Kazi v. KFC US, LLC

• Decision Date: 12 November 2020
• Docket Number: Civil Action No 19-cv-03300-RBJ
• Parties: ZUBAIR KAZI and KFC of Pueblo, INC, Plaintiffs, v. KFC US, LLC, Defendant.
• Court: U.S. District Court — District of Colorado

ZUBAIR KAZI and KFC of Pueblo, INC, Plaintiffs, v. KFC US, LLC, Defendant.

Civil Action No 19-cv-03300-RBJ

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

November 12, 2020

Judge R. Brooke Jackson

ORDER ON DEFENDANT'S MOTION TO DISMISS

This matter is before the Court on defendant's motion to dismiss. ECF No. 18. For the reasons discussed below, defendant's motion is GRANTED in part and DENIED in part.

I. FACTUAL BACKGROUND

The following facts are alleged in the Amended Complaint (ECF No. 17) and are assumed to be true for purposes of the pending motion. This is a franchise encroachment case. Plaintiff Zubair Kazi is a president of numerous companies that own and operate franchises across the United States. These include a KFC location in Pueblo, CO. ECF No. 17 at ¶1. Kazi and KFC of Pueblo (collectively "franchisee") have sued defendant KFC US, LLC ("KFC") for licensing another KFC restaurant ("outlet") near franchisee's current location. Id. at 1.

At some point in the past franchisee and KFC entered into a contract ("Franchise Agreement") by which franchisee would establish a KFC location at 1644 S. Prairie Avenue, Pueblo. Id. at ¶5. The contract gave franchisee a license to prepare fried chicken and other food recipes and to market them with certain trademarks and service marks. Id. at ¶7. The parties renewed that contract on June 1, 2017. Id. at ¶5; ECF No. 17-1 at 2. The relevant contractual provisions are as follows:

3.6 Except as provided in subsection 3.8, during the License Term KFC shall not use or license others to use any of the trademarks licensed hereunder in connection with the sale of any food products at any location within a radius of one and one-half miles of the Outlet, unless [exceptions not relevant here].

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19. Right to Apply for New Franchised Outlets. Before permitting the establishment of any new franchised outlet (defined below) at a location closer to the Outlet than to any other franchised outlet (except pursuant to commitments made before the Effective Date of this Agreement), KFC shall be obligated to give Franchisee 30 days prior written notice of such proposed action. During such 30-day period, Franchisee may apply to KFC for a franchise to operate an outlet at such proposed new location and KFC shall negotiate in good faith with Franchisee regarding said application . . . . As used herein "new franchised outlet" means an outlet not previously in existence, whether franchised or owned by KFC or its affiliates, and which will not be owned by KFC and its affiliates.

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20.4 Non-Waiver. No failure, forbearance, neglect or delay of any kind or extent on the part of KFC in connection with the enforcement or exercise of any rights under this Agreement shall affect or diminish KFC's right to strictly enforce and take full benefit of each provision of this Agreement at any time, whether at law for damages, in equity or in injunctive relief of specific performance, or otherwise. No custom, usage, concession or practice with regard to this Agreement, the Franchisee or KFC's other franchisees shall preclude at any time the strict enforcement of this Agreement (upon due notice) in accordance with its literal terms. No waiver by KFC of performance of any provision of this Agreement shall constitute or be implied as a waiver of KFC's right to enforce such provisions at any future time.

20.5 Scope of Agreement, Changes, Consents, Etc. This Agreement constitutes the entire understanding and agreement of the parties concerning the Outlet and supersedes all prior and contemporaneous understandings and agreements of the parties, whether oral or written, pertaining to the Outlet, except for any express obligations of the Franchisee under the franchise option agreement for the Outlet and except for any written "master" agreement that may be in force between KFC and the Franchisee. No interpretation,change, termination or waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing and signed by Franchisee and KFC's President, Vice President in charge of franchising or franchise services or General Counsel, except that a waiver need be signed only by the party waiving. Nothing in this section 20.5 is intended to disclaim or require Franchisee to waive reliance on any representation that KFC made in the Franchise Disclosure Document that KFC provided to the Franchisee.

ECF No. 17-1 at §§ 3.6, 19, 20.4, 20.5.

At some point after the parties renewed their contract, KFC issued a document entitled "KFC Impact Study Guidelines." ECF No. 17-2 at 2. These guidelines were effective from March 21, 2019 through December 28, 2020. They stated that a franchisee who received notice of a new proposed outlet ("option") under section 19 of the contract, or a franchisee whose location was next-closest to the proposed new outlet and within ten miles, could request an impact study. Id. The purpose of the impact study would be to determine the impact the new proposed outlet would have on the existing outlet. Id.

The guidelines also included a table that lays out "KFC Action" based on the results of the impact study. Id. The relevant part of the table indicated that if the potential impact of the new outlet was less than ten percent, KFC would approve the option. If the potential impact was between ten and fifteen percent, KFC's action was "further review." If the potential impact was above fifteen percent, the option would be denied. Id. A footnote also stated that "KFC reserves the right to deny option, regardless of the matrix above, based on other situations and circumstances (for example, including but not limited to: impact on low volume restaurant, cumulative owner impact, cumulative same restaurant impact, cross owner impact, etc.). Id.

According to franchisee, the parties "came to know and understand" that the Pueblo market could likely not sustain more than one KFC location because other KFC locations in thearea had become unprofitable and unsustainable in the past. Id. at ¶10. Franchisee alleges that its contract with KFC "came to include" these guidelines and that "the Parties came to understand and agree that they be part of the Agreement." Id. at ¶6. Defendant disputes this. ECF No. 18 at 6; ECF No. 22 at 1. Franchisee alleges that while KFC had discretion regarding new outlet locations in the Pueblo area, KFC represented to franchisee that it would license new outlets according to the guidelines and their course of dealing. ECF No. 17 at ¶9. Relying on the contract, the guidelines, and the parties' course of dealing, franchisee invested substantial time and money into developed his franchise location in Pueblo. Id. at ¶11.

On April 4, 2019 KFC informed franchisee that it was considering establishing a new KFC location in north Pueblo. KFC advised franchisee of its rights under section 19 of the Franchise Agreement to apply to operate the new outlet, to request an impact study, or both. Id. at ¶12. On April 12, 2019 franchisee opted not to apply for the right to operate the new outlet. He made this decision because he was "confident" that a "reasonably and prudently prepared Impact Study" would show that the potential impact of the new outlet on his own outlet would be more than fifteen percent. Instead, per the guidelines franchisee timely submitted a request for an impact study and the $6000 fee. Id. at ¶13.

KFC commissioned the James Andrews Group ("JAG") consulting firm to conduct the impact study. On June 12, 2019 JAG produced a report that said the proposed north Pueblo KFC location would impact franchisee's south Pueblo KFC location by 13.4 percent. Id. at ¶14. Franchisee alleges that the JAG study and corresponding survey were "not reasonably and prudently performed" and were "fundamentally flawed." Id. at ¶15. In response franchisee commissioned his own impact study, completed by FTI consulting, which concluded that theproposed north Pueblo KFC would adversely impact franchisee's south Pueblo location by 33 percent to 36 percent. Id. at ¶16.

Franchisee asked KFC not to allow the proposed north Pueblo franchise and licensure to proceed. KFC refused. Franchisee alleges that by the time he filed his amended complaint on February 20, 2020 the new franchisee for that location had obtained a building permit and begun construction. Id. at ¶18.

I. PROCEDURAL BACKGROUND

Franchisee initially filed this case on November 21, 2019. ECF No. 1. He filed an amended complaint on February 20, 2020. ECF No. 17. In his amended complaint franchisee alleged breach of contract, bad faith, promissory estoppel, and unjust enrichment. Franchisee also asked this Court to permanently enjoin KFC from licensing the new outlet and the new franchisee from operating it. Id. at ¶¶20-40.

Defendant KFC moved to dismiss this case on March 5, 2020. ECF No. 18. On March 26, 2020 franchisee responded. ECF No. 20. KFC replied on April 9, 2020. ECF No. 22.

III. STANDARD OF REVIEW

To survive a Rule 12(b)(6) motion to dismiss, the complaint must contain "enough facts to state a claim to relief that is plausible on its face." Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plausible claim is a claim that "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court must accept the well-pled allegations of the complaint as true and construe them in the light most favorable to the plaintiff, Robbins v. Wilkie, 300 F.3d 1208, 1210(10th Cir. 2002), conclusory allegations are not entitled to be presumed true. Iqbal, 556 U.S. at 681. However, so long as the plaintiff offers sufficient factual allegations such that the right to relief is raised above the speculative level, he has met the threshold pleading standard. E.g., Twombly, 550 U.S. at 556; Bryson v. Gonzale...