Is a franchisor’s immediate termination of a franchise agreement based on a franchisee’s criminal behavior that takes place outside of his or her franchised business and does not otherwise impact the franchised business a case where the punishment does not fit the crime?

The U.S. District Court for the District of New Jersey recently considered this issue in two separate decisions entered in the case of International House of Pancakes, LLC v. Parsippany Pancake House Inc. See Int’l House of Pancakes, LLC v. Parsippany Pancake House Inc. (Parsippany 2), No. 12-3307, 2012 WL 4465517 (D. N.J. Sept. 25, 2012); Int’l House of Pancakes, LLC v. Parsippany Pancake House Inc. (Parsippany 1), No. 12-3307, 2012 WL 2476407 (D. N.J., Jun. 27, 2012). The case involves IHOP’s termination of a New Jersey franchisee’s franchise agreement because its president and majority owner plead guilty to a charge of endangering the welfare of a child. See Parsippany 2, 2012 WL 4465517, at *2; Parsippany 1, 2012 WL 2476407, at *1. The Court’s differing decisions in the case – one in Parsippany 1 and one in Parsippany 2 – regarding IHOP’s two separate and distinct motions to enforce the termination of the franchise agreement with Parsippany, illustrate the factors to be considered in determining whether a franchisee’s criminal conviction is grounds for a franchisor to immediately terminate a franchise agreement without providing the franchisee an opportunity to cure. Irrespective of whether the right to terminate is based on the express terms of the franchise agreement at issue or on “good cause” limitations imposed by statute, the question of whether a franchisor can terminate often boils down to whether the franchisee’s criminal conduct has affected the franchised business resulting in harm to the franchisor’s goodwill.