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Federal Court Reinforces That Franchisors Should Control Advertising to Ensure Uniformity

Client Alert

Author: A. Christopher Young

1/31/2018
Federal Court Reinforces That Franchisors Should Control Advertising to Ensure Uniformity

An Illinois federal judge recently found that a franchisor has the absolute right to control its franchisees’ advertising of the products and services offered under a franchise. Lokhandwala v. KFC Corp., No. 17-cv-6394 (N.D. Ill. Jan. 23, 2018). The decision is instructive for franchisors and franchisees alike. For franchisors, it provides assurance that with the right franchise agreement language, they can — and should — dictate and control the manner and substance of the advertising to benefit the entire franchise system. For franchisees, they need to fully understand the discretion the franchise agreement gives their franchisors to control advertising of trademarked products and services for the good of the entire franchise system before they embark on their own marketing initiatives, even with the apparent blessing of the franchisor.

Afzal Lokhandwala — and corporations he controlled — owned and operated eight KFC franchises in Illinois. From 2002, when he opened his first franchised restaurant, through 2017, the plaintiff advertised that his franchised businesses offered Halal chicken. “Halal” refers to food prepared in accordance with Islamic laws and customs. The plaintiff claimed KFC not only knew that his business strategy centered on advertising the sale of Halal chicken at his branded restaurants, but that a KFC representative actually approved of the advertising in an email.

KFC enacted a policy in 2009 that prohibited franchisees from making religious dietary claims about the products sold at KFC-branded restaurants. In late 2016 or early 2017, KFC informed the plaintiff that he could no longer advertise or market Halal products at his restaurants and cited its 2009 policy.

The plaintiff sued KFC, seeking a declaration of his rights under the various franchise agreements, for breach of contract and promissory estoppel. He claimed that KFC’s eleventh-hour enforcement of its religious dietary claims policy contradicted the representations KFC made when the plaintiff opened stores in 2010 and 2012 and contradicted the course of dealing and performance established during the operation of the franchised restaurants in which KFC allowed the plaintiff to advertise Halal products in his stores. KFC argued the franchise agreements gave it the absolute right to control what the franchisee said about the products and services offered at branded restaurants notwithstanding the alleged prior representations and the parties’ course of dealing. The court agreed with KFC and dismissed the claims as a matter of law.

The court’s decision rested solely on its interpretation of the plain language of six key provisions of the franchise agreements. The franchise agreements provided in relevant part:

  • The franchisee will strictly comply with KFC’s requirements and instructions regarding the use of the trademarks, tradenames and service marks in connection with the Approved Products and the Outlet.

  • The franchisee will take such action and precautions as necessary to assure that advertising and promotional material meet KFC’s standards and specifications.

  • No failure, forbearance, neglect or delay of any kind on the part of KFC in connection with enforcing and exercising rights under the franchise agreement shall diminish KFC’s right to strictly enforce and take full benefit of each provision at any time in the future.

  • No custom usage concession, practice or course of dealing will preclude KFC from strictly enforcing this agreement in accordance with its literal terms.

The final two relevant provisions of the franchise agreement were the no-waiver and integration clauses. Finally, the franchise agreements’ choice of law provisions provided that Kentucky law governed their interpretation.

These provisions led the court to conclude that KFC could prohibit the plaintiff from advertising Halal products at the branded restaurants, even if KFC expressly permitted or acquiesced to that advertising in the past. The court did not consider extrinsic or parol evidence of what KFC represented the franchisee could say about his products, relying on the franchise agreements’ unambiguous advertising and integration clauses.

The court rejected two creative and novel arguments made by the franchisee. First, the franchisee claimed that KFC’s advertising policy could not be enforced because it prevented the franchisee from making truthful statements about the source of the products sold at the branded restaurants. The court noted that such an argument implied that truthful statements do not constitute advertising. Finding that advertisements often contain truthful statements about products, the court held that KFC has the right to control anything its franchisees say about the products and services offered at their branded restaurants.

Second, the franchisee claimed that an Illinois law, the Halal Food Act, required him to inform consumers about the source and preparation of the food sold at his restaurants. But the court found that this argument misinterpreted Illinois law. The Halal Food Act defines a “dealer” as one who “advertises, represents, or holds itself out” as “selling, preparing, or maintaining” Halal food. The law would not apply to the franchisee if he stopped advertising his products as Halal, as KFC directed.

This decision underscores the importance of drafting franchise agreements to give the franchisor the absolute, unfettered discretion to control the advertising of branded products and services. Uniformity is essential to the success of a franchise system as a whole. Fundamentally, a trademark signals to consumers that the products or services are of a uniform nature and quality. For that reason, the franchisor, as the owner of the trademark and tradename, and not individual franchisees should retain the right to decide what is said about the branded, trademarked products and services. While an individual franchisee may chafe at that delegated power, ultimately all franchisees and the franchisor benefit from a clear, uniform message.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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