Franchisor Awarded Lost Future Profits; & Franchisee Keeps Case in Home Court

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August 2015

Valley’s Most Trusted Advisors

Barry Kurtz was recently recognized as one of the San Fernando Valley’s Most Trusted Advisors by the San Fernando Valley Business Journal. This is the second time he has been named for this award.

New Team Member

Gabriel A. Wintner is the newest associate to join our Franchise & Distribution Practice Group. A graduate of Northwestern University School of Law in Chicago, Gabe previously served as head of the legal department for Mathnasium – an international franchisor with over 500 units at the time.

Learn more about: Gabriel A. Wintner

David Gurnick Article in Valley Lawyer

“There are distinct differences between parody, satire and lampoon. Intellectual property attorneys should be able to recognize these differences and understand the respective case law to best protect their clients’ trademarks and copyrights — or to best argue their clients’ fair use of other people’s work…”

Read more: Fun With Trademarks and Copyrights: Parody, Satire and Lampoon

FRANCHISOR 101:
Florida Franchisor Awarded Lost Future Profits

An arbitration panel in Florida found that a disaster recovery and remediation business franchisee breached his agreement with John Woods, his franchisor, by terminating the agreement 13 years before expiration of the 20-year term. The arbitrators awarded John Woods damages for the future profits it would have earned had the franchisee remained in operation because:

(1) the lost future profits were within the reasonable contemplation of the parties at the time of contracting and

(2) they were proven with reasonable certainty.

The arbitrators found that lost future profits were within the contemplation of the franchisee when signing the franchise agreement even if the potential payment of these damages was not disclosed in the FDD. Rejecting the franchisee’s expert testimony, the panel found that future damages were not a fee or one of the franchisee’s duties upon termination that were required to be disclosed in the franchisor’s FDD. The panel also found that Florida law did not require an explicit reference in the parties’ contract to reserve the franchisor’s right to lost future profits.

The arbitrators further found that the franchisor proved its damages with reasonable certainty by calculating as past damages the lost profits the franchisor had incurred from the date of termination through the date of the hearing, and for future profits, by analyzing the franchisee’s past revenues and assuming the franchisee would generate similar revenues in the future with a modest increase in the first few years. In all, the arbitrators awarded the franchisor past due fees as well as lost future profits in the amount of $908,903 for the remaining 13 years of the term of the franchise agreement.

The arbitrators’ ruling demonstrates a danger for franchisees unilaterally terminating a franchise agreement when the agreement does not provide such a right. The ruling also provides franchisors significant ammunition for recovering future damages against a franchisee who fails to perform pursuant to the agreement.

FRANCHISEE 101:
Franchisee Keeps Case in Home Court Despite Forum Selection Clause

Rob & Bud’s Pizza (“R&B”) is a Papa Murphy’s franchisee and owns and operates multiple Papa Murphy’s Take ‘n’ Bake Pizza restaurants in Arkansas, Missouri and Kansas. In April 2014, R&B and other Papa Murphy’s franchisees sued Papa Murphy’s in its home state of Washington alleging that Papa Murphy’s induced them to purchase franchises through fraudulent and deceptive misrepresentations and omissions.

While the Washington litigation was ongoing, R&B initiated another lawsuit in Arkansas state court alleging Papa Murphy’s was unlawfully attempting to terminate R&B’s franchise agreements in retaliation for R&B’s refusal to agree to Papa Murphy’s settlement demands in the Washington litigation. Papa Murphy’s then removed the Arkansas state court case to Federal district court and filed a Motion to Transfer Venue to Washington.

R & B’s franchise agreements all contained mandatory forum selection clauses that required all litigation to occur in Washington. However, the Arkansas Procedural Fairness for Restaurant Franchisees Act (“APFRFA”) states that:

a party to a restaurant franchise may commence a civil action … in Arkansas if either party to the restaurant franchise is a resident of Arkansas, [and] [n]either a franchisee nor a franchisor shall be deprived of the application and benefits of this subchapter by a provision of a franchise purporting to designate the law of another jurisdiction as governing or interpreting the franchise, or to designate a venue outside of Arkansas for the resolution of disputes.

The Arkansas court reasoned, under Arkansas public policy, that the Washington forum selection clauses should not be enforceable unless:

(1) neither R&B nor Papa Murphy’s were residents of Arkansas; or

(2) R&B and Papa Murphy’s were not parties to a restaurant franchise within the meaning of the APFRFA.

The Court found that R&B was indeed a resident of Arkansas due to its operation of Papa Murphy’s restaurants in Arkansas and that, despite the Washington forum selection language in the franchise agreements, Arkansas public policy strongly weighed against enforcement of the forum selection clauses, and accordingly denied Papa Murphy’s motion to transfer the case to Washington. The Court also found that convenience to the parties weighed in favor of denying a transfer of venue to Washington because the events took place in Arkansas, most of R&B’s restaurants were in Arkansas, and R&B’s principal who was central to the facts of this case, lived closer to Arkansas than Washington.

This case demonstrates the importance of researching a state’s public policy when bringing cases against a franchisor. Franchisees may be able to benefit from the courts in their home state despite language in the franchise agreement to the contrary.

Read the entire decision: Rob & Bud’s Pizza, LLC v. Papa Murphy’s Int’l, LLC

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2015. All Rights Reserved.