Franchise Agreements commonly contain a requirement that a franchisee continuously operate its business and that the business operate for the entire term of the Franchise Agreement. If the franchisee ceases operation before the Franchise Agreement terminates, can the franchisor recover for its loss of revenues, i.e., loss of royalties or advertising fees? Cessation of operation is customarily an event of default, which can give rise to damages.
Franchisors rely on a stream of income from royalties and advertising fees for their financial viability. When these sources are prematurely affected, the franchisor’s future can be impaired. A recent Missouri, United States District Court Case, Hardee’s v. Hallbeck, 2011 WL 4407435, September 21, 2011, found that a franchisee could not prevail on a motion for summary judgment, and, therefore, the franchisor’s claim for lost profits--because of the franchisee’s closing of a Hardee’s franchise a year and a half before the end of a Franchise Agreement--would proceed, and the amount, if any, of the damages remained a question of fact to be determined at trial.
Despite the fact that the Franchise Agreement did not have a provision as to future damages or a liquidation damages clause, the court held that a franchisee that breaches a Franchise Agreement by abandoning the franchise mid term did not warrant summary judgment being granted to the franchisee. Under Missouri law, which the court held governed the case, lost profits relating to a breach preventing performance are recoverable provided the loss: is the natural and proximate result of the breach; is ascertainable with reasonable certainty; is not speculative or conjectural; and was within the contemplation of the parties when the contract was made. The court believed that the franchisee’s closure of its Hardee’s could serve as the proximate cause of any lost profits, and that a genuine fact issue existed as to whether the franchisee would have realized future profits. The court felt a fact finder could find that, except for the store closure, some revenue could have been realized from continued operation, and the length of operations and the amount of revenue that may have been derived were fact issues.
The franchisee’s attempts to argue that the franchisor’s acts and conduct relieved them of their contractual obligations fell on the court’s deaf ears.
The franchisor produced expert testimony that provided an adequate basis for estimating lost profits with reasonable certainty. The court stated that the amount, if any, of said lost profits constituting the franchisor’s damages, remained a question of fact to be determined at trial.
So if the franchisor is able to convince the trier of fact as to the amount of lost profits, which their expert concluded amounted to approximately $50,000, then the franchisee could be liable for closing its restaurant and going dark before the end of the Franchise Agreement. Also, the Franchise Agreement provided that the prevailing party in any judicial proceeding would be entitled to expenses and attorney’s fees. It remains to be seen what will happen when the case gets to trial, but suffice it to say that early termination of a Franchise Agreement without provocation should cause franchisees to think twice before they shut their doors.