Thursday, April 19, 2012

Franchisor’s Airing of Provocative Commericals Did Not Breach Good Faith Duty Owed to Franchisees

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

Fast food franchisor, Hardee’s Food Systems, Inc., did not breach the implied covenant of good faith and fair dealing in its agreement with a franchisee by airing sexually provocative television commercials, a federal district court in St. Louis has ruled.

The franchisee alleged that the franchisor’s airing of two specific “lewd” ads on television during the franchisee’s renewal period abused its discretion its discretion in a manner that denied the franchisee the expected benefit under the agreement. The franchisee argued it received repeated complaints about the ads in its “predominantly agricultural and union oriented community” and sought lost profits and other damages.

Under Missouri law, where a contract left a decision to the discretion of one party, the issue was not whether the party made an erroneous decision, but whether the decision was made in bad faith or was arbitrary or capricious so as to amount to an abuse of discretion, the court explained.

In this instance, there was no evidence from which a jury could find that the challenged conduct of Hardee’s was arbitrary and capricious, opportunistic, or evaded the spirit of the franchise agreement to deny the franchisee the expected benefit thereof, the court held.

Instead, the evidence showed that Hardee’s made a strategic marketing decision and approved the ads at issue in what it believed was in the best interests of the Hardee’s brand, which is what the agreement contemplated that Hardee’s would do.

The decision is Hardee’s Food Systems, Inc. v. Hallbeck, CCH Business Franchise Guide ¶ 14,809.

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