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Termination (Pretextual or Ulterior Motive)

The general rule was set forth by Judge Posner in Tuf Racing Products v. American Suzuki [223 F.3d 585 (2000)]:

If a party has a legal right to terminate the contract, its motive for exercising that right is irrelevant. The party can seize on a ground for termination given it by the contract to terminate the contract for an unrelated reason.

Most courts perform a three-step analysis in reviewing the franchise termination:

  1. Where the franchisor states a factually-accurate lawful basis for termination, 
  2. and that basis is either non-curable or the cure time has expired,
  3.  the franchisor may terminate the franchise on the ostensible basis even where there is an ulterior motive which would not be a proper basis for termination.

No discussion of franchisor pretext would be complete without mentioning Vylene v. Naugles [105 B.R. 42 (1989)], where the franchisee Debra Green had an affair with franchisor chairman Harold Butler, a married man old enough to be Debra's father. The trial court noted:

Apparently Vylene's relationship with Naugles ran rather smoothly so long as the affair lasted. Vylene's difficulties with Naugles began shortly after the termination of the affair.

The Vylene court found that the franchisee got the short end of the stick, but this is a rare instance where hard facts made the law.

Majority jurisprudence is in agreement with Judge Posner of the 7th Circuit, who snapped at the Great American franchisees:

The law generally...does not provide remedies for spiteful conduct or refuse enforcement of contractual provisions invoked out of personal nastiness.

Shortly after that, the 3rd Circuit followed in finding that a McDonalds franchisee's sanitary violations

constituted a material breach of the franchise agreement sufficient to justify termination, and thus, it does not matter whether McDonald's also posessed an ulterior, improper motive for terminating the...franchise agreement McDonald's v. Robertson [147 F.3d 1301 (1998)].

Other courts have agreed with Robertson:

  • McDonald's v. Underdown [2005 WL 1745654 (M.D. Pa. 2005]
  • Shred-It America v. Haley Sales [2001 WL 209906 (W.D.N.Y. 2001)]
  • Zeidler v. A&W Restaurants [ 2001 WL 62571 (N.D. Ill. 2001)], on appeal here
  • Midas v. T&M Unlimited [ 2000 WL 1737946 (W.D.N.Y. 2000)]

Maturing franchisors often seek to get rid of "Mom & Pop" operators, but when John Deere franchisees alleged that the ulterior motive of the zor was a long-standing plan to push out small zees, the 8th Circuit found even the alleged ulterior motive to be a "legitimate business reason" Taylor Equipment v. John Deere, [98 F.3d 1028 (1996)]

In the face of a similar "Mom & Pop" claim, the court found no claim stated under the NY Franchised Motor Vehicle Dealer Act, Prestige Harley-Davidson v. Harley-Davidson [ 2008 WL 216987 (S.D.N.Y. 2008)], and another court in Brooklyn NY was skeptical of the claims of Dunkin' franchisees who alleged they were being pushed aside in favor of a mega-franchisee.

Application of the implied covenant of good faith and fair dealing has been unsuccessful in overriding express contractual terms permitting the franchisor decision:

  • GNC Franchising v. O'Brien [443 F.Supp.2d 737 (W.D.Pa, 2006)]
  • Popeyes Inc. v. Tokita [ 1993 WL 386260 (E.D.La. 1993)]

Allegations of ulterior/pretextual motive are commonly raised by franchisee defendants, and as one of the most litigious franchisors, the Dunkin' Donuts system has dealt with this issue of ulterior motive on numerous occasions, including:

  1. Dunkin' Donuts v. 1700 Church Ave. [ 2008 WL 1840760 (E.D.N.Y. 2008)]
  2. Dunkin' Donuts Franchised Restaurants LLC v. Grand Central Donuts Inc [E.D.N.Y.  2007-4027]
  3. Elkhatib v. Dunkin' Donuts [ 2007 WL 1976126 (7th Circuit 2007)]
  4. Nazareth's v. Dunkin' Donuts [ S.D. Fla. # 2004CV20678]
  5. Dunkin' Donuts v. Liu [79 Fed.Appx.543 (3d Circuit 2003)]
  6. Dunkin' Donuts v. National Donut Rests. of NY [E.D.N.Y. # 2002 CV 6302]
  7. Dunkin' Donuts v. Patel [174 F.Supp.2d 202 (D.N.J. 2001)]
  8. Dunkin' Donuts v. Donuts [ 2000 WL 1808517 (N.D. Ill. 2000)]

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Auto dealers are covered by special federal franchise legislation which may restrain franchisors who posess "an ulterior motive for its action" General Motors v. New A.C. Chevrolet, (3d Cir. 2001).

Petroleum dealers are also covered by special federal law, and since many dealers have short-term franchises of only a few years the matter of renewal is important, and the PMPA is designed to balance the legitimate needs of the franchisor with those of the franchisee, PDV Midwest Refining LLC v. Armada Oil, (6th Cir. 2002). As a result, the most frequent claim of "ulterior motive" seems to be under the PMPA, but those cases should not be relied on by non-petroleum franchisees.

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