On February 28, 2018, the Georgia Court of Appeals issued its opinion in Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc. The opinion is relevant to both franchisors and franchisees operating in Georgia or under Georgia law. The takeaway: if a franchisee repudiates its franchise agreement, and the franchisor elects to treat the repudiation as a breach excusing its own performance obligations, the franchisor will be precluded from splitting its claims into successive lawsuits.
Legacy Academy, Inc. (“Legacy”) is a daycare franchisor. Doles-Smith Enterprises, Inc. (“DSE”) was a Legacy franchisee pursuant to a 25-year franchise agreement dated November 2006. The franchise agreement required DSE to pay Legacy 5% of its gross revenue every month as royalty fees and 1% of its gross revenue every month as advertising fees. The franchise agreement also required Legacy to provide support and assistance to DSE in operating its daycare.
In August 2012, DSE informed Legacy it was unilaterally de-identifying as a Legacy franchisee, and would cease paying both royalty and advertising fees, but would continue operating its daycare facility. DSE concurrently sued Legacy. In response, Legacy ceased providing support and assistance to DSE, and sued DSE for royalty and advertising fees.
In February 2015, at the trial, Legacy only sought unpaid royalty and advertising fees through December 2014 rather than through November 2031. After the trial, however, Legacy began suing DSE for two months of unpaid royalty and advertising fees at a time.
DSE’s defense to these follow-up lawsuits was predicated on the doctrines of “anticipatory repudiation”[1] and “res judicata.”[2] Specifically, DSE argued it repudiated the franchise agreement, and Legacy accepted that repudiation. As such, DSE’s entire liability under the franchise agreement—i.e., for royalty and advertising fees through November 2031—were accelerated and immediately due and owing. If true, Legacy’s claims for unpaid royalty and advertising fees after December 2014 would be barred by the doctrine of res judicata because Legacy had not recovered such fees in the first lawsuit.
In March 2017, the trial court agreed and the Court of Appeals has now affirmed that decision. As a result, even though DSE promised to pay Legacy 6% of its gross revenue from January 2015 to November 2031, Legacy is barred from recovering those amounts from DSE.
The doctrine of anticipatory repudiation creates risks for both franchisors and franchisees. If a franchisee repudiates its franchise agreement, all its financial obligations under the franchise agreement will become immediately due. (Of course, if the franchisee breaches the franchise agreement, and the franchisor responds by terminating the franchise agreement, the franchisee will face the same risk anyway. See Legacy Academy, Inc. v. JLK, Inc., 330 Ga. App. 397 (2014)). On the other hand, if it is unclear whether the franchisee’s conduct amounts to a repudiation, a franchisor’s cessation of its own performance obligations could itself amount to a repudiation or an outright breach.
Whether helping franchisors with litigation avoidance or franchisees with avoiding potentially catastrophic financial ruin, Ichter Davis LLC is ready and able to provide a full array of legal services on your behalf. If you are interested, please call William Daniel Davis at 404-869-7600.
[1] An anticipatory repudiation of a contract occurs when a party unconditionally refuses to abide by its promises under that contract before it is time to perform those promises. When one party repudiates the contract, the other party can (1) rescind the contract and sue for restitution; (2) treat the repudiation as a breach of the entire agreement and file a lawsuit; or (3) continue to perform its promises while waiting to see if the repudiating party, in fact, fails to perform.
[2] Generally speaking, res judicata provides that a final judgment in a lawsuit involving the same parties is final as to all issues that were disputed or could have been disputed. The idea is to prevent a party from splitting its claims, i.e., filing multiple lawsuits for the same cause of action.
