The Franchise Memorandum

A federal district court recently granted in part and denied in part a franchisor's motion to dismiss counterclaims filed by a former franchisee. Yumilicious Franchise LLC v. Barrie, 2014 U.S. Dist. LEXIS 113049 (N.D. Tex. Aug. 14, 2014). Yumilicious brought suit against its franchisee, Why Not, LLC, based on alleged breaches of two franchise agreements. It claimed that Why Not breached the franchise agreements when it closed one of the franchised stores without authorization and when it and its guarantors failed to pay monies owed for royalties and products. Why Not filed counterclaims alleging that Yumilicious had itself breached the franchise agreements by failing to support the franchised stores or provide affordable products, and had also fraudulently induced it into entering the franchise agreements in violation of the Texas Deceptive Trade Practices Act (DTPA) and common law.

The court dismissed Why Not's contract claim because it failed to explain how any of the alleged breaches caused it damage, and it failed entirely to respond to the arguments advanced by Yumilicious that no damages existed. The franchise agreements did not guarantee access to products at a low cost or fair market price, nor did the franchisor guarantee a certain amount of profit. The court also granted Yumilicious's motion with regard to the DTPA claim, which was based on alleged deficiencies in Yumilicious's FDD. It was undisputed that Why Not received the FDD in May 2010, long before Yumilicious filed its action, and was therefore outside the two-year statute of limitations for a DTPA claim. But the court did not dismiss the common-law fraud and negligent misrepresentation claims, which it found were pleaded with enough specificity to meet the heighted pleading standard under the federal rules. Finally, the court dismissed Why Not's claim that the franchise agreements should be declared null and void, because Why Not failed to respond to Yumilicious's argument that any defect in the agreements was ratified over the four years of performance of the contracts. However, because Why Not could still argue that it had a right to rescind the contracts based on its fraud allegations, the court stated that Why Not could amend its claim.