Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Franchisee stated contract, fraud, tortious interference claims against owner of franchised premises, (Jul 17, 2013)

By John W. Arden, J.D., LL.M.

A donut shop franchisee in litigation against its franchisor stated claims for breach of contract, fraud, civil conspiracy, and tortious interference with a contract in a third-party complaint against the owner of the franchised premises, the federal district court in Philadelphia has ruled (Dunkin’ Donuts Franchised Restaurants, LLC v. Claudia I, LLC, July 15, 2013, Stengel, L.). However, the franchisee failed to state a claim for tortious interference with a prospective business advantage against the property owner.

The franchisee (Claudia I, LLC) was sued by its franchisor (Dunkin’ Donuts Franchised Restaurants, LLC) for breach of the franchise agreement. Claudia responded by filing a third-party complaint against the owner of the franchised premises (Spring Hill Realty, Inc.), alleging breach of contract, fraud, civil conspiracy, tortious interference with a contract, and tortious interference with a prospective business advantage.

Spring Hill had entered into a prime lease with Dunkin’ Donuts 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.

The prime lease stated that Spring Hill consented to the assignment or subletting of the premises to a franchisee. All benefits inuring to Dunkin’ Donuts as tenant were expressly retained unless specifically granted to Claudia under the sublease. The prime lease also provided that where the common area maintenance expenses were found to be overstated by 5% or more—and that the tenant has overpaid for its pro rata share of such expenses by more than $1,500—the landlord would bear the cost of an inspection and promptly refund any overpayment.

The prime lease and sublease both made representations about the square footage of the premises, which had a direct impact on the amount of common area maintenance that Claudia was required to pay. Claudia obtained a square footage audit in February 2011, finding that the square footage specified in the prime lease and sublease were overstated by more than 10%.

After Claudia brought the third-party complaint, Spring Hill moved to dismiss or to require a more definite statement. The federal district court granted the motion for a more definite statement, and Claudia amended the third-party complaint. The court then took up the motion to dismiss.

Breach of contract. Spring Hill contended that Claudia lacked standing to bring a breach of contract action against it because Claudia failed to allege the existence of a contract between them. Claudia alleged that it was a third party beneficiary of the prime lease between Spring Hill and Dunkin’ Donuts pursuant to a sublease. The court noted that, generally, a person must be in privity of contract to sue for damages for breach of such contract. However, under certain conditions—such as being an intended beneficiary of a contract—a nonparty may sue as a third-party beneficiary.

Although Claudia did not cite any specific language in the prime lease that might evidence the parties’ intent to benefit Claudia, Claudia argued that the sublease required that any claims it would have against Spring Hill had to be raised directly with Spring Hill. It also argued that the prime lease specifically defined the “permitted use” of the premises as being the “operation of a quick service restaurant” under the Dunkin’ Donuts, Baskin Robbins, or Togo’s brands. Because Dunkin’ Donuts does not maintain corporate stores, the promised benefit of the prime lease had to run directly to Claudia, the franchisee claimed.

While Claudia did not allege sufficient facts to prove that Spring Hill intended to benefit Claudia through its lease agreements, Claudia only had to allege sufficient facts to defeat a motion to dismiss, the court observed. “Because at this juncture I must draw any inferences favorable to Claudia, I cannot make determinations regarding the parties’ intent and whether circumstances are compelling in this case based on Spring Hill’s motion to dimiss,” the court said. “Therefore, dismissing Claudia’s third-party beneficiary claim at this stage of the proceedings is premature because the inquiry involves factual questions of intent.”

Fraud. Spring Hill argued that Claudia could not plausibly prove that Spring Hill made a representation regarding square footage that would be material to Claudia’s sublease with Dunkin’ Donuts. Therefore, there was no representation actually made to Claudia by Spring Hill falsely, with knowledge or reckless disregard of its falsity, with the intent to mislead or inducing justifiable reliance, according to Spring Hill.

The court was not convinced that Claudia failed to allege the claim with sufficient specificity, but it was concerned that—under the “gist of the action” doctrine—the tort action would be barred as based on the contract. Nevertheless, dismissing the case would be premature because the validity of the contractual relationship between the parties was in dispute.

Conspiracy. To establish a civil conspiracy, Claudia had to show: (1) a combination of two or more persons acting with a common purpose to do an unlawful act by unlawful means or for an unlawful purpose, (2) an overt act done in pursuance of the common purpose, and (3) actual legal damage. Absent a civil cause of action for a particular act, there can be no cause of action for civil conspiracy to commit that act.

Spring Hills claimed that Claudia had not properly pled a conspiracy claim because it had not identified an underlying cause of action in the first place. Claudia argued that it sufficiently pled a claim for fraud and therefore must be permitted to proceed on the conspiracy count. The overt act was the statement of square footage, which resulted in monetary damages. “Because the court finds that Claudia has adequately stated a claim for an underlying cause of action, at this stage, Spring Hill’s argument is moot,” the court concluded.

Tortious interference with a contract. To prove tortious interference with contractual relations under Pennsylvania law, a plaintiff must show (1) the existence of a contract or prospective contractual relation between the plaintiff and a third party, (2) purposeful action on the part of the defendant, specifically intended to harm the existing relation, or to prevent the prospective relation from occurring, (3) the absence of a privilege or justification, and (4) the occasioning of actual legal damage as a result of the defendant’s conduct.

Claudia argued that it had a contractual relationship with Dunkin’ Donuts through the franchise agreement that was being damaged by Spring Hill’s actions. By refusing to abide by the terms of the primes lease in good faith, Spring Hill had caused a rift, resulting in the termination of the franchise agreement, according to Claudia. Although the court was skeptical about Claudia’s ability to prove that Spring Hill had engaged in purposeful action specifically intended to harm the relationship between the franchisor and franchisee, it refused to dismiss the claim at this stage of the proceedings.

Tortious interference with prospective business advantage. Claudia failed to show the existence of a prospective contractual relationship between it and Dunkin’ Donuts, since there was an actual contract between the parties rather than a prospective one. Thus, the claim was dismissed.

The case is Civil Action No. 12-2010.

Attorneys: Craig R. Tractenberg (Nixon Peabody LLP) for Dunkin’ Donuts Franchised Restaurants, LLC. Ayesha Krishman Hamilton (Hamilton Law Firm, PC) for Claudia I, LLC. Joshua J. Knapp (Barley Snyder LLC) for Spring Hill Realty, Inc.

Companies: Dunkin’ Donuts Franchised Restaurants, LLC; Claudia I, LLC; Spring Hill Realty, Inc.

Cases: FranchisingDistribution PennsylvaniaNews