The Franchise Memorandum

The United States District Court for the Northern District of Illinois denied a motion to dismiss and permitted franchisor Tilted Kilt Franchise Operating, LLC to proceed with its request for a declaratory judgment that it had good cause to terminate its agreement with a franchise developer. Tilted Kilt Franchise Operating v. 1220, 2016 WL 4063172 (N.D. Ill. July 29, 2016). Tilted Kilt sought to terminate the agreement after discovering that the developer had made financial performance representations to prospective franchisees that were inconsistent with its Franchise Disclosure Document. Franchisees who did not realize the revenue that the developer had projected sought a refund of their franchise fees from Tilted Kilt, as well as other relief. The developer responded to Tilted Kilt’s suit by filing a motion to dismiss, asserting, in part, that Tilted Kilt failed to state a claim under Federal Rule of Civil Procedure 12(b)(6). The court ruled against the developer on all counts.

The developer’s motion first asserted that Tilted Kilt had not pleaded an “actual controversy” as required under the Declaratory Judgment Act. The court found, however, that the developer’s alleged breach constituted a controversy under the Act. The court further held that a declaratory judgment action—rather than a breach of contract claim—was appropriate because Tilted Kilt’s requested remedy was a declaration that termination without an opportunity to cure was proper. In response to the developer’s claim that Tilted Kilt could not lawfully terminate the agreement without first providing notice and an opportunity to cure, the court examined both the Illinois Franchise Disclosure Act and the parties’ agreement. Although the issue had not yet been addressed in the Seventh Circuit or an Illinois state court, the court acknowledged persuasive authority that an incurable breach obviates the need for an opportunity to cure. It further noted Tilted Kilt’s argument that the developer’s conduct constituted a crime that was injurious to its goodwill as well as a repeated violation of the franchise agreement, both of which are grounds to terminate a franchise agreement without providing a cure period under Illinois law. Finding that these allegations were sufficient to state a claim, the court denied the developer’s motion to dismiss.