The Franchise Memorandum

A federal court in Ohio recently declined to dismiss a franchisee’s claims of breach of contract, rejecting the franchisor’s argument that the claims were barred by general releases included in the parties’ agreement. SC Am. v. Marco’s Franchising, 2023 WL 2229654 (N.D. Ohio Feb. 23, 2023). When the franchise agreement for SCA’s pizza restaurant was nearing expiration, Marco’s told SCA it would only renew the agreement if SCA remedied its operational shortcomings. SCA did not, but the parties renewed the agreement anyway. Marco’s nevertheless terminated that new agreement based on operational deficiencies and offered SCA two days to sign a limited license agreement that would allow it to continue operations while it sought a buyer from among existing franchisees. SCA failed to find a buyer and sued for breach of contract and of the implied covenant of good faith and fair dealing. Marco’s moved to dismiss based on the releases contained in the renewal agreement and the limited license agreement.

SCA argued that Marco’s only entered into the renewal agreement in order to obtain a general release of claims from SCA and to limit the sale of the franchise to existing franchisees. SCA also argued that it was coerced into signing the limited license agreement based on the fact it came unexpectedly on the heels of the renewal and that it had been allowed only two days to decide whether to sign. The court concluded that SCA had adequately pleaded the existence of coercion and wrongful conduct and also noted that the release language was so general that the trier of fact would have to examine closely whether the parties intended to waive the specific claims SCA asserted.