The Franchise Memorandum

A federal court in Illinois recently denied cross motions for partial summary judgment as to franchisor 360 Painting, LLC’s claims for breach of contract by painting franchisee R. Sterling Enterprises, Inc. (RSE), and breach of guaranty by RSE’s guarantor for failure to pay certain royalties and fees. 360 Painting, LLC v. R. Sterling Enter., Inc., 2024 WL 2113035 (N.D. Ill. May 10, 2024). 360 Painting and RSE entered into a franchise agreement for a ten-year term, and Robert Sterling personally guaranteed the agreement. Under the franchise agreement, RSE was required to pay 360 Painting certain percentages of its gross sales as royalties and other fees and accurately and timely report its gross sales to 360 Painting. After auditing RSE’s reporting several times, 360 Painting terminated the franchise agreement and sued for damages, alleging that RSE intentionally underreported gross sales, which caused an underpayment of royalties and other fees to 360 Painting. RSE counterclaimed and the parties asserted cross motions for partial summary judgment. RSE alleged that 360 Painting waived its right to collect fees that accrued prior to termination via certain waiver language included in an addendum to the franchise agreement. The court denied both the motion and cross motion for partial summary judgment on the breach of contract and guaranty claims because a genuine issue of material fact existed related to 360 Painting’s waiver of fees.

RSE contended that 360 Painting’s agreement in the addendum to “waive any obligation to pay unpaid and/or future royalty fees, national marketing fund contribution and/or other fees owed post-termination” waived 360 Painting’s right to any fees post-termination. 360 Painting argued that the addendum language only waived the specific fees identified that could arise after termination. The court held that the franchise agreement and addendum were ambiguous because each party offered a reasonable interpretation of the documents. The court determined that the ambiguity could not be resolved by the facts gleaned from the contract language and through canons of interpretation since the franchise agreement did not provide guidance on how to interpret specific provisions in light of the addendum. The court further reasoned that the purpose of either document was not explicitly stated, and thus offered no guidance to resolve the competing, reasonable interpretations. Finally, the court concluded that evaluation of extrinsic evidence was necessary to determine liability during a trial, because enough ambiguity existed with respect to the contractual language. 

*Haozheng Jiang is a Summer Associate for Lathrop GPM who contributed to the writing of this post.