American Dairy Queen Corporation Sued in Case Offering Guidance on Interpreting Minnesota’s Franchise Act

26 January 2023 Publication
Author(s): Peter Loh James M. Guenthner

A case between a franchisor and franchisee in the U.S. District Court for the District of Minnesota offers guidance on interpreting Minnesota’s Franchise Act. In LG2, LLC v. American Dairy Queen Corp., LG2, LLC (LG2), a Dairy Queen franchisee, sued American Dairy Queen Corporation (ADQ), the franchisor. ADQ had originally entered into a franchise agreement in 1961 with an individual named Bob Denny for the right to a Dairy Queen franchise in Johnson County, Oklahoma. Several successor entities obtained those rights through assignment until LG2 acquired them in late 2019.

In September of 2021, LG2 attempted to open a Dairy Queen restaurant at a new location within the county. ADQ conditioned approval of the new location on LG2 entering into a new franchise agreement and/or altering its menu. Following that notification, LG2 sued ADQ in late April 2022 in federal district court in Minnesota, the location of ADQ’s headquarters, claiming that ADQ breached its contract with LG2 and the implied covenant of good faith and fair dealing, as well as violated the Minnesota Franchise Act (MFA).

ADQ filed a motion to transfer venue to the Eastern District of Texas or, in the alternative, to dismiss LG2’s claim based on the MFA. ADQ argued that ADQ employees with knowledge of the relevant facts resided in Texas. The district court denied ADQ’s motion to transfer venue after considering the proposed venue and its convenience for the parties and witnesses and the interests of justice.

The Court next considered ADQ’s motion to dismiss the MFA claim. LG2 argued that the MFA applied because ADQ drafted the agreement assigning the franchise to LG2, and it became effective once ADQ signed it in Minnesota. Further, LG2 argued that the agreement “contemplated a relationship involving continuous communication and payments between LG2 and ADQ in Minnesota.” ADQ argued in response that the MFA does not apply to franchises outside of Minnesota.

The Court walked through what it means to “sell” a franchise under the MFA and, therefore, be subject to the MFA. The Court focused on whether ADQ’s consent to the franchise’s assignment was enough to meet this prerequisite. The Court held that ADQ’s acts only pertained to its right to consent to the assignment and, thus, were not sufficient to constitute a “sale or an offer to sell” under the MFA.

This opinion is important to note for franchisors in Minnesota. It indicates that franchisors and franchisees with agreements falling under Minnesota law must be careful when assigning or consenting to the assignment of franchise rights. How an assignment occurs can determine whether the MFA applies or not. If a franchisor is highly involved with the assignment beyond mere consent then the MFA might apply to a future dispute.

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