Franchise 101: Court Delivers Liquidated Damages; and Convenience Store Pays for Inconvenience

Franchisor 101: Court Delivers Pizza Franchisor Liquidated Damages

The Sixth Circuit Court of Appeals recently affirmed a $2.6 million award of liquidated damages in favor of a pizza franchisor and a summary judgment order enforcing termination of franchise agreements due to nonpayment and other franchisee defaults.

The franchisees ran Little Caesars franchises in multiple states. The franchisees stopped making timely royalty payments and violated other franchise agreement provisions. Little Caesars sent the franchisees default notices for not paying on time, refusing to produce financial records, and not paying for supplies. The franchisees failed to cure the defaults. Little Caesars terminated the franchises and demanded the franchisees comply with post-termination obligations, including closing the franchises and paying liquidated damages.

The termination notices explained that if the franchisees continued operating the restaurants during any litigation, Little Caesars would accept payments from them without waiver of its rights, including the right to enforce termination of the franchise agreements. The termination notices said Little Caesars reserved all its post-termination rights until it received a court order.

Little Caesars sued to enforce the terminations. Throughout litigation, the franchisees continued to operate the restaurants. Ultimately, the court granted summary judgment for Little Caesars, enforced the termination and awarded Little Caesars $2.6 million in liquidated damages.

The Sixth Circuit affirmed the district court’s decision. On appeal, the franchisees argued that Little Caesars waived its right to terminate the franchise agreements by letting the franchisees continue to operate after sending notices of termination. The Sixth Circuit affirmed the district court’s holding that there was no evidence of a waiver. Instead, the district court held that Little Caesars’ termination notices contemplated continued dealings between the parties during the course of litigation.

Before terminating a franchise agreement, a franchisor should work closely with franchise counsel to craft a clear notice of termination that preserves the franchisor’s remedies if the dispute winds up in litigation. Having these issues in mind can reduce the risk of arguments by disgruntled former franchisees of improper notice or, like in this case, claiming waiver of the right to terminate.

Franchisee 101: Convenience Store Pays for Inconvenient Ordinance

A federal court in New Jersey denied a 7-Eleven franchisee’s motion for a temporary restraining order. The franchisee sought an order enjoining 7-Eleven from enforcing various franchise agreement provisions, including charges for each hour the 7-Eleven store was closed, since the franchisee could not operate the store 24-hours a day.

In 2015, the franchisee signed a franchise agreement to operate a 7-Eleven store 24-hours per day in Princeton, New Jersey. At that time, Princeton adopted a local ordinance that prohibited retail food stores, like 7-Eleven, from operating between 2 a.m. and 5 a.m. The ordinance had a sunset provision, ending in 2017, unless readopted by the city.

Pursuant to the franchise agreement, the franchisee was required to pay 7-Eleven a royalty based on the store’s gross profit, plus an additional charge for each hour the store was closed per week. To account for the ordinance, the franchisee and 7-Eleven amended the franchise agreement to temporarily let the franchisee operate the store less than 24-hours per day and not pay additional fees for a period of two years or until the store could operate 24-hours, whichever occurred first. If the store was not permitted to operate 24-hours after two years, the franchisee would be subject to additional fees for the reduced hours of operation.

In 2017, the ordinance was made permanent, and 7-Eleven increased the franchisee’s royalty to account for hours the location was closed. The franchisee sued, arguing that 7-Eleven unilaterally amended the franchise agreement to increase the royalty solely on the basis that the franchisee could not operate 24-hours per day and that requiring the franchisee to operate 24-hours per day defied local law.

The franchisee filed for a temporary restraining order, arguing 7-Eleven breached the covenant of good faith and fair dealing and the New Jersey Fair Practices Act (NJFPA). The franchisee’s request was denied. The court determined that the franchisee was not likely to succeed on the merits because the plain language of the franchise agreement permitted 7-Eleven to increase fees after two years if the franchisee did not operate 24-hours a day. Further, 7-Eleven was acting in accordance with the terms of the franchise agreement by charging the additional fees.

Franchisees should carefully review all amendments to their franchise agreement with franchise counsel prior to signing any document. It is difficult to prepare an amendment that covers every possibility of things that may happen. But situation-specific amendments, like in this case, should be drafted to account for multiple potential scenarios and franchisees should understand what they are agreeing to, including any potential risks, prior to entering into an amendment to their franchise agreement.

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