The Franchise Memorandum

A federal district court in Wisconsin recently granted summary judgment in favor of the franchisor of Dairy Queen® restaurants against a counterclaim alleging that it had improperly interfered with negotiations between a franchisee and its subfranchisee, to which the franchisee was attempting to sell its territory rights. Am. Dairy Queen Corp. v. Universal Inv. Corp., 2017 WL 3701865 (W.D. Wis. Aug. 25, 2017). The subfranchisee, Universal Investment Corp., had operated a Dairy Queen unit in Wisconsin for more than 40 years. Universal’s franchise rights were originally granted by Stephen Partnership, a former Dairy Queen licensee and territory operator in Wisconsin. In August 2013, American Dairy Queen terminated Stephen Partnership’s territory rights for failure to submit monthly reports and payments. The franchisor subsequently sought a declaratory judgment that it had validly terminated Stephen Partnership’s territory rights. In June 2014, during the pendency of the dispute between American Dairy Queen and Stephen Partnership, Universal attempted to purchase territory rights from Stephen Partnership. While negotiations were taking place between Stephen Partnership and Universal, the franchisor reached a settlement agreement with Stephen Partnership that transferred all of Stephen Partnership’s rights back to the franchisor.

Universal subsequently alleged that American Dairy Queen improperly interfered with Universal’s prospective contract with Stephen Partnership. The franchisor moved for summary judgment against the claim of tortious interference on the ground that it had legally terminated its relationship with Stephen Partnership and that Stephen Partnership had no continuing right to sell territorial rights to Universal. In granting summary judgment, the district court noted that the franchisor’s actions were consistent with its right to control its trademark and license.