Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Tilted Kilt franchisor allegedly breached area development agreements, (Mar 24, 2016)

By Linda O’Brien, J.D., LL.M.

The franchisor of Tilted Kilt® restaurants has breached the area development agreements with a franchise developer by failing to provide the developer with franchise disclosure documents that satisfy federal and state law and by terminating the developer’s franchise agreements without good cause, according to a complaint filed in the federal district court in South Bend, Indiana (Kilt Holdings, LLC v. Tilted Kilt Franchise Operating, LLC, March 22, 2016).

Tilted Kilt Franchise Operating, LLC (TKFO) is a franchisor of the nationwide chain of franchised Tilted Kilt Pub & Eatery® restaurants, which are Celtic-themed sports and entertainment bars and restaurants.

The complaint states that, in October 2011, TKFO entered into an area development (AD) agreement with Kilt Holdings, under which Kilt Holdings purchased the area development rights to solicit, sell, and support franchises for Tilted Kilt® restaurants within certain identified counties in Indiana, Michigan, and Kentucky (“the Indiana Territory”). According to the agreement, Kilt Holdings was required to develop a certain number of Tilted Kilt® restaurants within the Indiana Territory within a specified time frame. Kilt Holdings could comply with this development requirement by either directly opening the restaurants or by obtaining third-party franchisees to do so.

TKFO also entered into AD agreements with Kilt Holdings, under which Kilt Holdings purchased the area development rights to solicit, sell, and support franchises for Tilted Kilt® restaurants within certain identified counties in Michigan (“the Michigan Territory”) and Nebraska (“the Nebraska Territory”). Under the three agreements, Kilt Holdings was required to train and support individual franchisees within the applicable territories. However, Kilt Holdings allegedly was not given the right to enforce the terms of the individual franchise agreements for the restaurants within its territories. That right was reserved exclusively to TKFO, the lawsuit claimed.

According to the complaint, as a seller of franchises, Kilt Holdings is required to comply with various federal and state laws relating to the offer and sale of franchises, including providing prospective franchise buyers with a franchise disclosure document (FDD). TKFO, as the franchisor under each individual unit franchise agreement, is obligated to provide Kilt Holdings with FDDs that can be disseminated to prospective franchise buyers. However, TKFO allegedly has violated this obligation by providing Kilt Holdings with FDDs that do not comply with the laws applicable to the various jurisdictions.

In 2015, Kilt Holdings became aware that TKFO failed to comply with the applicable federal and state franchise laws by refusing to update its FDD to disclose a massive number of closures that had occurred within the Tilted Kilt® franchise system. TKFO has masked the failure rate its franchisees, the complaint alleges, by engineering the closures and their timing in a way to avoid disclosing them to potential franchise buyers. Because TKFO has provided legally non-compliant FDD, it is impossible for Kilt Holdings to comply with its obligations to locate, train, and support franchisees for the Tilted Kilt® restaurants within its territories, the plaintiff charged. Kilt Holdings has sold a sufficient number of Tilted Kilt® franchises within its three territories to comply with the development schedules under those agreements. Despite TKFO’s actions being the overriding cause of any non-compliance by Kilt Holdings, on March 2, 2016, TKFO informed Kilt Holdings that it was terminating the AD agreements for non-compliance, the complaint states.

The plaintiff asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and violations of the Indiana Deceptive Franchise Practices Act, Nebraska Franchise Practices Act, and Michigan Franchise Investment Law. The action seeks declaratory and injunctive relief, an accounting, punitive and exemplary damages, pre- and post-judgment interest, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 3:16-cv-00171-JVB-CAN.

Attorneys: Joseph W. Barber (Howard and Howard Attorneys PLLC) for Kilt Holdings, LLC.

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

News: FranchisingDistribution IndianaNews