The Franchise Memorandum

In Halloum v. DFO, Inc., 2010 Cal. App. Unpub. Lexis 2558 (Cal. Ct. App. Apr. 8, 2010), a California Court of Appeal considered various claims by a franchise applicant against DFO, Inc., the franchisor for Denny’s restaurants, including claims of unlawful race and national origin discrimination. The plaintiff, a Palestinian Arab, claimed Denny’s was motivated to deny his franchise application by his race and ethnicity following the events of September 11, 2001.  The court first affirmed the trial court’s dismissal of claims for breach of an oral contract, promissory estoppel, negligent misrepresentation, and unfair business practices under the Federal Trade Commission Act and the California Franchise Investment Law.  Those claims were largely based on theories of actual and apparent authority that failed because Denny’s had provided the applicant with a written description of the application process and had made clear that an application could only be approved in writing.  

The appellate court did not disturb the trial court’s finding that the franchise applicant had established a prima facie case of discrimination, which essentially required the plaintiff to show membership in a class protected by state or federal discrimination law, and his basic qualification to be considered for the award of a franchise.  However, the discrimination claim failed because Denny’s provided unrebutted evidence of its legitimate, nondiscriminatory reason for denying the application.  Denny’s showed that the application was denied because of the plaintiff’s repeated and continuing failure to submit a complete site approval package.  In addition, the court considered statistical evidence that Denny’s had awarded 84 franchises to Middle Eastern applicants after 9/11.  The court affirmed summary judgment in favor of the franchisor.