Legal News: Distribution & Franchise

Court Rejects Effort By Assignee of Franchise Agreement to Escape Agreement’s Obligations

In Noble Roman’s Inc., v. B & MP, LLC et al., the U.S. District Court for the Northern District of Illinois denied a motion to dismiss a suit alleging breach of a franchise agreement. In March 2010, Noble and B & MP entered into a franchise agreement that granted B & MP authorization to sell Noble’s branded food products for ten years. The agreement required B & MP to report weekly gross sales to Noble, pay a weekly royalty fee, and only obtain food and beverage items, supplies, materials, and other products from Noble approved suppliers.

In 2011, Leslie Perdriau, the sole owner and manager of B & MP, assigned B & MP’s assets, liabilities, and business operations (including the franchise agreement) to Army Trail – of while Leslie Perdriau was also the sole shareholder and director. Two years later, Noble complained about B & MP’s failure to pay their royalty fees, resulting in a default of the franchise agreement. Additionally, after an audit, Noble discovered that B & MP was purchasing ingredients from an unauthorized distributor. Noble notified B & MP of its default under the agreement and filed a lawsuit.

Noble’s suit included B & MP, Army Trail, and Leslie Perdriau as defendants for breach of contract, violation of the Lanham Act, and a claim against Perdriau for personal liability for the debts of B & MP and Army Trail. The defendants moved to dismiss the claims against Army Trail because Army Trail did not sign the franchise agreement. They further contended Army Trail did not assume B & MP’s rights and obligations under the franchise agreement because Noble did not provide written consent to the assignment as required by the franchise agreement. The court ruled that Noble waived the requirement when it treated Army Trail as an authorized franchisee. Noble had knowledge of Army Trail’s existence and received fees from Army Trail’s bank accounts; therefore, a written consent was not required. 

Similarly, the defendants raised a statute of frauds defense based on Army Trail’s failure to sign the franchise agreement. The court rejected this argument as well, holding a new contract does not need to be signed after the original contract is assigned and complies with the statute of frauds. 

The defendants further argued that the franchise agreement was unenforceable against Army Trail because Noble failed to provide disclosures required by the Illinois Franchise Disclose Act. The court also rejected this argument because under the Illinois Franchise Disclosure Act, a franchisor is not required to provide another disclosure to a new franchisee when the franchise agreement is assigned to the new franchisee. A valid assignment allows the assignee to step into the shoes of the assignor. 

The defendants lastly argued for dismissal of the Lanham Act claim under the doctrine of laches arguing Noble unduly delayed in bringing its claim. When reviewing a motion to dismiss, the court must take all the allegations in a complaint as true. Thus, a defense of laches had to wait till summary judgment motion for facts to establish a genuine delay entitling the defendants to this defense. 

This case provides lessons for a franchisor seeking to enforce its rights under a franchise agreement against the assignee of that agreement. If the assignee assumes the role of the franchisee and performs under the agreement with or without the written consent of the franchisor, the franchisee may not be able to disclaim its obligations under the assumed contract. Additionally, the Illinois Franchise Disclosure Act does not require a franchisor to provide additional disclosure to a new franchisee who accepts assignment of the franchise agreement.