Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Franchisor allegedly breached contract to acquire most profitable locations, (Jan 19, 2016)

By Edward L. Puzzo, J.D.

Red Robin has breached its franchise and development agreements with Lehigh Valley Restaurant Group, franchisee of 21 Red Robin restaurant locations in Pennsylvania, as part of a strategy of acquiring profitable restaurant locations for itself, according to a complaint filed in the federal district court in Allentown, Pennsylvania (Lehigh Valley Restaurant Group, Inc. v. Red Robin International. Inc., January 15, 2016).

Tilghman agreement. Lehigh's first franchise agreement with Red Robin (the Tilghman agreement) was for a term of 20 years, expiring in August 2013, with the right to extend the agreement for an additional 10 years. Lehigh alleges that in 2012, despite Lehigh's timely notification of its intent to exercise its option to extend the Tilghman agreement for another 10 years, Red Robin failed to renew the agreement, but instead offered to extend it for only six months or to extend it for 10 years under different terms. Eventually, Red Robin agreed to a 10-year extension under the original terms.

Northampton agreement. Similarly, Lehigh's second franchise agreement with Red Robin (the Northampton agreement) was for a term of 20 years, expiring in November 2015, with the right to extend the agreement for an additional 10 years. In 2015, Lehigh sought to extend the Northampton agreement for 10 years beyond the original expiration of November 26, 2015, but Red Robin allegedly refused to acknowledge the attempt to renew.

Lehigh's complaint claims that Red Robin breached the Northampton franchise agreement and its duty of good faith and fair dealing by refusing to renew the agreement, despite's Lehigh's timely notice of renewal. Lehigh noted that it had continued to operate the restaurant in compliance with Red Robin policies and procedures, and Red Robin continued to accept Lehigh's franchise fee payments despite the expiration of the original agreement.

The motivation for this refusal to extend the Northampton franchise agreement, Lehigh alleges, is that, following its change of management in 2010, Red Robin has had a "franchise acquisition" strategy, attempting to acquire Lehigh's high performing and profitable franchise for its own benefit rather than be limited to the royalties and other fees it currently receives.

Area Development Agreement. Separately in 1995, Red Robin entered into an Area Development Agreement (ADA), giving Lehigh the rights to develop additional Red Robin restaurants in the Phoenix, Arizona area. The ADA was extended in 1999, in 2003, in 2005, and in 2007. In 2014, Lehigh sought to extend the ADA, but Red Robin refused to renew and extend the agreement, Lehigh alleges.

Consequently, Lehigh's lawsuit charges Red Robin with (1) breaching the ADA by requiring that any extension conform to Red Robin's Brand Transformation Initiative (BTI) instead of the development model Lehigh was entitled to use under the ADA as amended and (2) breaching its duty of good faith and fair dealing by seeking to coerce Lehigh into agreeing to requirements contrary to the original ADA as amended and by suspending negotiations during the pendency of a separate lawsuit brought by an association of Red Robin franchisees, of which Lehigh is a member.

In addition to damages, Lehigh is seeking a declaratory judgment that it has the right to renew the ADA and the Northampton franchise agreement.

The case is Civil Action No. 5:16-cv-00201-EGS.

Attorneys: George C. Werner (Barley Snyder) for Lehigh Valley Restaurant Group, Inc.

Companies: Lehigh Valley Restaurant Group, Inc.; Red Robin International. Inc.

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