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The front of a Dairy Queen restaurant in Houston, Texas, in 2020 image

Ruling addresses scope of Minnesota Franchise Act

Editor’s note: An earlier headline on this story said the franchisee LG2’s lawsuit has been dismissed. While American Dairy Queen Corp. won a ruling in the lawsuit, the lawsuit continues. The story has been updated to include details of that continuation. 

On Jan. 12, the U.S. District Court of Minnesota determined that the Minnesota Franchise Act (MFA) does not expand to out-of-state franchisees simply because Minnesota-based franchisors consent to the sale of the franchise to the out-of-state franchisee. The litigation rages on, however, as the out-of-state franchisee alleges that actions undertaken by the franchisor did trigger the MFA.

In April 2022, LG2, LLC (LG2), a Texas-based LLC, brought suit against American Dairy Queen Corp. (ADQ), asserting violation of the MFA. Back in 1961, ADQ entered into a franchise agreement with Bob Denny, who opened a Dairy Queen franchise in Johnson County, Oklahoma. Over the years, successor entities obtained franchise rights through assignment. In 2019, LG2 acquired those rights.

ADQ’s predecessors began franchising Dairy Queen restaurants in the 1940s. Many of those franchise agreements are extant. Those legacy agreements are terminable for good cause, with notice and reasonable opportunity to cure the defect.

LG2 wanted to open a Dairy Queen at a new location. The restaurant previously had been based in Texas and was moved to Tishomingo, Oklahoma, north of the Texas state line. LG2’s proposed new location was less than 2 miles from the previous location.

Texas-based Dairy Queen franchises can serve Mexican-style food such as tacos and burritos, whereas Dairy Queen restaurants in other parts of the country cannot. ADQ consented to the new location on the condition that LG2 limit its menu and/or enter into a new franchise agreement. It reasoned that, by not converting to an ADQ-approved system food concept, the restaurant would cause customer confusion and undermine ADQ’s brand and franchise system.

LG2 contended that the legacy agreement with ADQ did not require ADQ’s permission to relocate. It also maintained that the current ADQ franchise agreement was much less favorable than the legacy agreement, containing additional fees to be paid, increased hours of operation, and mandatory building modernization. Subsequently, LG2 sued ADQ in 2022 for violation of the MFA, also claiming that ADQ breached its contract with LG2 as well as the implied covenant of good faith and fair dealing.

“For years, ADQ has attempted, and continues to attempt, to rid the system of all legacy franchise agreements and impose its modern-day obligations and restrictions on these early franchises, in derogation of the express terms of the underlying legacy franchise agreements,” the complaint read. “This case is yet another illustration of ADQ’s attempt to do so.”

ADQ moved to dismiss the MFA claim. LG2 claimed that the MFA was applicable since ADQ drafted the agreement that assigned the Dairy Queen franchise to LG2, going into effect once it was signed in Minnesota. ADQ, on the other hand, argued that, even though the agreement was signed in Minnesota and the relationship between franchisor and franchisee would require communications and payments between the franchisee’s state and Minnesota, the MFA did not apply to franchises located outside of Minnesota.

Pushback to LG2’s MFA claim did not simply stem from the fact that ADQ wanted LG2 to make concessions before agreeing to move the restaurant. Rather, there was concern about the scope of the MFA. Consenting to out-of-state franchise assignments is something that franchisors do all the time. If consent constituted a sale under the MFA, then it opened the door to a profound increase of the reach of the MFA.

The court determined that ADQ had not sold or offered to sell a franchise. ADQ had consented to the franchise’s assignment. However, the court decided that ADQ’s acts of consent did not constitute an offer to sell or a sale, as the MFA requires. As ADQ did not sell its franchise, then the MFA did not apply to franchises outside of Minnesota.

Faegre Drinker Biddle & Reath’s litigation team, including Lauren Linderman, Hannah Leinendecker, Joshua Turner, and Josiah Young, represented ADQ. They assert that the ruling is important because it resolves an issue of law relevant to the MFA’s application.

“There are two lines of cases in the District of Minnesota. The first line of cases holds that the MFA does not apply to out-of-state franchisees, full stop. The second line of cases holds that the MFA could apply to out-of-state franchisees if conduct regulated by the Act took place in Minnesota,” the team wrote. “To ADQ’s knowledge, no court had considered the issue of whether a Minnesota franchisor’s mere consent to the assignment of a franchise located outside Minnesota from one non-Minnesota entity to another non-Minnesota entity was sufficient to trigger the application of the MFA.”

“The ruling makes clear that the Minnesota Franchise Act does not apply to out-of-state franchisees merely because a Minnesota-based franchisor consented to the sale of the franchise to that franchisee,” stated the litigation team.

“We believe that we alleged, in our original Complaint, that conduct regulated by the Act did occur in Minnesota, but the Court, in its dismissal of the MFA claim, said the Court had no basis for finding allegations in the Complaint that this Minnesota-based franchisor did more in Minnesota than simply consent to the sale of the franchise to this franchisee,” said Michael Dady in an email.

LG2 moved the court to allow them to amend their original complaint. It alleges that there was further conduct undertaken by ADQ that would mean that the MFA does apply. Those arguments have not yet been heard.

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