Franchise 101: Future Royalties & Beyond; and a Sweet Non-Compete
Tal Grinblat in Franchise Times
Congratulations to Tal Grinblat named a Legal Eagle by the Franchise Times for the fifth, consecutive year. In addition to this designation, Tal is also a State Bar of California Certified Specialist in Franchise & Distribution Law, and a member of the Executive Committee of the Business Law Section of the California Lawyers Association.
Future Royalties and Beyond
A Florida federal court refused to dismiss a franchisor’s claim for past due royalties and lost future profits.
The case concerned an Interim Healthcare staffing franchise in Arizona. The franchisor issued a default notice based on the franchisee’s failure to pay agreed royalties. After the franchisee failed to cure the default, the franchisor terminated the franchise agreement and sued for almost $400,000 in past due royalties and more than $1,400,000 in lost future royalties.
The franchisee moved to dismiss the claim for future royalties, arguing that future amounts were speculative and that the franchisor’s act of terminating the agreement-rather than the franchisee’s breach – caused any alleged future royalty damages.
The court rejected this argument, noting that although Florida courts are “hesitant” to award future royalties, the franchisor properly pled its claim by alleging breach of the franchise agreement, lost profits as a proximate result of the breach, that losses were contemplated by the parties based on the agreement’s ten-year term, and that the claimed losses were not speculative as they were based on average weekly fees and number of weeks remaining on the agreement. The court noted that future profits can be recovered in Florida by demonstrating the loss with “reasonable certainty by competent proof” and that the franchisor would be held to that standard at trial.
Lost future royalties may be difficult to recover, but a properly detailed pleading can get the claim to trial rather than being dismissed early in the case. Franchisors should work closely with franchise litigation attorneys to strengthen the pleading of such claims.
A Sweet Non-Compete
A Florida federal court held that the non-compete provision in a chocolate shop franchise agreement was enforceable against an ex-franchisee operating a competing chocolate store at the former franchised location.
The franchisee was terminated for refusing to install the new point of sale system, which was required by the franchise agreement. After termination, the former franchisee continued to operate in the same location.
The franchisor sued to enforce the non-compete provision in the franchise agreement. The non-compete prohibited the former franchisee from operating a competing business within 25 miles of its former location or other franchised locations for two years.
The former franchisee argued that the non-compete provision was unenforceable under Florida law, claiming the franchisor failed to prove a legitimate business interest justifying the provision. The court was not persuaded. It found the franchisor had legitimate business interests in protecting its goodwill in the region surrounding the location and in protecting its ability to sell new franchises. The court concluded that the franchisor’s interest in re-entering the market and efforts to bolster the goodwill associated with the franchisor’s brand in the area of the franchisee’s former location were legitimate business interests for enforcing the non-compete provision.
A franchisee leaving a franchise system should evaluate its legal rights before deciding to operate a competing business. A non-compete provision may or may not be enforceable in the state where the franchisee plans to operate. Knowing the enforceability of non-compete provisions in the franchisee’s jurisdiction before operating a competing business can save time, money and headache.