Tuesday, January 25, 2011

Injunction Preserves McDonald’s Franchises Pending Trial of Renewal Claims

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A franchisee of several McDonald’s restaurants was reasonably likely to succeed on the merits of his claim that the franchisor had agreed to renew his three franchises with fewer than five years remaining on the agreements, a California trial court has decided. Moreover, the balance of the harms tipped strongly in favor of a preliminary injunction allowing the franchisee to continue operating the three McDonald’s franchises pending a full adjudication on his claims. Accordingly, the franchisee’s request for a preliminary injunction was granted.

A concurrent request by McDonald’s for a preliminary injunction to prevent the franchisee’s “unauthorized use” of its trademarks at the three restaurants was denied.

Offer to Extend Franchises

Shortly after purchasing seven existing restaurants from another franchisee (including the three at issue), the franchisee alleged that McDonald’s had made a written offer to extend the agreements for the three restaurants for a 20-year term and that the franchisee had mailed McDonald’s an acceptance.

A McDonald’s employee admitted that she sent a letter offering a new 20-year term for one of the franchises, but testified that she never received a response. She further alleged that she left a voicemail with the franchisee about the offer and sent a follow-up letter after the offer expired, but never received any reply.

At trial, a jury could interpret the assignment agreement by which the franchisee acquired the seven additional franchises in accordance with a broader understanding between the parties under which McDonald’s had agreed to grant the franchisee franchise extensions for those that were due to expire soon, the court determined.

In fact, the evidence indicated it would have been "extraordinary, harsh and unjust" if the franchisee had been expected to invest the $10.5 million that he invested in the acquired franchises only to have several of them expire without extension within five years.

While acknowledging that some evidence could be considered as supporting either side, the court found a reasonable likelihood that the trier of fact would accept the franchisee’s view of the evidence.

Balance of Harms

The franchisor argued that allowing the franchisor to continue operating the franchises after expiration of the franchise agreements would be “potentially damaging” to its business model, goodwill, and trademarks. However, there was no showing that the McDonald’s brand was suffering from the franchisee’s operations. The franchisee had a long history of protecting the brand and had no interest in damaging it at this point.

In contrast, there was a real possibility of serious and possibly catastrophic results for the franchisee if the three franchises were turned over to McDonald’s. Thus, the balance of harms clearly favored the franchisee, the court ruled.

The decision is Husain v. McDonald’s Corp., Superior Court, Marin County, California, CCH Business Franchise Guide ¶14,530.

1 comment:

Anonymous said...

McDonald's has bullied franchisees for years under threat of taking stores and too many franchisees have folded and walked away. No franchisee enters into an agreement expecting for the relationship to end at the 20 year term limit; the expectation is renewal. McDonald's has been utilizing threat to deny rewrites for some time now to control pricing, national marketing, and franchise behavior. Kudos to Husain for standing his ground. Maybe more will join suit.