Third Circuit flags “non-renewal” clauses and addresses constructive termination claims

A recent Third Circuit decision offers important guidance to franchisors and franchisees on non-renewal and constructive termination claims. In Scion Hotels LLC v. Holiday Hospitality Franchising LLC (3d Cir. July 31, 2025), the court vacated summary judgment on a franchisee’s wrongful non-renewal claim under the New Jersey Franchise Practices Act (NJFPA), holding that a contract clause declaring the franchise “non-renewable” was unenforceable. At the same time, the court affirmed dismissal of the franchisee’s constructive termination and “unreasonable standards of performance” claims. The opinion underscores the importance of clear evidence when alleging economic harm, among other points.

Scion acquired a Holiday Inn near Newark Airport and operated under a short-term franchise agreement with Holiday Hospitality Franchising (HHF) through April 2021. The agreement stated it was “non-renewable” and included a non-compete style restriction against diverting business to a competing brand. HHF approved another Holiday Inn in the market in late 2019. In 2020, Scion signed a post-expiration conversion agreement with Hampton Inn (Hilton), with contemplated renovations near the end of the term.  When HHF did not renew, Scion sued under the NJFPA for wrongful non-renewal, constructive termination, and unreasonable standards of performance. The district court granted summary judgment to HHF.

When the Third Circuit issued its decision this summer, the court held as follows:

• Non-renewal clause unenforceable: The court held that the “non-renewable” provision functioned as an impermissible release under the NJFPA and was unenforceable because it would relieve the franchisor from statutory renewal obligations absent “good cause.”
• Wrongful non-renewal (Scion’s claim reinstated): The record did not indisputably show Scion operated a competing brand or acted in direct defiance of the agreement during the term. Whether Scion’s conduct (signing a future conversion deal and planning renovations near expiration) constituted a material breach is a fact issue for trial.
• Constructive termination (affirmed in favor of HHF): The court affirmed dismissal of the claim where (1) the franchise agreement granted only a non-exclusive license (no contractual exclusivity), and (2) Scion failed to present non-speculative evidence of a substantial decline in net income.
• Unreasonable standards of performance (affirmed in favor of HHF): The claim failed because there was no default tied to unreasonable standards, bad intent, or economic ruin; the franchisor’s business decisions did not fit the statutory theory.
• Damages (Scion’s claim revived): If Scion proves wrongful non-renewal, HHF may be liable for damages causally linked to the non-renewal. The district court’s blanket rejection of damages was vacated.

Recommendations for franchisors:

• Build and document good cause: If non-renewal is contemplated, create a robust record of substantive defaults, notice with reasons, and opportunities to cure where applicable.
• Manage encroachment risk: If opening nearby locations, confirm no contractual exclusivity and assess potential claims exposure; document business justifications and lack of intent to undermine.
• Preserve defenses with contemporaneous notice: Provide written notice specifying all reasons for non-renewal; omissions can narrow defenses later.

Recommendations for franchisees:

• Avoid conduct that looks like a material breach: If planning a post-term conversion, carefully sequence renovations and brand steps to begin after expiration; document compliance during the term.
• Negotiate for exclusivity: If market encroachment is a concern, seek contractual exclusivity or remedies; absent a clause, constructive termination claims are uphill.
• Build an evidentiary record: Keep detailed financials, market data, and communications. If alleging economic harm, support it with concrete, non-conclusory evidence.
• Respond promptly to notices: If you receive performance or non-renewal notices, respond in writing, address alleged defaults, and preserve objections.
• Consider strategy: If non-renewal lacks good cause, evaluate potential costs (e.g., accelerated conversion expenses, lost profits) and maintain documentation tying losses to the non-renewal.

If you have questions about the content in this article, reach out to McDonald Hopkins' Franchising and Restructuring attorney, Maria Carr.