The Franchise Memorandum

The Fifth Circuit Court of Appeals has reversed a Texas court’s ruling excusing an area representative’s untimely renewal notice and rendered judgment for the franchisor. Pizza Inn, Inc. v. Clairday, 979 F.3d 1064 (5th Cir. 2020). Clairday and Pizza Inn were parties to two area development agreements under which Clairday held two five-year options to renew. Clairday failed to timely notify Pizza Inn of his intent to exercise the second renewal option. Pizza Inn did not honor the tardy notice of renewal and did not renew. A jury awarded damages after finding that Pizza Inn had breached the agreements. Determining that the notice of renewal was sufficiently timely under the doctrine of equitable intervention, the district court upheld the verdict and awarded Clairday attorneys’ fees. Pizza Inn challenged (1) the application of the equitable-intervention doctrine, (2) the damages award, and (3) the award of attorneys’ fees.

The Fifth Circuit held that the district court applied the equitable-intervention doctrine incorrectly, noting that because strict compliance with the agreement did not result in an unconscionable hardship, equitable intervention was inapplicable. Clairday asserted three hardships that, in his view, made it unconscionable to enforce the renewal deadline strictly: a partial forfeiture of the $1,250,000 purchase price of the Agreements, a forfeiture of future profits, and the shuttering of a Pizza Inn franchise store. The court found that Clairday did not suffer a forfeiture of his initial $1,250,000 investment because Clairday received the full agreed equivalent of the price he paid for his option when the option expired. Therefore, Clairday lost no more than his power to exercise the option. Next, Clairday’s loss of the opportunity to turn a profit did not shock the conscious to the extent that it should be found unconscionable and trigger the court to apply the narrow equitable exception. Finally, Clairday’s final asserted hardship — shuttering a Pizza Inn franchise store — also fell short of the high threshold he needed to prove unconscionability because the store was a distinct entity, subject to its own contracts, and not associated with the area developer agreements. Such an attenuated connection was insufficient to attach the store’s closure to Pizza Inn’s decision not to renew the agreements. Accordingly, because Clairday did not suffer unconscionable hardship, the court reversed the district court and rendered judgment for Pizza Inn.