Unreported / Non-Citable
Background
Jason Kitts acquired Rainbow cleaning franchises in Monroe, Michigan (2009) and Oakland, Michigan (2014), assigning them to his company Cheyenne Partners while remaining personal guarantor. He also acquired a Grounds Guys franchise in 2014. Although the franchises were financially successful, Kitts had a contentious relationship with Rainbow. After months of unproductive communications, Rainbow filed suit in McLennan County, Texas on September 5, 2017, and issued a Notice of Default on September 8, 2017, specifying alleged breaches. Rainbow sent a Notice of Final Termination on November 16, 2017. The case was initially removed to federal court but remanded to state court in December 2018. Following a June 2024 bench trial, the trial court found breach of contract and awarded damages to Appellees.
On appeal, Cheyenne Partners raised four issues: that Michigan law should apply; that evidence was insufficient to show breach; that Appellants established affirmative defenses; and that their counterclaims were conclusively established. The appellate court heard arguments on issues three and four after Appellants’ motion for rehearing.
The Court’s Holding
The court affirmed the trial court’s judgment entirely. First, the court held that Appellants waived the choice-of-law issue by failing to file a Rule 202 motion requesting judicial notice of Michigan law or to properly preserve the issue at trial. Informal references to Michigan law during testimony and in post-trial motions were insufficient procedural invocation.
Second, the court found sufficient evidentiary support for breach of contract. Evidence demonstrated that Appellants failed to timely submit required weekly sales reports (missing 18 reports for Monroe territory and 35 for Oakland by termination), failed to pay associated license fees, failed to provide required audited financial statements, and materially impaired Rainbow’s goodwill through non-compliance with a Liberty Mutual insurance program requirement. The Franchise Agreement’s terms permitted termination without notice and opportunity to cure for failures to report timely, provide audited statements, or materially impair goodwill.
Third, the court rejected Appellants’ affirmative defenses of fraud by non-disclosure, breach of Michigan law, and prior material breach. The Franchise Agreement’s Section 13.7 carved out an exception to the dispute resolution notice requirement when the franchisor needed to protect intellectual property and trade secrets, making Rainbow’s failure to notify Kitts before suit legally permissible. Appellants’ reliance on Michigan law was procedurally barred. The evidence showed Appellants’ own breaches occurred in 2016-2017, before any alleged counter-breaches, so later acts could not excuse past non-performance. The court also found Appellants failed to prove fraud and that merely signing a release document did not constitute injury or fraud.
Key Takeaways
- Choice of law issues must be preserved through timely Rule 202 motions; informal references or post-trial assertions are procedurally insufficient and waived.
- Franchise agreements can validly condition termination rights on contractual breaches that do not require notice and cure opportunity, such as failures to report or provide financial documentation, if the agreement expressly permits it.
- Franchisors may include carve-outs in dispute resolution provisions allowing immediate legal action to protect intellectual property and trade secrets, bypassing mandatory notice requirements.
- A party’s prior material breach does not retroactively excuse that party’s own earlier breaches of the same contract.
Why It Matters
This decision reinforces strict procedural requirements for raising choice of law issues in franchise disputes and validates franchise agreement provisions that distinguish between breaches requiring cure opportunities and those allowing immediate termination. For franchisees, the ruling demonstrates that non-compliance with reporting, payment, and financial statement requirements can trigger termination without notice if the agreement so provides. For franchisors, the decision confirms that carve-outs protecting proprietary information and trade secrets in dispute resolution clauses are enforceable and allow pursuit of remedies without pre-suit notice obligations.
The opinion also clarifies that affirmative defenses based on unapplied foreign law cannot succeed when that law was not properly invoked through the requisite procedural framework. This ensures predictability in interstate franchise disputes and reinforces the importance of proper legal preservation at trial.