The Franchise Memorandum

An Ohio appellate court, reversing a summary judgment decision, recently held that the “full-time efforts” section of an Area Representative Agreement was applicable only to the area representative entity and not the individual owners. American Eagle Investments, Inc. v. Marco’s Franchising, LLC, 2024 WL 3738750 (Ohio App. Aug. 9, 2024). American Eagle, an area representative of Marco’s Pizza, brought suit alleging breach of contract after Marco’s terminated the Area Representative Agreement upon learning that owners of American Eagle entered into another area representative agreement to develop franchises for a different brand. Marco’s moved for summary judgment, claiming that the other brand’s area representative agreement prevented American Eagle’s owners from complying with the provisions of the Area Representative Agreement which required “active full-time management” of their Marco’s franchise. The trial court granted Marco’s summary judgment motion finding that reading the provisions of the Area Representative Agreement as a whole showed the parties’ intent that both American Eagle and its principal owners “would be bound to commit their combined full-time resources, efforts and loyalty to Marco’s, and not another franchise opportunity.” The appellate court reversed, reasoning that the applicable section of the Area Representative Agreement was applicable only to the entity American Eagle, and not to the owners individually.

American Eagle argued that the trial court erred when it determined that the “full-time efforts” section of the Area Representative Agreement was enforceable against the principal owners individually because the section applies only where the area representative is an entity organized under state law. The appellate court agreed finding that the title of the section: “Area Representative That is a Corporation, Partnership, or Limited Liability Company” makes clear that the entire section is applicable only if the area representative is an organized entity, as opposed to an individual. In addition, the appellate court found other requirements in that section that were applicable only to an entity, such as requiring the area representative to provide Marco’s with its articles of incorporation, bylaws, certificate of organization, etc. The appellate court also pointed to the Guarantee, Indemnification, and Acknowledgement which expressly binds the owners, individually, to many sections of the Area Representative Agreement but it does not bind them to the covenants in the “full-time efforts” section. The appellate court held that the applicable section unambiguously applies to only the American Eagle entity, and the Area Representative Agreement was not violated merely because the individual principal owners engaging in activities outside Marco’s business.