Recovery of Lost Profits Allowed to Franchisor from Terminated Franchisee

In the recent case of Meineke Car Care Centers, Inc v. RLB Holdings, LLC, (2011) the Fourth Circuit held that a franchisor could recover prospective damages, including lost profits, from a franchisee.  Additionally, such recovery by the franchisor is permitted even when it terminated the franchisee due to the franchisee’s breach of the franchise agreement.

In attempting to argue against this outcome, RLB, the franchisee, submitted to the Court that its shops were not “commercially feasible” to operate.  Despite RLB’s efforts, the Court held that Meineke, the franchisor, did not need to show the shops could have been profitable.  Instead, all that had to be illustrated was that the shops would have generated revenues upon which royalty payments would have been based.

The Court agreed with Meineke’s method of calculating lost profits based on the average weekly sales of franchise shops multiplied by the number of weeks in the three year period for which it sought relief multiplied by the average historical royalty payments paid to Meineke.  This formula was met with approval because as the Court noted in its opinion, using past profits as a tool to calculate future profits is a widely accepted method.

Finally, the Court deemed recovery of lost profits possible for Meineke despite the fact its franchise agreement with RLB did not explicitly address such issue.  In support of this, the Court stated that lost profit damages were “reasonably within contemplation of both parties,” making recovery nevertheless permissible.

Are lost profits a possibility of recovery in contracts you have entered?  Depending upon which side of the issue you are on, it may be worth a review of your contracts to determine whether lost profits could be recovered in your favor or if lost profits could costs assessed against you.