Tuesday, January 21, 2003
KFC Franchisee Did El Pollo Loco Wrong, Court Rules
By ROBERT GREENE, Associate Editor
A fast food chicken chain’s attempt to yank the franchises of a man who was running a half-dozen of a competing chain’s outlets on the sly has resulted in a ruling that one party’s delayed discovery of another’s misrepresentations can toll the statute of limitations on a contract claim.
Normally, California’s four-year limitations period for suits over written contracts is not subject to tolling under the so-called discovery rule. That’s because a buyer generally finds out the contract was breached when the deficient goods are delivered or services are performed.
But the Ninth U.S. Circuit Court of Appeals on Friday applied the discovery rule to the franchise and sublease agreements that Abdul Malik Hashim signed with El Pollo Loco, since Hashim faked a letter that purported to assure the corporation that he had severed his relationship with Kentucky Fried Chicken.
Only after more than four years had passed did El Pollo Loco discover Hashim was still operating KFC stores in the Bay Area.
El Pollo Loco immediately terminated the franchise agreements and subleases, then sued to back up its actions. U.S. District Judge Gary L. Taylor of the Central District of California permitted use of the discovery rule and granted El Pollo Loco’s motion for preliminary injunction.
The move was well within Taylor’s discretion, Judge Johnnie B. Rawlinson wrote for the three-judge Ninth Circuit panel. Rawlinson said El Pollo Loco need not have exercised due diligence to discover the truth, but could rely on the truth of Hashim’s assertions up to the point that it learned he was lying.
“Hashim’s misrepresentation and forgery hindered EPL’s discovery of the breach under the Franchise Agreement,” Rawlinson said. “Accordingly, the district court did not err in applying the discovery rule to toll the statute.”
El Pollo Loco insists that it be the only chicken fast food restaurant in each franchisee’s coop. The corporation’s vice president of operations told the court that “EPL screens prospective franchises to be certain that they are not associated with any company that is in competition with EPL, including all other fast food restaurants that specialize in chicken.”
Hashim had helped operate a Burger King and was franchisee of a KFC before entering into agreements to run El Pollo Locos in Santa Clara and Sunnyvale in 1994. He presented his new corporate franchisers with a letter from KFC acknowledging transfer of the fried chicken restaurant.
But the letter was a forgery.
Meanwhile, Hashim acquired five more KFCs. The Kentucky Fried Chicken people apparently didn’t like sharing the roost any more than El Pollo Loco did, because Hashim decided in 2001 to send a letter—also forged—advising KFC that he no longer operated any El Pollo Locos.
The El Pollo Loco franchise agreement specifically prohibits owning or operating a competing restaurant without written permission.
The franchises were terminated under the terms of the agreement, and El Pollo Loco filed suit and sought a preliminary injunction when Hashim continued to operate the outlets. Hashim opposed the motion on statute of limitations grounds, and El Pollo argued, in its reply brief, that the discovery rule kept the statute from applying.
Taylor agreed and granted the preliminary injunction.
In upholding the decision, the Ninth Circuit panel also rejected Hashim’s argument that Taylor abused his discretion by considering the discovery rule claim when it came up for the first time in the reply brief.
The hearing transcripts showed that Taylor heard Hashim’s arguments on the tolling issue.
“Denying EPL the opportunity to counter this potentially dispositive argument would have effectively stripped EPL of its right to argue against Hashim’s defense,” Rawlinson said.
The case is El Pollo Loco v. Hashim, 02-55378.
Copyright 2003, Metropolitan News Company