A Georgia federal court recently found that a person who did not sign a franchise agreement was nevertheless bound by it. That was good news for a franchisor caught between two parties who claimed no responsibility for violating the franchise agreement by opening a competing business in the same franchise location.
Franchisor Cajun Global LLC, doing business as Church’s Chicken, had a typical franchise agreement provision that prohibited its franchisee, Swati Enterprises, from selling or transferring the franchise agreement without the franchisor’s written knowledge and approval. Despite this clause, two months after entering into the franchise agreement, Swati sold the franchise restaurant in Texas to an individual, Abdul Rahman, without Global’s knowledge or consent. Rahman never signed a franchise agreement with Global.
Swati and Rahman admitted the franchise was sold to Rahman, that Rahman performed under the franchise agreement as if he were a franchisee, and that he accepted the agreement’s benefits. The court found that Rahman, in concert with Swati: (1) paid royalties and marketing fees under the franchise agreement, (2) used Global’s federally registered trademarks, (3) received operational training and support from Global, (4) allowed Global to inspect the franchised restaurant, (5) addressed operational deficiencies that were found during inspections, and (6) obtained a confidential operational manual for the franchise. Global never knew of Swati’s and Rahman’s agreement because, according to Global’s allegations, Swati and Rahman represented that Rahman was the manager for Swati and that Swati remained the franchise owner.
When the franchise term ended, Rahman rebranded the franchised restaurant but continued to sell fried chicken. Global asked the court for a preliminary injunction against Swati and Rahman for violating the Lanham Act and the non-compete provision in the franchise agreement for operating a similar restaurant. Swati did not oppose the injunctive relief sought but said it could not comply because it no longer owned the restaurant. Rahman, in turn, claimed he was not bound by the franchise agreement because he did not sign it. The court disagreed.
Regardless of whether Rahman knew anything about the franchise agreement, the court found he was an owner, employee, and someone “in active concert and participation” with Swati under the federal preliminary injunction rule. Also, given Rahman’s “prolonged” performance under the franchise agreement and his acceptance of its benefits, state law principles of assumption and equitable estoppel applied to prevent Rahman from avoiding the non-compete obligations (and the Georgia court’s venue and jurisdiction) on the basis that he did not sign the franchise agreement. The case can be found here.
The takeaway: In certain circumstances, a franchisor may be able to enforce a franchise agreement against a non-signatory, depending on applicable state law and federal injunctive relief rules. This case is also a reminder for franchisors to keep their records current regarding franchisee ownership changes and to require franchisee compliance with contractual provisions requiring that the franchisor be notified of such changes.
If you have any questions about this article or the issues raised in it, please contact the authors or Greensfelder’s Franchising & Distribution Group attorneys.