Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Va.: Terminated KFC franchisee's contract breach, racial discrimination claims dismissed, (Mar 29, 2016)

By Edward L. Puzzo, J.D.

Breach of contract and racial discrimination counterclaims brought by a terminated KFC franchisee failed due to, respectively, a lack of ascertainable damages and a non-discriminatory basis for the termination, the federal district court in Alexandria, Virginia has ruled (KFC Corporation v. Gazaha, March 24, 2016, Trenga, A.).

Nabil Gazaha owned and operated a KFC restaurant franchise in Baltimore from 2007 to 2015. Pursuant to the franchise agreement, KFC conducted periodic Food Safety Compliance Checks (FSCCs) to verify compliance with KFC's food safety quality standards. On July 28, 2015, after failing a total of four food safety examinations, KFC notified Gazaha that, due to his default and failure to cure the default, they were terminating his franchise. Gazaha brought two counterclaims against KFC, alleging (1) breach of contract for improper termination and (2) wrongful termination due to intentional race discrimination. Gazaha is an African-American.

Contract breach. Under Kentucky law, which governs the franchise agreement, proof of damages are a fundamental element of a breach of contract claim, the court noted. The evidence here indicated that Gazaha's franchise consistently lost money during the period of 2011 through 2015. There was also no credible evidence presented as to the value of the business prior to termination in contrast to the value of the business after termination. The court found that Gazaha failed as a matter of law to present evidence sufficient to establish that he suffered any damages as the result of KFC's termination. Without proof of damages, his breach of contract claim must fail, the court ruled.

Racial discrimination. For claims of racial discrimination in the making and enforcing of contracts, the court explained, the complaining party must either present "direct evidence" of racial discrimination, or else proceed under the burden-shifting framework set forth in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973).

The only evidence of discrimination Gazaha presented was (1) that an unnamed KFC employee characterized the neighborhood where his franchise was located as "unsafe," and (2) that statistically, the termination rate for African-American KFC franchisees is higher than the rate for Caucasian KFC franchisees. The court declared that these allegations were not "direct evidence" of racial discrimination.

Alternatively, these allegations could be used under the burden-shifting framework of McDonnell Douglas. In order for the complaining party to establish a prima facie case of racial discrimination, in the context of franchise terminations, the court explained, the complaining party must show that the franchisor treated the franchisee, a member of a protected class, less favorably with regard to an allegedly discriminatory act than the franchisor treated other similarly situated persons outside the protected class.

The court noted that the KFC employee's alleged statement was isolated, casual, and not made by anyone in a position of authority to terminate the franchise agreement. As for statistical data allegedly showing racial disparities in termination, without additional evidence that Gazaha or other African-American franchisees were terminated for racial reasons, statistical evidence alone is insufficient to create a triable issue of fact, the court declared.

Even if the court were to assume that a prima facie case of racial discrimination were shown, the franchisor may rebut the presumption by articulating a legitimate, non-discriminatory reason for its termination decision, the court explained. Here, KFC offered a legitimate, nondiscriminatory reason for the termination: Gazaha's failure of four consecutive health inspections.

Consequently, the court found that Gazaha failed as a matter of law to present evidence sufficient to support his breach of contract and discrimination counterclaims. The court therefore dismissed both.

The case is Civil Action No. 1:15-cv-01077-AJT-JFA.

Attorneys: Julie Moore Carpenter (Jenner & Block LLP) for KFC Corporation. Michael Christian Whitticar (NOVA IP Law, PLLC) for Nabil Gazaha.

Companies: KFC Corporation

Cases: FranchisingDistribution VirginiaNews