Wrongful Termination of Franchise Agreement
The Cintron court took a more analytical approach. Although the court initially expressed the same concern as the Waters court about calculating future royalties lost to a non-operating company, Cintron relied on a traditional contractual analysis under Pennsylvania law that governed the franchise agreement to support the granting of lost future royalties. [FN69] Cintron argued that because Pennsylvania law allowed for loss of profits — „the difference between what the plaintiffs actually earned and what they would have earned if the defendant had not committed the breach“ — Maaco was entitled to receive any lost future royalties it would have received if the franchisees had not breached the franchise agreement. [FN70] Under Pennsylvania law, the court concluded that Maaco, as a non-violating party, had the right to be placed in almost the same position it would have taken had there been no violation. [FN71] Franchise and distribution agreements are enforceable under state contract law. In situations where termination is imminent or in progress but not yet completed, we may act quickly to try to stop a planned or pending termination. This gives the franchisee time to challenge the alleged grounds for termination. In cases where a court has found an unlawful termination, we have helped our clients obtain damages for financial consequences, including years of future lost profits. We represent franchisees in disputes, arbitrations and other forms of dispute resolution. We have also challenged contractual provisions that require franchisees to engage in out-of-state litigation or unfair arbitration agreements.
As the only decision that provides a comprehensive assessment of the licensee franchisee`s obligation to pay future royalties, Sealy has become the most important case for franchisees trying to avoid such damages. It may also have created a loophole for franchisees who want to exit their franchise agreements without risking judgment on future royalties. Consider the following facts. A franchisee decides to leave their franchise system and stops paying royalties for a period of time. The franchisor sends a notice of default to the franchisee. The franchisee does not heal. Finally, the franchisor terminates the contract and initiates a lawsuit. The franchisee removes his signs and begins to operate an independent business. The franchise agreement may also have contractual obligations (mainly for the franchisee) after the termination or expiry of the contract.
The franchisee must: Some agreements are quite complex, and you would be well advised to consult a business lawyer before signing. State law may also apply. Most prevent dismissal, with the exception of the „good cause“ defined by each state. Recovering future royalties is not a revolutionary concept. However, the right to claim future costs has not been the subject of many decisions. Although courts may grant future royalties in some cases, they generally do not thoroughly analyze the franchisor`s right to claim. When a court rejects a franchisor`s claim for future royalties, the decision is usually tight and may simply be based on the theory of lack of scruples (i.e. It is not scrupulous to require a franchisee who is no longer active to pay the lost future royalties) to explain why the relief requested was refused. Due to the lack of case law, franchise practitioners can only be guided by general contract law and a handful of decisions that allow for minimal analysis of the problem. The court found that the franchisees` termination of their contracts was motivated by their desire to increase profitability and achieve a higher level of success in their communities.
[FN10] The court also found that AAMCO`s conduct did not warrant termination of the contracts by the franchisees. [FN11] Based on this unlawful termination, the court awarded AAMCO its lost future royalties for ten franchises for a period of four years. [FN12] As a result, a franchisor`s rights to collect future royalties lost in less egregious circumstances remained uncertain, according to McAlpine. In 1993, when Burger King Corporation (BKC) filed a nearly three million dollar proof of claim against its debtor-franchisee, the U.S. Florida Bankruptcy Court articulated a new approach to losing future royalties by considering the franchisee`s objection to BKC`s claim. [FN20] As for Mid-America Corp., a franchisee was involved that operated twenty-one Burger King restaurants in Tennessee. [FN21] Immediately after filing for bankruptcy protection, the franchisee closed four of his restaurants. [FN22] BKC submitted its proof of entitlement for the amounts due under all franchise agreements and certain leases with the franchisee. [FN23] BKC also claimed the loss of future royalties and advertising costs for the franchisee`s closed units. [FN24] However, not all courts consider Sealy to be a supervisory or even convincing authority on the issue of lost future royalties.
As a result, confusion about lost future royalties persists. Some dishes completely ignored Sealy. In Burger King Corporation v. Barnes, a federal district court in Florida, Sealy did not consider future royalties lost at all in its analysis, even though the franchisee operated a Burger King franchise in Los Angeles. Instead, the court, to review the case under Florida law, simply allowed BKC to reconsider its future 120 Mid-America royalty, which, as noted above, had not issued an arbitration award to BKC when the company could not provide evidence of savings resulting from the closure of the debtor`s restaurants. [FN57] In the Barnes case, the franchisee had informed BKC in writing that he intended to close his restaurant and cease to perform the franchise agreement. [FN58] BKC brought an infringement action and sought damages for the lost future royalties. In calculating the loss of profits, BKC addressed the crucial issue raised by the Mid-American court. Although BKC continued to claim that it had not benefited from a cost reduction due to the franchisee`s breach, BKC provided evidence of the total amount it had spent on the care of its franchisees by BKC employees. [FN59] From this amount, BKC calculated its annual operating costs per restaurant. [FN60] BKC then subtracted the annual cost of calculating the franchisee`s total future royalties and presented its calculation of the reduced shortfall to the net present value. [FN61] If you have decided to terminate the franchise agreement before it expires, contact a business lawyer familiar with franchising.
Before attempting termination, ask your attorney: Our Chicago-based illegal termination attorneys have represented tightly-owned private or family businesses and large corporations in all types of industries: In this scenario, a defaulting franchisee in states that refuse to enforce restrictive agreements can avoid liability for future damages under the franchise agreement. unless the franchisor can prove that the non-payment is an early rejection of the franchise agreement. If a franchisor is unable to prove a rejection, it should carefully consider its options before deciding to terminate the contract. For example, the franchisor may simply sue the defaulting franchisee for the amounts due instead of terminating the contract and consequently cancelling its rights to future royalties. .