Prospective Franchisees Should Take Steps to Preclude Later Franchisor Claims for Future Lost Profits

November 28, 2011, 12:37 PM

Franchisors continue to pursue claims for lost future profits (e.g., lost future royalties and advertising fees), even after the franchisor has terminated the franchise agreement. The only sure way for a franchisee to eliminate claims for such damages is up front, when the franchise agreement is being negotiated. Franchisees often bargain to exclude (or attempt to exclude) liquidated damages clauses specifically granting the franchisor a set sum of damages upon termination of the franchise agreement, even by the franchisor particularly in non-hotel franchise agreements, where the use of such liquidated damages provisions are not as well-established.

Franchisors may assert the right to recover such lost future profits damages from terminated franchisees, even when the franchise agreement is completely silent on the franchisors right to recover future lost profits damages. For example, in Meineke Car Care v. RLB Holdings, Bus. Franchise Guide (CCH) 14,580 (4th Cir. April14, 2011) the United States Court of Appeals for the Fourth Circuit recently held that North Carolina law generally permitted the recovery of future lost profits and that nothing in the parties franchise agreement or in the nature of the franchise relationship precluded such an award.

Accordingly, a prudent franchisee should insist on an addendum to the franchise agreement eliminating any obligation to pay future lost profits damages (e.g., any amounts designed to compensate the franchisor for royalties, advertising fees, etc. for the remaining term of the franchise agreement after its termination).
Stephen E. Story