The Franchise Memorandum

In Lenexa Hotel, LP v. Holiday Hospitality Franchising, Inc., 2013 U.S. Dist. LEXIS 125240 (D. Kan. Sept. 3, 2013), a federal district court in Kansas denied a hotel franchisor’s motion to dismiss a franchisee’s claims for breach of contract and breach of the implied duty of good faith and fair dealing, and for a declaratory judgment regarding the parties’ obligations under their license agreement. The plaintiff’s allegation was that Holiday Hospitality Franchising, the franchisor of the Holiday Inn, Crowne Plaza, and InterContinental brands, repeatedly represented during the course of the parties’ pre-contract negotiations that it could effectively market the franchisee’s property as an upscale metropolitan hotel and generate sufficient customer demand through its reservation system. After the hotel opened and failed to perform up to expectations, the franchisee sued, claiming that Holiday Hospitality did not properly market the hotel on the internet or through its call centers. Holiday Hospitality moved to dismiss the complaint, arguing that (1) Lenexa had not identified any specific provision of the license agreement that Holiday Hospitality purportedly breached, (2) Lenexa consequently could not assert a breach of the implied duty claim, and (3) the facts alleged did not give rise to a case or controversy such that the court could grant declaratory relief.

The court determined that the franchisee had adequately stated its claims. Viewing the complaint in the light most favorable to Lenexa (and without relying on the pre-contract statements alleged by Lenexa), the court held that the complaint sufficiently alleged that the parties’ license agreement imposed marketing and reservation obligations on Holiday Hospitality and that it breached those provisions by not permitting Lenexa to use advertising programs for which it paid a monthly fee. In light of its finding that the complaint sufficiently stated a claim for breach of contract, the court further concluded that the franchisee sufficiently alleged a breach of the implied duty of good faith and fair dealing. Finally, the court preserved the franchisee’s request for a declaratory judgment because it arose out of the same set of operative facts as the contract claim.