October 07, 2025|Franchise Frontlines
October 7, 2025 | U.S. District Court for the Western District of Missouri | Unpublished Opinion
Executive Summary
In an unpublished order, Judge Greg Kays of the Western District of Missouri denied Three Dog Bakery, LLC’s Partial Motion to Dismiss two counterclaims filed by its former Fargo, North Dakota franchisee—K2Peach, Inc. and its individual guarantors—and also denied a related motion to strike allegations in the counterclaim. The franchisor argued that the counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing failed as a matter of law following the franchisee’s alleged failure to pay royalties and report sales. The court found that dismissal would be premature, emphasizing that under Twombly and Iqbal the franchisee had pled enough to allow the case to move forward. Although the court expressly noted that its ruling did not signal any view on the counterclaims’ ultimate merit, the decision serves as a reminder that franchisors rarely succeed in eliminating counterclaims at the pleading stage, even in strong enforcement actions.
Relevant Background
This dispute arises from a 2021 franchise agreement under which K2Peach, Inc. and its owners—who also signed personal guaranties—opened a Three Dog Bakery location in Fargo, North Dakota. Under the agreement, the franchisee was granted the right to sell baked goods for dogs using Three Dog Bakery’s proprietary recipes, operating system, and licensed trademarks. As with most franchise agreements, the contract required K2Peach to submit monthly sales reports and pay royalties based on those reported sales.
According to the allegations in the franchisor’s complaint, K2Peach stopped paying royalties in October 2024 and, months later, stopped reporting sales altogether. Three Dog Bakery alleged that these failures violated express provisions of the franchise agreement requiring reporting of Gross Sales, Net Sales, and Royalty Sales. On June 12, 2025, after allegedly attempting to resolve the issues, the franchisor issued a termination notice to K2Peach, effective June 14, 2025. The parties disputed whether the termination complied with contractual obligations, but the franchisor maintained the termination was proper based on the franchisee’s reporting and payment failures.
Three Dog Bakery filed suit on July 1, 2025, asserting claims for breach of contract and misappropriation of trade secrets under both the Missouri Uniform Trade Secrets Act and the federal Defend Trade Secrets Act. The trade-secrets claims alleged that K2Peach continued using Three Dog Bakery’s proprietary recipes and business system after termination. In response, the franchisee filed counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing.
The counterclaim asserted, among other things, that Three Dog Bakery allegedly failed to support the Fargo location as required, improperly terminated the franchise prior to expiration of the contractual cure period, and engaged in conduct that the franchisee characterized as commercially unreasonable. The franchisor moved to dismiss both counterclaims under Rule 12(b)(6), arguing that the franchisee’s theories misunderstood the agreement, that the allegations were inconsistent with the written contract, and that the implied covenant claim could not override the agreement’s explicit requirements. Three Dog Bakery also filed a Rule 12(f) motion to strike certain paragraphs of the counterclaim as immaterial or impertinent.
Decision
The court denied both motions. The analysis is concise, but it offers several important takeaways for franchisors engaged in litigation arising out of termination, nonpayment, or post-termination conduct.
On the Rule 12(b)(6) motion, Judge Kays explained that the franchisee had alleged enough facts to state plausible claims under the governing Twombly and Iqbal standard. The court emphasized that it must accept the allegations as true at this stage and construe all inferences in the franchisee’s favor. Referring to the franchisee’s arguments, the court held that Three Dog Bakery “misconstrued” the nature of the counterclaims and that the allegations—when viewed as a whole—were sufficient to “nudge” the claims into the realm of plausibility. The judge made clear that this ruling did not signify that the counterclaims had merit, nor that the franchisee would ultimately prevail; instead, the court found that the allegations could not be dismissed without a more developed record.
This reasoning reflects a broader judicial trend: even in franchise cases where the franchisor appears to have strong contractual grounds for termination, courts are reluctant to dismiss counterclaims without allowing discovery. The court’s reference to the franchisee’s briefing highlighted that early-stage characterizations of the parties’ contractual obligations are often too fact-dependent to resolve under Rule 12(b)(6).
On the motion to strike, the court likewise refused to remove any allegations from the counterclaim. Judge Kays described motions to strike under Rule 12(f) as an “extreme and disfavored measure,” citing Eighth Circuit guidance that such motions are often misused as tactical devices. The judge reiterated that even if certain allegations may ultimately prove irrelevant, the proper course at the pleading stage is not to remove them, particularly when they cause no prejudice and may become relevant later. The court emphasized that it was not determining whether the challenged paragraphs would play any role at later stages, only that they would not be stricken now.
By resolving the motions in this manner, the court preserved the opportunity for both sides to develop a factual record related to the termination, reporting requirements, the parties’ contractual relationship, and the actions taken before and after the termination. For franchisors, this outcome exemplifies the difficulty of eliminating counterclaims early—especially breach and implied-covenant claims—which courts routinely allow to proceed even when the franchisor has strong documentary evidence supporting termination.
Looking Forward
This decision may be useful for franchisors examining litigation strategy following termination or nonpayment by franchisees. First, the court’s refusal to dismiss the counterclaims highlights that, at the pleading stage, franchisees may succeed in keeping breach and implied-covenant claims alive even when the franchisor maintains that its actions were consistent with the agreement’s express requirements. Courts often view such disputes as fact-specific and therefore better resolved after discovery rather than through early motion practice. Franchisors may benefit from anticipating that counterclaims will likely survive a Rule 12(b)(6) challenge and plan their litigation budgets, timelines, and discovery strategies accordingly.
Second, the ruling demonstrates the limits of Rule 12(f) as a tool for removing difficult or inconvenient allegations from the pleadings. Motions to strike tend to draw judicial skepticism, and in franchise litigation, courts frequently decline to grant them absent clear prejudice. This may encourage franchisors to focus on targeted discovery or later case-narrowing motions rather than early attempts to strike allegations.
Third, the case underscores the importance of maintaining clear, consistent documentation regarding royalty payments, reporting obligations, cure periods, and termination notices. Although the court made no findings on the merits, the ability to withstand counterclaims at later stages often depends on the franchisor’s ability to demonstrate that it followed contractual procedures, communicated clearly, and maintained contemporaneous records.
Finally, franchisors may benefit from viewing early-stage counterclaims as a procedural hurdle rather than an indication of substantive weakness. As the court emphasized, the fact that a counterclaim survives a motion to dismiss does not reflect liability or the strength of the franchisee’s position; it reflects a procedural standard that grants franchisees significant latitude to articulate grievances before the factual record is developed. As the case advances, the franchisor may ultimately prevail once evidence clarifies the parties’ obligations and the contract’s performance history.
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.
