Franchise Law

February 2002

BURGER KING: "HAVE IT MY WAY"

by Philip A. Kramer, Esq.

H&H operated 29 Burger King restaurants in Texas. After successfully negotiating the sale of all 29 restaurants to the Olajuwon Group, Burger King refused to approve the transfer. H&H filed suit alleging that Burger King interfered with its attempted sale of the 29 restaurants to the Olajuwon Group. Burger King moved for summary judgment to establish its unilateral right to determine the suitability of any transfer.

The franchise agreements required H&H to "maintain the Franchised Restaurant(s) in good condition and repair in accordance with BKC's then current repair and maintenance standards" and to "improve, alter, and remodel the Franchised Restaurant(s) to bring it into conformance with ... standards for new or remodeled Burger King restaurants," as Burger King might direct.

According to H&H, in August of 1998 Burger King forced them to make repairs to 15 of the restaurants. Those 15 restaurants were situated on real estate owned by Burger King. Burger King contends that it allowed H&H through December 21, 1998, to complete the repairs, and asserts that when its representatives visited the restaurants in January of 1999, the repairs had yet to be completed. Burger King informed H&H that it was in default, and advised it that unless the repairs were completed, the franchises would be terminated.

H&H maintained that Burger King's "purported" termination of the franchise agreements was merely part of Burger King's scheme to force H&H to sell the restaurants at a drastically reduced price. Burger King replied that rather than making the necessary repairs and curing its default, H&H attempted to sell the restaurants. H&H asserted that after it had initiated the repairs, Burger King advised it to cease the repairs and consider finding potential buyers, and that H&H did so at Burger King's behest.

H&H located the Olajuwon Group("Olajuwon") as a potential buyer of all 29 of its restaurants. H&H and Olajuwon commenced negotiations for the restaurants in April of 1999, and eventually agreed on a price of $28 million for all the restaurants. At the time of the negotiations, Olajuwon owned 7 Burger King restaurants in the Cleveland, Ohio Area. H&H contended that Burger King was fully aware of the negotiations and never expressed any reservations regarding Olajuwon as a perspective buyer. Once the agreement between Olajuwon and H&H was reduced to writing and Olajuwon had deposited earnest money in an escrow account, Burger King met with Olajuwon.

Burger King notified Olajuwon of its disapproval of the H&H/Olajuwon sale in a letter dated June 28, 1999, a copy of which was sent to H&H. In the letter Burger King explained its concern that Olajuwon would encounter economic and management challenges which could strain the franchisee's support system and resources and jeopardize the franchisee's viability. Burger King was particularly concerned because Olajuwon had recently acquired 7 restaurants in the Cleveland Market that were not operating in compliance with Burger King's standards, and Burger King claimed that Olajuwon had failed to complete the enumerated repair and maintenance items on these 7 restaurants despite agreeing to do so.

H&H claimed that Burger King's true motivation in disapproving the sale was to force a sale at a drastically reduced price to certain pre-approved buyers identified by Burger King. In particular, H&H claimed that Burger King's refusal of Olajuwon was unreasonable considering H&H was current on all obligations at the time of the proposed transfer, Olajuwon was an existing Burger King operator familiar with the Burger King system, Olajuwon was headquartered closer to the restaurants than was H&H, Olajuwon had the personnel and infrastructure to operate the restaurants at peak efficiency , and Olajuwon would have less fixed debt than H&H, which would permit Olajuwon to continue investing in the restaurants without any cashflow difficulties.

H&H claimed that Burger King's refusal to approve the sale between H&H and Olajuwon was a violation of the franchise agreement, which provides that "consent [to transfers] will not be unreasonably withheld." Burger King replied that it acted within the agreement by determining in its "sole judgment" that Olajuwon did not satisfy Burger King's business requirements, did not have adequate financial resources to operate the franchises, and did not demonstrate to Burger King's satisfaction that it met the financial, character, managerial, ownership, or other criteria.

Additionally, Burger King argued that the agreement allowed it to disapprove a sale where the franchisee, here H&H, is in default. Burger King contends that as a matter of law, no breach occurred because it is undisputed that H&H was in default. As noted earlier, H&H disputed that it was in default.

Although the franchise agreement stated that Burger King's consent shall not be unreasonably withheld, the court ruled that Burger King did not breach the contract under Florida Law because it was afforded "sole judgment" in determining whether Olajuwon satisfied all Burger King's business standards and requirements.

Because the decision to disapprove the sale was based on the grounds specifically left to Burger King's "sole judgment" in the franchise agreement, the decision was not arbitrary. Therefore, Burger King's consent was not unreasonably withheld in violation of the franchise agreement.

Burger King was entitled to disapprove the sale to Olajuwon under the "sole judgment" clause of the franchise agreement. The court did not reach the issue of whether Burger King was entitled to disapprove the sale based on H&H's alleged default.

The Court concluded that H&H's breach of contract counterclaim failed because Burger King disapproved the sale to Olajuwon based on grounds specifically left to its "sole judgment" under the franchise agreement. H&H's counterclaim for breach of the covenant of good faith and fair dealings also failed because Burger King did not breach any express term of the franchise agreement. H&H's tortious interference counterclaims likewise failed because H&H is not a consumer with standing to sue under the Act. For these reasons, Burger King's motion for partial summary judgment was granted.