Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Tex. App.: Franchisee’s hiring of employees of another franchisee could breach franchise agreement, (Mar 7, 2014)

By John W. Arden, J.D., LL.M.

A Florida Applebee franchisee’s hiring of five employees within six months of their termination of employment with a Texas Applebee franchisee could constitute a breach of its franchise agreement, which prohibited the hiring of any management-level personnel employed by Applebee’s, a subsidiary, or another franchisee in the system, according to the Texas Court of Appeals (Gator Apple, LLC v. Apple Texas Restaurants, Inc., March 5, 2014, Fillmore, R.). A trial court’s summary judgment ruling and award of damages, attorney fees, and interest were upheld.

Gator Apple was the franchisee of a number of Applebee franchises in Florida and Georgia. Its franchise agreement with the franchisor included provisions that required the uniform interpretation of franchise agreements around the country, that applied Kansas law to the contract and that prohibited the parties from hiring or seeking to hire employees in a management position within six months of their employment by the franchisor, a subsidiary of the franchisor, or another franchisee.

In 2008, Apple Texas purchased a number of Applebee franchises in North Texas. At the time, Richard Steven DiMeo was Applebee’s Director of Operations in Texas. After the purchase, DiMeo became the vice president of operations for Apple Texas. In October 2009, Apple Texas terminated DiMeo’s employment and promoted another employee into that position. DiMeo contacted the franchisor about another possible employment opportunity. The franchisor asked Apple Texas for a letter of release that would allow Applebee’s to talk to DiMeo. Apple Texas provided a written consent under the “Interference with Employment Relations” provision of the franchise agreement.

The franchisor did not have an appropriate opening for DiMeo, but Applebee employees informed DiMeo about an opportunity with Gator Apple. DiMeo was told by franchisor employees that Apple Texas interpreted the release as being specific to the franchisor. Nevertheless, DiMeo contacted Gator Apple and started working as its executive vice president and CEO on November 30, 2009. DiMeo also brought in four other former management employees from Apple Texas.

Apple Texas brought suit against Gator Apple for breach of contract, alleging a violation of the “Interference with Employment Relations” provision of Gator Apple’s franchise agreement. Apple Texas filed a motion for summary judgment, asserting that it was a third-party beneficiary of the franchise agreement between Gator and Applebee’s, that Gator Apple breached the franchise agreement, and that it was entitled to liquidated damages of $1,259,172, representing three times the combined annual salaries of DiMeo and the other four employees. It argued that Kansas law was applicable to the breach of contract claim.

Gator Apple responded that Texas law applied and that the claim ignored Applebee’s long-standing practices concerning inter-franchise hires and franchisor-franchisee hires. Gator Apple asserted that Applebee’s customarily requested payments of no more than 50 percent of actual compensation when an employee was hired by a franchisee and often waived the fee in situations where the employee had been terminated or had already decided to leave the employer. Gator Apple argued that the liquidated damages clause of the franchise agreement was a penalty provision designed to serve as a deterrent and was not reasonably related to the actual costs of replacing an employee. Gator Apple also asserted that it did not breach the franchise agreement because Apple Texas gave DiMeo and Pitts letters of release and arbitrarily refused to give letters of release to the other employees.

The trial court partially granted Apple Texas’s motion for summary judgment, concluding that Kansas law governed whether (1) the liquidated damages provision was enforceable, (2) the franchise agreement was valid and enforceable, and (3) Apple Texas was a third-party beneficiary. It entered a final judgment awarding Apple Texas $1,259,172 in damages, $110,000 in attorney fees, pre-judgment and post-judgment interest, and contingent attorney fees on appeal.

On appeal, Gator Apple argued that the trial court erred in concluding that Apple Texas was a third-party beneficiary of the entire franchise agreement and in applying Kansas law to determine whether the liquidated damages provision of the franchise agreement was an unenforceable penalty. Gator further contended that the trial court erred in granting summary judgment because fact issues existed regarding (1) whether Apple Texas provided releases to DiMeo and Pitts, (2) whether Apple Texas waived its breach of contract claim by conduct, (3) whether the hiring of the former employees was permissible in light of Applebee’s policies of limiting or waiving fees under the “Interference with Employment Relations” clause, and (4) whether Gator Apple caused Apple Texas’s damages.

Choice of law. The appellate court held that the trial court properly applied Kansas law, since the franchise agreement expressed a clear intent in favor of the uniform application of Kansas law to the entire agreement. Gator Apple argued that application of Kansas law to liquidated damages conflicted with a fundamental public policy of Texas. The appellate court held that parties generally may choose what law should apply through a choice of law contractual provision. However, parties may not require that their contract be governed by the law of a jurisdiction having no relation to them or their agreement. In this case, the trial court did not err in applying the law of Kansas, where Applebee’s was headquartered.

Liquidated damages. Gator Apple asserted that the liquidated damages provision of the franchise agreement was unenforceable because (1) the amount of damages had no relation to the cost of replacing an employee and was not intended to reflect such costs; (2) the damages would have been simple to calculate and would have been comprised of recruiting fees, relocation costs, and lost productivity during training; and (3) the provision fixes an unreasonably large measure of damages. However, Gator Apple did not carry its burden of producing summary judgment evidence establishing that the facts and circumstances in this case compelled a determination that the liquidated damages constituted a penalty or that the amount of damages was unreasonably large, the appellate court held.

Issues of fact. According to Gator Apple, the trial court erred in granting summary judgment because there were issues of material fact regarding breach, causation, and damages. Specifically, it alleged fact issues regarding whether Apple Texas provided releases to DiMeo and Pitts; Apple Texas waived its breach of contract claim; the hiring was permissible in light of Applebee policies; and Gator Apple caused damages to Apple Texas.

Gator Apple admitted in response to a request for disclosure that it did not obtain letters of release from Apple Texas to discuss employment opportunities with DiMeo or Pitts. The letter provided by Apple Texas for DiMeo applied only to opportunities with the franchisor. Thus, there was no issue of fact regarding whether Gator Apple breached the “Interference with Employee Relations” provision.

On the waiver issue, the appellate court found no intentional relinquishment of Apple Texas’s contractual rights. Finally, there were no issues of fact regarding whether Apple Texas’s decisions and conduct caused the employees to leave and therefore Apple Texas was not damages by Gator Apple. Regardless of the employees’ reasons for leaving Apple Texas, Gator Apple was precluded by contract from hiring the employees within six months without consent.

The case is No. 05-12-01369-CV.

Attorneys: Hilaree A. Casada (Cowles & Thompson) for Gator Apple, LLC.

Companies: Gator Apple, LLC.; Apple Texas Restaurants, Inc.

Cases: FranchisingDistribution TexasNews