The Franchise Memorandum

The United States District Court for the Eastern District of Pennsylvania partially denied a motion to dismiss a complaint alleging that a transmission repair franchisor had failed to maintain its brand. Jade Grp., Inc. v. Cottman Transmission Ctrs., LLC, 2016 WL 3763024 (E.D. Pa. July 13, 2016). The plaintiff-franchisees entered into license agreements that allegedly required the franchisor, Cottman Transmission Centers, to “continue to develop, promote and protect the good will and reputation associated with the Cottman names and marks.” In 2006, Cottman purchased the brand’s most significant competitor, AAMCO, and planned to convert its Cottman franchisees into AAMCO centers. Cottman franchisees objected, leading the franchisor to change its position. By 2014, the number of Cottman franchises had dwindled, and at that time the franchisor announced that it would no longer devote any additional resources to the Cottman brand. The franchisees sued, alleging that Cottman had failed to maintain or increase the number of Cottman stores in breach of the parties’ contracts and the implied covenant of good faith and fair dealing, among other claims. Cottman moved to dismiss the complaint, arguing that the claims were barred by the statute of limitations, and that there was no contractual obligation to increase or maintain store counts.

The court largely disagreed. Viewing the facts in the light most favorable to the franchisees, the court found the franchisees’ claims were based not on an alleged obligation to increase or maintain store counts, but rather an alleged obligation to develop, grow, and protect the brand’s goodwill. Further, because the complaint was unclear as to when the breach allegedly occurred, the court could not dismiss the franchisees’ contract claims based on the statute of limitations. However, the court dismissed the good faith and fair dealing claims, since those claims were duplicative of the contract claims.