A federal district court in Texas denied a preliminary injunction filed by a franchisee (“EYM”) after Pizza Hut, as franchisor, terminated the franchise agreements.

In 2021, EYM failed to remain current on their payment obligations to the franchisor and its vendors. In 2022, the franchisor sent EYM several default notices. In 2023, the franchisor entered into a forbearance agreement with EYM and agreed not to terminate the franchise agreements provided EYM complied with the forbearance conditions.

After EYM received additional default notices, the franchisor notified EYM that the forbearance agreement was subject to immediate termination due to EYM’s failure to comply with the terms of the forbearance agreement. EYM filed suit in Texas state court alleging breach of contract, tortious interference with contracts and prospective business relations, and breach of fiduciary duty. The franchisor removed the case to federal court, where EYM moved for a preliminary injunction to enjoin Pizza Hut from terminating EYM’s ability to operate their restaurants, removal of the franchisee’s restaurants from the Pizza Hut online ordering system, and disrupting the franchisee’s ability to receive supplies, among other conduct. The court denied EYM’s motion for a preliminary injunction, concluding the franchisee had not shown a substantial likelihood of success on the merits on its three claims.

Under Texas law, to prove breach of contract the following four requirements must be met: (1) a valid contract; (2) plaintiff’s performance or tendered performance; (3) defendant’s breach; and (4) damages. EYM admitted that it had not performed under the terms of the forbearance agreement. Additionally, EYM did not specify or provide evidence as to which contract was subject to the franchisor’s interference and EYM’s assertion that the franchisor owed fiduciary duties to EYM as the franchisee ignored that six of the seven contracts EYM entered into with the franchisor explicitly stated that no fiduciary duty is created among the parties. Accordingly, the court found EYM was not likely to succeed on the merits.

Franchisees should consult franchise counsel if they are unable to comply with their franchise agreement or upon receipt of a notice of default from their franchisor to evaluate their options, including understanding risks and consequences, which often depend on both the terms of the franchise agreement and applicable law.

EYM Pizza of Georgia LLC, et al. v. Pizza Hut LLC, No. 3:24-CV-0646-X (N.D. Tex. Apr. 2, 2024)