Zubair Kazi operated a KFC franchise in Pueblo, Colorado since the 1980s. In 2019, KFC approved another individual to open a KFC restaurant in Pueblo. Kazi sued, claiming KFC breached its implied duty of good faith and fair dealing. Kazi claimed the approval violated KFC’s guidelines concerning impact a new restaurant might have on Kazi’s existing restaurant. A jury awarded Kazi close to $800,000 in past and future lost profits.

KFC asked the court to reject the jury verdict, arguing that reasonable business decisions cannot be second-guessed by a jury. KFC argued its guidelines and franchise agreement let KFC license the new restaurant. Under the guidelines, KFC hires a consulting company to do an impact study. KFC approves the new franchise if the study finds less than 10 percent impact on sales, conducts further study if the impact is 10 percent to 15 percent, and withholds approval if the impact exceeds 15 percent.

Kazi argued KFC’s sales impact study was predetermined, as KFC used a company it knew would generate a favorable report, and KFC disregarded information suggesting a higher impact on Kazi’s sales.

The court agreed with the jury that KFC hired a company it frequently used in the past, which found a less-than-15 percent impact every time. The court concluded the evidence supported the jury’s conclusion that the consultants did not conduct a reliable survey. They omitted an important question about Kazi’s restaurant. KFC did no further review after a preliminary indication suggesting 22 percent impact on Kazi’s sales. KFC’s continued use of the consulting company supported an inference of bad faith.

KFC also argued that Kazi did not prove future lost profits with reasonable certainty. The court disagreed, pointing to Kazi’s longtime experience as a KFC franchisee and testimony of his damages expert, who limited his opinion to the length of the franchise agreement.

A franchisee should review with counsel its franchisor’s policy on impact studies, if any, and try to assess the type of study performed and factors considered in determining sales impact of a new franchise opening near a franchisee’s existing unit. KFC appealed the decision, so unless settled, a further ruling is expected.