El Pollo Loco, Inc., the nation’s leading chicken chain, breached their covenant of Good Faith and Fair Dealing when it encroached on the non-exclusive territory of its nearby franchisee, according to a Los Angeles County, California jury after a four-week trial.
The same jury also determined that El Pollo Loco, Inc. failed to offer the impacted franchisee the right to operate the two encroaching corporate restaurants. According to Robert Zarco, Esq., founding partner of the Miami law firm of Zarco, Einhorn, Salkowski & Brito, P.A., who represented the franchisee at trial, “The decision by this jury has been a long time in the making, and supports the legal principles espoused by the courts in In re Vylene Enterprises and in the seminal case of Scheck vs Burger King.”
Plaintiffs Michael and Janice Bryman owned and operated the only El Pollo Loco restaurant in Lancaster, California since 1999; at the time annual sales volume was at $1.4 million. Despite El Pollo Loco, Inc. having designated the entire Los Angeles DMA as a corporate market, El Pollo Loco, Inc. did not undertake any major efforts to develop any new restaurants in Lancaster during the last 15 years.
After El Pollo Loco, Inc.’s then owner, Trimaran Capital Partners, took the company public in 2014, El Pollo Loco, Inc. began a campaign to grow the number of restaurants. Purporting to rely on its express reservation of rights clause under its form franchise agreements granting El Pollo Loco. Inc. the right to place a competing corporate restaurant “in the immediate vicinity of or adjacent to” an existing franchise restaurant, El Pollo Loco, Inc. used its required electronic reporting knowledge of the Brymans’ 2014 – $3.8 million in gross sales, to determine where it was going to develop additional corporate restaurants.
According to the lead trial attorney Robert Zarco, a critical moment in the case happened when the presiding judge first ruled that the express contractual provisions relied upon by El Pollo Loco, Inc. were unconscionable as a matter of law, and were unenforceable. “That decision together with this confirming jury verdict,” said Zarco, “will have a significant impact on the other 250 franchise agreements existing between El Pollo Loco, Inc. and its system franchisees,” a fact that El Pollo Loco, Inc. itself has recognized in its recent financial filings.
“This is truly a precedent setting case. To be able to get a 12 member jury panel to render a verdict that the commonly used ‘reservation of rights’ clause in Franchise Agreements, which reserve for a franchisor the right to put a store wherever it wants-(when there is no exclusive territory), to be deemed unconscionable and unenforceable by a court and to later obtain a jury verdict consistent therewith, is a huge deal!” said Zarco.
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