Robinson additionally alleged that the defendants violated the implied covenants of good faith and fair dealing by conditioning the renewal of the 2004 Franchise Agreement on Robinson’s agreement to be governed by a non-competition provision that would require him to disaffiliate from the Robinson Animal Hospital. The claim failed because the renewal of the franchise relationship was governed by the express renewal provisions of the 2004 Franchise Agreement, and Robinson could not have had any objectively reasonable expectation of entitlement to renewal of the franchise agreement on any terms, let alone the same terms that allowed him to operate the Robinson Animal Hospital during the initial term of the agreement. The claim was therefore dismissed with prejudice.

Intentional interference. Robinson’s theory that the defendants intentionally interfered with economic relations was premised solely on the defendants’ alleged “wrongful conduct” in failing to renew the franchise, in assuming ownership and operation of the franchise, and in forming relationships with then-existing customers of the franchise. However, the elimination of the franchise program was deemed a proper purpose for refusing to renew the franchise and the agreement provided that the defendants would take over the franchise at the conclusion of the relationship. The intentional interference claim was consequently dismissed with prejudice.

Corporate formalities. Lastly, the court concluded that Robinson’s claim for disregard of corporate formalities was not an independent cause of action. Because the pleadings failed to state any other claim for relief, it was unnecessary to consider the claim for disregard of corporate formalities.

The case number is 3:14-CV-1736-PK.

Attorneys: Jeffrey M. Edelson (Markowitz Herbold Glade & Mehlhaf, PC) for James W. Robinson. Jeffrey G. Bradford (Tonkon Torp LLP) and Paul J. Ferak (Greenberg Traurig, LLP) for Charter Practices International LLC, Medical Management International, Inc., and MMI Holdings, Inc.

Companies: Charter Practices International LLC; Medical Management International, Inc.; MMI Holdings, Inc.

Cases: FranchisingDistribution OregonNews