Update on Future Damages on Termination of a Franchise Agreement

June 18, 2012, 9:10 AM

The law on recoverability of lost future profits upon the termination or abandonment of a franchise continues to rapidly develop.

In Days Inn Worldwide, Inc. v. Inv. Props. of Brooklyn Ctr., LLC, Case No.10-609 (MJD/JJK), Bus. Franchise Guide (CCH) 14,756 (D. Minn. Aug. 25, 2011), the federal district court in Minnesota held that Days Inn Worldwide could not recover 12 years of lost future profits from a franchisee that unilaterally terminated the parties agreement by selling the hotel to a third party. The Court held that Days Inn could not establish with the reasonable degree of certainty required what the hotels revenues would have been over the remaining 12 years of the license agreement, because many factors could influence profitability during that time. Moreover, the Court noted that Days Inn presented no evidence that it had attempted to find another franchisee or open another hotel in that market.

Conversely, in Hardees Food Systems, Inc. v. Jeffrey T. Hallbeck, Case No.4:09CV00664, Bus. Franchise Guide (CCH) 14,693 (E.D. Mo. Sept.21, 2011), the franchisors claim for lost future profit damages from a terminated franchisee with one year left in its franchise term survived the franchisees attempt to get summary judgment on the claim. The Court held that the franchisor could potentially obtain lost profit damages based on the franchisees abandonment of the franchise depending on the nature of the breach and whether the breach itself prevents the franchisor from earning those future royalties. The Court also rejected the franchisees argument that future damages were too speculative, holding that the franchisor had provided an adequate basis on which the jury could base a damages award with reasonable certainty.

As a result of the continuing development of the law in this area, franchisors should continue to carefully assess the wording used in their franchise agreements regarding potential future damages recoverable upon termination or abandonment. Conversely, potential franchisees should attempt to bargain for an explicit exclusion of future profits damages before entering into the franchise relationship. --Stephen E. Story