The Franchise Memorandum

A federal court recently granted summary judgment to a franchisor despite rejecting the franchisor’s choice of law argument. In Red Roof Franchising, LLC v. AA Hospitality Northshore, LLC, 2012 U.S. Dist. LEXIS 90564 (D.N.J. June 28, 2012), the United States District Court for the District of New Jersey upheld the termination of a franchisee who ceased making payments under its franchise agreement before completely abandoning the business. The franchisee had operated a Red Roof Inn in Minnesota under an agreement that contained a Texas choice of law provision. Prior to the end of the agreed-upon term, the franchisee ceased operating the business as a Red Roof Inn and began operating it under a different name. Red Roof then terminated the franchise agreement and brought suit for breach of contract, alleging that the franchisee (and two guarantors) failed to pay outstanding franchise fees and continued to use Red Roof’s proprietary information and marks following their termination. In response, the franchisee claimed that Red Roof breached the franchise agreement in several respects, and that those failures excused its nonpayment of the required fees. Red Roof sought summary judgment on its claim for breach of the franchise agreement and argued that Texas law should govern any common law issues.

The court first determined that it would apply New Jersey law to the breach of contract claims, despite the Texas choice of law provision in the franchise agreement. The court noted that, although New Jersey law generally enforces choice of law provisions, the franchise at issue was located in Minnesota, which meant that Minnesota had a greater interest in the interpretation of the franchise agreement. The court further observed that the Minnesota Franchise Act voided the contract’s choice of law clause, a result that Red Roof itself acknowledged. Applying New Jersey choice of law principles, the court next concluded that it would apply New Jersey law to the contract claims, given that there was no conflict between New Jersey and Minnesota law on the subject.

The court then granted summary judgment on Red Roof’s breach of contract claim with respect to the fees that accrued prior to the abandonment of the franchise. The court noted that the franchisee could not respond to Red Roof’s alleged breaches by discontinuing its own performance under the franchise agreement while continuing to take advantage of the contract’s benefits. The court reasoned that even if Red Roof breached the contract, the franchisee had the option of either terminating the contract and ceasing to perform, or continuing to perform and suing for damages. The court denied summary judgment on Red Roof’s claim that the franchisee continued to reap the benefits of the franchise agreement after its termination by using Red Roof’s marks and confidential information. Red Roof had not presented any facts in support of this allegation, and a genuine issue of material fact existed as to how the franchisee could operate as a different hotel while still using Red Roof’s proprietary materials.