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The Franchise Memorandum

Tenth Circuit Holds that Good Faith and Fair Dealing Claim Requires Expectation Created by Express Contract Terms

The Tenth Circuit has ruled in favor of KFC in a dispute with a franchisee alleging a breach of the implied covenant of good faith and fair dealing. Kazi v. KFC US, LLC, 2023 WL 4983119 (10th Cir. Aug. 4, 2023). Zubair Kazi was a franchisee who owned a KFC franchise in Pueblo, Colorado. Under the terms of the franchise agreement, Kazi was entitled to an exclusive 1.5 mile area of operations and a first right to apply for any new location proposed by KFC that was outside the 1.5 miles but close to Kazi’s location. Under separate guidelines not in the franchise agreement, Kazi also had the option to request an impact study. The guidelines provided that KFC would not develop the location if the study found an impact on sales of more than 15%. When KFC planned to open a new location 4.6 miles from Kazi’s location, Kazi did not apply for the new location, but instead requested an impact study using a company approved by KFC. It showed an impact on sales of 13.4%. Displeased with the results of that study, Kazi then performed his own study which predicted a 35% impact on his location’s sales. KFC ignored Kazi’s study and ultimately decided to open the new location even farther (5.3 miles) from Kazi’s store, but did not notify him of the change or conduct a new impact study.

Kazi sued KFC in federal court, alleging breach of contract, promissory estoppel, unjust enrichment and breach of the implied covenant of good faith and fear dealing, on the basis that KFC failed to follow impact study guidelines and relied on a flawed study. The court dismissed the breach of contract claim as there was no violation of franchise agreement and dismissed the promissory estoppel and unjust enrichment claims due to the existence of a valid written contract, leaving Kazi with only his good faith and fair dealing claim. After a five-day trial, the jury found in favor of Kazi and awarded him damages of $792,239. KFC appealed and the Tenth Circuit held that, in order to maintain a claim for breach of the implied covenant of good faith and fair dealing under Kentucky law, the claimant must identify an expectation created by specific language in the contract that was defeated by the bad faith of the other party. Because Kazi could not cite language in the franchise agreement that supported his expectation that KFC should have conducted a new impact study or declined to develop the new location, the court vacated judgment and remanded for entry of judgment in favor of KFC.

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