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The Franchise Memorandum

Fourth Circuit Vacates Dismissal of Claims that Franchisor Tortiously Interfered with the Business Relationship of its Franchisees

The Fourth Circuit Court of Appeals has vacated a judgment dismissing claims that Mid-Atlantic Restaurant Corporation (owner of the Smithfield’s Chicken ‘N Bar-B-Q franchise system) interfered with the business relationship between owners of certain of its franchisees. Musselwhite. v. Mid-Atlantic Restaurant Corp., 2020 WL 1873330 (4th Cir. Apr. 15, 2020). In the underlying action, Musselwhite, a part-owner of several Smithfield’s Chicken ‘N Bar-B-Q franchisees, alleged that Mid-Atlantic wrongfully interfered with the business relationship between Musselwhite and his longtime business partner, Brian Cheshire, by inducing Cheshire to execute a Buyout Agreement with Musselwhite, divesting Musselwhite of his interest in a company leasing property to several franchise locations. A federal district court in North Carolina had dismissed the claims, but the Fourth Circuit vacated and remanded the judgment, concluding that the district court misapplied the doctrine of collateral estoppel and improperly relied on the findings of fact in a state court judgment dismissing similar claims.

The district court had concluded a state-judgment conclusively established that Mid-Atlantic lacked malice and, therefore, Musselwhite was collaterally estopped from bringing his claim for tortious interference against Mid-Atlantic. The Fourth Circuit disagreed, finding that the issue of Mid-Atlantic’s alleged malice had not been adjudicated by the state court in the course of rejecting Musselwhite’s claim of fraud. MidAtlantic also contended that, because the state court found Musselwhite was derelict in his obligations under his franchise agreements with Mid-Atlantic, Mid-Atlantic had a legitimate business reason to act as it did. The Fourth Circuit found this argument unpersuasive because these findings were not “necessary and essential” to the state court’s judgment, which would be required to invoke collateral estoppel. The Fourth Circuit similarly found errors in the District Court’s conclusion that other claims had been released, and vacated the judgment and remanded for further proceedings.

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