Earlier this year, the United States Court of Appeals for the Fourth Circuit considered a case where a franchisor sought to recover lost profits from a franchisee it terminated for a breach of the franchise agreement.
In Meineke Car Care Centers, Inc. v. RLB Holdings, LLC, the Court ruled that even though the franchise agreement did not specifically provide for damages for lost profits, the franchisor could recover them since the franchisee’s breach was the cause of the franchisor’s lost profits, the franchisor was reasonably certain to realize revenue absent the franchisee’s breach, the franchisor’s damages calculation was reasonable and the damages for lost profits were reasonably supposed to be within the contemplation of the parties.
As a franchisee or a prospective franchisee, the important rule to take from this case is that if you are terminated by the franchisor, the franchisor can recover lost future profits from you to which the franchisor would have been entitled absent a breach of the franchise agreement.
From a practical standpoint, there are some basic principles to apply to avoid the situation contemplated above. It is imperative that a franchisee or prospective franchisee carefully read and fully understand the franchise agreement. In particular, a franchisee must understand what constitutes a breach, when and how the franchisor may terminate the relationship and what are the franchisee’s options for terminating it.
While disputes between franchisors and franchisees are sometimes unavoidable, knowing and understanding the franchise agreement and the related legal rights can go a long way in protecting a franchisee from severe financial penalties such as damages for lost profits.