Federal Court Protects Franchisor’s Rights Pursuant to Clear Terms of Franchise Agreement 

In Bank United, NA v. GC of Vineland, LLC, Karen and William Scism and GC Vineland, LLC (“GVC”) (collectively the “Scism Parties”) filed a complaint in the U.S. District Court for the District of New Jersey against Golden Corral Corporation and Golden Corral Franchising Systems Inc. (collectively “Golden Corral”). The Court granted Golden Corral’s motion to dismiss and counterclaims against the Scism Parties and dismissed the Scism Parties’ complaint with prejudice.

On May 24, 2007, the Scisms and Golden Corral entered into a franchise agreement that allowed the Scisms to open and operate a Golden Corral restaurant. The agreement required the Scisms to pay Golden Corral a royalty fee equal to 4% of the restaurant’s gross sales and a marketing fee. On April 20, 2011, the Scisms assigned the franchise agreement to GVC. About 7 years later, the Scism Parties stopped running operations at the restaurant, and Golden Corral declared a default of the agreement and terminated it on June 18, 2018.

The Scism Parties brought twelve claims against Golden Corral, but after the Court granted Golden Corral’s motion to dismiss in part, only two of the Scism Parties’ claims remained: breach of contract; and violation of the New Jersey Franchise Practice Act (NJFPA). Golden Corral moved for summary judgment and counterclaimed for ceasing operations and failing to pay damages pursuant to the franchise agreement.

The Scisms alleged that Golden Corral breached the franchise agreement by violating a “Whereas Clause” in the agreement and a provision concerning restaurant inspections, failing to provide adequate assistance and training, and restricting the Scisms’ ability to set prices.

First, the Court agreed the Whereas clause was a general reference that does not set forth any rights or obligations of the parties. Specific clauses in a franchise agreement trump the general language in a franchise agreement when there is a conflict. Since the Scism Parties did not address this argument, the Court dismissed this claim for breach of contract claim for failure to provide any argument in opposition to Golden Corral’s motion.

Second, the Scism Parties argued Golden Corral did not provide the required number of “man-days” of assistance per the franchise agreement. The franchise agreement required Golden Corral to provide on-site management assistance with the opening of the restaurant for an aggregate amount of fifteen to forty-five “man-days.” The agreement did not define “man-days,” therefore the Court looked to the dictionary definition—“a unit of one day’s work by one person.” Golden Corral demonstrated it provided two representatives to help for three days before the opening and for the first ten days of the restaurant opening for a total of twenty-six “man-days.” On these grounds, the Court dismissed this claim for breach of contract.

Third, the Scism Parties argued Golden Corral failed to provide periodic and continuing advisory assistance. The franchise agreement required Golden Corral to provide advice and written materials concerning new developments in the Franchisor’s restaurants including, but not limited to, equipment, food products, packaging, and preparation. Golden Corral satisfied the franchise agreement when they sent the Scisms monthly newsletters that detailed what was happening and what changes were about to occur. Additionally, the Scism Parties argued Golden Corral did not provide meaningful or substantive assistance when they did not come to the restaurant to assist. However, the franchise agreement did not require Golden Corral to physically come to the restaurant to provide meaningful or substantive assistance. Therefore, the Court dismissed this claim for breach of contract.

Next, the Scism Parties argued Golden Corral did not allow them to set their own prices. The franchise agreement allowed franchisees to set their own prices but also permitted Golden Corral to establish maximum prices based upon a market analysis. The Court dismissed the Scism Parties’ breach of contract claim relating to price fixing because the Scism Parties did not cite to any case law that supported complying with nationwide promotions or national advertising constituted price fixing. Moreover, the Scism Parties failed to explain how the advertisements and promotions did not fall under Golden Corral’s rights under the franchise agreement to set maximum prices according to a market analysis. 

Lastly, the final claim for breach of contract alleged Golden Corral violated the inspections clause by failing to conduct their inspections “at a reasonable time” since they were inspected first in the region seven times in a row. Golden Corral argued that under the franchise agreement, inspecting a restaurant first seven times in a row was not “unreasonable” because the timing of the inspections occurred at a reasonable hour of the day and not in the middle of the night. The Scism Parties failed to address Golden Corral’s argument on this point, and the Court dismissed this claim.

The Scism Parties’ remaining claim asserted Golden Corral violated the NJFPA. Under the NJFPA, franchisors may not impose unreasonable standards of performance upon a franchisee. The statute does not define “unreasonable standards of performance” but New Jersey case law holds a plaintiff cannot succeed on a NJFPA claim unless they provide evidence of arbitrariness, bad intent, or economic ruin. Courts may consider the cumulative effect from multiple acts of the defendant. The Court held (i) requiring the franchise to run meal promotions for veterans and children; (ii) requiring the franchise to purchase certain equipment; and (iii) making the franchise pay for unsolicited food shipments were not unreasonable standards of performance.

This case provides lessons for a franchisor seeking to uphold their requirements under a franchise agreement. Courts will support a franchisor’s rights under the clear terms of a franchise agreement. Additionally, not all conduct of a franchisor that results in harm to a franchisee is a violation of the NJFPA; however, if the franchisor causes the franchisee to operate at a substantial financial loss or requires the franchisee to operate arbitrarily or with bad intent, a court will find a violation of the NJFPA.