|
|
Can A Franchisor Collect Future Royalties When A Franchise Agreement is
Terminated? Maybe -- Maybe Not.
By Mario Herman
Some franchisors have become much more aggressive in attempting to
collect future royalties from franchisees that have been terminated. This
article explains how franchisor claims for future royalties may or may not
be awarded.
In the seminal case of
Postal Instant Press, Inc. v. Sealy (“PIP”), 43 Cal.App.4th 1704, 51
Cal.Rptr.2d 365 (1996), the court determined that the franchisor was not
entitled to future royalties because it found that the franchisee's breach
of the franchise agreement was not the proximate cause of the franchisor's
loss of such royalties.
Id. at 1706, 51 Cal.Rptr.2d 365. In PIP the franchisees became
delinquent on their royalty and advertising fee payments.
Id. at 1707, 51 Cal.Rptr.2d 365. The franchisor viewed the failure to
make the payments timely as a material breach and terminated the franchise
agreement, requesting the franchisees to cease operating their printing
store.
Id. The franchisor then filed suit for breach of contract against the
franchisees seeking both past and future royalty payments.
Id. at 1707-08, 51 Cal.Rptr.2d 365.
In supporting its decision to deny the franchisor future royalty fees for
lack of proximate cause, the PIP court noted:
Nothing in the franchisee's failure to pay past royalties in any sense
prevented the franchisor from earning and receiving its future royalty
payments. No, it was the franchisor's own decision to terminate the
franchise agreement that deprived it of its entitlement to those future
royalty payments. At worst, if the franchisor had not terminated the
franchise agreement it might have been required to sue again or perhaps
again and again to compel the franchisee to pay those future royalties in a
timely fashion as those royalties accrued. PIP,43 Cal.App.4th at
1710-11.
The court continued by emphasizing that the franchisor had chosen to
terminate the agreement, thus depriving itself of future royalties.
Id. at 1713.
Courts from other jurisdictions have
followed the Sealy reasoning. See, e.g.,
Burger King Corp. v. Hinton, Inc.,
203 F.Supp.2d 1357, 1366 (S.D.Fla.2002) (finding that franchisor's
decision to terminate the franchise agreement due to franchisee's breach in
failing to pay fees was the proximate cause of loss of future profits);
Kissinger, Inc. v. Singh, 304 F.Supp.2d 944, 950-51 (W.D.Mich.2003)
(applying reasoning of
Sealy in denying franchisor's motion for summary judgment regarding
future lost royalties);
I Can't Believe It's Yogurt v. Gunn, No. Civ.A. 94-OK-2109-TL, 1997 WL
599391, at *23-24 (D.Col. Apr. 15, 1997) (same).
Additionally, in
Meineke Car Care Centers, Inc. v. RLB Holdings, LLC, No. 3:08cv240-RJC, 2009
WL 2461953 (W.D.N.C. Aug. 10, 2009), the court held that where the
franchisor terminated the franchise agreements, making it impossible for the
franchisee to generate future royalties, the franchisee was not liable for
future royalties.
In
July 2003, the U.S. District Court for the Southern District of California
held that PIP did not preclude a claim for lost future royalties as a matter
of California law if the franchisee terminates the agreement, or if the
franchisor terminates the agreement but the franchisee's conduct proximately
causes the damages, and the award is neither excessive, oppressive nor
disproportionate. It's Just Lunch Franchise LLC v. BFLA Enterprises, LLC,
No. 03-CV-0561, 2003 WL 21735005 (S.D.Cal. July 21, 2003) (“IJL”).
Whether a Franchisor can collect future royalties will depend on: (a)
what the franchise agreement specifically states; (b) what the Franchise
Disclosure Document (FDD) discloses; (c) whether the franchisor or the
franchisee terminated the agreement; and, (d) which state’s law is found to
govern the franchise agreement. If your Franchisor is attempting to
collect future royalties, you should consult a seasoned franchisee attorney
to discuss the facts specific to your case.
Mr. Herman, licensed in Washington, D.C., represents franchisees
domestically and internationally in negotiation, mediation, arbitration, and
litigation with their franchisors.
mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)
|
|
