The Franchise Memorandum

In Bans Pasta, LLC v. Mirko Franchising, LLC, 2014 U.S. Dist. LEXIS 71466 (W.D. Va. May 23, 2014), a federal court in Virginia denied franchisee Bans Pasta's motion to dismiss franchisor Mirko's counterclaims for breach of contract and other claims. We reported on a previous decision in this case in Issue 178 of The GPMemorandum. Franchisee Bans Pasta accused Mirko Franchising and its representatives of negligently or fraudulently inducing it to enter into the franchise agreement. Bans Pasta notified Mirko in March 2013 that its bad acts constituted a constructive termination of the franchise agreement. But Bans Pasta continued through August 2013 to operate the Mirko Italian restaurant franchise using the Mirko's trademarks. At that time, Bans Pasta notified Mirko that it had rescinded the franchise agreement. Almost immediately thereafter, Bans Pasta started operating a different Italian restaurant at the location of its former franchise. Mirko then terminated the franchise agreement, and Bans Pasta sued for rescission and asserted other claims. Mirko filed counterclaims for breach of contract and other claims, and Bans Pasta moved to dismiss them.

In denying Bans Pasta's motion to dismiss, the court held that Mirko had adequately pled its breach of contract claim that Bans Pasta had (1) used Mirko's trademarks for the period of March through August 2013, (2) failed to continue to operate the restaurant, (3) failed to pay certain monies, and (4) failed to return Mirko's confidential manuals. Bans Pasta disputed that Mirko could state a claim for breach of contract because Mirko had terminated the franchise agreement. The court disagreed and held Mirko could recover past-due and future royalties. Bans Pasta also claimed Mirko's claim was not viable because Mirko had averred that it had provided support to Bans Pasta through August 2013 and thus, Mirko had authorized Bans Pasta's use of the trademarks. The court held, however, that Mirko had apparently pled these facts in the alternative. That is, at issue was whether Bans Pasta had rescinded the franchise agreement in March 2013 when it told Mirko that its actions constituted a constructive termination. If Bans Pasta rescinded at that time, but continued to operate using the Mirko's trademarks, then Mirko could show that Bans Pasta had breached the agreement. The court therefore denied the motion to dismiss.