The Franchise Owner's most trusted news source


Log In / Register | Jan 22, 2018

Hooters Sues Longstanding Franchisee for Abandoning Restaurants

Hooters

ATLANTA – Hooters of America last week sued a 20-year veteran franchisee for abandoning two of its twelve restaurants on the east coast, one in such deplorable condition that customers sent Hooters corporate detailed complaints about the store's filth, stench and buckling floor slates. The franchisor claims that because Hoot Owl did not make the necessary improvements, and then ceased its operations, Hooters is entitled to terminate its entire franchise agreement for all stores with no chance to cure.

But the litigation is complicated.

While the franchise agreement of Atlanta-based Hooters clearly states that any conflict of law will be "interpreted and construed" under Georgia law, Hoot Owl operates its restaurants in Delaware, Rhode Island, Pennsylvania and New Jersey. That has caused a controversy as to which state laws apply to the franchisee's termination. The franchise agreement states, "Hoot Owl shall be deemed to be in default . . . and all rights granted herein shall automatically terminate without notice to Hoot Owl, if Hoot Owl at any time ceases to operate or otherwise abandons the franchise business. . ."

The lawsuit, filed in federal court in Georgia, alleges franchisee Hoot Owl Restaurants breached its franchise agreement and violated trademark laws by ceasing operations and abandoning its restaurants in Rehoboth Beach, Delaware and Warwick, Rhode Island. While the Rehoboth Beach location had permission from Hooters to operate on a seasonal basis, this year the restaurant failed to reopen on May 15, in time for the summer season. Hooters states that it promptly emailed Hoot Owl, inquiring when it planned to open. On May 25 the franchisee responded saying the restaurant would not be reopening for the 2016 season.

Hoot Owl's Facebook page stated that the Rhoboth restaurant had been "permanently closed," prompting a comment from a "disappointed customer." It reads in part, "our family went to this location last summer. it [sic] was great. my [sic] daughter had her picture taken with two of the waitresses. . . we were looking forward to coming back . . . this summer when it opened. we [sic] were disappointed to find out the building is up for lease."

The second restaurant abandoned was located in Warwick, Rhode Island. Hooters alleges that Hoot Owl allowed the condition of the restaurant to "severely deteriorate." The franchisor received a customer complaint stating in part, "In the last year the place has really gone to hell. As soon as you enter, the window panes on the front door looks like they haven't been cleaned for 6 months. The men's restroom has a strong stench of urine. The toilet is crooked & cracked the tank top has been repaired with duct tape & has been there for a while. The floors in the main room are buckling & floor slates are missing. I tripped on one . . ."

Despite repeated assurances from Hoot Owl, the Warwick Restaurant was not remodeled and the condition worsened, Hooters explains in the lawsuit. It added that the restaurant was in such "deplorable condition in July 2014 that Hoot Owl "voluntarily closed the restaurant in order to perform necessary repairs," following a health department report. Rhode Island Department of Health had reported that it found mouse droppings in the bar area, to-go containers stored on a shelf with mouse droppings, and a smelly walk-in refrigerator.

When a storm hit the Warwick location last winter, the restaurant suffered more damage. It has remained closed with Hooters marks still displayed on the outside of the building. A sign on the front, with several letters missing states, "DUE TO NO DAMAGES W." And a paper sign taped to the door explains, "WE ARE CLOSED." It apologizes for the abrupt closure due to damage to the roof, saying they will keep customers updated.

Hooters has so far terminated Hoot Owl's franchise rights for three of its restaurants in the Philadelphia area, the complaint states. The franchisor is now asking the federal court to determine which state laws govern its rights to terminate its franchise agreement with Hoot Owl.

Hooters' long association with franchisee Hoot Owl ends in dispute

Hoot Owl entered into its franchise agreement with Hooters on May 23, 1996, allowing the franchisee to operate the twelve franchised restaurants in four states, all subject to a single franchise agreement. In signing the contract, the franchisee agreed to maintain its restaurants according to Hooters standards, that of first class repair and condition. And it agreed to keep the businesses open and in normal operation seven days a week, fifty-two weeks per year, except Thanksgiving and Christmas. In the event the restaurants were damaged or destroyed by fire or other casualty, the franchisee was required to make those repairs within 90 days, and to be completed by 180 days.

Hoot Owl is also required to immediately cease operating its Hooters franchised restaurants if terminated by Hooters, holding itself out to the public as a present or former Hooters franchisee. And Hoot Owl must immediately and permanently cease using the franchisor's trademarks, trade secrets, and turn over all information, documents and other proprietary material related to the Hooters system.

The franchisee also agreed in its contract to promptly pay Hooters all monies it owed through the effective date of termination, and liquidated damages in an amount equal to the fees payable to Hooters system for 13 four-week periods prior to the date of notice of termination. In addition, the franchisee was expected to pay all costs and expenses, including the attorneys' fees incurred by Hooters as a result of the default, and to pay the same for Hooters' obtaining injunctive and other relief for enforcement.

Hooters of America contends that Hoot Owl caused damage to its brand and its affiliates in shuttering both restaurants because Hooters has used the widely recognized "Hooters Marks" since 1983 and continues to use them in interstate commerce. The federal complaint asks for declaratory judgment and for monetary damages in an amount to be proven at trial. Hooters also asks for an injunction requiring Hoot Owl to comply with its post-termination obligations under the franchise agreement.

Hooters is seeking a declaration that Georgia law governs this matter under the "choice of law" provision in the franchise agreement. And it asserts that under Georgia law it is entitled to immediately terminate all of Hoot Owl's rights based on Hoot Owl's default for abandoning its two Hooters restaurants, a willful breach of its contract.

Privately held Hooter of America, LLC owns 160 restaurants, and is franchisor to 430 locations in 28 countries, according to its website.

AttachmentSize
Hooters Complaint.pdf415.32 KB
No votes yet

About Janet Sparks

Janet Sparks's picture

Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.