The Franchise Memorandum

The United States District Court for the Northern District of Texas has granted in part and denied in part a motion for summary judgment filed by franchisor Pizza Inn in a dispute with one of its area developers. Pizza Inn, Inc. v. Clairday, 2019 WL 499105 (N.D. Tex. Feb. 8, 2019). Pizza Inn entered into two area developer agreements with Clairday that permitted Clairday to promote and develop Pizza Inn franchises in Arkansas. The agreements contained a primary term of 20 years and provided Clairday the option to renew for two additional five-year periods. The parties renewed the agreements for one additional five-year period but disagreed as to whether Clairday properly exercised his right to renew for the second five-year period. Pizza Inn sought a declaratory judgment that Clairday did not have a right to demand a second renewal of the agreements. Clairday then counterclaimed, alleging violations of the Arkansas Franchise Practices Act and breach of contract and seeking a declaratory judgment that he had the right to renew the agreements for the second five-year period. Pizza Inn moved for summary judgment on its declaratory judgment claim and on all of Clairday’s counterclaims.

The court denied Pizza Inn’s request for summary judgment on the renewal issue. Pizza Inn first argued that the parties had executed a letter agreement that clearly limited Clairday to one renewal period and extinguished his right to a second renewal. The court disagreed, finding that the letter agreement was ambiguous as to whether it extinguished Clairday’s right to renew the area developer agreements a second time. Pizza Inn next argued that Clairday had failed to abide by the terms of the area developer agreements and therefore had forfeited his right to renewal. The court denied Pizza Inn’s request for summary judgment on that basis, holding that there was a genuine issue of material fact as to whether Clairday had defaulted. The court also agreed with Clairday that strict compliance with the exercise of an option to renew was not necessary and that, despite providing Pizza Inn notice of renewal two months late, the delay only produced de minimis harm and therefore was an improper basis for granting summary judgment.

The court also denied summary judgment on Clairday’s declaratory judgment and breach of contract counterclaims because material questions of fact existed as to whether Clairday had breached the agreements. However, the court granted summary judgment to Pizza Inn on Clairday’s counterclaims for violations of the Arkansas Franchise Practices Act, concluding that the parties’ relationship fell outside the scope of the statute because the area developer agreements did not create a franchisor-franchisee relationship.