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KFC Corp. v. Gazaha

United States District Court, E.D. Virginia, Alexandria Division

March 24, 2016

KFC CORPORATION, Plaintiff,
v.
NABIL GAZAHA, et al., Defendants.

MEMORANDUM OPINION

ANTHONY J. TRENGA JUDGE

Defendants/counterclaim plaintiffs Nabil Gazaha and NAYAA, LLC (referred to individually and collectively as "Gazaha") have filed against plaintiff/counterclaim defendant KFC Corporation ("KFC") claims for common law breach contract resulting from KFC's termination of a franchise agreement and for race discrimination in violation of 42 U.S.C. § 1981. For the reasons stated herein, the Court finds that there are no genuine issues of material fact and that Gazaha has failed as a matter of law to present evidence sufficient to establish, as to the breach of contract claim, either damages or a right to reinstatement of the franchise; and as to the race discrimination claim, a prima facie case of discrimination, or alternatively, any evidence of pretext necessary to rebut KFC's asserted non-discriminatory reason for terminating the franchise agreement. KFC's Motion for Summary Judgment on Defendants' Counterclaims [Doc. No. 60] is therefore GRANTED.

I. BACKGROUND

Unless indicated otherwise, the following facts are undisputed:

KFC is a franchise restaurant system operating in the United States and abroad. Counterclaim plaintiff NAYAA, LLC owned and operated one KFC franchise restaurant (the "Outlet") in Baltimore, Maryland from June 2007 until its closure in late August 2015. Counterclaim plaintiff Nabil Gazaha is the sole owner of NAYAA, LLC and in this capacity, owned and operated the Outlet. Gazaha is African-American. This Court has federal question and diversity jurisdiction pursuant to 28 U.S.C. §§ 1331, 1332, 1338, and 1367. Venue is proper under 28 U.S.C. § 1391, as Gazaha resides in Alexandria, Virginia.

At all material times herein, KFC and Gazaha were parties to a franchise agreement dated July 25, 1997 [Doc. No. 63-10] (the "Agreement"). In the Agreement, KFC granted Gazaha a limited license to use KFC's intellectual property (e.g. trademarks, brand name, etc.) to prepare, market, and sell KFC products at the Outlet.

Under the Agreement, KFC may terminate a franchisee for, among other things, failure to "comply with all reasonable standards ... regarding the operation of the business" which KFC may establish "from time to time." [Doc. No. 63-10 § 5.3]. Included among the Agreement's quality standards is a comprehensive food safety program to ensure product quality under which KFC conducts periodic "Food Safety Compliance Checks" ("FSCCs"). The criteria for these FSCCs are contained in a reference guide, which KFC provides to its franchisees. KFC uses an independent, third-party health inspector, Steritech, to conduct the on-site FSCCs. Minor FSCC violations are called "Secondary" violations, while major violations are called "Significant" violations. The Agreement also grants KFC the right to "enter and inspect the Outlet" to conduct the health and safety inspections. [Doc. No. 63 at 2]. If a franchise outlet is found to be non-compliant with fifteen (15) or more "Secondary" standards or one (1) "Significant" standard during an inspection, the franchise location is deemed "Underperforming, " or failing, the health and safety check. Id. at 3. In that regard, KFC has a "Four Strike Policy" which it describes as follows:

If an outlet fails an FSCC inspection, it is re-inspected within approximately 30 to 45 days; If the outlet fails a second consecutive FSCC inspection, KFC issues the franchisee a warning letter and conducts a re-inspection within approximately 30 to 45 days; If the outlet fails a third consecutive FSCC inspection, KFC issues a letter declaring the franchisee in default under the Franchise Agreement and providing notice of a potential termination. The default letter states that the outlet must pass the next FSCC inspection in order to cure the default. The letter further explains that if the outlet fails a fourth consecutive inspection, the outlet will have failed to cure the default and the franchise agreement "will terminate without further opportunity to cure." KFC conducts a re-inspection within approximately 30 to 45 days of the franchisee's receipt of the letter; If the outlet fails a fourth consecutive FSCC inspection, the franchise agreement is subject to termination without further opportunity to cure.

Id. at 6-7.

Between March and July 2015, Gahaza's Outlet failed four consecutive FSCC inspections. On March 17, 2015, a Steritech inspector named Josh Keilson ("Keilson"), inspected the Outlet and reported that it failed to comply with the "Significant" food safety requirement that certain products be held at a temperature at or below 40 degrees. Steritech also reported 10 other "Secondary" violations at the Outlet. On April 18, 2015, Keilson again inspected the Outlet and reported that the Outlet failed to comply with the requirement that certain foods be held at or below 40 degrees, along with 10 other "Secondary" violations. On May 8, 2015, after the second failed inspection, KFC sent Gazaha a warning letter stating that the Outlet had failed two FSCCs, that it needed to pass the next FSCC, and that if it did not, he would be in default. Id. at 7-8. The warning letter continued that if the Outlet went into default, Gazaha could cure only by passing the next FSCC inspection. Lastly, the letter stated that if the default went uncured, the Agreement would be "eligible for termination without further opportunity to cure." Id. at 8.

On May 30, 2015, the Outlet once again failed its health and safety inspection because, among other violations, foods were not properly refrigerated at or below 40 degrees. Keilson also reported a finding of "16 to 25 fruit flies, including fruit fly larvae, in the Outlet, " which constituted another "Significant" violation. Keilson reported eight other "Secondary" violations. On June 3, 2015, following the third failed inspection, KFC sent Gazaha a letter notifying him of his default under the Agreement, that the next inspection would be conducted shortly, and that the Outlet must pass that inspection in order to cure the default. The June 3 letter further warned that failure to cure would result in termination of the Agreement "without further opportunity to cure." Id. On July 7, 2015, a second Steritech inspector, Penny Schwartz ("Schwartz"), reported that the Outlet had again failed to follow food refrigeration standards because it had stacked food in its walk-in freezer at a depth of more than three inches, which prevents the food from cooling at a rate necessary to minimize the risk of bacterial growth. This finding constituted a "Significant" violation; and Schwartz reported an additional 11 "Secondary" violations. On July 28, 2015, KFC sent Gazaha a letter notifying him that because he had failed to cure the default identified in the June 3, 2015 letter, Gazaha's franchise for the Outlet was terminated, effective immediately, together with a demand that he comply with his post-termination obligations, including his non-competition obligations. [Doc. No. 63-8].

Despite the July 28, 2015 termination of his franchise, Gazaha continued to operate the Outlet as a KFC restaurant until August 23, 2015 by selling non KFC-approved products at the Outlet once he had exhausted his inventory of KFC-approved products. Gazaha also ceased paying royalties and advertising cooperative fees to KFC as required by the Agreement [Doc. No. 63 at 7-8] and posted signs at the Outlet publically accusing KFC of racial discrimination.

Accordingly, on August 24, 2015, KFC filed this action to enjoin Gazaha from operating the Outlet. [Doc. No. 1]. On August 26, 2015, KFC filed a Motion for a Preliminary Injunction [Doc. No. 4]; and on September 14, 2015, after a hearing, the Court granted that Motion and enjoined Gazaha from operating the Outlet as a KFC franchise, but did permit Gazaha to operate a restaurant from that location consistent with his non-competition obligations under the Agreement. [Doc. No. 21]. The preliminary injunction remains operative.

On September 24, 2015, Gazaha filed an Answer, Defenses, Counterclaims and Demand for Jury Trial. [Doc. No. 25]. In Count I of the Counterclaim for breach of contract, Gazaha alleges that KFC improperly terminated the Agreement and seeks reinstatement of the Agreement or at least $750, 000 in damages. Id. ¶¶ 23-26. In Count II, Gazaha alleges intentional race discrimination and wrongful termination in violation of 42 U.S.C. § 1981 on the grounds that KFC terminated the Agreement ...


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