How does the litigation involving City Wide in Item 3 potentially affect the obligations of a franchisee as described in Item 9?
City_Wide Franchise · 2025 FDDAnswer from 2025 FDD Document
ITEM 3 LITIGATION
Dauntless Enterprises, Inc. and Kenneth Ayers v. City Wide Franchise Company, Inc. (United States District Court for the District of Kansas, Case No. 2:23-cv-02273, filed June 16, 2023). Dauntless Enterprises, Inc., a CITY WIDE franchisee ("Dauntless"), and Kenneth Ayers, its owner ("Ayers"), filed this suit against CITY WIDE seeking a preliminary injunction in connection with the expiration of Dauntless' franchise agreement. Plaintiffs alleged that Dauntless satisfied each of the renewal conditions set forth in the franchise agreement with CITY WIDE and was therefore entitled to a 10-year renewal term of the franchise agreement. CITY WIDE disagreed that Dauntless satisfied all renewal conditions (although CITY WIDE had agreed provide a step-up renewal if Dauntless met certain financial and operational milestones). In their Complaint, plaintiffs alleged breach of contract against CITY WIDE and further sought to enjoin CITY WIDE from: (i) refusing to renew Dauntless' franchise agreement and (ii) terminating the franchise agreement upon the expiration of the initial 15-year term on June 19, 2023, pending a final ruling on plaintiffs' claims in arbitration. CITY WIDE opposed plaintiff's motion for preliminary injunction. On or around June 22, 2023, Dauntless and Ayers filed a demand for arbitration alleging breach of contract and breach of the covenant of good faith and fair dealing, seeking to require CITY WIDE to specifically perform the franchise agreement by entering into a new franchise agreement for a 10-year term. The parties settled all claims on July 7, 2023. Under a definitive settlement agreement dated July 28, 2023, the parties extended the initial term of the franchise agreement through December 31, 2026 (the "2026 Calendar Year") and provided Dauntless with the option to obtain a successor term from January 1, 2027, through April 3, 2033, if Dauntless satisfies certain renewal conditions. The renewal conditions vary depending on the amount of Gross Sales that Dauntless will achieve in the 2026 Calendar Year. Pursuant to the settlement agreement, Dauntless also agreed to retain at least four sales executives throughout the term of the franchise agreement, including any successor term. On August 1, 2023, the arbitration and federal court case were both dismissed with prejudice.
What This Means (2025 FDD)
The 2025 City Wide Franchise Disclosure Document's Item 3 details a legal dispute that, while settled, can highlight the importance of adhering to franchise agreement terms, which directly ties into a franchisee's obligations as outlined elsewhere in the FDD. Specifically, the case Dauntless Enterprises, Inc. and Kenneth Ayers v. City Wide Franchise Company, Inc. involved a franchisee, Dauntless, disputing City Wide's refusal to renew their franchise agreement. Although the parties reached a settlement, the initial dispute underscores the potential for disagreements regarding the interpretation and fulfillment of franchise agreement conditions. This situation emphasizes the importance of franchisees understanding and meeting all obligations to maintain a good standing with City Wide and to ensure renewal options are available.
Item 22, which covers contracts, includes provisions that could be affected by disputes similar to the one described in Item 3. For instance, Section 14 outlines various events of default that could lead to termination of the franchise agreement if not cured by the franchisee. These defaults range from breaches of specific covenants to failures to meet operational or financial benchmarks. The litigation in Item 3 serves as a reminder that disagreements over whether a franchisee has met certain conditions (in that case, renewal conditions) can escalate into legal disputes with significant consequences. Therefore, franchisees must meticulously comply with all contractual obligations to avoid potential defaults and terminations.
Furthermore, Item 22 also includes clauses regarding the franchisee's obligation to notify City Wide of any legal actions that could affect the franchised business. This requirement ensures that City Wide is promptly informed of any issues that could impact the franchise's operation or financial condition, allowing them to take appropriate action. The Dauntless case illustrates how legal disputes, even if ultimately settled, can disrupt the franchised business and necessitate involvement from City Wide. Therefore, franchisees must maintain open communication with City Wide and adhere to all notification requirements to ensure compliance and mitigate potential risks.