Franchisors draft franchise agreements to ensure that their rights will be enforced. When the drafting review is not comprehensive, the result may be troubling outcomes. The U.S. Court of Appeals for the Eighth Circuit recently held that perhaps it is not that easy to see the ambiguity in a contract. In the case of Home Instead v. Florance, (8th Cir. July 16, 2013), 2013 U.S. App. LEXIS 14336, two of the four federal judges looking at the language concluded that the language was ambiguous and a dissent by a single circuit court judge was insufficient to affirm the decision of the U.S. District Court for the District of Nebraska. As a result, the injunction against franchise termination that was denied by the district court needs to be reconsidered on remand.
Home Instead Inc. franchises senior care services. Home Instead and Friend of a Friend Inc., David Florance and Michelle Florance (collectively referred to in the opinion as Friend) originally executed franchise agreements in 1997 and 1999 that allowed Friend to open two Home Instead franchises. In 2012, when the agreements were set to expire, Home Instead and Friend began negotiating another renewal. Home Instead attempted to raise the minimum monthly performance requirement in the renewal agreement, but Friend asserted its 2002 agreements locked in the performance requirement. Friend sought a preliminary injunction when the parties reached an impasse during the negotiations seeking to enjoin termination of the franchises during the renewal term. The district court denied the injunction and this appeal followed.
Two key provisions of the 2002 renewal franchise agreements are at issue. The first provision is Section 2.F, which falls under the heading "Grant of Franchise." Section 2.F provides:
"The exclusive right to operate the franchised business within the exclusive area is contingent upon franchisee achieving and maintaining minimum gross sales of $5,000 in each twice-monthly billing period ($10,000 per month) by the end of the first year of operation of the franchised business, achieving and maintaining minimum gross sales of $10,000 in each twice-monthly billing period ($20,000 per month) by the end of the third year of operation of the franchised business, and achieving and maintaining minimum gross sales of $15,000 in each twice-monthly billing period ($30,000 per month) from the end of the fifth year of operation of the franchised business through the end of the term of this agreement or any renewal term of a renewal franchise agreement (the 'performance standard')."
The second key provision is Section 15.A, which falls under the heading "Renewal of Franchise" and provides:
"If, upon expiration of the initial term of the franchise, franchisee has during the term of this agreement substantially complied with all its material provisions and agrees to comply with the specifications and standards then applicable for new franchised businesses, then franchisee has a right to renew the franchise for an additional term equal to the then-customary initial term granted under franchisor's then-current form of standard franchise agreement. … The franchisee may choose to retain the provisions of this agreement with respect to the amount of royalty fee should the then-current agreement call for a larger royalty fee."
During the district court proceedings, Home Instead argued that Section 15.A unambiguously allows Home Instead to raise the minimum monthly performance requirement in renewal agreements, provided that the new requirement is generally applicable to all new franchises. Friend argued that Section 2.F unambiguously sets the minimum monthly performance requirement at $30,000 for all franchise renewals.
The district court concluded, as a matter of law, that the agreements do not fix the minimum performance requirement at $30,000 for renewal agreements. The court reasoned:
"When read naturally and together with the rest of the renewal agreement, § 2.F creates a floor, not a ceiling. For the duration of the renewal agreements, and for any subsequent renewal, franchisees must achieve a minimum of $30,000 in monthly gross sales. Nothing in § 2.F prohibits the franchisor from raising the minimum amount."
The district court then denied Friend's motion for a preliminary injunction, holding that because the 2002 franchise agreements unambiguously support Home Instead's position, Friend's probability of success on the merits "is nil."
Upon de novo review, the Eighth Circuit concluded that the franchise agreements are ambiguous with respect to whether Home Instead may raise the minimum monthly performance requirement in renewal agreements. It reasoned the language in Section 2.F stating that the $30,000 requirement applies "through the end of … any renewal term of a renewal franchise agreement," could be read as fixing this minimum performance requirement as long as the franchisee continues to renew its franchise agreement. On the other hand, Section 15.A states that the franchisee must "agree to comply with the specifications and standards then applicable for new franchised businesses" in order to renew a franchise agreement, with the exception that the franchisee "may choose to retain the provisions of this agreement with respect to the amount of royalty fee." This language could be read as requiring the franchisee to agree to all standardized terms in franchise renewals, except for royalty fees.
When these provisions are read together, the court held that a reasonable interpretation of the franchise agreement could be that both Section 2.F and Section 15.A address the same subject — permissible terms for renewal contracts — and that Section 2.F thus prevails over Section 15.A with respect to minimum performance requirements in renewal contracts because it is more specific. However, Section 15.A explicitly allows franchisees to retain royalty fee provisions in renewal contracts but makes no mention of performance requirements. Thus, another reasonable interpretation could be that Section 2.F merely specifies that minimum performance requirements in renewal contracts will be at least $30,000 per month, while Section 15.A gives Home Instead the authority to raise those minimum requirements as long as the higher requirements are generally applicable to new franchised businesses.
Consequently, the district court was held to have erred in concluding that the contract was unambiguous and that, as a matter of law, the contract allows Home Instead to raise the minimum performance requirement in renewal contracts. Because the district court's denial of Friend's motion for a preliminary injunction was based on this erroneous legal conclusion, the denial was an abuse of discretion. The dissent disagreed and would affirm the decision of the district court because of its opinion that no ambiguity exists.
This case demonstrates the necessity of having franchise counsel review the franchise agreements both for uniformity and ambiguities. Expert drafting requires redrafting, rather than patchwork additions to franchise documents, to achieve a uniform consistency and avoid unwelcome outcomes.
Craig R. Tractenberg is the team leader of the franchise practice at Nixon Peabody and an adjunct professor of franchise law at Temple University's Beasley School of Law.