Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Tilted Kilt not barred from seeking to terminate a franchise agreement without opportunity to cure, (Aug 1, 2016)

By Jody Coultas, J.D.

Area developers were denied dismissal of a motion filed by Tilted Kilt Franchise Operating, LLC for a declaratory judgment that the area developers breached their agreement by the federal district court in Chicago. Tilted Kilt was also able to show that the court had jurisdiction and that its claims were not barred by the Illinois Franchise Disclosure Act (Titled Kilt Franchise Operating, LLC v. 1220, LLC, July 29, 2016, Gottschall, J.).

In 2007, 1220, LLC became a Tilted Kilt area developer and granted rights for a territory comprised of certain counties in Illinois, Wisconsin, and Indiana for a period of twenty five years. 1220 is responsible for: (1) soliciting and referring to Tilted Kilt for its consideration qualified prospective franchisees; (2) performing site acquisition services for restaurants located within its territory; and (3) providing opening and ongoing operational support to Tilted Kilt franchises within its territory.

Tilted Kilt alleged that 1220 breached the parties’ agreement by making misleading financial performance representations to prospective franchisees, and prepared a misleading projection of revenue and expenses for a Tilted Kilt restaurant which was not contained in Tilted Kilt’s then-current franchise disclosure document and delivering it to prospective franchisees.

In response to Tilted Kilt’s motion for a declaratory judgment that it was entitled to terminate the agreement without providing an opportunity to cure, 1220 filed the motion to dismiss for lack of subject matter jurisdiction.

Jurisdiction. A party asserting federal jurisdiction under 28 U.S.C. § 1332 must establish both diversity of citizenship and an amount in controversy exceeding $75,000. A challenge to the amount in controversy element must show with legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal. 1220’s "challenge" was merely an assertion that Tilted Kilt failed to plead monetary damages that would exceed $75,000. Because 1220 did not dispute any material facts in Tilted Kilt’s complaint relating to the amount in controversy and because it was not "legally certain" that recovery would be less than the jurisdictional floor, the amount in controversy requirement was met, according to the court.

Declaratory judgment. The court found that the instant case had been appropriately brought as a declaratory judgment action.1220 argued that Tilted Kilt failed to plead an "actual controversy" as required to proceed under the Declaratory Judgment Act (DJA). A declaratory judgment claim presents an "actual controversy" if "there is a substantial controversy" between the parties; "uncertain or speculative business injury…will not support a finding that an actual controversy exists." Tilted Kilt alleged that because of the breach, an attorney sent a letter to Tilted Kilt demanding both a refund of the fees paid to Tilted Kilt to acquire the franchise and also a release of their obligations under their franchise agreement with Tilted Kilt. This was sufficient to show an actual controversy. Having the court find that 1220 breached the contract would not provide any clarity as to whether Tilted Kilt would be entitled to terminate the contract without an opportunity to cure.

Notice and opportunity to cure. Tilted Kilt stated a claim for relief, according to the court. 1220 argued that Tilted Kilt’s request to terminate without providing an opportunity to cure would violate § 19 of the Illinois Franchise Disclosure Act and § 17.2 of the agreement. There have been no cases, either in the Seventh Circuit or Illinois state court, addressing whether the Illinois Franchise Disclosure Act’s 30-day cure requirement may be obviated if the breach in question is "material" or "incurable." Tilted Kilt adequately alleged, with supporting authority, that an incurable breach obviates the need for an opportunity to cure in common law. Tilted Kilt also alleged that 1220 committed a crime and repeated violations of the law and of the agreement, making the requirement of notice and opportunity to cure unavailable.

The case is No. 15-cv-10377.

Attorneys: Fredric Adam Cohen (Cheng Cohen LLC) for Tilted Kilt Franchise Operating, LLC. Carmen David Caruso (Carmen D. Caruso Law Firm) for 1220, LLC.

Companies: Tilted Kilt Franchise Operating, LLC; 1220, LLC

Cases: FranchisingDistribution IllinoisNews