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Wendy's v. Saverin

The 6th Circuit didn't have sympathy for a franchisee/lawyer who didn't read his contracts with Wendy's.

Wendy's International Inc. v. Ronald Saverin (9 Jul 2009) is the story of a one-time Wall Street lawyer who became enamored with QSR franchises after putting together a Burger King deal.

Saverin built a $50M empire with 2,000 employees and dozens of Wendy's franchises. For the first five years Saverin did well but in 2003 he began to have financial difficulties. By 2006 the franchises were in receivership.

Prior to the receivership, Saverin had signed a forbearance agreement with Wendy's, and gave them his personal guaranty for the debts of the franchised outlets. Within 2 hours of the appointment of a Receiver, the franchisor notified Saverin that he would be terminated.

Within a few days the franchises were in bankruptcy, and Wendy's sought to collect $947K plus additional monies, and said that Saverin was personally liable as Guaranty under the Franchise Agreement, Reinstatement Agreement, and Forbearance Agreement. Ultimately Saverin and Wendy's stipulated that the total amount due would be $1.8M.

On appeal, Saverin argued that:

  1. In not opposing appointment of a Receiver, Wendy's had breached the implied covenant of good faith.
  2. Saverin should not be held personally liable for certain of his company's debts, and therefore owed less than the $1.8M.
  3. Saverin should be entitled to set off some of any personal Guaranty, because Wendy's would now be able to open more profitable corporate-owned units since Saverin's Franchise Agreements were terminated, and would resell some of Saverin's territory.

The court goes into some detail in explaining that since Wendy's had a right to terminate Saverin, the franchisor merely exercised its contractual rights.

Applying Ohio law, the court notes that the implied covenant is not an independent cause of action, which is the rule in most of the United States (As discussed by Michael Webster and Liz Spencer, the law in Canada and Australia regards the implied covenant differently than in the U.S.; a detailed discussion of good faith can be found here at pp. 234-244)

The court even cited Kentucky law for the proposition that "hard nosed" and "distasteful" behavior does not constitute bad faith (We observe that Mr. MauMau is from Kentucky, but we have never known him to be hard-nosed or distasteful).

The court chastizes Saverin for attempting to introduce evidence of verbal promises made by the franchisor; the court noted that the relevant written documents contained an integration clause and suggested that where a particular provision is important, it should be made part of the written contract, because if the provision could have been foreseen at the time of drafting then the implied covenant would not be applied to insert a provision which was forseeable at the time of contract execution.

The court wrote that they were "unpersuaded by Saverin's argument... Saverin, after all, is a lawyer and experienced investor who was represented by sophisticated legal counsel at all times."

Given that Saverin had signed a stipulation, the court had little patience for his argument that the $1.8M judgment should be reduced since "the court thus awarded Wendy's only the amount that Saverin agreed was due."

As Bruce Schaeffer has noted, future profits are highly speculative and as such courts are reluctant to award them. Ronald Saverin found out to his chagrin that the court was not going to speculate as to the future profits which Wendy's would make, and hence would not permit those profits to be offset from the $1.8M judgment. Moreover, the court noted that such future profits would be due to Wendy's own hard work.

Franchisees reading the tale of Ronald Saverin will see the importance of reading the contract language and not assuming that some future judge will make the franchisor be nice -- good faith cannot be used to override express terms of the contract.

And franchisees can take some comfort in remembering that even sophisticated attorneys can be unsophisticated franchisees.

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About Corbin Williston

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Corbin is the online pen name of a contracts aficionado who needs to get a better hobby.

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