A Texas federal court granted American Dairy Queen Corporation’s motion for partial summary judgment against a terminated franchisee, finding no dispute to the material facts establishing the franchisee’s material breach of the franchise agreement and trademark infringement.
The parties entered into a franchise agreement for the operation of a Dairy Queen restaurant in Texas. Dairy Queen later terminated the franchise agreement based on the franchisee’s violations of various covenants. Specifically, Dairy Queen alleged the franchisee breached the franchise agreement by selling shakes made using soft serve mix instead of milk, in direct violation of the franchise agreement, which unequivocally states that only fresh milk shall be used as the liquid parts of malts and shakes.
The franchisee conceded this breach, but claimed it was an “isolated and temporary ingredient substitution,” which is a nonmaterial breach and is insufficient to justify termination. The court disagreed and concluded the franchisee materially breached the agreement by failing to use fresh milk to make malts and shakes.
The court also found in favor of Dairy Queen on its trademark infringement and unfair competition claims. The franchisee disputed the timing of the use of the marks and claimed that any use of the “Dairy Queen” marks occurred prior to the franchisee’s receipt of written notice of termination. However, Dairy Queen offered evidence establishing that the franchisee displayed the Dairy Queen marks on multiple dates after the franchisee received the notice of termination.
The court found the franchisee had not shown a genuine dispute of material facts on this issue. Dairy Queen also established a likelihood of consumer confusion between licensed Dairy Queen brand restaurants and the franchised restaurant.
Franchisees should carefully read their franchise agreements to make sure they abide by all obligations and system standards. A franchise system is defined by the consistency of its franchised locations’ offerings. A franchisee’s decision to make a change or substitution in a core offering of the franchise can lead to disastrous results, up to and including termination of the franchise agreement.
American Dairy Queen Corp. v. UAM, LLC, No. 5:24-CV-01209-JKP (W.D. Tex. Apr. 25, 2025)
