The Franchise Memorandum

A federal court in Illinois recently dismissed a former franchisee’s counterclaims for alleged fraudulent misrepresentation, breach of contract regarding the franchisor’s advertising fund, and breach of contract and implied contract for failure to certify a franchisee’s SBA loan. Chicago Franchise Sys., Inc. v. Dominque, 2024 WL 756806 (N.D. Ill. Feb. 23, 2024). Chicago Franchise Systems, the Nancy’s Pizzeria restaurant franchisor, initiated the case seeking to enjoin former franchisee Yves Lesley Dominique and Dominusdomi, LLC from infringing and diluting its trademarks, and to recover damages due to Dominique’s alleged breach of the parties’ franchise agreement. Dominique asserted counterclaims alleging that Chicago Franchise fraudulently misrepresented that Dominique would earn $2 million annually if he followed certain new vendor restrictions and additional training requirements contained in settlement documents the parties signed, while failing to disclose that such provisions were different from those applicable to other franchisees. Dominique also alleged that Chicago Franchise breached the franchise agreement by failing to perform its advertising obligations and by failing to certify Dominque’s SBA loan. Chicago Franchise moved to dismiss the counterclaims for failure to state a claim.

The court dismissed each of the counterclaims. First, it ruled that Dominique waived his argument for fraudulent misrepresentation by failing to respond to Chicago Franchise’s assertion that the promise of future revenue is not a basis for false misrepresentation, and instead arguing that the omission of information may be a basis for misrepresentation. The court further ruled that Dominique failed to show a special or fiduciary relationship exists, which is necessary to provide fraud by omission of material fact. Second, the court concluded Dominique failed to establish Chicago Franchise’s breach of its advertising obligations on the basis of the implied covenant of good faith and fair dealing, since Dominique did not establish that Chicago Franchise was given discretion by the agreement and had acted in bad faith in exercising such discretion. Finally, the court determined that the claims regarding Chicago Franchise’s failure to certify Dominique’s SBA Loan must fail, because he did not identify a contractual provision in the contract to support the claim.