The Franchise Memorandum

Meanwhile, a federal court in Kentucky held that a franchisee sufficiently pled a claim against a franchisor for intentional interference with a prospective economic advantage. Raheel Foods, LLC v. Yum! Brands, Inc., 2017 WL 217751 (W.D. Ky. Jan. 18, 2017). Raheel was party to several franchise agreements with Yum! Brands and eventually decided to sell its franchised stores. Under the franchise agreements, prior to selling the stores, Raheel was required to obtain Yum! Brands’ approval of the proposed purchaser. Raheel alleged that it presented proposed purchasers to Yum! Brands for approval and that Yum! Brands undercut Raheel either by offering the proposed purchasers corporate-owned stores at below-market prices, or by refusing to approve the proposed purchasers as franchisees when presented but later approving them to purchase corporate-owned stores. In ruling on a motion to dismiss filed by Yum! Brands, the court held that, taking Raheel’s allegations as true (which the court was obligated to do for purposes of deciding the motion), Yum! Brands’ conduct could potentially constitute intentional interference with a prospective economic advantage, and the case could proceed to discovery.

Yum! Brands had argued that because it had the right under the parties’ franchise agreements to deny any sale proposed by Raheel, its denial of Raheel’s proposals was not improper interference as a matter of law. The court disagreed, holding that Raheel did not allege that the mere denial of the proposed sales was improper interference but rather that Yum! Brands used its disapproval rights for an improper purpose—to take Raheel’s buyers for itself. Yum! Brands had further argued that it was a competitor with Raheel (in the respect that both parties were engaged in selling franchised stores), and that competition alone was not an improper basis for interference. Again, the court disagreed, reasoning that Yum! Brands was privy to the terms of the proposed deals and allegedly used its contractual right of approval to handcuff Raheel and purloin its potential purchasers.