A recent case involving the Whataburger franchise system reminds franchisors of the importance of the use of iron-clad language when granting future development rights. In Whataburger, Inc. et. al. (“Whataburger”) v. Whataburger of Alice, Ltd. (“WOA”), the court was tasked with interpreting the language of a settlement agreement (“Settlement Agreement”) to determine whether WOA had the unfettered right to open new restaurants.
As background, WOA had previously operated 28 franchised restaurants and sold them to Whataburger under the Settlement Agreement. In that Settlement Agreement executed in 1993, Whataburger granted WOA the exclusive right to construct, operate or develop Whataburger restaurants in certain counties in Texas. Each location would have a fixed royalty fee and advertising fee. In 2013, WOA had 12 new franchised restaurants and had found a location at which it wanted to open another franchised restaurant. Whataburger refused to grant WOA the right to open the additional franchised restaurant arguing that it had the right to approve new site locations. Further, Whataburger claimed it would not approve any new sites unless WOA agreed to renegotiate its current franchise agreements to increase the fixed royalty fee and advertising fee to the standard rates. The instant lawsuit stemmed from this disagreement.
In affirming the trial court decision in favor of WOA (partially), the District Court looked to the specific language of Settlement Agreement. Specifically, the District Court held that the clear language in the Settlement Agreement that states WOA has the “exclusive right to construct, operate or develop” Whataburger restaurants means just that. It does not require any prior site approval by Whataburger. Further, it held that the terms of the franchise agreement that provide for Whataburger’s prior approval of sites does not come into effect until after that franchise agreement is signed. Lastly, it held that even if it is standard industry practice for franchisors to approve sites, the parties were free to agree to different terms. As such, Whataburger was required to provide its standard form of franchise agreement (with its negotiated royalty fee and advertising fee rates) for each location WOA chose in the subject counties.
The District Court held that the trial court erred in its declaration that WOA had the right to “re-designate” each of its current franchised restaurants as “new locations” upon renewal. This time, the District Court looked to the language of the franchise agreement in making its determination. Specifically, the District Court held that the “Entire Agreement”, “Superseding Effect” and renewal provisions superseded the terms of the Settlement Agreement with respect to those specific locations. At this point, the parties were only bound by the terms of the franchise agreement for that opened location.
This ruling serves as a reminder that it’s important to be extremely clear in the language a franchisor uses to grant future development rights. Franchisors must ensure that they maintain the right to site-approval in the development right grant. Further, it is extremely important to ensure that the franchise agreement contains the requisite “boilerplate” provisions to ensure that it supersedes any prior agreement with a franchisee. Lastly, it is critical to draft strong renewal provisions that require franchisees to comply with certain obligations in order to renew.