Now Let's Get Readyeeee To Watch the Feathers Fly!

The facts of the case should be interesting, but here’s a situation where AFC once owned both Churches Chicken and Popeyes Chicken.  AFC sold Churches to Arcapita.  Now it’s alleged that Arcapita, has now started buying up some of the Popeyes and is converting them to Churches.  Popeyes has cried foul, saying that the agreement prevented Arcapita from acquiring Popeyes. 

Hmmmm….should be interesting to watch the Feathers Fly as these to chicken Zors fight it out.  You know I wanted to make reference to the type of fighting one might consider this, but I'll not!  Hmm and I thought this type of fowl fighting was illegal everywhere except for here in the south.

ATLANTA, Feb. 28 /PRNewswire-FirstCall/ -- AFC Enterprises, Inc., the franchisor and operator of Popeyes(R) Chicken  

In the suit, AFC claims Church's, which is owned by private equity firm Arcapita, Inc., a subsidiary of the First Islamic Bank of Bahrain, tortuously induced and colluded with Popeyes' former franchise group, CVI Company, Ltd. ("CVI") of McAllen, Texas, and its principals, to breach their binding franchise, development and guaranty agreements with Popeyes and sell their franchised restaurants to Church's for cash with the intent to harm Popeyes.

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Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising! 

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Popeyes perspective

Atlanta newspaper article here presents from Popeyes side.

Tortuous Interference with Contract ----Maybe not?

It certainly looks like tortuous interference with contract on the part of Church's on the surface but there must be something that has not been disclosed that will be disclosed in court.
Why wasn't Popeyes in court asking for an injunction against the sale of these franchised stores. Did these individual Popey franchisees legally terminate their contracts under the terms of the franchise agreement? ----while colluding with Church's? If they terminated their agreements with Church's under the terms of their individual agreements, didn't Church have the option to purchase these individual stores at termination? And, if they didn't, what does this mean.
It is hard to believe they just sold gheir stores for cash out of the blue?

Church's Approached By Third Party to Buy Popeye Franchise

Church's Chicken Friday replied to Popeye's accusations that they colluded with a franchisee that was terminated to flip Popeye's territory to only Church's Chicken. According to the Atlanta Journal-Constitution:

It (Church's) did not initiate any contact or communication with CVI, nor "solicit the offer or sale of any asset of CVI (the previous Popeye's franchisee)." Church's said it was approached by third parties, which the company did not name." ..."I know it can be difficult to lose a business battle," Church's Chief Executive Harsha Agadi said in the statement. "But it is simply unacceptable when that loss leads a competitor to accuse us of unethical behavior. Church's has not only acted within the law, but is always committed to upholding the highest ethical standards. Quite simply, the accusations made by Popeye's, legal and ethical, are completely without merit."

I'm not sure why the franchisers are taking pot shots at each other. There's nothing un-American, illegal  or unethical about a franchiser trying to buy the competition's units to better position themselves in the market. What is at issue is the franchisee and whether they are bound by agreement from selling to a competitor.

Frankman

Franchisee Raspberry Cheer for Right of First Refusal

Great article on Popeye's Chicken suing its franchisee for selling franchise units to the competitor, Church's Chicken! Popeye's has a good case, in my unlawyerly opinion. A franchisee cannot just sell their franchise to whomever they want (sigh). Franchisors typically stipulate in the franchise agreement the right of first refusal. Such a refusal right is to protect the brand and territory, say a McDonald's franchisee from selling to a rival brand like Burger King. The franchiser will try to help sell the franchise unit(s) to buyers of their own brand.Otherwise, a rival brand can come in like Church's did to Popeye's in Texas' Rio Grande Valley, by buying up an entire market to shut out a competitor."Flipping flags" makes economic sense for the buyer and to franchisees. Buyers are getting a proven business, since it is easier to know of the units strengths and weaknesses. And it opens up the playing field to raise the selling price when franchisees want to exit. The more competition in buying, the better.  Can you imagine how a franchisee who has half of LA, Chicago or NYC could make out as rivals vie for those strategic grounds?Alas, such is not to be (big sigh).The new owners of Church's is Arcapita Inc., a subsidiary of First Islamic Bank of Bahrain. There isn't much franchising done in Bahrain. I'm wondering how knowledgeable Arcapita is about franchising. Did they make a senior decision as if the Popeye's franchises in Atlanta were part of a corporate chain, and not a franchised chain? There's a big difference.

I'd normally side with the franchisee but this guy's just WRONG.

I can only suspect that he's taken his money and left the country because otherwise his exposure would be a no-brainer.  And Church's behavior in this is absolutely reprehensible. All parties KNEW the requirements and limitations for a franchise resale.  What were they thinking????  This goes beyond a franchise dispute, it lacks the most basic of a business relationship...........good faith. Both the franchisee and Church's need to be held accountable for their back-door antics and a punitive award issued that will make a deep enough impact so as to deter future acts like this. 

I can only assume

that an injunction couldn't be provided prior to the sale because acording to the article, Popeye's wasn't informed until after the sale was finalized and ownership transfered to Church's. 

It does sound a little nuts but having seen some outrageous antics from a franchisor myself, despite their own contract, I can believe that some people and some companies can do just about anything when greed and arrogance are partnered.

As Feathers Fly don't forget...

Bob:

I agree with your summation, there are two other points to remember:

FIRST: IF, and that's a BIG IF, but If Church's did plot to buy the Popeye's locations, and IF the Popeye's (ex)Franchisee was involved in the 'conspiracy' Churchs would most likely be wise enough to foresee that a third party 'broker' should be involved in the transaction.

SECONDLY: One must not forget that not that very long ago both Popeye's and Church's were under the same corporate umbrella.  I would think that there would be language in the buy/sell agreement which would (at least for some period of time) prevent one party from going after the zee's of the other party.  I would also suspect that there was a predefined agreement regarding competiveness within markets. etc.

Regardless, as I stated when I originated the post, it should be interesting to watch The Feathers Fly as these to Chicken Zor's go after one another.  We've all heard of 'Cock Fights', and then of course there's the Fighting Game Cocks of S. Carolina.  I guess we can refer to these as the Litigating Franchise Cocks?

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

You'd be suprised

There is actually a lot of franchising in Bahrain, Kuwait, UAE, and Dubai - given that there is alot less anti-American rhetoric in those countries. They likely cater to the large American miliary presence (Bahrain is home to US 7th Fleet) as well as the developing tourist market (Dubai's man-made island for resorts).

When Does Franchiser's Right of Refusal End?

"Popeye's wasn't informed until after the sale was finalized and ownership transfered to Church's." - Tinker

The plot thickens. Talk about Popeye's being asleep at the wheel. 

The article says that 6 of the 10 Popeye's franchise units in the valley were closed and 4 were sold to competitor Church's. So those units may have been terminated with Popeye having no intention to salvage the franchises. Popeye's seems to have objected only when they discovered that some of the terminated units were scooped up by Church's.

And can franchisors stop a terminated franchisee from selling a business to the competitor? How about ten years later? Two years? Six months? 3 months?

I sure wish there were reporters out there who understood franchising so they could ask better questions when investigating such stories. But alas, such reporting is rare.

Frankman

But, Tinker! Flipping flags is almost impossible.

I don't think that individual franchises could be acquired outside of the individual contracts without the awareness of the franchisor.

All franchise agreements indicate that the franchisor has the right of "first refusal" in a sale-transfer in which they reserve the right to aprove the buyer. The franchisor reserves rights to himself to demand a general release as a condition of the sale-transfer, as well as a confidentiality clause in the asset purchase sale.

I think you will find that these franchisees either sold these stores legally in a sale transfer or terminated their agreements legally and then sold their stores. Wouldn't the individual franchisee have the right, under both of these conditions, to sell the business to the highest bidder, if Popey didn't exercise either of the options available to them?

Both the tangible assets and the intangible asset of the business built up by the franchisee can be acquired by the franchisor under the franchise agreement, and when the franchisor doesn't exercise his options, isn't the franchisee free to make the best deal he/she can make to sell his business?

Popeye's Non-Compete Agreement Most Likely Over

FranSynergy,

You make a good point - There should be a non-compete clause in Popeye's selling agreement of Church's. You would think if that were the case, AFC Enterprises (dba Popeye's) and their spokespersons would have simply said that Church's Chicken broke the sales agreement with its purchase of Popeye's franchises. END OF STORY.

But that is not what Popeye's has said, which is what makes me think the non-compete stipulation never existed or it is now irrelevent.

Even if there was a non-compete clause that prevented the buying of each other's franchises, it has been two-years since Popeye's sale (2005) of its one-time sister company Church's. Doesn't a non-compete clause typically wither away after such a long period? Courts take dimly to competitors setting up eternal pacts of non-competition, which is illegal in America.

It sounds like Popeye's is not covered.

Frankman

Noncompete: Temporal & Geographic scope

Frankman writes: And can franchisors stop a terminated franchisee from selling a business to the competitor? How about ten years later? Two years? Six months? 3 months?

This particular case is a bit odd, and I have a feeling we are not getting all the facts (as you mention, the plot thickens). But on the wider point you raise:Most franchise agreements have non-compete clauses. These extend beyond the term of the contract (indeed, that is when they are most needed!) and are generally upheld so long as they are reasonable in temporal and geographic scope. Bear in mind that non-competes act to restrain trade, and impair a citizen's ability to earn a living, and so courts will tend to construe these clauses very narrowly, particularly in California and particularly with respect to temporal scope (one year seems to be OK everywhere, after that it gets more dubious). But the geographic scope can be quite wide, since the clause may relate to the terminated party competing within, for example, "a 10 mile radius of any outlet of the franchisor"... now in a case like McDonalds or Subway, that pretty much covers the planet and portions of nearby nebulae.

Sale-Transfers are Generally Business Failures

Most sale-transfers and terminations are actually business failures. As Frankman said, Poppey made a decision to let these stores go and are probably way off base in their LATE objection to the rebranding of these stores.
I think you will find that they were "Terminations" because if they were sale-transfers, Popey wouldn't approved a sale and a transfer of a franchise under a different brand name, obviously!
The Franchisors, of course, try to control the assets of the franchisee even after the death of the franchisee in the non-compete clauses but they can't prevent franchisees from selling the assets that they own to other investors who may want to fly a different flag.
Normally, the franchisor gets the benefit of the continuation of royalties, fees, etc... when there is a sale-transfer or a termination, in which the assets are sold to another invester franchisee in the franchisor's network. But, when there is no franchisee standing by, why should the franchisee be penalized because the new buyer of his assets wants to rebrand? Isn't the original franchisor's objection at this late stage also a tortuous interference with the contract of the franchisee?

Bahrain Franchising

I hear you about American franchise popularity in Bahrain. The U.S. military can satisfy their Big Mac hunger pangs while there. But I was really speaking of single-unit franchise owners, and not so much master franchises. Large companies in that part of the world typically buy master franchise rights, but they do not become sub-franchisers themselves. They operate the complete chain as corporate stores rather than sell to a middle-class person who wants to buy a single-unit franchise. No?

Such a master franchise that ran all stores as corporate, would not understand the intricacies and legal ramifications needed in buying and selling franchises.

Frankman

I agree, but THAT's the point.

"I don't think that individual franchises could be acquired outside of the individual contracts without the awareness of the franchisor."

No franchise agreement is going to allow a franchisee to just sell the business arbitrarily.  It's one of the most basic and universal elements in all franchise agreements.  However, it is entirely possibly, and that is what Popeye's is claiming in their suit, that the franchise owner did exactly THAT.  Given that neither party has claimed that a termination was involved, I can only assume that Popeye's ascertion that they were told 'after the fact' has merit.  It is entirely possible that both negotions between the franchisee & Church's as well as the actual transfer occurred in secret and that only after the transaction was finalized, was a letter sent to Popeye's notifying them of the business sale. 

One of the facts mentioned in the article that makes me give Popeye's the benefit of the doubt is that it states one of the locations had only been opened a year.  Even with my own cynical perspective, I can't imagine any circumstance where a franchise agreement could just be abandoned by the franchisee like that.  He HAS to know that.

It will be interesting to see more of the facts come out and should there be mitigating circumstances that shine a different light on this situation, I'll be glad to alter my opinion.  But based on what is public at this point, I just can't see the franchisee or Church's having a leg to stand on for their actions.

Specific breach & Non-Compete

Bob:

Of course most anything is speculative at this early stage.  It does seem odd to me that in the initial reports it seemed as though Popeye's was crying 'unfare, unethical, immoral, more than stating a specific breach in the terms of any specific agreement.

As for the non-compete, my experience has been that the courts do not look favorable on long term non-competes, which might prevent an individual from earning a living.  However, in B-2-B situations I have not personally seen this same concern.  Just my personal experiences, no official data supporting that opinion.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Church's response

Church is saying 19 years. I think Frankman is correct, but this is Church's reply .

Possible estoppel, also

Guest wrote: Isn't the original franchisor's objection at this late stage also a tortuous interference with the contract of the franchisee?Good point, and there may be an estoppel issue here.

Attorneys had to be involved! Tinker

Yes, Tinker, we will probasbly just have to wait for more information. Perhaps the reporters who wrote about this didn't really understand "franchising".
We know, however, that there were attorneys involved on both sides of the issue and that these individual owners didn't engineer this "conspiracy" without legal counsel from Church's.
Since the tangible assets and the lease improvements of the individual businesses belong to the individual franchisee owner and whomever has a security interest in these assets, it is hard to understand how a location that was only opened a year could have terminated. But, if there was a legal termination under the individual contract, no matter what the reason. and the franchisee honored the "non compete" clause and sold the assets of the business to any third party, would Popeye have a leg to stand on?
If Churh's knew that Popeye was not picking up so-called abandoned stores as a matter of policy and whispered into the ears of these franchisees who were terminated their relationship with Popeye's because of "business failures" "Call us, and we will buy your assets for cash", is this illegal?
If Popeye's had the option at termination to purchase these asssets and allowed the units to close and didn't exercise their option, what difference does it make who buys the assets under the law. The franchisee who has agreed not to compete and is not competing and who has terminated the relationship with Popeye's under the terms of the contract certainly has a right to realize what they can from the sale of their assets.
While the contracts of adhesion do not permit the franchisee to use his/her owned assets in the service of any other brand in the same sector at termination, these contracts cannot prevent competition from those franchisors in the sasme business from entering into competition with them.
Even if Popeye's can prove that Church's made an offer to purchase the tangible assets before the individual franchisee's termination, I don't think Popeye's would have a leg to stand on. I don't think Popeye's would have allowed these units to terminate if they were "valuable" and "viable" locations that were making money. It may be that all of these units were acquired by Churh's at a loss to the individual franchisees involved.
It is a given that franchisees do not terminate profitable units to take a beating on the sale of their tangible assets.
It will be interesting to know the facts. But, I don't think it will be a matter of individual, viable Popeye restaurants just flipping the flag.

AFC: Popeyes and Church's split

The transaction that caused Popeye's and Church's to no longer be sister companies is likely not the agreement to focus upon. The transaction simply made them competitors. The agreement(s) that this matter centers on are the underlying franchise agreements for each unit being sold and those rights accorded to the parties. Is the third party interfering with the contracting parties? We don't know at this point.  

You Say Tomato, And I Say Tamahtoe

there may be an estoppel issue here. - Paul Steinberg

You say estoppeland I think falafel You say tortuous interferenceand I think Abu Ghraib...say, isn't legalese grand?

Please explain in English.

Frankman

There was an 'attorney' who orchestrated the attack on us.....

These franchisors and individuals who have what I personally consider 'criminal traits' aren't limited to CEO & accountants.  Experience tells me that most of what they are able to do is BECAUSE of those attorneys that cross that line.  There are decisions made everyday in corporate American with attorneys & accountants consulting on risks & rewards of each position. 

There is a great report that I read on the American Bar Association, titled "The Role of Risk Analysis in Dispute and Litigation Management".   There's an entire vocation out there that does nothing but advise companies on whether the reward is worth the risk.

But Bob, what about....

Hey Bob,

But what about those of us here in the south where it's a good ole ta-mater?

We've got fried green ta-maters, Scalloped ta-maters, Ta-mater glazed ribsCanned 'maters, Roasted 'maters, Pick 'em n eat 'em Cherry 'maters'Mater Sanwitches with fried chicken, 'Mater relish  umm umm good!Stewed 'maters

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising 1 Franchisee at a time!

Estoppel definition

In 1628, the great jurist Edward Coke (pron. "Cook") put it best:

"Estoppe" commeth of the French word estoupe, from whence the English word stopped: and it is called estoppel or conclusion, because a man's owne act or acceptance stoppeth or closeth up his mouth to allege or plead the truth

Sometimes, you "speak now or forever hold your peace": that is one kind of estoppel.Franchisees buying an existing location and assuming a lease or sub-lease of real property will ask for an Estoppel Letter from the Landlord since they are not going to simply take the word of the selling franchisee that the lease is paid up to date and in full force. In New York the standard form retail space lease has an "Estoppel" provision stating that the Tenant will provide an Estoppel Letter to the Landlord or his designated agent upon request. Such a request will come about if the Llord wants to sell or refinance the building.Please do not disclose this information to anyone else. If people found out what the legalese really meant, I would be out of a job, as would all those folks teaching at law schools.

Tortious Interference definition

Oops, forgot your other Q:A: Depends on state law, the Restatement(2d) of Torts says:

One who intentionally and improperly interferes with another's prospective contractual relation (except a contract to marry) is subject to liability to the other for the pecuniary harm resulting from loss of the benefits of the relation, whether the interference consists of

(a) inducing or otherwise causing a third person not to enter into or continue the prospective relation or (b) preventing the other from acquiring or continuing the prospective relation.

Earliest citation is to 1621, when someone threatened "to mayhem and vex with suits" customers patronizing a particular merchant. So vexatious plaintiffs have been with us for at least a few centuries...

Settlements cover calculated fraud and deceit, Tinker

Yes, I'm sure Ralph Nader was the first to try to teach the American People how far the large corporations would go to maximize their profits, even at the risk of human life. We shouldn't therefore be surprised at what franchisors will do to maximize their profits on the backs of the individual franchisees who risk everything to rent that brand name.
The little corporations learn from the large corporations and it is all a matter of "risk" and "money" and "bottom lines" that allows corporations to take calculated risks in the operation of their businesses that may hurt individual consumers but that will enhance their profits and bottom lines.
One wonders if ADR and the FAA that permits even non-attorneys to be arbitrators, permits much actual fraud and deceit to be covered up in the process of arbitration and settlement of the matters at hand outside of a judicial process in the courts.
The irony is that we are a very litigious society because we are conditioned as Americans to believe in individual rights and due process of law but the delivery of "due process" becomes a burden to government ---who looks for solutions to the delivery of "due process" outside of the courtroom and the view of juries.
Some of the solutions, however, appear to deprive individuals of equal protection and due process because the individual (the weaker party) can't afford access to the courts OR to the procedures of arbitration and mediation that are made available under ADR as mandated in franchise agreements.

In the franchisor-franchisee relationship where the franchisor will not deal with the franchnisees as a "class", the individual franchisee can't afford to take on the "big franchisor" who can defeat the franchisee through procedural tactics and delay, etc.because the money for litigation or mediation or arbitration is not a factor for the franchisor.

The individual franchisee, therefore, when he signs the "take it or leave it" adhesory contract has no idea that he is signing his rights away to "due process of law". He understands that he has given up his right to a jury but he isn't in the state of mind to believe that he may not be able to afford mediation or arbitration when he needs it, and, of course, is "sure" that mediation or arbitration will never be a factor in the happy relationship that is being formed. The franchisors premeditate the possibility that there will be litigation because of their premeditated "bad faith" practices and legalize their "bad faith" in the contract and premeditate the denial of "due process of law for the franchisee" in the contracts of adhesion.
The franchisors premeditate the control and acquisition of the assets of the franchisees in failure in these adhesory contracts but they don't reveal their actual practices in the disclosure circulars.
If their actual practices are illegal under law, they can avoid detection and punishment for these practices through settlement of the matter outside of the view of the court and continue these practices if they are profitable practoces until the next time they are "caught" and then they can settle again.
Does this promote the "public good"? Probably not, but it is a tool of the corporations that allows them to engage in risky and perhaps illegal behavior that maximizes profits and protects their bottom lines. They take these risks over and over again because they study the risk and the profits justify the risk.
The courts always do the right thing when the matter is brought to their attention but, because the courts are so busy and overburdened with litigation, they also develop rules to promote "settlement" before actual trial of the matters at hand. These rules are a procedural matter but they tend again to help the stronger party in the controversy.
Due Process is an ideal of our great democracy but more and more it is an ideal that is not being realized for the common people or individuals because they can't afford access to the courts or to ADR in civil matters.
The currency of the legal process in criminal matters appears to be the "plea bargain" and the currency of the legal process in civil matters appears to be "the settlement"!
I'm sure Paul will straighten me out on this, Tinker!

Green 'Maters from the South

I stand corrected. 'Maters, eh?

I had no idea the South had such an abundance of 'mater dishes. With so much, I'd say there is definitely the makings of a specialized 'mater franchiser coming soon. A good name could be...

  • Maul O' 'Maters? (Translation: Mile of Tomatoes)

 Frankman