The Franchise Memorandum

A federal court in South Dakota was asked to interpret the renewal language of three franchise agreements as amended after a class action lawsuit involving Little Caesar and its franchisee. Sioux Falls Pizza Co., Inc. v. Little Caesar Enterp., Inc., 2012 U.S. Dist. LEXIS 34687 (D.S.D. Mar. 14, 2012). At issue last month was whether Little Caesar could refuse to renew the franchises based on the franchisee’s prior litigation against the franchisor over the Hot-N-Ready concept. The franchisee claimed in the first litigation that it created the Hot-N-Ready concept and sued Little Caesar. Little Caesar counter-sued, contending that the litigation breached that portion of the franchise agreement that prohibited the franchisee from contesting Little Caesar’s proprietary marks. The district court agreed with Little Caesar, and the Eighth Circuit affirmed.

After the Eighth Circuit’s decision, Little Caesar notified the franchisee that it would not be renewing its franchise agreements. The franchisee sued for a declaratory judgment. This case centered on the interpretation of the renewal provision of the franchise agreements, as amended by a settlement agreement in a prior class action lawsuit involving Little Caesar and its franchisees. Under that settlement agreement, the franchisee had the option to renew the franchise if (1) the franchisee was not in monetary default with Little Caesar; (2) the franchisee was not “in default of any provision of this Agreement [meaning the franchise agreement], any amendment hereof or successor hereto, or any other agreement between Franchisee and Little Caesar . . .”; and (3) “in the reasonable judgment of Little Caesar, Franchisee shall have substantially and timely complied with all the terms, conditions, and obligations of such agreements during the terms thereof . . . .” The parties agreed that the franchisee had met the first two requirements in that it was not in default of the franchise agreements at the time, but they disputed the interpretation of the last requirement.

The franchisee contended that, while the word “Agreement” in the second clause specifically referred to the franchise agreements, the term “such agreements” in the last requirement did not include the franchise agreements, but other agreements entered into between the parties. Little Caesar disagreed and contended that the term referred to and included the franchise agreements. The court sided with Little Caesar, finding that the franchisee’s interpretation would lead to a “counterintuitive result” that Little Caesar would have the right not to renew if an amendment to the franchise agreement or other ancillary agreement between the parties was breached, but not if the franchise agreement itself was breached. The court also held that the litigation involving the Hot-N-Ready concept was a default of the parties’ franchise agreements for which Little Caesar, in its reasonable judgment, could choose not to renew the franchises.