Buying a franchise is typically a 10 year commitment. But, what if you get into a franchisee business and decide, oh, this is not for me. What if a couple of years go by and you decide, hey, I don’t want to do this anymore. Do you just stop operating? Close the doors one night and never come back.
That is what happened in the case of Super 8 Worldwide, Inc., formerly known as Super 8 Motels, Inc. [Franchisor] and Anu, Inc. et al. Or, supposedly this is what happened. Anu, a Motel 8 franchisee [Franchisee], stopped operating. Franchisor has pictures to prove it. Anu just stopped operating his Motel 8 franchise. Who knows why? So what is a franchisor going to do? What can the franchisor do?
In this case the Franchisor sent Franchisee an acknowledgment of termination notice. And, sued the Franchisee and the individual franchisee owners for breach of contract. Franchisor wanted 114, 000 dollars from Franchisee for breach of contract. The Franchisee did not answer the complaint. Franchisor filed a motion for summary judgement. In an unpublished decision, the Federal District Court in New Jersey granted the Franchisor’s motion for judgement and orders the Franchisee to 317,591.65 dollars in liquidated damages.
In order to prevail in breach of contract case, as stipulated by the court, you need:
- A valid contract
- Breach of the contract [aka failure to perform under the contract]
- Damages to the complaining party
Sounds fairly simple. The Court thought so, too. The franchise agreement was a valid contract. Under the franchise agreement, Franchisee was ‘permitted’ to operate a Motel 8 franchise. Even though the franchise agreement said Franchisee was ‘permitted’ to operate a franchisee, the Franchisee was truly obligated to operate the franchise business and the Franchisee did not. As a result of not operating the franchisee business, Franchisor did not get royalties; therefore the Franchisor was damaged.
So what are the take-a-ways? First, if you don’t answer a complaint in court, a judgement most probably will be entered against you and you may be ordered to pay damages.
Second, the decision to stop operating a franchise business, before the franchise agreement term ends can result in a judgement and order to pay money to the franchisor for royalties that would have been paid in the future. Most courts will award such damages, but courts may reduce or limit the amount of damages based on the franchisor’s duty to find a new franchisee.