Manufacturer Acted Reasonably in Terminating a Franchisee for Failure to Abide by Agreement

Tasty Baking Company (“Tasty”), a manufacturer of prepackaged goods, terminated Distefano, Inc. (“Distefano”), Maryland-based owner of a franchise with rights to sell Tasty products in a prescribed area called a “route.” Tasty and Distefano entered into an agreement obligating Distefano to use “best efforts to develop the market for and maximize the sale of” Tasty products. Distefano also agreed not to allow expired products on the shelves of stores or distribute competing snacks or baked goods.

When Tasty found expired product in stores on Distefano’s route and heard from customers about poor service, it sent Distefano a written notice of breach of the agreement. Distefano was unable to contest the allegations. Subsequently, Tasty again discovered expired products in stores on Distefano’s route. This prompted Tasty to notify Distefano it was terminating the agreement. Distefano sued Tasty in a case styled as Distefano, Inc. v. Tasty Baking Company, Civil Case No. SAG-22-01493, in the U.S. District Court for the District of Maryland, alleging violation of the Maryland Fair Distributorship Act (“MFDA”) and breach of contract.

The Court dismissed the claim of violation of the MFDA. The Court noted the uncontroverted facts demonstrated that Tasty and Distefano had a franchise relationship. Tasty provided Distefano with a franchise disclosure document prior to Distefano’s acquisition of the route. Further, Tasty was subject to a consent order after the Maryland Securities Commission charged it with violations of the Maryland Franchise Registration and Disclosure Law. Thus, Distefano could not bring a claim for violation of the MFDA.

The Court next turned to the breach of contract claim specifically alleging that Tasty violated the implied duty of good faith and fair dealing. The Court noted that Pennsylvania law (the Distribution Agreement called for its application) only extended a duty of good faith and fair dealing to the question of the appropriateness of terminating a franchise agreement and in no other areas of the franchise relationship. The duty obligates a franchisor to act in good faith and with commercial reasonableness. Even when if duty applies, it cannot override the express terms of an agreement.

The Court ruled that Distefano could not show bad faith in Tasty’s termination. Distefano violated the agreement when it allowed the presence of expired goods on the shelves, and Tasty had no obligation to help Distefano with customer complaints. It was not commercially unreasonable for Tasty to terminate under the circumstances.

The case demonstrates how a franchise agreement with clear terms can allow a franchisor to terminate a franchisee without liability. Moreover, express terms of a franchise agreement will override claims for breach of the duty of good faith and fair dealing.