Franchise 101: Promises to Prospectives; and Default! Default!

Franchisor 101: Promises to Prospectives

A federal district court in New Jersey denied Travelodge Hotels’ motion for partial summary judgment against a former franchisee, holding there are genuine issues of fact as to Travelodge’s breach of contract claims.

Travelodge entered into a franchise agreement for its franchisee to operate a Travelodge hotel in Ohio for a fifteen-year term. The franchise agreement required the franchisee make certain recurring payments, and provided that Travelodge could terminate the franchise agreement before expiration if the franchisee discontinued operating the hotel as a Travelodge branded hotel and/or if the franchisee lost the right to possess the hotel’s premises. The franchisee was obligated to pay liquidated damages and reimburse Travelodge for any outstanding recurring fees and costs if the franchise agreement was terminated under one of these two circumstances.

The franchisee ceased operating the hotel as a Travelodge branded hotel. Travelodge informed the franchisee it was terminating the franchise agreement and demanded payment of liquidated damages and all outstanding recurring fees and costs. Travelodge sued for payment of recurring fees, liquidated damages, interest, and attorneys’ fees and costs after the franchisee did not pay.

In a motion for partial summary judgment, Travelodge argued it was undisputed the franchisee breached the franchise agreement because the franchisee admitted that it failed to operate the hotel as a Travelodge. However, the franchisee contended the franchise agreement was voidable because of fraudulent inducement: that Travelodge’s representatives made promises that, despite franchise agreement terms to the contrary, the franchisee could rebrand its existing Travelodge hotel into a different brand within Travelodge’s parent company’s group of hotels. The franchisee also argued that it was excused from paying some or all of its outstanding recurring fees because the franchisee was not provided access to the Travelodge reservation system until approximately three months after signing the franchise agreement.

The court found the franchisee’s assertions could support a finding that the franchise agreement was voidable as fraudulently induced. The court determined that, despite the presence of an integrated contract, evidence outside the written contract is admissible to demonstrate that a party was fraudulently induced to enter into a contract. The court also held Travelodge’s delay in providing the franchisee access to the reservation system could excuse the franchisee from paying some portion of its outstanding fees.

Promises or agreements outside of the franchise documents are risky. Franchisors should make sure their sales representatives have sufficient training in what they are permitted to say, or agree to, with prospective franchisees. All agreements should be memorialized in writing. Unauthorized oral agreements can come back to haunt unsuspecting franchisors.

Travelodge Hotels, Inc. v. Durga, LLC, 2023 U.S. Dist. LEXIS 9272 (D.N.J. Jan. 19, 2023)

Franchisee 101: Default! Default!

A federal district court in Michigan granted franchisor Little Caesar Enterprises, Inc. (LCEI) a default judgment against its former franchisee for violating the terms of the franchise agreement.

The franchisee entered into a franchise agreement with LCEI to operate a Little Caesars restaurant. The franchisee was to provide weekly reports of gross sales, pay continuing royalty and advertising fees and certain other fees. The agreement also provided that LCEI could terminate the contract if the franchisee failed to make any required payments or ceased operating the franchise for three or more consecutive days. The franchisee agreed that, upon termination, not to hold itself out as a franchisee of LCEI or use its trademarks, to return confidential materials and information, and to pay LCEI liquidated damages.

The franchisee went out of business and stopped reporting sales. LCEI sent the franchisee a notice of default and termination of the franchise agreement and filed suit. The franchisee was served with the complaint but failed to respond. LCEI filed a motion for default judgment.

The court determined the franchisee violated the terms of the franchise agreement, which constituted good cause for termination. The court entered judgment in favor of LCEI for unpaid royalties and advertising expenses, unpaid amounts to suppliers, and awarded LCEI $164,576.26 in liquidated damages. The court noted that liquidated-damages provisions are enforceable under Michigan law and that liquidated damages are appropriate where damages from contractual breach are uncertain and difficult to ascertain. The parties acknowledged in the franchise agreement that damages from a breach of the agreement would be difficult to ascertain.

Liquidated damages provisions are common in franchise agreements. Franchisees should review their franchise agreements with franchise counsel prior to signing so they understand the implications of any liquidated-damages provisions and the potential monetary impact of such provisions upon early termination of the franchise agreement, especially if the franchisee’s owners are subject to a personal guarantee.

Little Caesar Enters. v. Walters Invs., Inc., 2023 U.S. Dist. LEXIS 11877 (E.D. Mich. Jan. 24, 2023)




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