The Franchise Memorandum

The Missouri Court of Appeals reversed an award of attorneys’ fees to a franchisor made by the trial court, finding that the franchisor’s recovery was barred by a settlement agreement, and even if not barred, would have been limited to success on only breach of contract claims under the franchise agreement. AEFC, Inc. v. Vietti, 2020 WL 7381536 (Mo. Ct. App. Dec. 16, 2020). Plaintiff AEFC licenses the “Adam & Eve” brand to franchisees who use it to sell lingerie and adult-themed novelty products. Following the deterioration of AEFC’s relationship with franchisee Vietti Enterprises and its president Tammy Vietti, the parties entered into a settlement agreement. Unlike the franchise agreement and its personal guarantee, the settlement agreement contained no attorneys’ fees provision. By executing the settlement agreement, the parties agreed to terminate the franchise agreement and agreed to a two-year period of noncompetition. The very next day, Vietti’s husband opened a competing business at the site of Vietti’s Adam & Eve store. AEFC sued Vietti for fraudulently inducing it to enter the settlement agreement, seeking damages and rescission. It also advanced several alternative theories of recovery, including breach of the franchise agreement, personal guarantee, and settlement agreement. At trial, AEFC abandoned its claim for rescission of the settlement agreement and most of its alternative claims, seeking recovery only for fraudulent inducement or, in the alternative, breach of the settlement agreement. The jury found Vietti liable for damages of $106,626.61 for fraud and so did not consider the breach claim. The trial court then awarded AEFC $350,708.00 in fees.

Vietti appealed the fee award, arguing that it was improper in light of the fact that AEFC did not prevail on any breach of contract claim. The appellate court agreed. First, it noted that the parties stipulated to post-trial consideration of attorneys’ fees only if AEFC prevailed on a contractual claim — which it did not. Second, the court rejected AEFC’s argument that the attorneys’ fees provisions of the franchise agreement and personal guarantee justified the fee award, pointing out that the settlement agreement expressly terminated the franchise agreement and personal guarantee. That termination remained effective, because AEFC abandoned its request for rescission of the settlement agreement. As a result, AEFC had no basis for recovery under the fee provisions of the franchise agreement or personal guarantee.