Franchise 101: A Path to Lost Future Royalties; and All Bark and No Bite

Franchisor 101: A Path to Lost Future Royalties

A California federal court denied a franchisee’s motion to dismiss a franchisor’s counterclaims related to the loss of future royalties after terminating two separate franchise agreements in Ohio.

Qdoba Restaurant Corporation and Qdoba Franchisor LLC (collectively, “Qdoba”), franchisors of Mexican food restaurants, entered into a franchise agreement with Fiesta Ventures Dayton (“FVD”). The parties also signed a development agreement to open a franchised business in Bevercreek, Ohio, under a new entity owned by FVD named Fiesta Ventures Bevercreek (“FVB”).

The FVB restaurant failed to open after numerous extensions. The parties subsequently entered into a Workout Agreement, which provided a new opening deadline and included a cross-default provision that held FVD liable for the defaults of FVB. When FVB failed to open, Qdoba issued a notice of default and terminated the franchise agreements with FVD and FVB.

The franchisee filed suit alleging Qdoba breached both franchise agreements and that the terminations constituted unfair business practices under California Law. Qdoba filed six counterclaims, two of which sought lost future royalties for termination of the franchise agreements and breach of the Workout Agreement. The franchisee moved to dismiss the two counterclaims, which the court denied.

The franchisee alleged that Qdoba’s loss of future royalties is unavailable as a matter of law when a franchisor exercises its contractual right to terminate a franchise agreement. The court disagreed and held that although lost future royalty damages are not generally recoverable after a partial breach, a “total breach exception” still exists, which the court found applicable here.

The court found that the total breach exception applied because the franchisee, not Qdoba, was the proximate cause of the termination. The court noted that a total breach occurs after the franchisor makes repeated requests for the franchisee’s performance over a prolonged time period, and franchisor reasonably believed that franchisee’s performance is unlikely. In this case, the court found Qdoba provided numerous extensions and opportunities to correct the defaults under the franchise agreements and the Workout Agreement, and the franchisee’s conduct clearly justified Qdoba’s belief that performance was unlikely.

The court also rejected the franchisee’s public policy arguments under the California Franchise Relations Act (“CFRA”) and California Franchise Investment Law (“CFIL”). The court found that the text of the CFRA, and its precedent did not apply to out-of-state franchise locations in Ohio, and that the CFIL policy was inapplicable because the statute primarily governs the offer and sale of franchises. Therefore, the court held Qdoba could proceed with counterclaims for loss of future royalties.

Before terminating a franchise agreement, franchisors should consult franchise counsel to assess the nature of the franchisee’s breach and whether certain remedies of the franchisor are impacted by the termination. This case demonstrates that a franchisor may recover lost future royalties as damages when the franchisee’s conduct rises to the level of a total breach.

Fiesta Ventures of Bevercreek, LLC v. Qdoba Rest. Corp., No. 24-cv-02218 JLS (BLM) (S.D. Cal. Aug. 21, 2025)

Franchisee 101: All Bark and No Bite

A federal court in Michigan largely denied a franchisor’s motion for preliminary injunction against its former franchisees, accused of breach of contract, trademark infringement, trade secret misappropriation, and civil conspiracy.

Fetch! Pet Care, Inc. (“Fetch”), a franchisor in the pet care services business, alleged its former franchisees violated their franchise agreements by launching competing pet care businesses using Fetch’s trademarks and confidential business information. Fetch cut off the franchisees’ access to its systems after allegedly discovering breaches and attempts to misappropriate customer information.

Fetch filed a motion to enjoin its former franchisees from continuing to operate their competing businesses and using Fetch’s proprietary and confidential information. The parties were concurrently engaged in arbitration when Fetch sought an injunction.

The court held that Fetch failed to demonstrate a likelihood of success on most of its claims. The court first addressed the former franchisees’ allegation of Fetch’s “unclean hands,” which may be employed by a court to deny injunctive relief where the party applying for such relief is guilty of conduct involving fraud, deceit, unconscionability, or bad faith. The court found sufficient evidence of Fetch’s unclean hands in its general conduct in aggressively recruiting franchisees while obscuring from them the true and full nature of the business and expected financial performance.

The court further evaluated the claims under the “first breach” doctrine. The court found sufficient evidence that Fetch committed the first breach when Fetch cut off the former franchisees’ access to the Fetch! system before the franchisees ever began competing against Fetch. The court found that although the franchisees registered a new business name, they did not divert, compete, or own and operate a competing business until after they were cut off. The court concluded that Fetch could not show a likelihood of success on the merits regarding its breach of contract claims.

The court further found that Fetch could not demonstrate clear and convincing evidence of injury because most of the harm had already occurred, and any loss of future goodwill or fair competition was too speculative.

Lastly, the court determined in balancing of harm to others that the equities tipped in the former franchisees’ favor because they were already in arbitration and franchisees’ operations were their livelihood for years. With respect to public interest, the court found this factor neutral. For these reasons, the court denied Fetch’s motion to enjoin its former franchisees from continuing to operate competing businesses but granted the injunction regarding the former franchisees’ use of Fetch’s trademark.

Franchisees should consult franchise counsel before directly competing after the termination or expiration of their franchise agreement. While franchisor misconduct can be a strong defense, franchisees cannot misappropriate their former franchisor’s trademark.

Fetch! Pet Care, Inc. v. Atomic Pawz Inc., No. 25-cv-11568 (E.D. Mich. July 11, 2025)