Franchise Update
August 2004

Florida Permits Suit for Interference with Contract


The 11th Circuit recently ruled that under Florida law it was possible for a potential franchise purchaser rejected by the franchisor to sue the franchisor for interference with the sale contract. In KMS Restaurant Corp. v. Wendy's International, Inc., KMS contracted to purchase 27 Wendy's restaurants from the franchisee. Wendy's rejected KMS, and KMS sued for the tort of interference with contract, alleging that Wendy's had used improper methods to justify its rejection. Specifically, KMS alleged that Wendy's had taken actions to "destabilize KMS's corporate structure" and then cited the lack of stability as the ground for rejecting KMS as a franchisee.

The 11th Circuit confirmed that under Florida law a franchisor has a qualified and limited privilege to interfere with the sale of a franchise, "as the source of the business opportunity." In this case, "interfere" means to prohibit or prevent the sale. The privilege is limited by two factors: if the "sole motive" for the interference is malice; or if the franchisor interferes by "improper means." The court gave examples of "improper means" but did not strictly define or limit the term. The examples suggest that a franchisor's privilege is limited to making a business decision whether or not to approve the transaction. If it takes other actions intended to undermine the proposed transaction (e.g., trying to lure the buyer into purchasing a franchise from it instead, or coming between members of a purchasing joint venture) it may be liable for damages caused by the failure of the sale contract.

Thus, a franchisor asked to approve the transfer of a franchise must limit its activities to a good faith evaluation of the transaction and the buyer under the terms of the seller's franchise agreement. Actions which interfere with the transaction in other ways can lead to tort liability, to either the buyer, the selling franchisee, or both.

This update is only a summary. The Law Offices of Peter A. Singler can help you understand the full impact this law may have on your business. If you have any question, please contact Bruce Napell at (707) 823-8719 or BJN@singler-law.com.


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