The Franchise Memorandum

A California federal court recently granted in part a franchisor's motion to dismiss the franchisee's single claim for breach of the implied covenant of good faith and fair dealing. In Dos Beaches, LLC v. Mail Boxes Etc., Inc., 2012 U.S. Dist. LEXIS 73248 (S.D. Cal. May 25, 2012), the franchisee claimed that Mail Boxes Etc. breached the implied covenant by (1) selecting a poor location for the franchise, (2) negotiating a lease that prevented the display of the UPS logo, (3) interfering with lease modifications, (4) refusing to provide marketing materials, (5) refusing to grant a request to relocate, (6) divulging confidential information to a competitor, and (7) refusing to grant a second request to relocate.

In ruling on the motion to dismiss, the court began with the familiar standard that the implied covenant is meant to effectuate the intentions of the parties as reflected by the promises contained in the contract. The covenant cannot impose substantive duties or limits on the parties outside of those contained in the contract. In analyzing each of the alleged factual claims, the court found that all but one failed. The claims that Mail Boxes Etc. selected a poor location for the franchise and negotiated a lease that prevented the display of the UPS logo failed because they involved conduct that predated execution of the franchise agreement. The claim that the franchisor refused to grant two requests to relocate failed because the franchise agreement gave Mail Boxes Etc. discretion to withhold its consent. The claims that Mail Boxes Etc. refused to provide marketing materials and divulged confidential information failed because they did not stem from any provision contained in the franchise agreement. However, the court held that the franchisee had stated a potentially viable claim based on alleged interference in its negotiations with the landlord over modifications to the lease. The franchisee alleged that the franchisor interfered in those negotiations by advising the landlord that a competing franchisee would soon take over the franchisee's location. The court ruled that although the franchise agreement gave the franchisor the right to assist in lease negotiations, it did not permit the franchisor to interfere with them. The court permitted the franchisee to proceed with that one claim.