November 26, 2025|Franchise Frontlines
November 26, 2025 | U.S. Court of Appeals for the Fourth Circuit | Unpublished Opinion
Executive Summary
In an unpublished decision, Judge Harris, on behalf of a unanimous Fourth Circuit panel, affirmed summary judgment for Tasty Baking Company in a dispute arising from the termination of its distribution relationship with DiStefano, Inc. According to the opinion, DiStefano alleged that Tasty Baking wrongfully issued multiple breach notices, terminated the agreement in bad faith, and mishandled the route after termination. Both the district court and the Fourth Circuit concluded that the agreement expressly allowed termination once the distributor received three qualifying breach notices within a twelve-month period, that the record contained no evidence supporting DiStefano’s theory of bad faith, and that Pennsylvania law limits any implied covenant of good faith in franchise relationships to the act of termination itself. The courts also concluded that the post-termination claims failed because the contract did not create the obligations DiStefano sought to enforce.
Relevant Background
The opinion describes a distribution agreement under which DiStefano sold and delivered Tasty Baking products within a defined territory. The agreement contained a provision stating that more than two breach notices within a twelve-month period constituted substantial harm to Tasty Baking’s business and permitted immediate termination. It also established a post-termination procedure authorizing Tasty Baking to operate the route until it could arrange a sale of the distribution rights, with certain payment obligations allocated to DiStefano during the transition.
As recounted in the court’s opinion, Tasty Baking issued three breach notices between July and September 2021. The first two notices cited failures to remove expired product from retail shelves, and the third notice referenced a failure to meet a retailer’s service requirement. The opinion states that DiStefano did not produce evidence disputing the underlying conditions described in the notices. Tasty Baking then invoked the termination clause and took over temporary operation of the route while preparing it for resale.
DiStefano filed suit and alleged that Tasty Baking breached the contract and violated the implied covenant of good faith by unfairly targeting its accounts for inspections, failing to assist with a dissatisfied retailer, mishandling route operations after termination, and denying DiStefano profits it believed it was owed. Tasty Baking moved for summary judgment, which the district court granted. DiStefano appealed.
Decision
The Fourth Circuit affirmed the grant of summary judgment. According to the court, the termination clause unambiguously permitted Tasty Baking to end the relationship after issuing three breach notices within a twelve-month period. The opinion notes that DiStefano admitted it lacked evidence contradicting the accuracy of any of the notices. Given the agreement’s clear language, the court concluded that Tasty Baking acted within its contractual rights.
The court next examined DiStefano’s good-faith argument. Under Pennsylvania law, as explained in the opinion, the implied covenant of good faith applies only to the act of termination in a franchise context. DiStefano asserted that Tasty Baking singled it out for increased inspection frequency and failed to provide support with retailer relations, but the court observed that the record contained no evidence beyond conjecture showing disparate treatment or improper motive. With no evidentiary foundation for the allegations, the court held that the good-faith claim could not survive summary judgment.
The court also addressed the post-termination claims. The agreement required Tasty Baking to use reasonable efforts, taking into account its limited resources, while operating the route during the transition. The opinion states that DiStefano did not identify evidence creating a factual dispute regarding Tasty Baking’s efforts, and that even imperfect performance would not breach a clause requiring only reasonable efforts. As for profits, the court agreed with the district court that the contract did not obligate Tasty Baking to remit profits to DiStefano; instead, the agreement placed certain payment obligations on DiStefano during the post-termination period.
Finally, the court rejected the argument that the implied covenant of good faith extended to post-termination performance. According to the opinion, Pennsylvania precedent limits the doctrine to termination decisions, and no appellate authority has expanded it to cover operational disputes or post-termination conduct.
Looking Forward
This decision underscores the importance of clear termination provisions in franchise and distribution agreements and the benefits of documenting compliance issues before issuing a breach notice. Franchisors may view the case as a reminder that courts will enforce termination rights when the contract’s conditions are satisfied and the record supports those conditions. The decision also highlights Pennsylvania’s particularly narrow approach to the implied covenant of good faith in franchising, where courts restrict the doctrine to the termination decision itself.
The opinion further illustrates how post-termination claims often turn on the contract’s text rather than generalized notions of fairness or preferred operational standards. Franchise systems that temporarily assume control of a territory or route during a transition period may wish to review the scope of their obligations and ensure they align with what the agreement actually requires. The court’s analysis suggests that reasonable-efforts clauses provide meaningful protection when well drafted and when the franchisor maintains documentation supporting the efforts taken.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
