Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Okla.: Sonic franchisee allowed to pursue both Oklahoma and Florida counterclaims, (Jan 20, 2017)

By Edward L. Puzzo, J.D.

In a dispute between a Florida-based franchisee of Sonic restaurants and the Oklahoma-based franchisor, counterclaims could be brought under the substantive law of both states despite a choice of law provision in the License Agreement designating Oklahoma law as governing contract disputes, the federal district court in Oklahoma City has ruled (Sonic Industries LLC v. Halleran, January 19, 2017, Cauthron, R.).

This litigation arose between Sonic, an Oklahoma-based restaurant franchisor and OKS, franchisee of two Sonic restaurant locations in Florida with the rights to develop twenty more Sonic restaurant locations in Florida. Sonic brought claims of breach of contract and unjust enrichment against OKS under Oklahoma law; OKS brought counterclaims under both Florida and Oklahoma law.

Choice of law. Sonic argued that Oklahoma's substantive law applied to OKS' counterclaims and moved to dismiss the counterclaims. The court found that choice of law provision in the License Agreement between the parties stated that Oklahoma law would govern the Agreement, but further provided that the franchise laws and regulations of the location would also apply. The effect in this case, the court ruled, was claims and counterclaims could be brought under both Oklahoma and Florida law.

Bad faith. OKS brought a claim of bad faith against Sonic, i.e. a claim of breach of the implied covenant of good faith and fair dealing. The court stated that Oklahoma law applied to such a claim. Under that law, an implied covenant of good faith and fair dealing was recognized, but its breach was not recoverable as a tort separate from a breach of contract claim unless there is a "special relationship" between the parties involving a contract of adhesion: where there is a disparity in bargaining power resulting in the weaker party having no choice of terms or the stronger party being able to eliminate its risk. In this franchisor-franchisee relationship, the court stated, while Sonic may have had more bargaining power as a large corporation, it could not be said that OKS had no bargaining power or choice of terms. Therefore, there was no special relationship between the parties and the agreements in question were ordinary commercial contracts. Thus, OKS' bad faith claim could not be maintained separate from the breach of contract claim, and must be dismissed with prejudice, the court ruled.

Fraud. Sonic argued that OKS's claim for fraud failed to meet the heightened pleading requirements of Fed. R. Civ. P. 9(b). The court found the specificity in the pleadings—allegations that the Financial Disclosure Documents (FDDs) contained false information, and that misrepresentations were made by Sonic representatives regarding investment expectations–sufficient to meet those requirements. The court would not dismiss OKS' fraud claim.

Florida franchise law. OKS alleged that Sonic violated the Florida Franchise Act (FFA) by misrepresenting the financial viability of franchises sold to them. For example, it was alleged, Sonic knew that one shopping mall location sold to OKS would require $4 million in revenue before it could show a profit and further knew that no other Sonic franchise located in a shopping mall had produced similar revenue. The court found these pleadings had successfully stated facts which, if true, stated a claim for relief. The court therefore would not dismiss OKS' FFA claim.

Florida unfair trade law. OKS alleged that Sonic violated the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) by committing wrongful acts that violated the FTC's Franchise Rule. Sonic argued that the alleged wrongful acts were specifically disclaimed in the License Agreement and therefore could not violate the Franchise Rule. The court agreed with Sonic, stating that when a party that signs a contract whose terms contradict the alleged misrepresentations on which it relied, that party is barred from seeking relief pursuant to FDUTPA, as the party did not reasonably rely on the misrepresentations.

Oklahoma sales law. OKS alleged that Sonic violated the Oklahoma Business Opportunity and Sales Act (OBSA) by misleading statements in, and alternatively the failure to deliver, the FDDs. Sonic argued that the allegations pleaded alternative facts in an improper manner, but the court disagreed. Argument in the alternative is permitted, the court ruled, and the issue of whether or not FDDs were delivered was a question fact inappropriate for a motion to dismiss for failure to state a claim.

Oklahoma consumer law. OKS asserted a claim under the Oklahoma Consumer Protection Act (OCPA), but Sonic argued that the claim was precluded by the FTC's authority to regulate franchisors. The court noted that OKS did not dispute Sonic’s proposition that the Commission has authority to regulate Sonic’s activity as a franchisor, as they in fact alleged that Sonic breached the FTC's Franchise Rule. Because the FTC regulates the conduct at issue, the court ruled, the claim must be dismissed with prejudice.

The case is No. 5:16-cv-00709-C.

Attorneys: Amy J. Pierce (Corbyn Hampton Barghols Pierce PLLC) for Sonic Industries LLC, Sonic Franchising LLC and Sonic Industries Services Inc. Beshoy Rizk (Zarco Einhorn Salkowski & Brito PA) for Arthur J. Halleran, Jr. and OKS Campbell LLC.

Companies: Sonic Industries LLC; Sonic Franchising LLC; Sonic Industries Services Inc.; OKS Campbell LLC

Cases: FranchisingDistribution StateUnfairTradePractices OklahomaNews