The Franchise Memorandum

The United States Court of Appeals for the Eleventh Circuit has held that a franchisee is required to indemnify a franchisor for its litigation defense costs, vacating a district court’s orders of summary judgment in favor of the franchisee. Aaron’s Inc. v. MKW Invs., Inc., 2019 WL 4200260 (11th Cir. Sept. 5, 2019). Aaron’s Inc., a home furnishings retailer and franchisor, entered into a franchise agreement with MKW Investments under which MKW agreed to indemnify Aaron’s for certain expenses incurred as a result of certain conduct by MKW. After a former MKW employee sued both MKW and Aaron’s for wrongful termination, Aaron’s sought to enforce the indemnification provision and recover its costs in defending against the former employee’s claims. The district court denied Aaron’s claims, and Aaron’s appealed.

MKW successfully argued to the district court that its obligation to indemnify Aaron’s was extinguished after Aaron’s terminated MKW’s chosen counsel and hired its own attorney. The franchise agreement provided that Aaron’s “shall have the option, in its sole discretion, to defend any action or to allow Franchisee to defend such action with counsel satisfactory to Franchisor.” According to MKW, Aaron’s decision to replace MKW’s counsel with its own attorney operated as a condition subsequent terminating the duty to indemnify. The Eleventh Circuit disagreed, finding no language in the agreement that supported MKW’s interpretation. Instead, the indemnification provision unambiguously required MKW to indemnify Aaron’s, regardless of Aaron’s replacement of MKW’s chosen counsel with one of its own choosing.