Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Donut shop franchisee’s breach of contract claims against franchisor can proceed, (Feb 11, 2014)

By Linda O’Brien, J.D., LL.M.

A donut shop franchisee in litigation against its franchisor sufficiently stated counterclaims for breach of contract and the franchisor’s motion for summary judgment was denied, the federal district court in Philadelphia has ruled. (Dunkin’Donuts Franchised Restaurants, LLC v. Claudia I, LLC, February 10, 2014, Stengel, J.). However, the franchisee’s claims for fraud, civil conspiracy, and tortious interference with prospective business advantage were dismissed for failure to state a claim.

Dunkin’ Donuts Franchised Restaurants, LLC, DD IP Holder, LLC, Baskin-Robbins Franchised Restaurants, LLC, and DB Real Estate Assets I, LLC (collectively, “Dunkin’ Donuts”) – filed suit against franchisee, Claudia I, LLC and its members, Manfred and Lynne Marotta, for breach of the franchise agreement. Claudia responded by filing counterclaims against Dunkin’ Donuts and a third-party complaint against the owner of the franchised premises, Spring Hill Realty, Inc. Following a motion to dismiss the third-party complaint, her claims for breach of contract, fraud, civil conspiracy, and tortious interference with a prospective business advantage against Spring Hill were allowed to proceed.

Dunkin’ Donuts entered into a prime lease for property owned by Spring Hill in 2002. Claudia purchased an existing Dunkin’ Donuts franchise on the premises and took the predecessor’s franchise agreement and tenant interest by assignment in 2009. Claudia and Dunkin’ Donuts then entered into a franchise agreement and transfer agreement. The transfer agreement provided that Claudia acquired the tenant’s interest in the sublease of the location. Dunkin’ reserved the right to terminate the franchise agreement if it terminated the sublease to the store. Claudia had numerous complaints about Spring Hill and wanted to relocate the store. Although acknowledging that the store was not a good location, Dunkin’ Donuts chose to extend the prime lease rather than relocate. The store did not make a profit and Claudia ceased paying rent in 2011. Dunkin’ Donuts terminated the sublease and franchise agreement.

Dunkin’ Donuts alleged that Claudia breached the franchise agreement by withholding all rent and common area expenses, failing to remodel as provided by the franchise agreement, and failing to pay sales and payroll tax liabilities. Dunkin’ Donuts filed breach of a franchise agreement, trademark infringement, unfair competition, and enforcement of restrictive covenant claims and sought a preliminary injunction which was granted by the court. Dunkin’ Donuts subsequently moved for summary judgment on the Claudia’s counterclaims.

Breach of contract. The court found that Claudia produced sufficient evidence that Dunkin’ Donuts breached the implied duty of good faith and fair dealing. Under state (Pennsylvania) law, franchisors are required to deal with its franchisees in good faith and in a commercially reasonable manner. In this case, Dunkin’ Donuts controlled where Claudia located its franchise. The rent consumed a larger portion of Claudia’s gross sales when compared with the average rate in the geographic area. Also, Dunkin’ Donuts executives considered the premises to be a poor location. Moreover, the fact that Dunkin’ Donuts relocated the franchise after it took control of the store was suggestive of bad faith.

Fraud. However, the court found that Claudia failed to produce sufficient evidence for a claim for fraudulent inducement. Claudia could not claim fraud based on misrepresentations of the store’s square footage since the Marrottas suspected the square footage was overstated at the transfer of the sublease. Additionally, any representations by Dunkin’ Donuts employees, that the sublease could be renegotiated, were not actionable in fraud. Further, Dunkin’ Donuts had no duty to act independently of the sublease to renegotiate its terms or the franchise agreement to allow relocation.

Civil conspiracy. The elements of a state law claim for civil conspiracy are an agreement between two or more persons to do an illegal act by unlawful means with malice. Since Claudia failed to produce sufficient evidence of fraud, the civil conspiracy claim also fails, according to the court.

Tortious interference with prospective business advantage. Finally, Claudia produced no evidence of a prospective contractual relation or of wrongful conduct by Dunkin’ Donuts. The franchise agreement was an existing contract, not a prospective contract, and did not show that Dunkin’ Donuts intended to harm Claudia, the court concluded.

The case is No. 12-2010.

Attorneys: Craig R. Tractenberg (Nixon Peabody LLP) for DD IP Holder LLC, DB Real Estate Assets I, LLC, Baskin-Robbins Franchising, LLC and BR IP holder LLC. Ayesha Krishman Hamilton (Hamilton Law Firm PC) for Claudia I, LLC.

Companies: Dunkin’ Donuts Franchised Restaurants, LLC; DD IP Holder, LLC; Baskin-Robbins Franchised Restaurants, LLC; DB Real Estate Assets I, LLC; Claudia I, LLC; Spring Hill Realty, Inc.

Cases: FranchisingDistribution PennsylvaniaNews