The Franchise Memorandum

In Blockbuster, Inc. v. C-Span Entertainment, Inc., 2008 WL 3318882 (Tex. App. Aug. 12, 2008), a Texas Court of Appeals overturned a huge judgment that had been won by a franchisee on breach of warranty, conversion, and fraudulent inducement claims. The provision at issue was a broad release in a transfer agreement, through which agreement the franchisor had been released from all claims by the franchisee.

Sunil Dharod purchased a number of Blockbuster® shops in Tyler, Texas. At closing, Dharod signed the franchise agreement for the shops in his individual capacity. Blockbuster and Dharod subsequently executed a transfer agreement, whereby Dharod transferred his interests in the franchise agreements to his company, C-Span Entertainment. The transfer agreement contained release language whereby Dharod released “broadly” all claims arising under the franchise agreements or “under federal, state, or local law.” When the shops failed to perform, Dharod and C-Span Entertainment sued Blockbuster for breach of warranty, conversion, and fraudulent inducement. At trial, the trial court found in favor of Dharod and C-Span Entertainment on all claims and awarded them damages in the amount of $8.5 million. It also awarded them attorneys’ fees and costs. Blockbuster appealed. 

In overturning the judgment, the appeals court held that the trial court had incorrectly ignored the release language. Under Texas law, “[a] valid release is a complete bar to any action based on matters covered by the release.” The appeals court also overturned the award of attorneys’ fees and costs in favor of the franchisee, and, instead, awarded Blockbuster $2.5 million in attorneys’ fees as the prevailing party under the parties’ agreement.