The Federal Court of Appeal rules on the franchisor’s power to impose changes to the franchise system | Foley & Lardner LLP


The Eleventh Circuit Court of Appeals recently issued an opinion regarding a dispute regarding a franchisor’s efforts to force changes to a franchisee’s operations. The Court awarded the franchisor a mixed result. The decision provides guidance to franchisors who are also seeking to impose uniformity of operations and procedures in their own systems.

Miami Chocolates, LLC and Peterbrooke Franchising, Inc. had entered into a franchise agreement to operate a chocolate factory in Coral Gables, Florida. In January 2012, Peterbrooke Franchising of America, LLC purchased the rights to the franchise system from Peterbrooke Franchising. Between November 2013 and October 2015, Peterbrooke of America notified some franchisees of their need to upgrade their point-of-sale (POS) systems to the NCR Silver/Simplebox system. Miami Chocolates was one of the franchisees to receive such notice. Existing franchise agreements gave Peterbrooke of America the right to mandate a specific point-of-sale system of its choosing and required franchisees like Miami Chocolates to help install the new systems at their own expense.

Miami Chocolates objected to Peterbrooke of America’s directive to change its point-of-sale system. Instead, Miami Chocolates implemented a point-of-sale system of its choice, a Square POS system. Peterbrooke of America terminated the Miami Chocolates franchise due to this failure to implement the NCR Silver/Simplebox system. Upon termination, Miami Chocolates was expected to cease all use of Peterbrooke of America’s trademarks, remove all features of its trade dress, and comply with a non-competition clause. Miami Chocolates refused to comply, and Peterbrooke of America sued for violation of the Lanham Act, common law trademark infringement, common law unfair competition, and breach of franchise agreement. Miami Chocolates filed a countersuit for breach of franchise agreement, breach of implied covenant of good faith and fair dealing, and violation of the Florida Deceptive Trade Practices Act.

The district court granted summary judgment to Petebrooke of America. The trial court ruled that Peterbrooke of America had the right to require the switch to a different point-of-sale system. The district court also ruled that the non-compete clause was enforceable and awarded Peterbrooke of America more than $10,000 in damages.

Miami Chocolates appealed and argued that Peterbrook of America failed to test the NCR Silver/Simplebox system, failed to establish that Miami Chocolates’ failure to use the NCR Silver/Simplebox system constituted a violation substantial part of the franchise agreement and that Peterbrooke of America’s termination of the franchise agreement was wrongful. The appeals court disagreed with Miami Chocolates’ argument about testing the new POS system. The Court held that Peterbrooke of America had absolute power, under the franchise agreement, to impose changes to the point-of-sale system. Peterbrooke of America fulfilled it regardless of the existing testing requirement.

Nevertheless, the Court held that the question of the relative materiality of the Miami Chocolates breach remained an open question. The Court observed that the applicable provisions of the franchise agreement did not specify whether Miami Chocolates’ obligations to migrate to a new point-of-sale system were material. Conversely, the agreement qualified other conditions as material. Additionally, Peterbrooke of America had allowed other franchisees to stay on the older POS systems rather than converting to the NCR Silver/Simplebox system. Finally, the Miami Chocolates Square POS system had the same functionality as the NCR Silver / Simplebox system. Accordingly, the Court set aside the summary judgment of the trial court on Peterbrooke of America’s breach of contract and unfair competition claims against Miami Chocolates. The Court sent the case back to the trial court for further consideration of whether Miami Chocolates’ violation was material.

Take away quickly:

Courts will enforce franchise agreements, like any other contract, according to the plain meaning of their terms. Franchisors should draft their franchise agreements with this in mind and ensure that any terms they consider important are drafted as such.

[View source.]


Comments are closed.