Georgia Court of Appeals Rules Franchisors May Recover Lost Future Royalty Fees Post-Termination

Franchisees periodically pay royalty fees to their franchisors over the term of their franchise agreements. When a franchise relationship disintegrates, and litigation results, franchisors may seek to recover lost future royalty fees as monetary damages. Courts have reached conflicting results, however, about whether franchisors can recover such future royalty fees as monetary damages when they terminate franchise agreements. Compare, e.g., Meineke Care Care Centers, Inc. v. RLB Holdings, LLC, 423 Fed. Appx. 274, 281-83 (4th Cir. 2011); Am. Speedy Printing Centers, Inc. v. AM Marketing, Inc., 69 Fed. Appx. 692, 698 (6th Cir. 2003); Bans Pasta, LLC v. Mirko Franchising, LLC, No. 7:13-CV-00360-JCT, 2014 WL 2158128, at *4 (W.D. Va. May 23, 2014); Burger King Corp v. Barnes, 1 F. Supp. 2d 1367, 1370-71 (S.D. Fla. 1998); In re Mid-Am. Corp., 159 B.R. 48, 53 (Bankr. M.D. Fla. 1993); McAlpine v. AAMCO Automatic Transmissions, Inc., 461 F. Supp. 1232, 1274-75 (E.D. Mich. 1978), with, e.g., Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1708-13 (1996); ATC Healthcare, Inc v. Personnel Solutions, Inc., No. 01-CV-762-CBA, 2006 WL 3758618, at *11 (E.D.N.Y. Dec. 19, 2006); Dunkin Donuts, Inc. v. Arkay Donuts, LLC, Civ. No. 05-387(WHW), 2006 WL 2417241, at *5 (D.N.J. Aug. 21, 2006); Kissinger, Inc. v. Singh, 304 F. Supp. 2d 944, 951 (W.D. Mich. 2003); Burger King Corp. v. Hinton, 203 F. Supp. 2d 1357, 1366 (S.D. Fla. 2002); I Can’t Believe It’s Yogurt v. Gunn, No. Civ. 94-OK-2109-TL, 1997 WL 599391, at *23-24 (D. Colo. Apr. 15, 1997). As commentators have observed:
The unsettled nature of the recoverability of lost future royalties can be a source of tremendous anxiety for franchise attorneys and their clients who are confronted with a franchise relationship that has soured. This concern is well founded. The stakes involved in a lost future royalties contest are often high, particularly where long-term franchise agreements—some of which provide for a term of twenty years or more—are at issue. Franchisees worry that they may be found liable for multiple years of royalty payments. Franchisors are concerned that if they are unable to recover lost future royalties, they will have wasted significant time and money on a failed franchise with nothing to show for it. Adding to this anxiety is the fact that most jurisdictions have yet to rule on this issue, thus making it difficult for franchise attorneys to predict accurately toward which direction their court may lean.
Douglas R. Hafer & Logan W. Simmons, Lost Future Royalties: Lessons from Recent Decisions, 31 Franchise L.J. 150 (Winter 2012).
Until recently Georgia was such a jurisdiction, although the Texas Court of Appeals, applying Georgia law, had previously held a franchisor could recover almost $1.4 million in lost future royalty fees from a franchisee with two different franchises. See Progressive Child Care Sys., Inc. v. Kids ‘R’ Kids Int’l, Inc., No. 2-07-127-CV, 2008 WL 4831339 (Tex. Ct. App. 2008). On November 20, 2014, however, the Georgia Court of Appeals held a daycare franchisor was “entitled to seek recovery of lost future royalties it would have received if [the franchisee’s] breach had not prompted [the franchisor’s] termination of the franchise agreement prior to the completion of its original 20-year term.” Legacy Academy, Inc. v. JLK, Inc., — S.E.2d —-, 2014 WL 6476656, *4 (Ga. Ct. App. Nov 20, 2014).
This decision also highlights the importance of paying careful attention to the evidentiary requirements for proving such damages, however. In Legacy, the franchisor ultimately was unable to recover any lost future royalty fees because it failed to prove its lost net revenues. See Legacy, 2014 WL 6476656, at *5-6. Other franchisors have encountered similar problems in other jurisdictions. See, e.g., Kiddie Academy Domestic Franchising LLC v. Faith Enterprises DC, LLC, No. WDQ-07-0705, 2010 WL 673112, at *5-6 (D. Md. Feb. 22, 2010); Rocky Mountain Chocolate Factory, Inc. v. SDMS, Inc., No. 06-cv-01212-pab-bnb, 2009 WL 579516, at *9 (D. Colo. Mar. 4, 2009) ; In re Mid-Am. Corp., 159 B.R. at 55.
Whatever the merits of the rule, certainty has its advantages. Now, franchisors and franchisees subject to Georgia law will be better able make informed decisions. In the event of potential or actual litigation, however, all parties in franchise relationships need experienced counsel with experience in this subject matter. Cary Ichter and William Daniel Davis represented the franchisee in the Legacy case for four (4) years through dispositive motion practice, an interlocutory appeal, trial, and a second appeal. If you’re interested in a confidential and free consultation, call us at 404.869.7600.