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Landmark Jury Verdict and Final Judgement Upholds Franchisor’s Duty to Act in Good Faith and Deal Fairly with its Franchisees

Posted on Date: Oct 9, 2018

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By Robert Zarco
Founding Partner, Zarco, Einhorn, Salkowski and Brito

Recently, a California Superior Court 12-member jury in Los Angeles handed franchisees a huge victory when it delivered an $8.8-million-dollar verdict against El Pollo Loco (EPL) after the popular fast food chicken restaurant set up two competing locations in close vicinity of a franchisee’s existing restaurant location.

What made the case of Janice P. Handlers-Bryman and Michael Bryman v. El Pollo Loco, Inc. such a game-changer is that the court upheld the idea that a franchisor’s duty to act in good faith and to deal fairly with franchisees overrides explicit, yet legally and factually unconscionable terms and provisions laid out in the franchise disclosure document (FDD) including in the franchise agreement.

The Superior Court’s Final Judgment was most significant because in addition to finding a breach of good faith for placing a corporate unit so close to the franchisee’s existing location, the jury also determined that it was an additional breach of good faith for the El Pollo Loco franchiser not to have offered the new encroaching corporate locations to the well-financed franchisees who were recognized by corporate to be excellent operators.

Finally, the Court entered a Final Judgment in favor of the Brymans, ruling that El Pollo Loco violated the California Unfair Competition Law as a result of its wrongful conduct. As a final blow to EPL, the court entered a restrictive mandatory Permanent  Injunction precluding the EPL from providing franchise disclosure documents (FDDs) in their current form without first revising them to accurately and fairly disclose to prospective franchisees the true nature of the business, its expected caps on earnings opportunities, actual restrictions on territorial protections among other onerous provisions. Though this case will almost certainly be appealed by El Pollo Loco, it is still a potent step in the right direction in developing greater support for franchisee rights!

Robert Zarco, of Zarco, Einhorn, Salkowski & Brito located in Miami Florida stated that “This Jury Verdict and Final Judgment has been long overdue in the franchise world where the franchisees have been struggling for years in battling draconian, onerous and unconscionable contract provisions which are one-sided and fail to promote leveling the playing field between franchisee and franchisor.”

The Zarco trial team including Robert Zarco, Robert Salkowski and Margaret Lai, conveyed that it was a hard-fought legal battle, “with tempers and tensions flaring as El Pollo Loco’s counsel tried to deflect pointed accusations and damaging evidence, including unfavorable testimony from its own corporate executives,” emphasized Zarco. “It was a battle royale with the court having to assure and maintain the proceedings continued in an orderly manner.”

Early on, the Brymans were represented by David Gurnick during many of the pre-trial portions of the case, including a critical summary judgment victory that set the applicable legal standard of good faith that the trial court followed. The AAFD’s Chairman, Robert Purvin, served as an expert witness for the Brymans during the early pre-trial discovery and proceedings.

About the Case

In 1999, the Brymans purchased an existing El Pollo Loco in Lancaster, California and received and signed a 500-page FDD. They never read any of the non-financial terms. Over the years, the Brymans sought to open additional El Pollo Loco franchise units and proposed nearby locations for the units. However, they were unable to come to an agreement with EPL. Ultimately, the franchisor opened two EPL corporate-owned units. In an effort to mitigate the damages caused by the new locations effectively cannibalizing existing business, the Brymans had previously offered to operate the new and competing units in close proximity to the Brymans’ location.

In 2016, the Brymans sued El Pollo Loco alleging that the franchisor had breached their duty of good faith and fair dealing. In its defense, El Pollo Loco pointed to the FDD that the Brymans had signed, which stated:

“You will not receive an exclusive territory under the Franchise Agreement. The Franchise Agreement permits [EPL] to establish other franchised or company-owned restaurants that may compete with your location, including restaurants which may be in the immediate vicinity of or adjacent to your Restaurant.”

“Except for the express rights set forth at Section 23, nothing contained in this Agreement, whether express or implied, shall be deemed in any way to prevent or limit [EPL] from opening and/or operating, or granting the right to any person to open and/or operate, restaurants in the immediate vicinity of or adjacent to the franchisee’s Restaurant. Franchisee understands and agrees that [EPL] may open and/or operate restaurants in any area they choose or may authorize or license others to do the same, whether it is in competition with or in any other way affects the sales of Franchisee at the Restaurant.”

The Court Verdict

The 12-person jury in the case was ultimately unmoved by El Pollo Loco’s defense and found in favor of the plaintiff. The jury awarded the Brymans $8.8 million in damages. This verdict is substantial and newsworthy and builds on the equally valuable and earlier summary judgement decision of the court months earlier on some of the good faith claims ultimately presented in trial on the issue of cannibalization.

The court found that some of the terms in El Pollo Loco’s FDD and franchise agreement were unenforceable on the grounds of Shocking the Conscience rendering such provisions “unconscionable.” In rendering the summary judgement decision, the court had to find that the contract was both “procedurally” and “substantively” unconscionable. Procedural unconscionability focuses on how the contract was negotiated, while substantive unconscionability focuses on the specific terms of the contract.

Interestingly, the court deviated from previous norms by finding that the substantive damages were so severe that it lessened the requirements for showing procedural unconscionability. Even though El Pollo Loco pointed out that the Brymans used a prior attorney to review the FDD and even negotiated certain unrelated aspects the FDD, the court found that the terms in the contract (the substantive parts) were so unconscionable as to “shock the conscience.”

As a result, the court ruled that the challenged provision was “void on its face.”

Why This Decision Matters

El Pollo Loco’s FDD provisions granting itself the right to indiscriminatingly compete against franchisees with impunity are not aberrations. It’s the rule rather than the exception in the franchising industry today. While many franchisees enter the franchise process believing that the FDD is designed to safeguard their interests, nothing could be further from the truth. In fact, the FDD is often a document running hundreds of pages and filled with small text disclaimers by the franchisor and it is designed specifically to lock in franchisor rights over the interests of franchisees.

The Bryman decision essentially says that a franchisor’s responsibility to treat their franchisees with good faith and fair dealing is stronger than any provision they place in the FDD. A legal precedent like this could lead to a massive overhauling of FDDs. It might finally balance the playing field between franchisors and franchisees.

Why This Decision May Not Matter

Before franchisees get their hopes up too high, it’s worth remembering that this judgement came out of a single superior court in Los Angeles and will almost certainly be appealed. We must remember that several courts have upheld the validity of the FDD even against good faith and fair dealing challenges. There is always a possibility that a portion of the Bryman decision may ultimately be overturned on appeal, still, even if the decision is overturned in whole or in part and the award is reduced or vacated, this case is still important for many reasons. It signifies that a new legal theory regarding franchisee rights could be percolating in the wings. This decision and its hefty award to the plaintiff also puts franchisors on notice.

Franchisees must continue to fight against franchisor abuses. One of the most powerful ways to do that is to join one of the AAFD’s six action task forces. In particular, our Market and Territorial Protection Action Task Force confronts the exact franchisor abuse at issue in the Bryman case.

Learn more about the AAFD’s Action Task Forces and our upcoming AAFD Franchisee Leadership Summit in October, 2018.

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