Can a husband & wife franchisee avoid a non-compete by "selling" their locations to their son & daughter-in-law? A Michigan court gives victory to the franchisees.
Robert & Jean Rooyakker were franchisees of Little Caesar's. The Rooyakkers were well known to the franchisor, since Robert (a former lawyer) had been one of the 2 franchisees that had negotiated a settlement in 2001 after a class-action lawsuit brought by franchisees.
Little Caesar Enterprises Inc v. Robert Rooyakker et al ( 7 July 2009) originated in a decision by Robert & his wife Jean to use their own spice mix on the pizza pies. In February 2005, the franchisor initiated litigation to terminate the franchises. The parties settled prior to trial.
The Rooyakkers owned 7 restaurants. The settlement provided that their restaurants in Gaylord and Grayling would be de-identified and the other 5 restaurants would be sold.
The Franchise Agreement contained a post-term non-compete:
Franchisee shall not, during the time frame and in the geographic area described below, without Little Caesar's prior written consent, either directly or indirectly, for itself or through, on behalf of, or in conjunction with any person, persons. or legal entity, own, maintain, advise, operate, engage in, be employed by, make loans to, or have any interest in or relationship or association with a business which is a quick or fast service restaurant primarily engaged in the sale of pizza, pasta, sandwiches, and/or related products. The prohibitions...shall apply.. for a continuous uninterrupted two year period with respect to the Designated Market Area...
The Settlement Agreement provided:
The Rooyakker Parties...shall comply with all post-termination obligations of the franchise agreements. A restaurant which sells and advertises (offsite and onsite, including the menu), steaks, salads, pastries and desserts does not violate the post-termination non-competition provision...if it also offers pizza, pasta and sandwiches, as long as pizza, pasta, and sandwiches are not advertised or marketed as the primary or dominant items, and do not comprise the primary or dominant items, and as long as "pizza" is not in the store name, logo, or service mark.
Robert & Jean Rooyakker continued to operate the Grayling and Gaylord sites, and sold the other 5 restaurants to a company named "A & R Hospitality."
The only problem was that all 7 restaurants were operated under the single name "Spicy Bob's Italian Express" and...
...well, make that two problems: the owners of "A & R Hospitality" were Matthew Rooyakker, his wife, and another person. (Matthew was no stranger to disputes about non-compete clauses).
Needless to say, Little Caesars objected that there might be just a wee bit of coincidence in the last name of the parties involved in A & R Hospitality; the franchisor opposed the trial court's granting of summary judgment on the grounds that a material question of fact existed as to whether the "sale" was a sham.
In reviewing the grant of summary judgement in favor of the Rooyakker, the trial court said:
The court does not find a violation of any agreement. Granted it was a sale to a family member and included favorable terms. There is no prohibition against that. Robert Rooyakker did guarantee the down payment to the bank. The agreements do not prohibit that....
The appellate court didn't agree with the trial court about whether there had been a loan in violation of the Settlement Agreement, but with regard to the son's company the appellate court stated:
The express terms of the settlement agreement provide that it is binding on a successor, but that a 'buyer of assets' is not a successor... Little Caesar has not established anything about the transaction... that gives rise to a reasonable inference that their separate corporate identities should be disregarded for purposes of imposing an affirmative duty on A & R Hospitality to comply with the noncompetition covenant in the settlement agreement... In general, separate corporate entities are respected in Michigan, unless doing so subverts the ends of justice... there was nothing unlawful about A & R Hospitality being formed by Robert and Jean Rooyakker's son Matthew Rooyakker, in conjunction with his wife and Nicholas Aune, to purchase assets from A & T Holdings and operate them as Spicy Bob's restaurants.
The court remanded the case due to issues of fact raised by Little Caesar still requiring resolution, and interested BMM readers can read the case for further information. While the Rooyakkers may be held liable for breach in making a loan to their son's company, the assets are now in the son's company and the son is not bound by the non-compete but is able to benefit from the business goodwill.
Normally it is the franchisees who are the losers when contracts are strictly enforced according to their written terms.
The lesson for franchisors is to carefully draft your Settlement Agreements, and the lesson for franchisees is that courts are willing to find for franchisees who can find a way to comply with the letter --if not the spirit-- of their contract.
- Franchise topic:
- Enter Your Own Tag:
No comments:
Post a Comment