Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Va: Restaurant franchisor’s breach of contract counterclaims proceed, (May 28, 2014)

By Edward L. Puzzo, J.D.

A restaurant franchisor's counterclaims adequately alleged breaches of the franchise agreement and could not be dismissed, the federal district court in Roanoke, Virginia has ruled (Bans Pasta, LLC v. Mirko Franchising, LLC, May 23, 2014, Turk, J.).

Background. Franchisee Bans Pasta sought rescission of its franchise agreement with Mirko Franchising, alleging that it was negligently or fraudulently induced into entering into the agreement by false statements regarding the financial viability of Mirko restaurant franchises.

The franchise agreement, signed in September 2011 and personally guaranteed by Randy Sowden and Michael Boggins, provided that Bans would operate a Mirko restaurant for ten years in Roanoke, Virginia, and pay the franchisor a weekly service fee equal to six percent of the restaurant's gross weekly revenues. Confidentiality provisions, which survived the expiration or termination of the franchise agreement, required the franchisees to not divulge trade secrets. Pursuant to the terms of the franchise agreement, the terms were to be governed by Georgia law.

According to Mirko, in March 2013, five months after the restaurant's opening, Ban accused Mirko of certain bad acts resulting in "constructive termination" of the franchise agreement. However, for an additional five months following the alleged termination, Bans continued to operate the restaurant as a Mirko franchise, displaying proprietary signage, using proprietary food recipes and paying the franchise service fee. Bans then notified Mirko it was ceasing franchise operations and began operating a different Italian restaurant, called Fresco's, at the same location.

Mirko brought counterclaims, alleging various breaches of contract based on alleged violation of confidentiality provisions and for misappropriation of trade secrets under the Georgia Trade Secrets Act (GTSA). The franchisee Bans moved to dismiss the franchisor Mirko's counterclaims.

Breach of contract. Mirko alleged that Bans had breached the franchise agreement by failing to operate the restaurant as a Mirko's franchise, operating another business at the restaurant, using Mirko's proprietary marks in an unauthorized manner, and failing to pay monies owed under the franchise agreement. The court found that this sufficiently pleaded a breach of contract and damages, adequate to state a claim that should not be dismissed. Further, the court stated, the fact that Mirko officially terminated the franchise agreement based upon Bans breach did not mean that Mirko could not seek damages for the termination of the agreement.

Rescission. A crucial issue in this case, continued the court, was whether franchisee Bans properly rescinded the franchise agreement and if so, whether Bans rescinded it in March 2013 or at a later date after the filing of the lawsuit. Whether or not it is ultimately found that rescission occurred in March 2013, franchisor Mirko's counterclaims could be read as alleging that subsequent use of proprietary marks was a breach of contract. Consequently, the court ruled, these counterclaims should not be dismissed.

Injunctive relief. Franchisee Bans next claimed that franchisor Mirko's counterclaim seeking injunctive relief should be dismissed because Mirko terminated the franchise agreement effective August 2013, and Bans no longer operated a restaurant, and thus could not be said to continue to be in breach of the franchise agreement. The court noted, however, that Bans' obligation to return an operating manual and other confidential materials survived the franchise agreement, and Bans' failure to do was a proper basis for seeking injunctive relief. Thus, the counterclaim too should not be dismissed, the court ruled.

Trade secrets. Finally, the court ruled that Mirko's counterclaim that Bans had misappropriated trade secrets was properly pleaded and should not be dismissed. The counterclaim adequately described the trade secrets and that Bans had breached the confidentiality of that information by operating a competing restaurant in violation of the franchise agreement.

The case is Civil Action No. 7:13-cv-00360-JCT.

Attorneys: Himanshu M. Patel (Zarco Einhorn Salkowski & Brito, PA) and Melissa Walker Robinson (Glenn Robinson & Cathey PLC) for Bans Pasta, LLC. Charles Carter Lee (Woods Rogers PLC) for Mirko Franchising, LLC.

Companies: Bans Pasta, LLC; Mirko Franchising, LLC.

Cases: FranchisingDistribution VirginiaNews GeorgiaNews