Camp Creek Hospitality Inns, Inc. v. Sheraton Franchise Corp.
139 F. 3d 1396 (1998)
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Rule of Law:
When a franchise agreement is silent on the franchisor's right to operate a competing business, the franchisor may breach the implied covenant of good faith and fair dealing by establishing a competing enterprise in close proximity to the franchisee if its conduct violates reasonable commercial standards of fair dealing. Misappropriation of a franchisee's confidential business information by the franchisor for competitive use may also give rise to a claim under state trade secret laws.
Facts:
- In September 1990, Camp Creek Hospitality Inns, Inc. entered into a license agreement with Sheraton to operate a Sheraton Inn franchise near the Atlanta airport.
- Another Sheraton franchisee, the Sheraton Hotel Atlanta Airport (SHAA), was already operating in the same market.
- In early 1992, Sheraton Franchise permitted Camp Creek to change its name to 'Sheraton Inn Atlanta Airport,' expressly reserving the right to reconsider if customer confusion arose.
- In March 1992, ITT Sheraton began evaluating the acquisition of a nearby Hyatt hotel to operate as a company-owned property, without seriously considering the potential competitive harm to Camp Creek's Inn.
- In February 1993, while the acquisition was pending, Sheraton Franchise required Camp Creek to revert to the name 'Sheraton Inn Hartsfield-West,' citing customer confusion.
- In April 1993, an ITT Sheraton affiliate purchased the Hyatt property, and on May 1, 1993, it began operating as the 'Sheraton Gateway Hotel, Atlanta Airport,' a direct competitor to Camp Creek.
- The manager of the new company-owned Gateway hotel, Tom Faust, accessed and used Camp Creek's confidential and competitively sensitive data from the Sheraton reservation system.
Procedural Posture:
- Camp Creek Hospitality Inns, Inc. filed a lawsuit against Sheraton Franchise Corporation and its affiliates in the United States District Court for the Northern District of Georgia.
- The complaint alleged numerous claims, including breach of the implied covenant of good faith and fair dealing, tortious interference, misappropriation of trade secrets, and violations of the Lanham Act.
- The district court granted Sheraton's motion for summary judgment, dismissing all of Camp Creek's claims.
- Camp Creek, as the appellant, appealed the grant of summary judgment to the United States Court of Appeals for the Eleventh Circuit, with Sheraton as the appellee.
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Issue:
Does a franchisor breach the implied covenant of good faith and fair dealing under Massachusetts law by establishing and operating a competing, company-owned hotel in close proximity to a franchisee when the franchise agreement is silent on the franchisor's right to do so?
Opinions:
Majority - Birch, J.
Yes, a franchisor may breach the implied covenant of good faith and fair dealing by establishing a competing hotel near a franchisee when the contract is silent on the issue. While the implied covenant cannot override express contractual terms, the license agreement here was silent regarding Sheraton's right to operate its own competing hotel, as a clause permitting such competition was deleted from the final agreement. The existing site-only exclusivity clause only prevented Sheraton from licensing other franchisees on Camp Creek's property, not from competing itself. Given this contractual silence, whether Sheraton's decision to open the Gateway hotel, combined with other 'bad acts'—such as forcing a disadvantageous name change and misusing confidential information—violated reasonable commercial standards of fair dealing and deprived Camp Creek of the fruits of its contract is a question of fact for a jury. Therefore, summary judgment was inappropriate on this claim. The court also found that a jury could reasonably determine that Camp Creek's confidential business information constituted a trade secret under the Georgia Trade Secrets Act and that Sheraton misappropriated it, reversing summary judgment on that claim as well.
Analysis:
This case is significant for franchise law because it reinforces that the implied covenant of good faith and fair dealing can impose territorial protection for a franchisee even when the contract is silent and grants no express exclusive territory. The court's focus on the franchisor's bad faith and the deletion of a specific contractual clause permitting competition signals that courts will look beyond the four corners of the agreement to the parties' entire course of dealing. This decision makes it more difficult for franchisors to obtain summary judgment in encroachment cases where there is evidence of pretextual or malicious conduct. It serves as a caution to franchisors that they cannot capitalize on a contract's silence to undermine a franchisee's business in bad faith.
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