The Franchise Memorandum

A Kansas district court, applying Georgia law, recently denied a franchisor’s motion to dismiss a franchisee’s claim for breach of fiduciary duty. Lenexa Hotel, LP v. Holiday Hosp. Franchising, Inc., 2017 WL 2264358 (D. Kan. May 24, 2017). The franchisee, Lenexa, previously entered into a franchise licensing agreement with the franchisor, Holiday, to build and operate a Crowne Plaza hotel. In the agreement, Holiday represented that it would drive demand for the new hotel through its central reservation system and marketing resources. In its complaint, Lenexa alleged that Holiday failed to market and promote the hotel as promised, denying Lenexa the “fruits of its License Agreement.” Lenexa argued that these failures constituted a breach of Holiday’s fiduciary duty to Lenexa. Holiday countered that under Georgia law, a franchisor does not owe a fiduciary duty to a franchisee. Further, Holiday argued that the parties’ licensing agreement specifically disclaimed a fiduciary relationship.

The district court acknowledged authority finding that a franchisor-franchisee relationship does not in itself create a fiduciary duty. However, the court found that Lenexa had alleged more than a mere franchisor-franchisee relationship. Lenexa alleged that Holiday exercised a controlling influence over Lenexa’s business because: (1) Holiday required Lenexa to use a reservation system over which Holiday had complete control; (2) Lenexa’s business was entirely dependent on that system; and (3) the parties sought a common business interest—to drive business to the hotel. The court further found that language in the parties’ licensing agreement disavowing a fiduciary relationship was also not dispositive as to the existence of such a relationship because of the parties’ common business objective. Finally, the district court declined to dismiss Lenexa’s claims for breach of contract and breach of the implied duty of good faith and fair dealing and its request for a declaratory judgment.