Federal Appeals Court Rules on Franchisor’s Power to Impose Changes on Franchise System

The Eleventh Circuit Court of Appeals recently issued an opinion concerning a dispute over a franchisor’s effort to mandate changes to a franchisee’s operations. The Court granted the franchisor a mixed result. The decision gives guidance to franchisors similarly seeking to impose uniformity over the operations and procedures in their own systems.

Miami Chocolates, LLC and Peterbrooke Franchising, Inc. had a franchise agreement for the operation of a chocolate shop in Coral Gables, Florida. In January 2012, Peterbrooke Franchising of America, LLC bought the rights to the franchise system from Peterbrooke Franchising. Between November 2013 and October 2015, Peterbrooke of America notified certain 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. The franchise agreements in effect granted Peterbrooke of America the right to mandate a specific POS system of its choosing and obligated franchisees like Miami Chocolates to assist with the installation of the new systems at their own expense.

Miami Chocolates objected to Peterbrooke of America’s directive to change its POS system. Instead, Miami Chocolates implemented a POS system of its own choice, a Square POS system. Peterbrooke of America terminated Miami Chocolates’ franchise based on this failure to implement the NCR Silver/Simplebox System. Upon termination, Miami Chocolates was supposed to cease all use of Peterbrooke of America’s trademarks, remove all features of its trade dress, and abide by a non-compete provision. Miami Chocolates refused to comply, and Peterbrooke of America filed suit for violations of the Lanham Act, common law trademark infringement, common law unfair competition, and breach of the franchise agreement. Miami Chocolates counter-sued for breach of the franchise agreement, breach of the 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 lower court ruled that Peterbrooke of America had the right to mandate the change to a different POS system. The district court also held the non-compete provision was enforceable and awarded Peterbrooke of America over $10,000 in monetary 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 was a material breach of the franchise agreement, and that Peterbrooke of America’s termination of the franchise agreement was wrongful. The court of appeals disagreed with Miami Chocolates’ argument regarding testing of the new POS system. The Court held that Peterbrooke of America had the unfettered authority under the franchise agreement to mandate changes of the POS system. Peterbrooke of America fulfilled it whatever testing requirement existed.

Nonetheless, the Court ruled that the issue of materiality regarding Miami Chocolates’ breach remained an open issue. The Court observed that the applicable franchise agreement provisions did not specify if Miami Chocolates’ obligations to migrate to a new POS system were material. Conversely, the agreement did characterize other terms as material. Moreover, Peterbrooke of America had allowed other franchisees to remain on legacy POS systems rather than convert to the NCR Silver/Simplebox System. Lastly, Miami Chocolates’ Square POS system had the same functionality as the NCR Silver/Simplebox System. Accordingly, the Court vacated the trial court’s summary judgment on Peterbrooke of America’s breach of contract and unfair competition claims against Miami Chocolates. The Court remanded the case to the trial court for further examination of whether Miami Chocolates’ breach was material.

Quick takeaway:

Courts will enforce franchise agreements—like any other contracts—according to the plain meaning of their terms. Franchisors should draft their franchise agreements with this in mind and take care to make sure any terms they regard as material are drafted as such.