The Interim Health Care Case Mr. Caruso's most publicized victory for franchisees came in the United States Court of Appeals for the Seventh Circuit in Interim Health Care of Northern Illinois v. Interim Health Care, 225 F.3d 876 (7th Cir. 2000). Mr. Caruso represented a home health care franchisee in claims for territorial encroachment, failure to refer national accounts, and bad faith franchise termination. The
Federal Court of Appeals in Chicago reversed a summary judgment for the
franchisor, and confirmed the application of the implied covenant of good faith & fair dealing to a franchisee’s claims relating to the franchisor’s duty to refer national account business, and the termination of the franchise. The case was then settled on remand. The widely reported Interim case remains one of the most recent (and potentially far reaching) victories for a franchisee in a United States Court of Appeals under an implied covenant of good faith & fair dealing.
The Interim case is significant in two critical respects. First, the Court of Appeals recognized that even though the franchisee failed to pay royalties and was thus subject to termination under the terms of the franchise agreement and applicable provisions of the
Illinois Franchise Disclosure Act, the franchisee nonetheless presented sufficient evidence that the franchisor acted in bad faith in causing the termination through its cannibalization of the franchisee's business. In other words, good cause for termination under state law does not stop a claim for lack of good faith.
Second, although the Court of Appeals declined to find that the franchisee's territory was protected from all competition by the franchisor or other franchisees, as Mr. Caruso had argued, the Court nonetheless found sufficient evidence of bad faith by the franchisor in its failure to refer to the franchisee the business of its national account patients who resided in the territory. Thus, by pleading the national accounts claim over and above the rejected claim for a protected territory, we obtained substantial territorial protection even without a protected territory.
The decision of the Seventh Circuit Court of Appeals appeared to surprise many lawyers who regularly advise
franchisors. It should not have. In an article in the Franchise Lawyer, one franchisor attorney issued a general admonition that all franchisors should review their agreements to make sure that their agreements would survive a similar challenge.
