El Pollo Loco Verdict Makes ‘New Law,’ Attorney Says
A California court’s $8.8 million jury award to El Pollo Loco franchisees Michael and Janice Bryman in early May breaks new ground in franchise law, said their attorney, Robert Zarco of Zarco Law in Miami, although the franchisor said it will appeal the verdict and outside attorneys don’t necessarily see it the same way.
The jury found that El Pollo Loco Inc. was encroaching on the Brymans' territory by building company-owned restaurants in the same area, in Lancaster, California, and not giving the Brymans the right of first refusal to run the company-owned stores. Those stores siphoned revenue from the Brymans’ location, the suit said.
But instead of arguments centering on whether the restaurants violated actual terms of the contract, as is typical, the jury found the franchisor violated the implied covenant of good faith and fair dealing, which Zarco called ground-breaking.
“We made new law in franchising again yesterday!” wrote Zarco in an email May 2, the day after the verdict. He wrote the franchisees’ prior lawyer had previously voluntarily dismissed the case three days before trial, “after having been paid over $800,000 in fees and costs, believing the case was a loser.”
After Zarco gave a speech at a conference, he wrote, the franchisees asked him to take up the case, “which then required our firm to go through major procedural hoops to get an already closed case to be reopened by the court. This is typically an almost impossible task. The hard work paid off.”
James Mulcahy, managing partner at Mulcahy LLP in Irvine, California, represented El Pollo Loco in the case. He didn’t return messages seeking comment but said in an earlier statement the company plans to “vigorously appeal.”
El Pollo Loco, which has about 480 restaurants in the United States, posted first quarter net income of $2.5 million, down from $4.9 million for the same period a year before. Systemwide sales dropped 1.1 percent in the quarter.
Brian Schnell and Kerry Bundy, attorneys at Faegre Baker Daniels in Minneapolis who represent franchisors, were not involved in the case but were asked to put the verdict into context. “He convinced the state court judge in California,” Bundy said, referring to Zarco, to strike down a provision in the franchise agreement that allowed the franchisor expressly to open or operate a competing store. The judge called that provision “unconscionable,” which differs from what other courts have found routinely.
“This is one judge with one case with one set of facts,” and so not a game-changer in the wider franchise community, Bundy said.
Bundy said this case included “bad facts” as to what the franchisor allegedly did. “I always say that bad facts have a tendency of making bad law,” she said, especially when presented to a jury.
Added Schnell, “People’s emotions are involved. That’s the key when there’s a jury involved. Kerry and I talk to our clients all the time. There’s a little bit of a roll the dice, and it depends on the judge. A client will say, ‘What are our chances?’ But it depends on the judge.”