To resolve a litigation dispute, franchisor and franchisee enter into settlement agreements. Settlement Agreements can be a way to avoid costs and time of litigation. An added benefit is confidentiality. Litigation is a matter of public record, but settlements can include a confidentiality provisions that prevent the parties from discussing the particulars of case and terms of settlement. Covenants of confidentiality can be a great incentive for entering into a settlement.
Franchisors may not want the terms of the settlement released or discussed for fear that other franchisees will want that same deal. Franchisors likewise most likely don’t want prospective franchisees to learn any more about the case than what is required to be disclosed in the FDD. The inverse may also be true. Franchisees, may not want their business wrongdoings and possible loss of franchise business discussed with others.
Both rely on the confidentiality provision in settlement agreement. What if the confidentiality is broken or violated? The person with loose lips should be held responsible, right. They should be made to pay. Not in the case of Jana Caudill, et al., Plaintiﬀs-Appellants v. Keller Williams Realty, Inc. In this case, the Franchisor distributed the FDD [Franchise Disclosure Document] to 2,000 persons. This is overwhelming beyond the persons and entities required to be disclosure to under the FTC Rule and other franchise disclosure laws. As part of the FTC franchise disclosure laws, franchisors must outline in item 3, claims filed by and against the franchisor, including the claims, demands, and outcome.
Because the franchisor gave the FDD to more people than required by franchise disclosure laws, the franchisee asserted this constituted a breach of the confidentiality agreement in the settlement agreement. The court agreed, but refused to award the franchisee liquid damages. For each incident violation, damages would have totaled $20 million. The court said there was no evidence that the franchisee suffered any actual monetary damages and without a showing that the franchisee suffered monetary losses, the court awarded the franchisee nothing. The court simply issued a permanent injunction preventing the franchisor from disclosing or publishing the FDD beyond what is required under the FTC Franchise Disclosures laws.
Disturbing outcome. To fend against such an outcome, make sure to build-in contractual incentives into settlement agreements aimed at fostering adherence to confidentiality provision. And, if violations occurs, be prepared to site actual evidence of monetary loses caused by the violation.
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