Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Hickory Farms charged with failing to negotiate franchise renewal agreements in good faith, (Jul 23, 2014)

By Linda O’Brien, J.D., LL.M.

A specialty food franchisor breached its duty of good faith and fair dealing in negotiating renewal franchise agreements with several long-term franchisees by providing misleading franchise disclosure statements and requiring terms that substantially reduce the value of the franchisees’ businesses, according to a complaint filed in the federal district court in Toledo, Ohio (American Classic Provisions, Inc. v. Hickory Farms, Inc., July 21, 2014).

Hickory Farms is a wholesaler and retailer of specialty foods. Its business primarily consists of seasonal kiosks open the last 12 weeks of the year, usually in mall public walkway areas. American Classic Provisions, Valley Ventures, Hei, Edmunds & Katrancha, Hickory Farms of Charlottesville, Greensboro Cheeses Co., and Dodge Enterprises have been franchisees of Hickory Farms for over 40 years pursuant various successive franchise agreements. Under the agreements, the franchisees were granted semi-exclusive rights to their Franchise Geographic Areas (FGAs).

The complaint states that, in 1980, major supermarkets began selling specialty food products and gift packages for the holidays. Sales of Hickory Farm products declined, and Hickory Farms financial position deteriorated significantly. Hickory Farms initiated a program to sell its products on the Internet and through other retail channels, including sales to consumers in the franchisees’ FGAs. In 1987, the franchisees filed suit against Hickey Farms and entered into a settlement that reduced their royalty fees, provided compensation for sales that infringed upon their FGAs, and eliminated the requirement that franchisees operate year-round stores.

In 1996, the franchisees entered into renewal franchise agreements with Hickory Farms, which contained a renewal/extension clause stating that Hickory Farms would negotiate in good faith the terms of the renewal agreement to be offered to franchisees when the agreement expired in January 2014. After signing the 1996 agreements, the number of Hickory Farms franchisees was reduced by 50 percent and Hickory Farms had no formal franchise selling program, the complaint alleged.

According to the complaint, after the 1996 franchise agreements expired, Hickory Farms failed to negotiate in good faith to extend the agreements by offering renewal agreements with increased royalty fees and provisions allowing Hickory Farms to operate in any territory of its franchisees. Hickory Farms also allegedly misrepresented that the company was beginning to sell new franchises in order to subvert the franchisees’ renewal rights. Hickory Farms provided misleading franchise disclosure statements that showed that the company had a negative net worth and was not entitled to accept any initial franchise fees, according to the complaint. The disclosure documents affirmatively stated that Hickory Farms projected no new franchise outlets in its next fiscal year but failed to disclose that its executives had no experience in training, supporting, or selling franchises.

The renewal agreements offered by Hickory Farms contained provisions requiring franchisees to resell its goods at prices set by Hickory Farms, the franchisees charged. Without the ability to meet competitor’s prices and promotional deals and competing with Hickory Farms as well, franchisees would have no reasonable opportunity to operate profitably.

The plaintiffs assert claims for breach of contract, specific performance, and breach of duty of good faith and fair dealing. The action seeks declaratory and injunctive relief, damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 3:14-cv-01603-JJH.

Attorneys: Gerald R. Kowalski (Cooper & Kowalski, LPA) for American Classic Provisions, Inc., Valley Ventures, Inc., Hei, Inc., Edmunds & Katrancha, Inc., Hickory Farms of Charlottesville, Inc., Greensboro Cheeses Co., and Dodge Enterprises, Inc.

Companies: American Classic Provisions, Inc.; Valley Ventures, Inc.; Hei, Inc.; Edmunds & Katrancha, Inc.; Hickory Farms of Charlottesville, Inc.; Greensboro Cheeses Co.; Dodge Enterprises, Inc.; Hickory Farms, Inc.

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