The Franchise Memorandum

A federal court in Wisconsin recently held that a franchisor’s contractual right to approve or deny the transfer of a franchise includes the right to condition approval on the transferee’s signing the current form of franchise agreement. Am. Dairy Queen v. Wineinger, 2022 WL 3027004 (W.D. Wis. Aug. 1, 2022). David Wineinger had operated a Dairy Queen franchise in Sparta, Wisconsin since 1998, pursuant to a two-page franchise agreement that his predecessors-in-interest originally executed in 1952. Unsurprisingly, some of the terms of the 1952 agreement are outdated, but the two-page franchise agreement did prohibit Wineinger from transferring any rights under the agreement “without the prior approval” of Dairy Queen. When Wineinger sought to sell the franchise in 2021, he and Dairy Queen disagreed whether this language gave Dairy Queen the right to require any new owner to sign Dairy Queen’s current form of franchise agreement as a condition for approving any transfer.

The court sided with Dairy Queen on summary judgment. First, it held that the franchise agreement unambiguously gave Dairy Queen the right to withhold approval of any transfer, without limitation. Thus, it had the contractual right to do so, barring a violation of the implied covenant of good faith and fair dealing. The court held that, in the face of unambiguous contractual language, its decision would not consider five prior instances of Dairy Queen approving the unqualified transfer of the 1952 agreement. But the court noted that, even if it did consider the prior approvals, they showed Dairy Queen routinely enforced its right to approve any transfer and, furthermore, business circumstances had changed sufficiently to justify Dairy Queen’s current position. Next, the court rejected Wineinger’s argument that the implied covenant required Dairy Queen to exercise its discretion “reasonably.” Instead, the court concluded that Wineinger must demonstrate that Dairy Queen acted in bad faith or arbitrarily denied Wineinger the benefit of the parties’ bargain. The court observed that Dairy Queen’s desire to modernize and standardize its franchise agreements across the system was neither unreasonable nor arbitrary. Finally, assuming for the sake of argument that the Wisconsin Fair Dealership Law applied to an agreement first entered more than twenty years before the statute was passed, the court held that Wineinger could not show a violation of the statute because the condition that a new owner sign Dairy Queen’s current franchise agreement did not constitute a “substantial change to the competitive circumstances” of the agreement at issue, and good cause existed for the condition.